Stunned Icelanders Struggle - A parable for Americans?

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There is a world of difference between a tiny island nation of 300,000 souls and the world's largest economy and reserve currency.

But the precise conditions being experienced by Iceland right now are definitely within the realm of possibility for the US. Therefore this next story is highly instructive as a possible, if remote, road map for the US and other overleveraged countries.

REYKJAVIK, Iceland — The collapse came so fast it seemed unreal, impossible. One woman here compared it to being hit by a train. Another said she felt as if she were watching it through a window. Another said, “It feels like you’ve been put in a prison, and you don’t know what you did wrong.”

This country, as modern and sophisticated as it is geographically isolated, still seems to be in shock. But if the events of last month — the failure of Iceland’s banks; the plummeting of its currency; the first wave of layoffs; the loss of reputation abroad — felt like a bad dream, Iceland has now awakened to find that it is all coming true.

The first thing I take away from this is how fast these crises can develop. It can certainly happen at a pace that can overwhelm the ability of key political, financial, and social institutions to adapt. This leads to hardship and disruptions for the citizens.

These next two paragraphs capture the dynamic of a currency crisis perfectly:

Overnight, people lost their savings. Prices are soaring. Once-crowded restaurants are almost empty. Banks are rationing foreign currency, and companies are finding it dauntingly difficult to do business abroad. Inflation is at 16 percent and rising. People have stopped traveling overseas. The local currency, the krona, was 65 to the dollar a year ago; now it is 130. Companies are slashing salaries, reducing workers’ hours and, in some instances, embarking on mass layoffs.

“No country has ever crashed as quickly and as badly in peacetime,” said Jon Danielsson, an economist with the London School of Economics.

These are the same effects that I would anticipate, should the US dollar suffer a similar loss of international confidence. You might retort, "Yes, but Iceland had an enormous amount of capital outstanding for such a small country," but I would reply that the US is similarly overleveraged after more than 30 years of abuse of its reserve currency position.

It is this precise suite of effects - "overnight" loss of savings, soaring prices, currency rationing, and massive layoffs - that I hold as a distinct possibility for the US at some point over the next couple of years. This is a "Horizon I" concern of mine.

While I think the chances are low, I also think the impacts are catastrophic, so it is something that I have prepared for.

In part, this happened for the same reason that every bubble and collapse happens: People readily succumb to the notion that wealth accumulates all on its own, without any hard work on their part. In short, they believe that, when it comes to everlasting prosperity, "this time it's different."

Emboldened by the strong krona, once-frugal Icelanders took regular shopping weekends in Europe, bought fancy cars and built bigger houses paid for with low-interest loans in foreign currencies.

But no story of an addictive run to the heights followed by a trip to the rehab center is complete without an enabler:

Like the Vikings of old, Icelandic bankers were roaming the world and aggressively seizing business, pumping debt into a soufflé of a system. The banks are the ones that cannot repay tens of billions of dollars in foreign debt, and “they’re the ones who ruined our reputation,” said Adalheidur Hedinsdottir, who runs a small chain of coffee shops called Kaffitar and sells coffee wholesale to stores.

People all over the world are right to wonder, and perhaps become angry, about why the very institutions that created this mess are the primary (and majority) recipients of public money. In every country that I've looked at so far, the people fashioning the "cures" are the very people who created the illness.

Think of Hank Paulson, a consummate Wall Street insider steeped in the ways and means of "high finance," running the bailout machinery. All he can think to do is prop up the big institutions, because that's all he knows.

Because of this narrow focus, are mistakes being made?

You bet.

 

This is a companion discussion topic for the original entry at https://peakprosperity.com/stunned-icelanders-struggle-a-parable-for-americans-2/

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http://www.bloomberg.com/apps/news?pid=20601109&sid=a0CcmxJQnS7A&refer=home
Credit Swap Disclosure Obscures True Financial Risk (Update3)

By Shannon D. Harrington and Abigail Moses

Nov. 6 (Bloomberg) -- The most comprehensive report on unregulated credit-default swaps didn't disclose bets in the section of the more than $47 trillion market that helped destroy American International Group Inc., once the world's biggest insurer.

A report by the Depository Trust and Clearing Corp. doesn't include privately negotiated credit-default swaps that insurers such as AIG, MBIA Inc. and Ambac Financial Group Inc. sold to guarantee securities known as collateralized debt obligations. It includes only a ``small fraction'' of contracts linked to mortgage securities, according to Andrea Cicione at BNP Paribas SA in London.

