March 04, 2009
iceland goes boom
“Yes,” he says with a smile, “there’s been a lot of Range Rovers catching fire lately.” Then he explains. For the past few years, some large number of Icelanders engaged in the same disastrous speculation. With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn’t afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising. “The fishing guys pretty much discovered the trade and made it huge,” says Magnus. “But they made so much money on it that the financial stuff eventually overwhelmed the fish.” They made so much money on it that the trade spread from the fishing guys to their friends. It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders—especially young Icelanders—own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them. To the Range Rover problem there are two immediate solutions. One is to put it on a boat, ship it to Europe, and try to sell it for a currency that still has value. The other is set it on fire and collect the insurance: Boom!more from this great piece at Vanity Fair here.
Posted by Morgan Meis at 10:12 AM | Permalink
Comments
Stoneleigh on March 4, 2009 - 10:16am
The role of complex networked systems currently under threat is indeed vital, as is the recognition that a credit bubble creates excess claims to underlying real wealth. In contrast to currency inflation, which merely carves the real wealth pie into ever smaller pieces, credit expansion creates multiple and mutually exclusive claims to the same pieces of pie. Everyone feels wealthy, but that wealth is largely illusory. Once an inherently self-limiting credit expansion can proceed no further, it implodes, and excess claims are extinguished. This is the deleveraging we are currently seeing worldwide.
The effect of the on-going destruction of credit, which constitutes in excess of 90% of the effective money supply, will cause a global crisis of epic proportions. Money is the lubricant in the economic engine, and with an insufficient supply of it, the economy will seize up as it did in the 1930s.
Come now, no one said late stage capitalism would be fun.
Posted by: Dave Ranning | Mar 4, 2009 11:49:32 AM
"excess claims are extinguished"
That would be things like worker's pensions, home values and jobs. The bankers who created the mess have already had their bonuses and government handouts. The result is a further concentration of wealth. This crisis was very likely planned by elites for exactly this result.
Posted by: J. Hawkins | Mar 4, 2009 12:13:22 PM
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