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Welcome to the Currency War, Part 1: Iceland and the Tragedy of the Commons

Think of devaluation as the monetary equivalent of the “tragedy of the commons”. In a nutshell, if everyone shares ownership of or has access to a given resource, it is in each individual’s interest to grab what they can as quickly as possible, which soon depletes the resource.

With currency exchange rates, as with fisheries and sheep pastures, there’s an advantage for those who move first and pain for those who dither. Consider Iceland’s nearly-instantaneous recovery from its epic banking crash:

In European Crisis, Iceland Emerges as an Island of Recovery
VESTMANNAEYJAR, Iceland—Three and a half years after Iceland collapsed in a heap, Dadi Palsson’s fish-processing plant has the air of a surprising economic recovery.

Mr. Palsson arrived at 4 a.m. on a recent workday. Twelve tons of cod were coming in. Soon, his workers would bone, slice and pack the fish for loading onto towering container ships headed abroad.

In 2008, Iceland was the first casualty of the financial crisis that has since primed the euro zone for another economic disaster: Greece is edging toward a cataclysmic exit from the euro, Spain is racked by a teetering banking system, and German politicians are squabbling over how to hold it all together.

But Iceland is growing. Unemployment has eased. Emigration has slowed.

Iceland has a significant advantage over stressed euro-zone countries—a currency that could be devalued. That has turned its trade deficit into a surplus and smoothed its recovery.

So brisk is the fish business that Mr. Palsson’s factory draws Polish workers to this island off an island, a heart-shaped dollop of volcanic rock five miles from Iceland’s south coast.

“Every house is full because we can offer so many jobs,” said Mr. Palsson, 37 years old. On his humming factory floor, cod whip through machines that lop off heads and slice out bones. Rows of workers in Smurf-blue smocks lean over illuminated tables to cut the filets.

Iceland—with its own currency, its own central bank, its own monetary policy, its own decision-making and its own rules—had policy options that euro-zone nations can only fantasize about. Its successes provide a vivid lesson in what euro countries gave up when they joined the monetary union. And, perhaps, a taste of what might be possible should they leave.

Iceland fell hard in 2008. Its engorged banking system sunk and unemployment soared. The government was jeered out of office by dispirited voters in angry street protests. Young people packed their bags. As in the euro zone, the International Monetary Fund parachuted in with a bailout.

Its currency devalued by half. That boosted exports, like Mr. Palsson’s fish, and trimmed costly imports, like cars. The weakened krona was hard on homeowners who borrowed in foreign currency, but Iceland’s judges and policy makers orchestrated mortgage relief. Expensive foreign goods also ignited inflation. Consumer prices have risen 26% since 2008.

That rescue, in turn, weighed on the financial system. But unlike Ireland, for example, Iceland let its banks fail and made foreign creditors, not Icelandic taxpayers, largely responsible for covering losses.

Iceland also imposed draconian capital controls—anathema to the European Union doctrine of open financial borders—that have warded off the terrifying capital and credit flights that hit Greece, Ireland and Portugal, and now test Spain and Italy.

And instead of rushing into the sort of spending cuts that have ravaged Greece and Spain, Iceland delayed austerity. Initially, the country even increased social-welfare payments to its poorest citizens, whose continued spending helped cushion the economy.

Some thoughts
In Greece and the other PIIGS countries, Iceland is the real-world blueprint for those who want to abandon the euro experiment and take back national control of monetary policy — that is, to regain the ability to devalue.

Iceland is also an example for many proponents of holding the eurozone together, who see a monetization of peripheral country debt as the only way to preserve the union and keep the big German and French banks solvent. In other words, they’ll keep the euro but devalue it.

So regardless of whether the eurozone dissolves or endures, devaluation is the centerpiece policy. Either the drachma, peseta and lira are revived at a 50% discount, or the euro is devalued by a similar amount. There’s no sound-currency solution to all this debt.