New York-based DTCC's data, released on its Web site Nov. 4, showed a total $33.6 trillion of transactions on governments, companies and asset-backed securities worldwide, based on gross numbers. While designed to ease concerns about the amount of risk banks and investors amassed on borrowers from companies to homeowners, the report may have missed as much as 40 percent of the trades outstanding in the market, Cicione said.

The data are ``likely to underestimate the amount of net CDS exposure,'' Cicione, who correctly forecast in January that the cost of protecting European companies from default would rise, said in an interview. ``A broadening of the coverage to the entire market is what investors really need.''
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In listing the villains behind the U.S. housing and credit bubbles, don’t forget to include Barney Frank and Chris Dodd, the two principal congressional cheerleaders for the excesses of Fannie Mae and Freddie Mac, who in spite of their documented culpability remain as respective chairmen of the House and Senate committes charged with oversight of the "cures."

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We need to be adamant about recreating a nation without central banking afterwards.

I’ve resigned myself to the fact we’ll have a collapse.

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hi chris

i do not disagree with you very often. but i do not agree with you when you say "are mistakes being made?

you bet"

unless you are speaking in terms of the people that are being devastated by what is happening and those yet to be devastated. if you are speaking about an electorate which failed to throw the "bums" out and voted for tweedle dee instead of tweedledum.

unless you are talking about the hiring of a new treas sec. from wall street who will be a carbon copy of what we have now.

unless you are speaking of voting for someone for change who has no intention of changeing anything except to make things worse.

unless you are talking about the failure of the voters to vote for a third party candidate so that we might have some sort of real debate.

but i take it to mean you think that our economy is being "mismanaged". that the mistakes are some kind of technical problems that some incompetent fed chairmen and treas sec. are somehow not aware of.

i disagree because i will go to my grave knowing this is not a "mistake"

every step of this is planned to the last detail.

this is straight out of the university of chicago school of economics ( founded by the rockefellers) this is the next phase in the plan launched by milton friedman and ronald reagan in 1981.

i have read just about everything in your essential books list. it is excellent and it is basic training but i believe the list needs updating.

i would add david cay johnstons "free lunch"

and naomi klein’s "shock doctrine" ESPECIALLY since her book details the application of shock to achieve the goals of those in power.

again "mistakes" appear to be "mistakes" if you look from the bottom up not in this case if you look from the top down. i choose to follow the money and who is going to benefit from all this?

i understand you have to walk a narrow path to not appear to be too far out on the fringe, but i see no mistakes.

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Dear Chris, how will you defend what is yours, home and such with civil war? Our opponents are preparing with FEMA camps, martial law militia’s, special forces… Then how to stand up against 5000 canibals… When you stay foot you are outnumbered, even with machineguns, own water and food and a fortress. There is simply no stopping people when hungry but owning your private army like the US elite. And even they will go down in the end. Best go nature, hunt and gather, store tools and food, BC best. Surely stay home until that massive wave, crash of the net…army will be self sufficient…for safety reasons. Good luck, JCW

Our masters will declare martial law soon after the dollar crash and be gone…likely 2009…maybe 2010 if we are lucky. Maybe extra resource war in ME…scare folks with live nukes instead the depleted ammo used now. Anyway, US left with internal energy and struggle, soldiers on worldwide energymissions will find another fight at the homeland where all should be secure.

Supermarkets will run out within hours, days at most, riots, panic and the like on the streets.

Just for double safety, make a plan for the mountains, small band of family and friends.Go North, go wild.

 

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[quote=jcwhitefang] Supermarkets will run out within hours, days at most, riots, panic and the like on the streets.
Just for double safety, make a plan for the mountains, small band of family and friends.Go North, go wild. [/quote]

How many others do you think have that exact same plan?
I’d bet it’s in the millions.

The idea of "bugging out" into the hills is the shallow type of thinking that’ll could get your family killed.
It’s cold, harsh and unless you’re extremely skilled at building shelters and trapping, fishing and hunting, you’ll probably just die.
Don’t take my word for it - go camping with nothing but a rifle backpack and knife. Stay out for 5 or 10 days. Don’t bring any food.

Stay in your community;

  1. Pull together for a common defense. Don’t underestimate two things: a. Peoples will and desire to survive, b. Peoples aversion to dying. Assess your land or community. What are the most likely routes of approach? Cover and concealment for yourself and potential enemies? Do you have fortifications in your home? Do you own or know how to use a firearm? Does your family? Do your neighbors?

