The Problem Started and Remains with the Currency

Well, inflation has reared its ugly head again here in Iceland with a 1,13% increase over last month.  This bad news should come as no surprise to anyone.  I pointed out back in March in a previous blog entry called Kreppa Part 2 http://www.gregg.blog.is/blog/gregg/entry/841458/ that the weakening kronur was going to cause furthur inflation, eating away at any savings seen in the then 1% drop in the interest rate.  There will most likely be no further reduction in the prime interest rate as it does not help the current situation at all.  The whole problem from the beginning of the crisis has been the weakened kronur. It is the prime cause of the inflation seen today. And the weak kronur has an adverse effect on nearly everything else. Companies and individuals are heavily burdened with the ever increasing size of loans taken in foreign currency.  As the debt rises so will the defaults.  Nearly every town in Iceland is in even more dire straits because of their borrowing in foreign currency. Unless there is some solution to the kronur in the near future, the situation will begin to look even more bleak. 

And there could be even more bad news. Iceland is coming to a point where it may need to do one of two things.  The banks and government will either have to write off all the foreign currency debt and suffer the consequences of being nationally bankrupt for the future and claw its way back, or the country will have to eventually fall under the economic influence of the EU or some other nation, let the economic "hitmen" come in, and begin selling its fishing rights, power plants and anything else it can to survive.  But if Iceland would need to do the latter, what would be the point of "surviving"?

 

GTB

Verðbólgan mælist 11,6%

Athugasemdir

[Hjörtur J. Guðmundsson, 26.5.2009 kl. 17:20]

The problem is how the tool was used, not the tool itself. The króna didn't weaken just because. Blaming the króna is like hitting yourself on the finger with a hammer and cursing the hammer for it.

[Gregg Thomas Batson, 26.5.2009 kl. 18:21]

Hjörtur,

 As Thomas Jefferson once said,  "If our house be on fire, without inquiring whether it was fired from within or without, we must try to extinguish it." 

If you hit your finger do you not try to bring the swelling down regardless of how you injured it?

GTB