Tuesday, July 28, 2009

Wrecking Your Currency Key To Prosperity?

Europe's perhaps foremost pro-inflationist columnist, Ambrose Evans-Pritchard at the Telegraph, is holding up Iceland as an economic role model. No, I am not kidding, follow the link if you don't believe me.

His article are full of misleading or false assertions meant to deceive the reader. Contrary to his assertions of "stabilization", unemployment has risen far more in Iceland than in the euro area. While unemployment is now quite similar, it used to be (for structural reasons unrekated to monetary policy far lower in Iceland).

He further claims that Iceland has seen rising exports. Which is true, but only in terms of Icelandic kronas. In terms of just about any other currency it has however dropped significantly. To understand why measuring exports in terms of ISK, remember that Zimbabwe saw dramatic increases in exports in terms of Zimbabwe dollar before that currency vanished (Just like it saw dramatic increases in wealth generally in terms of Zimbabwe dollars)....

He of course also leaves out that with an increase in unemployment from 3.1% to 9.1%, even as the participation ("activity") rate declined from 84% to 81.9% and the average work week dropped from 40.8 hours to 38.9 hours and the average real wage dropped 8.2%, we're talking about a total real income reduction of about 20% in Iceland. That is not "magic[ally positive]", even in the context of this crisis.

The near collapse of the ISK hasn't exactly brought much good to Iceland, in other words. And recommending it as a general policy is even more senseless, because as I've explained before, relative exchange rates are zero sum games, meaning that it is impossible for everyone to devalue against each other. Yet the damage done to others through devaluation will help conceal the damage that policy does to the devaluing country.


Anonymous Anonymous said...

Now this is a subject I have much interest but not enough understanding of: it was my understanding that for a while Iceland was significantly more economically free than places like the US, and that their per-capita income was higher. Has this changed? Has Iceland recently introduced more interventionist policies, or are we now seeing the fruition of old policies?

3:01 AM  

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