Should Iceland Adopt the Canadian Dollar ?

 

Jón Sigurðsson	Myntráð	Kanadadalur	Icesave-vextir	forseti Íslands	Icesave-vextir
Stjórnarskráin	forseti Íslands	Vinstrivaktin	Samtök fullveldis	Evrópuvaktin	Heimssýn

  

  

Samstaða þjóðar    NATIONAL UNITY COALITION                                                               Baráttusamtök fyrir sjálfstæðu ríki á Íslandi    og fullveldisréttindum almennings.    Stöndum vörð um Stjórnarskrá Lýðveldisins.

  

  

   

    

Should Iceland Adopt the Canadian Dollar ?

Birtist fyrst hjá Ludwig von Mises Institute of Canada 09. marz 2012.

 

 

James Edward Miller.

                                 

Picture a man huddled on the ground being kicked repeatedly by a couple of ex-military type fellows wearing steel toed boots.  Less the man is a masochist, relieving the pain of an relentless barrage of injury should be his number one priority.  Now imagine the man has a chance to opt out of this dilemma but instead has the jack booted thugs replaced with aged men wearing open toed sandals who still proceed to kick him into submission.

Sure, the pain may be have been relieved to slight degree but the agony exists nonetheless.  The symptom for the disease was identified but the remedy was far too ineffective.

Now take Iceland, still recovering from the crisis of 2008, which is looking to adopt the oft-neglected Canadian dollar. From The Globe and Mail:

Iceland’s newfound love for the loonie is sparking a wave of controversy, from Reykjavik to Ottawa.

For 150 years, the rest of the world has shown scant interest in the Canadian dollar – the poor cousin to the coveted U.S. greenback.

But now tiny Iceland, still reeling from the aftershocks of the devastating collapse of its banks in 2008, is looking longingly to the loonie as the salvation from wild economic gyrations and suffocating capital controls.

Canadian ambassador to Iceland Alan Bones had planned to deliver remarks to a conference on the future of the Icelandic Krona, making it clear that if Iceland decided to adopt the Canadian dollar, with all its inherent risks, Canada was ready to talk.

Sounds like a plausible plan at first glance.  The Canadian dollar has been semi-resilient compared to the dollar over the past few decades.

 

 

Given that Iceland may want a slightly more stable currency, the Canadian dollar appears to be a sound choice.  See the krona volatility over the past decade, via Credit Suisse

 

According to The Globe and Mail article

The krona soared nearly 90 per cent between 2001 and 2007, only to crash 92 per cent after the financial crisis in 2008.

But of course adopting the Canadian dollar only brings the illusion of stability that all fiat currencies do.  According to the inflation calculator provided by the Bank of Canada, what cost $1 in 1935 (when the BoC was established) now costs $16.76 in 2012 dollars.  This is in comparison to the U.S. dollar where what cost $1 in 1913, the year of the Federal Reserve’s creation, costs $22.90 according to the inflation calculator at the Bureau of Labor Statistics.

Some stability.

While Iceland has applied to join the Eurozone, this opportunity continues to lose its attractiveness as the sovereign debt crisis drags on.  Ironically enough, Iceland was one of the only countries to partially embrace that crazy concept of privatizing losses when its banking system went to hell (with the exception of the nation’s three largest banks being nationalized in the fall of 2008).  Agence France-Presse notes:

Three years after Iceland’s banks collapsed and the country teetered on the brink, its economy is recovering, proof that governments should let failing lenders go bust and protect taxpayers, analysts say.

“The lesson that could be learned from Iceland’s way of handling its crisis is that it is important to shield taxpayers and government finances from bearing the cost of a financial crisis to the extent possible,” Islandsbanki analyst Jon Bjarki Bentsson told AFP.

“Even if our way of dealing with the crisis was not by choice but due to the inability of the government to support the banks back in 2008 due to their size relative to the economy, this has turned out relatively well for us,” Bentsson said.

Nobel Prize-winning US economist Paul Krugman echoed Bentsson.

“Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net,” he wrote in a recent commentary in the New York Times.

