Posted with permission by Richard.
Iceland’s economy is a glimpse of things to come for our own economy. The once booming and prosperous Icelandic economy that was bolstered by an international lending boom and real estate mania has given way to a financial and economic nightmare that threatens to undo years of prosperity and growth. The economic boom of the early and mid-2000’s transformed the island nation into a beacon of wealth. The Goldilocks economy was made possible by a strong financial system that managed to maintain full-employment, price stability and sustained moderate growth.
How did this isolated island nation ascend to the world’s sixth most prosperous country? The privatization of the financial system and the hefty reduction of business and corporate taxes made Iceland an attractive location for foreign investors and businesses. The top three financial institutions borrowed massive sums of money from foreigners and reinvested that money in the international real estate and lending bubble. The Icelandic economy continued to boom as international housing appreciated and surplus savings could easily and affordably be borrowed from emerging markets in Southeast Asia.
However, once the real estate and lending bubble peaked, markets soured and Iceland is now facing an unprecedented crisis that threatens to undermine the role model economy of the new millennium. The three leading financial firms are now facing an unbelievable run on cash. Foreign investors and hedge funds have bid the Icelandic Krona down 30% against the Euro since January of this year. Inflation is running at an 18-year high as the price of food, energy, transportation and medication is skyrocketing. Prices are rising way faster than wages and Icelanders are troubled by a declining lifestyle.
The current crisis didn’t materialize from nowhere. There were signs of crisis during the boom years. Iceland had an unsustainable current account deficit of 16%. That means the Icelandic economy was borrowing an unprecedented sum of cash from foreigners and importing an unprecedented % of goods and services sold to consumers. Even with a balanced fiscal budget, such an enormous national trade and capital imbalance can spell a severe crisis. While the financial system surged, it was rooted in borrowed money. Borrowing money from foreigners and reinvesting that money can’t last forever. Once the real estate bubble ended, there was no hope for sustaining that source of prosperity. The same reasons that drove their stock exchange from 1,000 to 9,000 in a few short years led to a 50% loss in a single year.
So how does Iceland’s economy relate to America’s economy?
Our economy is based on a financial boom. The Dow Jones Industrial Average and the S&P 500 are composed of financial firms, businesses, trusts and corporations. Without financial companies, our national market capitalization would dwindle to near nothing. Citigroup, Bank of America and Goldman Sachs create the New York Stock Exchange. Without financial companies, there’s nothing. George Soros and Warren Buffet are among the wealthiest Americans. George Soros and Warren Buffet are both financiers and financial speculators.
Our economy is suffering from the triplet deficits of fiscal, trade and capital imbalances. Our government is borrowing money from foreigners. We’re buying more from foreigners than we’re selling to them. We’re borrowing money from foreign investors and financial institutions. American companies are being purchased by foreigners with American dollars that were obtained from our trade deficits. Japan, China, Korea and Saudi Arabia own trillions of $’s in U.S. stocks, real estate and Treasury bonds.
Free market ideology has governed America since the early 1990’s. Bill Clinton deregulated markets, negotiated Trade Agreements and slashed taxes on businesses and investors. George Bush has continued this ideology by reducing taxes on millionaires and billionaires. In addition, Bush has launched aggressive conflicts in Afghanistan and Iraq to fatten the profits of defense, aerospace and energy companies. Free market ideology translates into boom and bust cycles. The late 90’s boom resulted in the 2001 – 2003 recession. The 2005 – 2007 prosperity will translate into a horrible and deepened crisis.
Unlike Iceland’s economy, America’s is dealing with trillions of dollars. Fiscal deficits alone have calculated into the trillions of $’s since the turn of the millennium. While an economy like Iceland can weather small sums, America’s economy is handling trillions of dollars. Our trade, capital and governmental imbalances are unbelievable, unprecedented and unsustainable. Even a historical global Empire couldn’t survive our imbalances.
Our economy is just beginning to suffer the pitfalls of Iceland’s economy. Inflation is rising to a Post-Gulf War high. Prices are just beginning to rise faster than wages. Our banking and financial system is just beginning to suffer losses. Our employment market is just beginning to loose jobs. Our trade deficit is just beginning to narrow. Americans are just beginning to save more of their money. Gas prices are just starting to approach the European average. Food is just starting to reach the unsubsidized average. Joblessness is just beginning to reach the European Union’s average.
So what can we do? We’re not an island economy. If we want to provide full-time jobs for everybody and low prices for everybody, we have to mass produce consumer goods. From automobiles to bread, we have to provide cheap and affordable goods to everyone. From rich to poor, we have to create an economy that benefits everybody. We need to nationalize the banks and financial firms to reduce interest rates on loans and mortgages. We need to nationalize the energy sector to curtail profits and provide the American people with affordable and renewable energy. We need to provide incentives to farmers to encourage them to grow and sell more produce. What we need is democratic socialism.
Free markets caused this crisis. Free markets can’t solve this crisis.