Everyone also knows that the benefits of devaluation go primarily to those who strike first, so there’s a growing sense of urgency.

Which brings us back to the tragedy of the commons. When (not if) the eurozone starts devaluing, the dollar and yen will have to follow suit, and then it’s game on, a race to the bottom with no winners. Except for gold.

15 thoughts on "Welcome to the Currency War, Part 1: Iceland and the Tragedy of the Commons"

  1. Yeah, treat the characters of the story as actors but as we all know it’s the writers and director who pull the strings.

    London Times reporting on Lincoln’s Greenback: “If this mischievous financial policy, which has its origin in North America, shall become endurated down to a fixture, then that Government will furnish its own money without cost. It will pay off debts and be without debt. It will have all the money necessary to carry on its commerce. It will become prosperous without precedent in the history of the world. The brains, and wealth of all countries will go to North America. That country must be destroyed or it will destroy every monarchy on the globe.”

    Now wouldn’t that be a shame?

  2. Please look at the work of Nobel Prize winner Elinor Ostrom before you spread the myth of the “Tragedy of the Commons.” This idea is undocumented. It popped up in one textbook in the 1950’s and is used mindlessly to justify government controls and regulation.

    There are literally thousands of examples of self-regulation of the commons around the world. Finding, analyzing and publishing these examples has been Ostrom’s life work.

    The stakeholders invent ways to keep the resource stable and renewable. The failures almost always involve government intervention and a government role.

    What we are witnessing in this financial and sovereign debt crisis is a failure of top down, government controlled systems. We are witnessing a failure of central planning, Western style.

    It’s not so much that Iceland moved first. Rather, Iceland did what made sense for Iceland. It acted within the realm of the commons that it could influence and control. Greece can do the same and so can any of the other EU countries if they take action to repudiate the debts.

    After all, what’s standing in the way of prosperity and growth is debt beyond the ability to repay. The answer is to get rid of the debt.

    And if you are going to print money anyway to make the creditors whole, go ahead. Do that too. Just be sure to wipe out the debt, in particular the private sector debt, so we can begin again. If that means no more credit except for self liquidating productive activities, so be it.

    Think about the German precedent in 1948. The Reichsmark was worthless. Each citizen received 800 new DM with which to begin over. No debts. A level playing field. Sound money.

    Iceland got to ground zero rationally. I see nothing wrong with that. It’s certainly better than chaos.

  3. The story on Iceland reminds me of the book I read concerning the German Mark after WWI. They devalued their currency and they had full employment, but it ignited runaway inflation. Perhaps the difference here will be Iceland does not have the crushing reparations to pay that Germany had. Only time will tell.

  4. Yes, I agree with John Rubino and James Turk…DEFINITE signs of Hyperinflation will be undeniable by the end of 2010!

  5. Ineptocracy,
    “So who leaves the Euro? The wealthier nation(s), or the spendthrift drunken sailor states?”
    I do believe you’ve got it, and nicely put. Nothing much is what its made out to be on this stage. Its a bit easier to follow the plot if you treat everyone in the news as actors.

  6. Iceland possesses a number of unifying traits others do not possess.
    An estimated half of the population is reputed to have congregated to protest the re-emergence of their mortgage debts held by speculators; a public response not imaginable in the kool aid drinking countries.
    Devaluation is the expedient political way to reduce the “cost” of their prolific ways, by creating new debts, or money in any form enabling them to spend and stay in power for another day. It is often planned to occur suddenly trapping as many as possible. and generally agree there are lessons in how Iceland handled it that would be wise to remember for everyone in fiat debtor nations.
    Nation leaders appear on the verge of a “avoiding a world recession” or some other claptrap excuse for saving themselves and their benefactors.
    The bias of who is being “saved” is the fundamental flaw in these efforts guaranteeing not just inflation, but out of control inflation, and further note that Iceland crashed, and so will we. When that happens, those in power will use all the laws they passed to subvert everyone to maintain their control, and all the frightened mothers will be cheering them to do so.
    Innovators, like money, will go to where they are treated best, and as long as this population wants the government to take care of them, it won’t be here.
    I do applaud Iceland, and their resolve. and hope others realize by this example who should pay these debts. That is the key message.

