Iceland isn’t famous for much.
It fought the ‘Cod Wars’ with Britain during the 1950′s and 1970′s, over, that’s it, fishing rights in the North Atlantic.
It’s the home of screechy singer Bjork.
And who can forget the eruption of Iceland’s Eyjafjallajökull volcano. It shut down Europe’s airspace in 2011 causing flight delays and cancellations for a week.
But Iceland is famous for something else. While governments and central banks around the world ran to prop up failing banks using taxpayer money, Iceland’s government did the unthinkable — it let its banks fail…
Now, you may think, ‘So what, it’s Iceland. Big deal.’
Remember, everything is relative. Sure, we’re not about to compare Iceland’s banking system with that of the US, Europe, or even Australia.
But for Iceland, the collapse of the banking system was a big deal in terms of the size of the banking system relative to the size of the economy. A report from Bloomberg News spells this out:
‘The island’s sudden economic meltdown in October 2008 made international headlines as a debt-fueled banking boom ended in a matter of weeks when funding markets froze. Policy makers overseeing the $14 billion economy refused to back the banks, which subsequently defaulted on $85 billion.’
What’s happened since then? It turns out Iceland’s economy is doing just fine. The unemployment rate in Iceland stands at just 4%. Compare that to many parts of Europe where the unemployment rate remains in the double digits.
Banks Fail, Life Goes On
Now, we won’t give Iceland a complete pass. Letting the banks fail was a great idea. What isn’t so great is the rest of the government’s plan. Again, Bloomberg News notes:
‘Of creditor claims against the banks, [Prime Minister] Gunnlaugsson says “this is not public debt and never will be.” He says his main goal while in office is “to rebuild the Icelandic welfare state.”‘
Yuk!
For ‘welfare state’ read ‘redistribution of wealth’. Although we guess a bunch of the people who benefited from the welfare handouts were taxpayers too. So in a way they simply got back some of the cash the government had taken from them in the first place.
And if we had to express a preference, we’d rather the cash went to Icelanders than to investors who deserved to lose money for taking part in a giant banking Ponzi scheme.
Even so, it still leaves us with somewhat of a bitter taste in our mouth. Especially when we read that Iceland’s policies have the full support Keynesian economist-in-chief, Paul Krugman.
But whatever you think of the fine details, the fact that Iceland let its banks collapse proves the deception of those in the US, Europe and Australia who claimed allowing banks to collapse would be catastrophic.
The opposite is true. Iceland now has the lowest unemployment rate in Europe, and a rate that’s even lower than Australia’s ‘miracle’ economy!
Mass Selling Creates Buying Opportunity
It’s a cast iron fact that markets (by markets we mean the free interaction of individuals just like you) will always come to a better solution on anything than a bureaucracy that always acts with a vested interest in mind.
This is what other Western nations should have done. If they had followed Iceland’s lead it’s more than likely that the ‘Crash of 2008′ would be a distant memory.
Everyone could have moved on with their lives. Those who wanted work would have work. Interest rates would be at a level determined by the market — high enough to encourage savers, but low enough to encourage borrowers.
The rates would fluctuate according to supply and demand, just as every other price fluctuates according to supply and demand.
Importantly, you wouldn’t have the constant ebb and flow of booming and busting markets. You wouldn’t have the paradox of bad economic news being good for the market and vice versa.
But, it is what it is. As we’ve explained for at least the past three years, it’s important for investors to acknowledge the situation and deal with it. There’s no point whinging about the manipulators. Make a note of it and then look for great investments that the market has unfairly beat into the ground.
One of those investments is the emerging markets investments we wrote to you about yesterday. Another is the resource sector — more on that later in the week.
The market is treating emerging market economies as though they are still economic backwaters full of good-for-nothing layabouts. The reality is far different.
Many — if not all — of the emerging market economies have an exciting story to tell and a promising future. And yet the markets are selling these economies in droves. And for what? That’s right, they’re after the safety of the US dollar.
To us this looks like a great opportunity to speculate on emerging markets and other beaten-down stories. In fact, we can’t think of too many other places where we’d rather put our money for a punt today.
Cheers,
Kris.
PS. Our old pal Nick Hubble likes the emerging markets story too. He has identified five ways to invest in some of the most exciting (and risky) of these opportunities. He calls these investment his ‘Tiger Cubs’ portfolio. Check out more here…
Special Report: 2014 Predicted
