Islandiak frogatzen du nazio-estatua bizirik eta ongi dagoela (eta 2)

1 Ikus https://www.unibertsitatea.net/blogak/heterodoxia/2016/06/01/islandiak-frogatzen-du-nazio-estatua-bizirik-eta-ongi-dagoela-1/.

2 Ingelesez: “Real Wages growing strongly in Iceland

Iceland Statistics reports that Real wages (Nominal wages adjusted for changes in the price of goods and services) initially fell after the crisis and the closure of the banks (by 13.1 per cent between February 2008 and May 2010).

However, once the government intervention stabilised the economy, real wages have grown strongly again and are now (April 2016) 12.8 per cent higher than they were at the peak before the crisis (February 2008).

Compare that the the Eurozone area where real wages overall have only grown by 4.8 between 2000 and 2015. For Greece, real wages have fallen by 14.1 per cent over that period; Spain growth by 6.1 per cent, Italy zero growth and Portugal a decline of 5.1 per cent.”

3 Ingelesez: “Real GDP has grown strongly since recovery in Iceland

Since returning to growth in the March-quarter 2011, Iceland has sustained positive growth. The outlook is strong with domestic expenditure growth robust, helped along by the growth in real wages.

Tourism has been aided by the lower exchange rate which has boosted exports.

The following graph shows annual real GDP growth since the March-quarter 2008 to the December-quarter 2015. The data for 2016 (not shown) suggests that growth will be stronger this year (estimated at 4.3 per cent) than last year when it averaged 3.9 per cent.”

4 Ingelesez: “The next graph shows the comparison with the Eurozone nations. The real GDP indexes are set at 100 at the March-quarter 2008 and extended to the December-quarter 2015.

The Eurozone 19 Member States together had still not returned to the March-quarter 2008 peak by the end of last year. Greece was 27.4 per cent smaller, Spain 3 per cent smaller, Italy 8.4 per cent smaller and Portugal 6.2 per cent smaller.

By contrast, Iceland was 5.5 per cent larger than it was at the pre-crisis peak in 2008. It lost 10 per cent of its output by March 2010, and then started its recovery.”

5 Ingelesez: “Inflation is low

Inflation experienced a sharp rise in inflation in 2009 as a result of the depreciating currency. But this shock soon dissipated and inflation is now low again.

The following graph shows the annual inflation rate from 2000 to May 2016.

It demonstrates that fears that hyperinflation will follow a currency crisis are ill-founded, as Modern Monetary Theory (MMT) proponents continually aim to reinforce.”

6 Ingelesez: “Unemployment is the envy of the world

The following graph shows the official Icelandic monthly unemployment rate from January 2003 to April 2016.

The official Icelandic unemployment rate was 3.7 per cent in April 2016 after peaking at 8.9 per cent in November 2010.

Most of the Eurozone nations would love to have an unemployment rate this low, especially only a few years after a massive collapse of its banking system.

Note also that unemployment has been falling while real wages have been rising strongly – putting paid to the orthodox claims that the latter causes the former to rise!”

7 Ingelesez: “Private consumption has recovered in the last two years and is driving growth along with Business investment

The National Accounts demonstrate that Gross domestic final expenditure grew by 1.6 per cent in the December-quarter 2015 on the back of strong growth in private final consumption (1.8 per cent growth), private business investment (3.9 per cent growth) and residential construction (11 per cent growth).

Government capital investment in improved infrastructure and services also grew by 6.2 per cent in the December-quarter.

With household spending growth now recovered (and real wages growing strongly to avoid a reliance on credit growth), business firms have an incentive to reinvest in new plant, equipment and buildings.

The strong domestic growth is creating a virtuous cycle of development, something that the Eurozone is incapable of achieving.”

8 Ingelesez: “The public deficit supported growth until private domestic expenditure was strong enough

The following graph shows the Fiscal deficit as a percent of GDP from 1980 to 2015. The large deficits in 2008 were in response to the collapse of the economy as the financial sector imploded.

The government didn’t impose large-scale austerity in response but allowed the deficit to support growth as long as it was required to allow private domestic expenditure to recover and take over the growth role.

The deficit is now small relative to GDP.”

