When we hear of economic breakdown, political unrest, and government collapse, most people don't think of Iceland. The true scope of the current global financial crisis, however, can probably be judged by the fact that Iceland's coalition government collapsed yesterday following an almost unheard-of groundswell of public opposition. The country has been in a state of crisis since this past October, when widespread bank failures resulted from a tremendous load of unserviceable debt, according to an Associated Press report yesterday ("Iceland's government topples amid financial mess" 01/27/09) So far the protests have been mild judging by what we've seen in the rest of the world, limited to banging on pots and pans outside the parliament building in the capital of Reykjavik, and throwing paint and eggs at the Prime Minister's car.
As described in the article, it seems evident that Iceland's troubles can be traced to a heavy reliance on Keynesian economics, coupled with massive borrowing from foreign sources when a strong Krona encouraged many Icelanders to deal in currency arbitrage for consumer purchases. An appreciating domestic currency would allow consumers and other debtors to purchase the loaned currency for repayment at a much cheaper price, essentially engaging in short selling in currency speculation.
A problem, however, results when the domestic currency decreases in value relative to the currency that was borrowed, making it more expensive to purchase the foreign currency with the domestic currency. What seemed like a good idea at the time then becomes a disaster, both individually and nationally. As a result, the country is not only burdened with bailout loans from the International Monetary Fund and a financial system in ruins after the banking collapse, ordinary consumers are loaded with debts that increase dramatically as the Krona declines, at the same time that unemployment and inflation are both rising rapidly.
At this point, the only real help for the situation is implementation of a Capital Homesteading program at the earliest possible date. To that end, CESJ has sent a letter to His Excellency, Dr. Hjálmar W. Hannesson, Ambassador of Iceland in Washington, DC, asking for a meeting with CESJ president Norman Kurland, and briefly describing the potential benefits for Iceland in adopting Capital Homesteading.