Sunday, October 19, 2008

Dollar Si, Krona No?

"In the U.S., markets worry that the government may not do enough to bail out it banks. In Iceland, they worry it can't. On Friday, the cost of insuring Icelandic government debt soared to punitive levels, while the country's currency--already worth less than half of what it was at the start of the year--dropped 8% against the euro since Monday. The trigger for the panic over Iceland's solvency came Monday when the government pumped Euro 600 million ($827 million) into Glitnir Bank hf, the country's third-biggest bank by market capitalization, taking a 75% stake. Meant to reassure financial markets, the bailout instead heightened concerns that Iceland might have to prop up its other banks, too, but that it lacks the resources to do so. ... On Friday, traders said it cost $1.5 million up front plus $500,000 a year to insure $10 million of Icelandic debt against default. That is up from $271,000 a year with no up-front fee a month ago according to Markit Group, a credit-information firm. ... The krona's latest tailspin could worsen the country's already sharp downtunrn. 'No one wants to he holding the Icleandic krona,' said Jon Harrison, a currency strategist at Dresdner Klienwortin London. 'No one wants to deal with the local banks'," WSJ, 4 October 2008.

"Saying Iceland was at risk of 'national bankruptcy,' Prime Minister Geir Haarde prepared to give regulators authority to take over the nation's failing banks as a worsening financial crisis all but cut off the island from the global financial system. ... Late Monday, Iceland's parliament was voting on an emergency law that could put the entire banking system under government control. It was expected to pass. 'There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy,' Mr. Haardie said. After the speech, Standard & Poors cut Iceland's foreign-currency sovereign debt rating for a second time in a week. ... Under the bill in Parliament, the government has wide-ranging authority to take over banks, seize control of management and direct asset sales. Mr. Haarde wouldn't say whether the government would use the full powers but said 'it is conceivable that some [banks] will not be able to function without the authorities intervening'," Charles Forelle at the WSJ, 7 October 2008.

"An article at, a Russian site asks, 'Time for a gold rouble?", which made me laugh in a Disrespectful, Xenophobic Mogambo Way (DXMW), as it looks like the damned Russians are so stupid they can't even spell 'ruble'! Hahaha! My levity was soon abandoned, however as the paper reports 'the decision by the US government to inject $700 billion into the financial system means that the already gigantic annual budget deficit of the American state (previously some $450 billion a year) will now rise by a factor of three. The total state debt of the USA will rise to well over $11 trillion. It is obvious that such a colossal debt can never be repaid. Instead, it will be serviced by more debt in the future', which they attribute to the collapse of the financial system, such as 'the collapse of those markets is only a symptom of a much deeper problem, the basic insolvency of the American state itself.' ... Since I never think of Russians except as humorless bad guys who speak English with terrible accents and who are always out to kill James Bond, it is novel to me that the paper concludes that 'as a major exporter of hydrocarbons, her role in the world economy is actually very important. As the age of the dollar draws to a close, Russia will have to consider selling her oil and gas not in the devalued American currency, but instead in the euro used by most of her customers.' ... SoI thought that was a little strange: but it got spooky when they wrote the line, 'the age of the dollar draws to a close', as my heart withered in fear and I suddenly mistrusted everyone around me, but before I could ask them to explain such a remark, it suddenly made sense when they went on, 'It is surely unnatural for two geographic neighbiors to do such large volumes of business using the currency of a distant and now ailing nation.' Ooops! They're right! we're freaking doomed! ... Somewhat mollified and again ready to give them the benefit of the doubt, they now finally win me over when they conclude, 'The contempt of the Keynesians notwithstanding, it is an undisputable fact that gold does remain the ultimate store of value, which is precisely why the states own so much of it'," my emphasis, Mogambo Guru at, 8 October 2008.

"Iceland sought to avert the collapse of its financial system Tuesday by reaching out to Russia for an emergency loan, trying to peg its plummeting currency and seizing a second big bank. ... Early Tuesday, the Icelandic central bank announced Russia would lend it Euro 4 billion ($5.4 billion), citing a seemingly unimpeachable source: Russian Prime Minister Vladimir Putin. Hours later, the central bank backpedaled, saying Russia and Iceland were planning to start negotiations on a loan Wednesday or Thursday. ... This week, krona trading had effecively disintegrated", Charles Forelle at the WSJ, 8 October 2008.