9 Ingelesez: “Exchange rate flexibility

The National Accounts also show that exports growth is strong (2.5 per cent in the December-quarter 2015).

The exchange rate depreciation in 2009 was large but finite and the following graph, which shows the exchange rate against the Euro from January 2005 to May 2016 has started a slow appreciation since its low of 184.64 in November 2009.

It has since regained strength on the back of the strengthening domestic economy as stands at 139 or so.”

10 Ingelesez: “The fundamental differences between the Eurozone nations and Iceland are threefold:

(a) Iceland issues its own currency while the other nations use a foreign currency;

(b) Iceland enjoys a floating exchange rate; and

(c) Iceland sets its own interest rate.

These are the characteristics that differentiate sovereign from non-sovereign nations in terms of the currency in use.

Iceland has experienced a massive gain in its international competitiveness in recent years with less austerity.

The exchange rate depreciation in Iceland made its exports cheaper and demand for them grew rapidly at the same time as import demand fell because of the rise in prices in the local currency.

The same sort of dynamic assisted Argentina in growing after it allowed its exchange rate to drop significantly in 2002.

Iceland’s real effective exchange rate evened out after its initial plunge. That is a common pattern.

After an initial plunge, the nominal exchange rate stabilises as growth returns.”

11 Ingelesez: “The scaremongers who claim that the weaker euro nations would experience massive and ongoing currency plunges are in denial of history.

Iceland’s approach to the crisis was less painful and more effective. Greece and other weaker euro nations could have enjoyed similar improvements in their external competitiveness if they had exited the EMU and allowed their currencies to float.

Internal devaluation has clearly not been an effective route to increasing international competitiveness despite all the neo-liberal claims to the contrary.

The costs of such a strategy have been huge in terms of lost output, mass unemployment and social breakdown.

A recurring misconception is that Modern Monetary Theory (MMT), as part of the “Post Keynesian” family should eschew the notion that exchange rate depreciation provides a fillip for exports and discourages imports. Apparently that notion is “neo-classical” and should be abandoned.”

12 Ingelesez: “All sorts of issues are raised to claim that the current account doesn’t respond to large exchange rate changes. For example, there are apparently: (a) lags in adjustment; (b) dominance of income over substitution (relative price) effects; (c) dominance of capital flows over trade in goods and services etc.

I agree that all these things are part of the real world. Currency prices are largely driven by movements in financial capital in world foreign exchange markets, which reflect speculation (often irrational in its motivation) in the face of uncertainty.

I agree that income effects (the loss or gain of income when a price changes) are stronger, usually, than substitution effects. In this case, a depreciation undermines real income in a nation to the extent that import prices are higher. But there are also boosts to real income if exports improve.

Further, trade adjustments if they occur take time (so-called adjustment curves) and it is entirely possible that following an exchange rate depreciation the current account increases before it decreases due to valuation effects on outstanding contracts etc.

There was a view in the Cambridge model of Godley and Cripps that real wage resistance would eliminate any competitive gains arising from depreciation.”

13 Ingelesez: “All of the above a acceptable propositions. But they don’t lead to the conclusion that it is strictly a neo-classical view to consider that if something becomes much cheaper then other things equal the volume demand for it will rise over time, and vice-versa. Post Keynesians would accept that proposition just as much as a mainstream economist would accept it.

The other proposition that often gets raised against MMT ideas is that the depreciation will be so severe that it destroys the currency.

Iceland proves the folly of that notion.”

14 Ingelesez: “The new Law brought in this month by the Icelandic government demonstrates categorically who is in charge!”

15 Ingelesez: “For those who think the state is dead, particularly those on the Left who promote grand (delusional) schemes of a Pan Europe Democracy as the only way of taking on the powers of corporations, Iceland should proves that neo-liberalism has to work through the legislative capacities of sovereign states.”

16 Ingelesez: “Corporations do not have armies (usually).

They have to manipulate the legislative process in their favour. The currency-issuing state is still supreme – globalisation or not – and the Right know that. The Left have been duped into believing otherwise.”

17 Ingelesez: “That is what has to change before progress is made in restoring some decency to the policy making process around the world.”