  2. Get seeds in the ground now! Even if you’ve only got a quarter of an acre - maximize your space, use your gutter system for rainwatyer collection. Grow as much as you can, and if at all possible, get chickens. If you absolutely can’t do that in your location - get out. If you don’t want to get out, don’t complain if you starve.

  3. Get in touch with canning and preserving your own food. Buy a dehydrator. Buy propane and cans. Buy extra lids.
    Canning is simple, and water bath is even more simple. Get this learning curve out of the way now, before you need it.
    Besides, it’ll help improve your overall food stock.

  4. If your in the city - DON’T tell people what you’ve got - for the love of God. Hording is a swipe of a pen away from being illegal. You don’t have to be a secret squirrel, but don’t brag. It also makes you a target.

You’ll have strength in numbers in the towns… the cities will be hard pressed to survive, but they’ve "survived" in most socio-economic collapses this century. As long as you don’t expect anything, and prepare according to that, you should be fine.

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When Iceland started happening, I too was struck by the possibility it could happen here. One good thing is, this country still makes its own food, and a goodly amount of its own energy, and I think we would eventually be able to keep the basics running if all hell broke loose, but it would not be pleasant to, say, live in LA when there was no gasoline available for private transportation. And the transition period would be no fun either. But contrast our situation with Japan, for instance. With no international trade, they are well and truly hosed.
I think Chris is right - the guys from Wall Street who are trying to "save the system" really only think about Wall Street, and so when Wall Street has problems, they want to save what they know. It’s a simple explanation for what’s going on, and as we know from Occam, all else being equal, simple explanations are more likely to be correct.
Having said that, I’m not quite sure how we got from "this thing is being mis-managed" and "iceland could happen here" to cannibalism and suggestions on heading north into the wilderness with your suburban nuclear family. For me, I know I don’t have the wilderness survival skills to make that work, and absent a "crash course" and major lifestyle change, I’m unlikely to be successful if I were to try.
 

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Just wanted to say that I agree with Dave on this one…indeed, while the situations are obviously not quite the same (example: Icelanders get three weeks’ notice before they’re out a job, here you get called in and sent home as often as not), if anything the Iceland example shows us that even when things fall apart, they mostly just keep going, only a bit different, and a lot less fun. I think there’s a tendency to expect and even want the end of society as we know it to be dramatic, but as the saying goes, Rome didn’t fall in a day. Even during the Black Death, most people got up and went to work every day because that was all they knew to do. Iceland’s economy failed spectacularly, and look–weeks later the coffee shop’s still half-full. I’m not saying you shouldn’t be prepared to defend what’s yours, but there have been plenty of frightened, starving people in the world who have somehow still managed to avoid becoming part of a cannibalistic mob.

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from the report:

"People all over the world are right to wonder, and perhaps becomeangry, about why it is that the very institutions that created thismess are the primary (and majority) recipients of public money. Inevery country that I’ve looked at so far, the people fashioning the"cures" are the very people who created the illness.

Think of Hank Paulson, a consummate Wall Street insider steeped inthe ways and means of "high finance" running the bailout machinery. All he can think to do is prop up the big institutions because that’sall he knows.

Because of this narrow focus, are mistakes being made"

If I may: it is my opinion that the focus on propping up the big institutions is not related with lack of imagination (due to a narrow focus of Paulson or whomever), but with a clear and pretty obvious intent of serving the interests of the politicians’ true constituents: the big financial powers. Need a data point? Congress passed the bailout in the face of a huge and vocal popular opposition. Look also at the type of remuneration that Paulson alone has received from Goldman Sachs, it makes you wonder if that is for services rendered or services yet to be rendered. Compare it with whatever salary he gets from being Treasury Secretary and then ask: "who’s your daddy?" It is clear to me that, just like in the 30’s, the big banks will be saved at all cost, even if it means ruining the general population. We are starting to see the signs, banks are acquiring mountains of cash, but they are hoarding it or using it to pay for mergers and acquisitions (or bonuses…), with the resulting contraction in money supply. I guess we can expect a continuation of the bull market in bonds all the way to the zero (plus epsilon) interest rate, with all its deflationary implications, just like in the 30’s.

In a crisis like this, the real wealth of a nation gets redistributed, just like when the stock market tanks, the wealth doesn’t evaporate, it was merely transferred from the last purchaser to the last seller. I imagine that even in Iceland the big capital will be buying assets on cents on the Kronur. Iceland may look much less socially equitable after this.

