Has Iceland returned to prosperity?

Written by Olafur Margeirsson Thursday, 29 December 2011 00:26
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In early December, Statistics Iceland issued the GDP figures for 3Q 2011.

The figures were, taking into the account how massive the global economic instability and lack of growth still are and the fact that Iceland’s banking system went magnificently bankrupt, rather surprising: 3.7% GDP growth over the first three quarters of 2011 compared to the same period the year before! Iceland was back on track, leaving Europe in the dustbin!!

The Central bank caught the goose flying (presumably an Icelandic expression - Ed) and claimed economic recovery was already there.

Therefore, people should not really be surprised about the rate hike in early November, especially since the labour unions managed to squeeze out a considerable nominal wage rate increase and that would, “of course”, lead directly to higher inflation in the close future. The government did the same, claiming the honour for the recovery and politely asked those who were always complaining about high unemployment and debts while pointing out record number of people leaving Iceland, most notably to Norway, to keep quiet. The recovery was here, no need to continue whining!

Many were still rather sceptical, simply because the debt shock since 2008 was still around and due to mad indexation of mortgages the debt wasn’t going anywhere despite write offs of (illegal!) foreign currency denominated loans and other weak debt reduction schemes. But the “World In Balance Sheet Recession” paper by Richard Koo, author of the outstanding “Holy Grail of Macroeconomics”, just opened my eyes.

Iceland was in a “Lehman Brother shock” and the balance sheet recession (too much debt) wasn’t going anywhere even though the figures of Statistics Iceland claimed otherwise.

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Olafur is the author of the forthcoming - Bad Economics (Searching Finance 2012) 

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