There are those who would like to suggest that Iceland is the next economic miracle state. Its flat taxes, high income, large overseas investment portfolio; all are hailed as signs of its success.
So take a sober moment and reflect on the fact that yesterday, according to the FT:
Iceland's central bank raised interest rates by 45 basis points to a record 13.75 per cent on Thursday in an attempt to rein in stronger-than-expected inflation in its fast growing economy.
Now is that a success story for the Icelandic population at large, or a story of the exploitation of their territorial space?
I leave you to choose. I know what I think.
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We are no better. If the government statistics actually reflected the true rate of inflation for most people then interest rates would be around that level here too.
Tom
I’m sorry – but that comment is simply wrong. That level of interest rate is clearly not required at this time to control the UK economy.
OK house prices are, or have been out of control. But if we had that rate of inetrest we’d a) be out of libe with the world b) flooded ith hot money we could not service c) have a sinking economy
So I’m afraid I simply don’t agree
Richard
The rest of the world mis-states inflation just as badly as we do. Look at food prices and oil/energy prices. Ok so DVD players from China are cheaper than a couple of years ago (although not for much longer if you read about pork prices etc) but you can’t eat a DVD player!
The only reason high rates would sink our economy is that it is so reliant on ever increasing debt to keep it ticking over. We cannot borrow our way into long term economic prosperity, but we certainly are trying at the moment.
Do we actually produce anything of value anymore? Or do we simply borrow more and more money to buy cheap imported goods of no real value, and sell houses to each other?
A Bank is a credit intermediary. It stands between borrower and depositor, and its function is essentially to guarantee the credit of the borrower, backing that guarantee with an amount of capital set by the Bank of International Settlements.
The “cost” of that guarantee is the sum of the operating costs of the Bank, and its default experience. Anything more than that is IMHO de facto “inflationary”.
The “Interest Rates” set by a Central Bank are purely arbitrary, and bear no relationship to the actual “Cost” of credit therefore. Moreover, clearing banks have become accustomed to “outsourcing” the only value they do provide – that of the implicit guarantee – through the use of credit derivatives, which are essentially guarantees of finite duration.
We have drilled into us that wage increases increase business costs and are therefore “inflationary”. Increases in interest rates also increase business costs, so surely they are inflationary, too?
The truth is that Credit has a Cost, consisting of shared system and default costs: while Capital – in the form of productive assets – has a “use value”.
But Money as it truly is – a measure of value – has no “cost”.
The inexorable mathematics of compound interest on our current “deficit-based” Debt Money drives the Irresistible Force of Economic Growth even now running up against the Immovable Object of finite resources generally, and liquid fuels in particular.
Chris
Good to have such an economically literate comment
Hope you’re well
Richard
Obviously Iceland’s economy was very fragile. It was largely depending on finance and services, with little manufacturing industry.