Of course expanding the safety net has only put a limit to the amount of dollars left in private, productive hands but Krugman is smart enough to get a 50% on the quiz.

Another fact Krugman would likely dismiss is that Iceland’s banking collapse was a product of central bank mismanagement and artificially low interest rates resulting in the typical boom bust cycle.  This case is documented in Philip Bagus’s and David Howden’s Deep Freeze: Iceland’s Economic Collapse.  From Chapter 1:

During the several years leading up to the collapse, Iceland experienced an economic boom. The Icelandic financial system expanded considerably; a nation with a population only slightly larger than Pittsburgh, Pennsylvania and a physical size smaller than the American state of Kentucky erected a banking system whose total assets were ten times the size of the country’s GDP. The prices of housing and stocks soared, and consequently so did Iceland’s wealth.

Iceland’s particular crisis, and the world’s in general, was caused by the manipulations of central banks and intergovernmental organizations. Thus, in the final analysis, it was the actions of governments that brought about Iceland’s financial collapse. While some point to the supposed independence of central banks from their nations’ governments, few could argue that the Central Bank of Iceland, with two of its three governors direct political appointees, could be anything other than a cog in the political machine.

In short, the causes of Iceland’s financial collapse are the same causes that explain the worldwide financial crisis of 2008. The main difference in Iceland’s case is their magnitude. In Iceland, the economic distortions were extreme, making the country’s financial structure particularly prone to collapse. Moreover, the Icelandic case contains a special ingredient that made an exceedingly rare event for a developed nation, sovereign bankruptcy, possible in the first place.

Monetary debacles are a dominant feature in central banking as anyone versed in Misean economics should know.  However it doesn’t look like the government of Iceland is going to learn its lesson as it looks to replace its already failed currency with another that will ultimately meet the same maker.  Michael Babad of The Globe and Mail recently gave a few reasons on why adopting the Canadian dollar would be a smart move. Here are a few of the most egregious:

3. Respected central bank

Iceland would of course have no say in monetary policy, but it would have a currency overseen by a very strong central bank and governor, who led Canada out of the recession admirably.

Mark Carney is also respected on the global stage, having recently been named to head up the Financial Stability Board.

“Dear Canada: If Iceland wants you rather than their own inept central bank to earn their seigniorage, accept the deal,” Mr. Wolfers said on Twitter.

4. Fiscal, economic stability

Iceland has no reputation in the wake of its banking collapse.

Who would you prefer at that point, a euro zone crippled by recession and a two-year-old debt crisis, or Canada?

With Canada, you get a stable, if lukewarm, economic outlook, a government that’s still rated triple-A, and a fiscal standing to die for (if you’re Greece or Portugal).

Obviously Mr. Babad has yet to hear of Canada’s looming housing bubble.  As I have documented numerous times, the run-up in Canada’s housing prices is unsustainable.  The bubble will burst soon enough leaving not only pain in wealth terms but in moral sentiment as well.  And as Chris Horlacher points out, the Canadian Mortgage and Housing Corporation, like its equivalents Fannie Mae and Freddie Mac in the U.S., guarantees a large part (90%!) of the country’s housing market.  Being leverage 100:1 means that come the collapse, the CMHC will likely need to be bailed out via the federal government.  This doesn’t bode well for Canada’s fiscal future.

So while Iceland is smart to begin looking elsewhere for a stable currency outside its own inept central bank, choosing another paper standard controlled by the few will not fix the underlying problems associated with cyclical downturns.  Rather than “choose” a national currency, the government would be better off keeping its hands off the entire affair and let the market decide what makes a sufficient unit of transaction.  But then again, politicians would be limited in the votes they can buy so hence the squashing of any true monetary freedom.

This is why fiat money will not see a death anytime soon.  Canada may gain in international influence as others look to its dollar as a reserve currency but it will drag those down foolish enough to trust the whims of its central bankers.   

 

  

>>><<<
 

 

James E. Miller holds a BS in public administration

with a minor in business from Shippensburg University, PA.

He is a former staff columnist to the Shippensburg Slate

and current contributor to his hometown newspaper,

the Middletown Press and Journal.

Read his blog. 

      

 

>>><<<