This is a war. It is between monied powerful interests and the rest of us. The war is worldwide. They rely on the people’s ignorance of monetary matters and on the difficulty that large groups of people have in organizing.This is not a "conspiratorial" accusation, it is simply the way you should expect power to behave: to extend and consolidate itself. It is an institutional necessity, like saying that GE is focused on profits is not a "conspiracy theory", it is merely the description of the nature of a corporation.

As to people wondering why the politicians are behaving the way they are, or why (if they know this), the Fed is not a government agency and that it has private stockholders, much like the Bank of International Settlements and other central banks, then, people should really take a look at history. Visual forms of education and information dissemination are essential to get people started as Chris’s magnificent videos have shown. As another example, people may want to show this around:

http://video.google.com/videoplay?docid=-515319560256183936

Regardless of what you make of the value judgments stated in a documentary like this, just the historical events and the reactions of the participants (as attested by their writings and quotes) should give people an idea of how deep and how old these problems are. Even I didn’t agree with everything there, but I thought that the narrative presented is important. It is essential that people learn.

 

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Here’s a wonderfully pithy piece about the perils of survivalism fantasies:

http://www.oftwominds.com/blogjun08/survival6-08.html

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Interesting site; thanks for the post. Many of his suggestions are appropriate and probably accurate.

I disagree with others.

 

SG

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Thanks mred, good assessment of the content.

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The Money Behind the Bailout Vote

According to Maplight.org, House members who voted for the bailout received 54 percent more moneyfrom banks and securities firms than members who voted against it. The nonpartisan campaign finance watchdog group has also broken down the average donation from those sectors, based on lawmakers’ bailout stances and party affiliations:

All House Members//// Average Amount Received
Voting Yes…$231,877
Voting No…$150,982
Democrats
Voting Yes…$212,700
Voting No…$107,993
Republicans
Voting Yes…$273,181
Voting No…$181,688

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our pres elect got 4x the money that mac got from wall street.

3 of the firms that contributed to mac are toast…birds of a feather

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Miranda

Thanks for the link. It’s always good to inject a little reality into survivalist fantasies. I’ve had occasion to look around my very small community and realized that there is an abundance of tools, basic skills and knowledge necessary to survive the bad times. Getting everyone to work together for a common purpose may be a little difficult, but when times are bad people, social animals that we are, do tend to congregate and seek solutions.

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Fed Defies Transparency Aim in Refusal to Identify Bank Loans

By Mark Pittman, Bob Ivry and Alison Fitzgerald

Enlarge Image/Details

Nov. 10 (Bloomberg) -- The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulsonsaid in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aatlky_cH.tY&refer=worldwide

Yah think they are hiding something???????

Maybe they are using a vast amount to keep the market propped up?????

PS I see us taking this, and the ONLY protest I see is in California over gay marriage?

I mean, not to word this crudely, but really, is taking it in the financial shorts okay but obsolving gay marriage isn't????

How come the conservative churches and all of us aren't more upset over how and where OUR tax money (and our kids, and their kids) is going?????

I'm not in favor of gay marriage, but if I was going to create a proposition THAT would be so low on the list. I'm not going to protest a propistion over keeping or removing gay marriage BUT I would protest this "bail out" and these "officials" not being transparent.

This is BEYOND wrong.

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its just amazing to the rest of the world that you guys in the states allow your politicians to take bribes and then blatantly look after their pals. incredible that they dont have to answer to anyone either as they do this

they are stealing your money right in front of the whole worlds media and nothing is done about it!

amazing table davos, thanks… i think!

what a nest of vipers & corruption, your whole system is built on lies & violence so it seems to us and yet your polititions brag about the supremecy of american freedoom and democracy!

am i dreaming? surely im going to wake up in a cold sweat any moment now…

… please!

come on…

…must…wake…up…now…

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Davos

I think we’ve gotten so used to being fat, dumb and happy that it takes a while to wake us from our lethargy. I talk to friends and co workers who are smart and relatively well informed, but none of this is really registering on their radar as fundamentally disturbing. They kvetch and complain just as they always have about government and corporate America, but, I think, just don’t recognize the real danger in our current systemic failures. They seem to think this is going to be one more short recession in which they may have to tighten their belts for a little while, but we’ll emerge into another booming economy in a year or so. The idea of 10’s of trillions of dollars in debt just doesn’t impress them.