"Iceland plunged further into financial turmoil--and muddled into a diplomatic spat with Britain over its handling of the crisis--on Wednesday as the country's third-largest bank went into receivership and the government abandoned attempts to put a floor under its free-falling currency. ... Prime Minster Geir H. Haarde ... added that talks with Russia over the potential of a 4 million [I believe the author means billion] euro ($5.47 billion) loan were scheduled to take place in Moscow on Tueday", Jane Wardell at the Houston Chronicle, 9 October 2008.

"As Iceland nationalized a second big bank and abandoned a brief attempt at pegging its tumbling currency, Britain and the Netherlands sought to protect hundreds of thousands of their savers who have money in frozen Icelandic bank accounts. ... The fallout from the financial meltdown in tiny Iceland underscores the often unpredictable connections the global economy has woven among far-flung people, banks and nations and the damage they can cause. ... Iceland's government has vowed not to default on its soverign debt, but some economists fear it could", Jeanne Whalen and Charles Forelle at the WSJ, 9 October 2008.

"Kristjan Davidsson went to sea as a deckhand at 16. At fisheries college he aspired to be a boat captain. For two decades, he sold fish and fish-processing equipment. Like his father, and pracitcally everyone else in this remote village, he owed his living to the fish his country pulled from the ocean. ... But just a half-dozen years ago, Icelanders discovered that cast fortunes could be made in high finance. ... The banks quickly swelled to a size that dwarfed the economy of some 300,000 Icelanders back home. ... The banks' assets reached Euro 100 billion, about 10 times the country's gross domestic product last year, and their foreign depositors have come to far outnumber the island's poipulation. ... Today, Iceland's swollen banks are ruined. In the space of a few days, practically the entire banking system has been seized by the government. ... The krona has ceased functioning as a currency outside Iceland. ... The U.K. and Netherlands are suing over frozen deposits held by their citizens, while the government is trying to arrange more foreign loans to help stave off national bankruptcy. ... Up until a few days ago, Icelanders thought they could live on banks. ... The krona was strong. That damped exports--fish is the island's biggest--and the trade deficit ballooned, a worrying sign. ... To their surprise, they became some of the wealthiest people on the planet. Many became millionaires, a few billionaires. The standard of living was high and foreign luxuries could be imported cheaply. They bought expensive cars with loans in yen and Swiss Francs with attractively low interest rates, racking up high debts exposed to the vagaries of currency exchange. ... For the banks, growing was easy. They could borrow at low cost from around the globe, then turn around with little oversight lend that money to businesses and entrepreneurs where they wanted--in the U.K., Denmark and the U.S. Over time, the banks assets--largely these loans they made--grew and grew. ... Just printing more money--something the U.S. can do--wouldn't help the banks much, since their foreign debts were largely in foreign currencies. The creation of more Icelandic krona would just puch down the exchange rate. Fearing this, investors began shunning the krona. It tumbled more than 40% against the euro this year. ... 'Overnight, the change of emphasis from banking over solid products, and that is fish and aluminum,' [Gisli Gislason, the director of the Reykjavik port] said. ... A real economy needs products to sell, Mr. [Halldor] Leifson [fisherman] says. Banking is 'paper money. You can't do anything with paper money'," my emphasis, Charles Forelle at the WSJ, 10 October 2008.

"Britain sent a team of negotiators to Iceland to resolve an increasingly bitter dispute over British savers and local governments whose deposits are frozen in failed Icelandic banks. ... 'We will take further action against the Icelandic authorities wherever that is necessary to recover the money,' U.K. Prime Minister Gordon Brown said at a meeting with voters in southern England on Friday. 'This is the responsibility of the Icelandic government. They've got to take responsibility'," WSJ, 11 October 2008.