  7. One more word about Jorg Hulsmann’s book “Deflation and Liberty”. It is not a detailed economics treatise, but a delightfully easy-to-grasp explanation of the naturally-occurring corrective that is monetary deflation. It is forthright and refreshingly short.

    For a more detailed analysis — I would say the definitive book on the subject — read Jesus Huerta de Soto’s “Money, Bank Credit, and Economic Cycles”. If you want to know what Congress or the EU lords must do (and will have to be *forced* to do), read his Chapter 9 of that masterful book.

    For the ultimate compendium on money in the American context, nothing can trump Edwin Vieira’s 1,700-page, two volume tome, “Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution”.

    Any member of the House who is indicted in his state criminal court by an AmericaAgain! Indictment Engine(TM) action, who sits on the U.S. House Commmittee on Financial Services yet says (s)he is ignorant of the constitution’s 220-year-old stipulations about U.S. money, will receive a highlighted copy of this exhaustive, comprehensive work surveying the entire history of Congress’ crime and chicanery.

    New deck, new deal…new game. Coming soon!

  8. Precisely so, John; as it should be. But Iceland doesn’t carry the criminogenic horde on its back that we have in Washington D.C., on Wall Street, and on every bank board and management team in America.

    For thousands of years, sound money has always been predominantly gold, secondarily silver. The Currency Act of 1789 defined a U.S. Dollar as essentially a Spanish ‘Taler’; a coin containing 371.25 grains of pure silver — *and the US Dollar has never been otherwise defined*.

    Jorg Hulsmann has been a stalwart on this subject. He co-authored “What Has Government Done to Our Money? and the Case for a 100 Percent Gold Dollar”; then he wrote two excellent books a few years later: “Deflation and Liberty” and “The Ethics of Money Production”, a wonderful historical survey of this subject from the best perspective: moral/ethical. Economics is 90% ethics and 10% math, after all.

    What’s transpiring now is what has transpired since the first armed marauders attacked the first undefended village: plain plunder. Governments are as corrupt today as ever before, and rule of law alone will restore us. It so happens that Americans have something that almost no other peopl on earth are blessed with: a “supreme Law of the Land” stipulating that nothing but GOLD AND SILVER COIN are lawful U.S. money.

    Obviously, I’m preaching to the choir; most folk that frequent your site understand the ethical basis and historic stability of specie over fiat. The gold byzant was the coin of the known world for almost 1,100 years. Now THAT is monetary stability — and our Supreme Law *demands* it!

    In this monograph, I explain how AmericaAgain! Trust intends to help a few million Americans force the U.S. Congress to obey the law, or serve prison time.


  9. Dear John,
    That sounds good,I’ll be in Munich,Germany next week and ready with my dollars to grab some euro,and just wait for the happening.
    My very best to you. John

  10. how come canada t.v. showed Prime Min Harper dealing with iceland
    in re iceland wants to use canada currency??????

    1. Its a counter plan to some Icelandic politicians who want to join the Euro. Plus, Canada is a stable democracy that is (somewhat) careful with its spending. It spends money on health care but it doesn’t print up and spend TRILLIONS on wars like the U.S. does to uphold a U.S. dollar hegemony on the rest of the world that tears apart its middle class so a few rich bstrds can get richer.

  11. The problem within the EU is that the floundering PIIGS have way more to gain more from a devalued Euro than do the supposedly more wealthy nations.

    And devaluation of the Euro itself doesn’t solve the problems of financial inequality between the member states.

    So who leaves the Euro? The wealthier nation(s), or the spendthrift drunken sailor states?

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