Here is James Surowiecki on the economic problems of Iceland. Google tells me that Iceland has about 316,252 people. Fairfax County is over three times more populous but it hardly receives any out-of-state attention. Of course Fairfax County has neither its own language nor its own culture (apart from a lunch tradition, that is) but for economic questions that should not matter much.
One question is whether we should be trading asset claims to the future creditworthiness of very small units. Let’s say there were tradeable shares in the future prospects of assistant professors. A low share price wouldn’t do much for your mid-contract review and maybe not for your mortgage prospects either. It seems that noise traders can wreak more havoc on small units, if only because volatility relative to retained earnings may be larger. Maybe the real problem is when the small units cannot self-insure; imagine the public uproar if the Icelandic government were caught selling itself short.
It’s “wreak” havoc, not wreck!
I used to work with a bunch of Finns, who often lamented the way their currency got batted around by FX speculators.Maybe that’s why they were the only Scandanavian country to go into the Euro.
You write:
One question is whether we should be trading asset claims to the future creditworthiness of very small units.
If you use minimum capitalization on venture exchanges as a comparable, Iceland would be over the hurdle.
There would be a lot more interest in the economics of Fairfax county if it had its own currency.
Why are they so concerned about a manipulation of their currency? Sure it will make imports expensive but their exporters will make a fortune. If they’re really convinced there is manipulation, shouldn’t they be able to bet against the manipulators and come out ahead in the long term?
Everything Surowiecki says rubs me the wrong way, he’s the one guy where I just don’t get Tyler’s fascination with him. To me Surowiecki comes off like, “overly simplistic summary, speculation speculation speculation, markets don’t work, end of story”.
“What is that Iceland exports?”
Fish, aluminum, tourism, financial services.
“Why are they so concerned about a manipulation of their currency?”
The banks are in trouble because they are strapped for foreign currency, the manipulation wasn’t foreseen.
[Maybe the real problem is when the small units cannot self-insure; imagine the public uproar if the Icelandic government were caught selling itself short.]
I don’t think you’ve thought this through, Tyler. I can indeed imagine the uproar.
“Sigurd, have you heard!!!! The government has sold our beloved Icelandic Krona to hold deposits in dollars and euro!!! They say it’s insurance against currency movements, but they’re not backing us up by buying krona!!! They’re selling Iceland short!!! Can you imagine the base lack of patriotism!!!”
“They’re called foreign exchange reserves, Lars, everyone has them”
“Oh”.
I don’t see the imagined problem of noise trader volatility here at all. Surely such an asset would have plenty enough volume to attract technical traders to correct any such bias, as much as any larger asset gets corrected.
Small untis have low opportunities in autarky (less specialization), so actually their reputation is much more important to them than large units. Also punishments can be better enforced againts a small unit than a big one which also keeps them in line. That is why as a borrower in the US you can get a loan for a lower rate and longer term than, for example, Argentina’s Government.
David Heigham
Further comment on re GW and Iceland.
Aluminium has been called ‘electricity in solid form’.
Since Iceland has opted to specialise in the manufacture of carbon-free aluminium (aforesaid Alcoa smelter, newly built) you can see how even a shadow price for carbon is beginning to make an impact, potentially. In addition, another export for Iceland will be web hosting services (power is 60% of the lifecycle cost of a web server farm these days).
Given that small countries can repudiate their debt, indeed can assume by fiat all domestic debt and then repudiate, I don’t understand how “creditworthiness” is even relevant. Yes, claims will be pursued in such a case, but violent enforcement is unlikely; French creditors are unlikely to gain succor from an invasion by their army and repossession of Icelandic assets.
To illustrate, Weimar Germany or, more recently, Argentina have perhaps approached “national bankruptcy” and yet have not been under threat of (financial) hostile takeover.
So Surowiecki, like any good journalist, seems to be spinning an impossible tale, so he can reach the dramatic image of a nation going bankrupt from subprimes.
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