"When Iceland's banking system collapsed last week, stunned bankers and government officials pointed blame at the freeze in short-term funding markets that has inflicted pain the world over. But Iceland's leaders had long been warned of the potential damage of a liquidity squeeze. And when it struck, authorities who had expressed optimism about the system didn't have the tools to keep it afloat. ... The central bank held low foreign-exchange reserves, leaving it with scant ammunition in a crisis. ... But there were other regulatory failures by the central bank and other authorities in recent years, [Gylfi] Magnusson [an economist at the University of Iceland] says. Among them, he says, reducing reserve requirements for banks and letting them accept giant deposits overseas. 'They gre well beyond what the government could reasonably hope to provide in deposit insurance.' ... [David] Oddison [central bank head] said foreign-exchange reserves weren't the issue. 'People started yelling that we must enlarge the foreign-currency reserves in step with the banks' growth. A totally wrong theory,' he said. 'We should have cut the banking system down'," my emphasis, Charles Forelle at the WSJ, 17 October 2008.

Venezeula's Hugo Chavez (HC) must be smiling at the "emergency" laws. HC is now the world's leader in monetary theory. I propose him for a Nobel Economics Prize. How far behind Iceland is the US?

Right on Mogambo. IA war story time, here's how IA became a "gold bug". If any reader wishes to deride IA as a crank for that reason, go ahead. See if IA cares. In January 1980, gold reached $875. Until then, I was a "good" Milton Friedman monetarist. Based on "inflation" from 1933, when gold was $20.67, I estimated gold's "fair value" was about $350. I saw something. With gold over twice its "fair value", the world's biggest gold holder, the "Treasury-Fed" with 261.5 million ounces didn't sell! Now, almost as a lark, IA rechecked all his assumptions about money, everything I ever learned, with a new assumption, i.e., gold is money and the dollar is a commodity. Many things fit which made no sense before. Even monetarism could be explained by the gold standard. I felt I made a breakthrough like that of relativistic mechanics. Huh? Newtonian mechanics fits within relativistic mechanics as long as you aren't moving near lightspeed. Similarly, monetarism can be explained by the gold standard. IA then remembered his first economics class, 101, the "Samuelson" class. My professor used McConnell's text. I remember reading a section on multipliers. There were balanced budget multipliers (BBM) and tax cut multipliers. The BBM left me stymied. I asked my professor "How did a dollar know if it was a tax increase dollar or a spending increase dollar? It seems a dollar is a dollar?" He had no answer. When I came to the marginal propensity to consume (MPC) I asked, "What if the MPC approached 1 in the limit? Does that mean if I throw a penny into the system we all become infinitely rich"? My professor said the MPC effect only works within the "relevant range". I said, "it sounds like you have no theory. Only ad hocery". If you want Keynes dissected, read almost anything by Henry Hazlitt, 1894-1993.

When times get bad enough, central banks will go anywhere for support. As they say, "Even the devil dances for gold".

I wonder how much political influence Czar Putin can buy for $5.47 billion?

Iceland's current predicament reminds me of Mexico in 1982. President Jose Lopez Portillio (JLP) promised to defend the peso "like a dog" before it collapsed. Hence, JLP's mansion is known to this day as "dog hill". It is rumored JLP salted away billions before the peso's collapse. The significance of Mexico's 1982 situation is: nothing a government official says should be believed.

Iceland's banks remind me of American "wildcat" banks in the 1830s. That's what America's SIVs are, today's wildcat banks. Or the Texas oil boom around Midland-Odessa of 1980-83. Or California's "genius" mortgage brokers who made $700,000 a year in 2004-2006 and now are unemployed. Iceland makes an excellent case study for the Austrian theory of the credit cycle. Connie Yu, are you listening yet? If you wish stay in California. Go to work for Chevron! Repent, there's still time.

What will Gordon Brown (GB) do to make Iceland pay? Will he have England declare war on Iceland? Assuming England wins the war, will GB institute slavery in Iceland to make Iceland's working class pay England's rentiers? All power to Iceland's working class! Britain will have as much luck recovering the monies in question as Mexico's creditors did in 1982, not much.

Oddsson can redeem himself. Call a press conference in New York to tell Zimbabwe Ben, "cut the banking system down".

No comments: