Islandia: makro ikuspegi bat (Ólafur Margeirsson-ekin)

Macro N Cheese – Episode 171
A Macro View of Iceland with Ólafur Margeirsson

(https://realprogressives.org/podcast_episode/episode-171-a-macro-view-of-iceland-with-olafur-margeirsson)

Artwork for podcast Macro N Cheese

Transkripzioa:

May 7, 2022

[00:00:04.650] – Ólafur Margeirsson [intro/music]

Essentially, you can create money however you want, but, ultimately, it’s going to be the real economy that limits your actions, essentially. And if you can solve a problem with money, it’s not a real problem. But in many cases, that’s exactly the limiting factor.

[00:00:25.450] – Ólafur Margeirsson [intro/music]

Of course, we had the volcanic eruption from the volcano whose name cannot be pronounced by anyone except Icelanders. It’s Eyjafjallajökull to just put the records straight. And weirdly enough, it acted as a commercial for Iceland.

[00:01:35.110] – Geoff Ginter [intro/music]

Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43.090] – Steve Grumbine

All right, folks, this is Steve with Macro N Cheese. Our guest today is Olaf Margeirsson. And Olaf is an economist from Iceland, and he comes highly regarded from Fadhel Kaboub, who many of you all know who listen to this show. I’m very excited to have Olaf join me today. Olaf, please tell us a little bit about yourself.

[00:02:04.930] – Ólafur Margeirsson

Thanks a lot, Steve, for having me. I’m happy to finally have the chance to chat. I am a regular listener to your podcast after all.

[00:02:14.420] – Grumbine

Yay!

[00:02:15.550] – Margeirsson

Yeah, exactly. So, a little bit about myself, originally from Iceland, like you said. I started my career, actually, before 2008 while I was a bachelor student in economics. That was neoclassical economics. And I had my first reality check in 2008 when 90% of the banking system in Iceland collapsed in about ten days in October, 2008.

That pushed me towards trying to understand the real function of the economy. So, I ended up doing a Masters and later on a PhD in economics, focusing on finance and instability. And that’s where, as you can imagine, with the focus on financial instability is where I got to know Hyman Minsky.

[00:03:12.470] – Grumbine

Ah, ha.

[00:03:12.470] – Margeirsson

Exactly. In 2014, I met said Fadhel Kaboub in upstate New York at the Minsky Conference, which they have every year. That was, basically, how I got to know a bit more of realistic economics from there, obviously, I developed into learning more about Post-Keynesian economics and from Post-Keynesian economics, I got to know MMT.

And over the last, basically, 13 – 14 years, I’ve been using this newly acquired knowledge about a bit more realistic ways of understanding the economy to write, in particular, about the Icelandic economy and how that fits within the MMT and how MMT actually works with that one. I live in Switzerland, though. I am the head of Global Real Estate Research at Credit Suisse Asset Management in Switzerland, but I also still have one foot back in the home country.

I was an alternate member of the supervisory board of the Central Bank of Iceland until 2021. And I’ve been writing, like I said, for about 12 – 13 years, probably about 250, or probably near to 300 articles about how the Icelandic economy works and how MMT in Iceland actually applies and how it, basically, functions – the Icelandic system – within the framework that MMT helps to understand and set up.

[00:04:53.950] – Grumbine

Why don’t you tell us a little bit about Iceland? I know that the idea of Greenland and Iceland has always been a bit of a joke, but Iceland is quite beautiful. All the pictures online, anyway. I’ve never been there myself. But tell us, what is Iceland like?

[00:05:10.940] – Margeirsson

Well, Greenland is beautiful as well. I’ve been to Greenland and I can recommend definitely that everybody should go there. But yeah, Greenland is not green. Greenland is ice and Iceland is green. That’s the old joke. So, Iceland is a bit special or I think, basically, call it the MMT crowd or the MMT economists in general. I think we can learn quite a lot from Iceland.

It is a very small, independent country. It’s about 350,000 people. I couldn’t give you exactly what it is in square miles or Hectares, but it’s about 100,000 km². But basically everybody is living in a southwest corner of the country, around three quarters of the whole population. So I sometimes joke that it’s basically a city state with a large garden.

And the funny thing about it is that it has its own currency as well, the Icelandic Krona. And, like any currency, that was created by law in 1871. In the case of the Icelandic currency, and basically over the 30, 40 years that Iceland was gaining its home rule, we were a colony of Denmark. We gained our independence in 1944 and our home rule about 30 years before that.

But the first step towards becoming an independent nation was taken in 1871, when there is basically a definition from the Danish Parliament of how the relationship should be between Iceland and Denmark. And that was the first cornerstone of how the development of the Icelandic independence was going forward from there. Part of that was the establishment of the Icelandic Krona.

And, so, it was exactly like Rohan Grey would say – repeated guest of yours – he always says that money is the creature of the law, essentially, and that’s exactly the case. It’s a live example of it, yet again – that law creates money, simply.

[00:07:23.830] – Grumbine

So, within the laws of Iceland. Is it tax driven? Is it fee driven? What is the hold that keeps the Icelandic Krona in play?

[00:07:35.890] – Margeirsson

It’s taxes. Iceland is a mix between an American society and the European society. Tourists that go to Iceland, they will probably notice that we have a lot of cars, streets are wide, which is very American of us. But we have this social democracy set up. We have very strong welfare system. We have public institutions that provide us with public education, public health care, et cetera.

And from the start, the fundamental driver of the demand for the currency or for the Icelandic Krona was taxation, and that is still the case today. Fees were always very little part of the whole thing. And that still is the case today. The issue, so to speak, with the Icelandic krona is, of course, the same with the Icelandic economy is the same issue as Fadhel, for example, has repeatedly pointed out with regards to, say many of the African nations is that we do not produce everything that we need.

We do not have a currency which is internationally accepted. So in order for us to be able to import something, we need to generate the income, as in the income in the Euros or the dollars that we then use to pay for the import. And it has been repeatedly the case throughout the economic history in Iceland that has been too much created of the Icelandic krona that has then entered the FX market, the foreign exchange market where we were buying, for example, dollars.

Basically, we created kronas at home by simply standard loans, create deposits from the banking system and so on. And that then created an oversupply of krona and the FX market because we were trying to import something that we hadn’t actually gained the export income to pay for. That obviously led to current account deficits. It led to a fall in the Icelandic currency. In the krona.

It led to import inflation. And there was a repeated cycle of devaluation of the currency, which was basically fundamentally driven by too much credit creation coming from the banking system. And that is, I think, a fundamental support for the MMT view that essentially you can create money however you want, but ultimately it’s going to be the real economy that limits your actions essentially. And if you can solve a problem with money, it’s not a real problem, but in many cases, that’s exactly the limiting factor.

[00:10:35.320] – Grumbine

That’s a great quote. I just saw that the other day. That’s fantastic. I want to ask you, with Iceland being primarily, I would assume, a net importer what exactly makes up the Icelandic economy? I believe in our conversations offline Iceland is energy independent. That’s a huge deal. Talk to me about what makes up the spectrum of sovereignty, if you will, for Iceland.

[00:11:00.550] – Margeirsson

So in the case of economic sovereignty or monetary sovereignty, as it’s called, it’s true. Exactly. We are mostly energy independent. We need to import the oil or the petrol, essentially gasoline that we use for cars, planes, and so on and so forth. We hardly use any gas whatsoever. Most of our heating is done by geothermal sources and whatever is left of, for example, house heating is driven by electricity.

I think the ratio is about 90% of the energy production in Iceland is from hydroelectricity. And per capita actually, we produce double the amount of energy that the next nation or the next country in Europe does. And that is Norway. So we are absolutely huge as an energy producer, per capita. The way that we use that energy is obviously for domestic industries or domestic households, in particular.

Energy prices in Iceland, are roughly a quarter of what they are in, say, the UK, where I used to live for many years when I did my PHD. And at the same time, we basically have an abundance of energy. We export, with inverted commas, that abundance via aluminum smelters. It is cheaper for many of the aluminum smelters or aluminum producers of the world to basically build aluminum smelters in Iceland, buy the electricity from there, and then export the goods over to Netherlands and to the US, et cetera.

So that’s one thing. The exports via energy, that’s one thing. Another very important one has been obviously fishing and the fishing industry. We did manage to completely overfish the stock of fish in the ocean around the country, especially in the 1960s. Actually, herring was one of the fundamental catches that we had up until the 1970s.

But during the 1960s, in the early 1970s, we basically shoveled everything out of the ocean and we overfished everything away with the consequence, as you can imagine, that many fishing villages and fishing societies around the coast basically went into a long term economics stagnation. So, we definitely have managed to do the mistakes of overusing resources to the extent that they basically were not able to catch up with our usage.

[00:13:37.750] – Grumbine

The unsustainability of overfishing.

[00:13:41.550] – Margeirsson

Absolutely. And today, a big segment of the economy is tourism. And to a large extent, there are three export industries in Iceland. It is fishing industry, it’s the aluminum export and then tourism. And as a rule of thumb, you can just simply say that each of them is one third of the gross exports. Now, the issue that we have from a macroeconomic point of view and from foreign currency generation, the aluminum smelters, they are all owned by foreign companies.

And so any profits that are generated in Iceland, they actually just exported immediately via the financial account. So we don’t actually benefit from the profits that are made. And after the crisis in 2008, it wasn’t the fishing industry or the aluminum smelters that were saving the economy, it was tourism to a large extent.

We grew the number of tourists in Iceland by about, if I remember correctly, 20% to 30% per annum for about ten years. And that massive explosion of tourism basically allowed us to get the foreign currency income that we needed in order to rebuild the economy after the GFC in 2008.

[00:15:01.630] – Grumbine

Has the IMF got its hooks into Iceland?

[00:15:05.050] – Margeirsson

Yes, they assisted us in, if remember correctly, they came in October rather than November 2008. There was pressure on reducing the fiscal support, especially during 2011. But ultimately it was so politically dangerous for the government that they actually just put their foot down, at least partially, and said, no, we’re not going to cut the fiscal spending as much.

And that actually ultimately was one of the reasons why Iceland did manage to grow again out of the crisis that it had. But I think the fiscal powers and the pressure that was there, it was not as important as the contribution to the economy that came via tourism. And it was luck to a large extent that allowed us to expand the tourist industry as much as we managed to do it.

[00:16:02.360] – Grumbine

The structural adjustments the IMF puts on countries that don’t have that luxury of sovereignty over all their sectors is usually pretty brutal and cruel, actually. They always want to put some form of austerity in there to make it more market friendly for capital to come in and do its thing. I’m curious, how did Iceland avoid that trap? Or did they?

[00:16:27.610] – Margeirsson

To some extent they did, yes. The government just put the foot down and simply said, no, we’re not going to do it. And they did it because there was a lot of anger in Icelandic society after 2008. If I remember correctly, after 2008, the unemployment rate skyrocketed on Icelandic standards up to about 17,000 people. And that’s not a lot. Obviously, we just think about it back then.

But essentially any numbers with regards to the Icelandic economy, the GDP or the population, for example, as a rule of thumb, you can just multiply it by 1000 and you get the US economy scale. The GDP of Iceland, for example, is about $21 billion¹, but the GDP of the US is around 22 trillion². So that’s a factor of 1000.

[00:17:22.570] – Grumbine

Wow.

[00:17:23.400] – Margeirsson

Population is roughly the same. So bit of rounding, but that’s an easy rule of thumb. So right after the crisis, there was a shock, obviously, to the economy. 40% of homeowners were underwater. There was a very high unemployment rate on Icelandic scale. Remember that this is a Nordic society that basically favors welfare a lot more than the systematic way of doing it in the US.

And obviously there was an inflation shock on top of everything as well that made actually things even worse for homeowners. Because more consistent Iceland power actually indexed to the inflation rate. So when inflation went up 10%, the principle of mortgage debt went up 10% as well. Yeah, that put obviously a lot of people underwater and you could feel the anger.

And when IMF came in and said we need to go into hard austerity, people simply just said, no, we’re not going to do that. And so it was ultimately not done. That was the reason. In 2011, essentially, that’s when the real recovery starts, the tourism rebounded thanks to or due to the fact that the ascended Krona lost about 50% of its value in 2008.

In 2011, you had a bit of an economic recovery in the UK, in the US. So it was US and British tourists that were the first ones to recover with regards to coming to Iceland. And they brought the dollars and the pounds that we needed. In 2010, of course we had the volcanic eruption from the volcano whose name cannot be pronounced by anyone except Icelanders.

It’s Eyjafjallajökull just put the record straight. And, weirdly enough, it acted as a commercial for Iceland. There was this feeling outside of Iceland that because the economy had collapsed, Iceland was famous as the bankrupt country back then. And there were news stories outside of Iceland that basically said that we had jailed all the bankers. That was one thing.

In 2010 we have the volcanic eruption and that was another round of the whole international community speaking about Iceland. And then in 2012, all of a sudden we could play football and we did quite well. And so again, there was basically three events in a row that all of a sudden helped us in generating publicity for Iceland.

And that publicity pushed people towards Googling the country and just searching for it, et cetera. And people saw photos from a country with a landscape that looked like it was from the moon and people were simply just interested in coming to a visit and that was that publicity rather than the act of the government in making sure that we wouldn’t go into too much austerity, that managed to push the recovery up to a level where we’re starting to be a bit self-sustaining.

[00:20:44.950] – Grumbine

You mentioned the international discussions about jailing all the bankers, and in leftist circles: this heroine comes in, she takes hold of the country, she jails all the bankers and everything’s happy. Iceland is this perfect paradise. This is the story that many of us have been told. What is that story? The real story, not the make-believe version I just said.

[00:21:11.180] – Margeirsson

It’s a bit blown up, unfortunately. So we had absolutely no idea what to do after the collapse. We needed foreign specialists to guide us what to do. One of them was a French lady called Eva Joly and she was an enormous help. She basically came in and she gave us a bit of guidance on how to react to all the frauds, to all the cheats basically that had been going on.

There was a lot of fraud that had been within the Atlantic banks before they collapsed and internal trading, et cetera. Political friends had got special deals, etc , etc. It was obviously blown up or it was made worse than in many other countries by the fact that Icelandic society is very small and everybody knows everybody else. So it’s very difficult to find somebody who is independent within University of Commerce.

Somebody is always going to be connected to somebody else. And so it has always been a bit of an excuse for the closely knit relationship between business and politics in Iceland that you just can’t find somebody else. That has been the ongoing excuse for many years. And so anything that is not done properly is basically excused by this in many cases.

The fight that happened after 2008, in some cases, yes, we did actually jail some bankers. There was even some politically related persons that went to jail as well because they had used insider information to profit and basically make sure that they wouldn’t lose as much money as everybody else to a large extent.

But in many cases, ultimately what happened was that there was a governmental body or a judicial body that was set up after the 2008 crisis, which had the role of building up the cases against all the bankers and everybody who had been using insider information and the fraudsters, et cetera. But due to at least one of the reasons why it didn’t work out was that there was a political pressure on making sure that this institution was not financed properly.

So they didn’t actually have time to do all the cases and to run all the cases and develop the cases and build up the cases that they wanted to do. And what that meant was that in many cases, when they finally got to the point that they were comfortable with taking the case to a judge, the elite fraud had taken place many years before, it was forgotten by that time.

[00:24:05.590] – Grumbine

Okay, so Bill Black from UMKC and the brilliant man of the law attacked the elite control fraud through the savings and loan crisis that occurred in the United States and also has been instrumental in driving out a lot of the corruption that occurred in that 2008, 2009 period leading up to that with the mortgage backed securities. That was in the United States. Clearly this had a global impact. How did the US failings of being able to handle this elite control fraud – how did this impact Iceland?

[00:24:45.910] – Margeirsson

So we didn’t really look too much towards the US at that time. We were looking more towards Europe. We had a British gentleman that came over to us who helped us in running the case against the Icesave Debacle, against actually the Dutch and the Brits. We had Eva Joly, who came from France to help us out with running the cases against the fraudsters and the bankers that had broken rules, et cetera.

And there was political will to take a look at whether Iceland should join the European Union. So what was happening in the US didn’t really register too much on the radar in Iceland.

[00:25:24.670] – Grumbine

Okay. The US seems to have an outsized impact on everything it touches. It seems to do a lot of damage elsewhere. I was just curious. Something you mentioned earlier that I think is very important for folks that are starting to look beyond the United States. A lot of people listen to this podcast in the US, but we do have a global audience. And one of the big concerns is that whole balance of payments discussion.

And you had mentioned about getting the foreign currency through exports, through tourism to be able to purchase things elsewhere. And we talked about the currency trading and being devalued. In the United States, most people think of the dollar because of the hegemony around the world. But when it comes to Iceland, when you are a developing nation or a nation that doesn’t have full sovereignty for production, explain the role of currency on the foreign exchange markets and the impact it has on your country or any country really.

[00:26:28.690] – Margeirsson

So, to a large extent, it’s a bit of a very parallel story or a mirrored story to what an example, we don’t have the population to manufacture everything that we need. We don’t have power plants. We don’t manufacture radios, or the laptops and the computers that are imported. So technological high tech industry goods, they need to be imported.

We also need to import many of our foodstuffs. There are no oranges in Iceland. Bananas don’t grow there. Obviously tomatoes only grow within greenhouses and so on. So there is a certain amount of food stuff that we need to import as well. What we can and what we do export with regards to food is obviously fish. Like I said, we gain the US dollars that we then later use to pay for imports with tourists.

But in 2006 – I think I am not mistaken here – we set a world record in current account deficit. In 2006, we had a 26% deficit as a percentage of GDP on the current account. And I am not familiar with any other economy that has managed to run such a large deficit on the current account, especially not amongst what you call developed economies like Iceland usually is considered.

The way we did this was with an incredible credit creation and credit expansion. The credit expansion ended up in a housing bubble. It ended up in a stock bubble. We had obviously bit of a land bubble as well. And all that money then ultimately, basically it landed on somebody’s bank account. And because we need to import so many other things, cars and so on.

When we were using that money, let’s say somebody built a house and he sold the house, that money was used to say import a Range Rover. A Range Rover incredibly enough, it was a status symbol in Iceland, the Range Rover. After 2008 they were called not Range Rover, but “Game Over.” And surprisingly enough, there was a lot of cars that blew up and they just combusted.

There was a lot of fires, accidental fires in Range Rovers simply because people were bankrupt and they were trying to get the insurance money back. But ultimately what happens in economies that have their own currency. It increases the set of possibilities that money creation can be used to and it can be used for many different things.

So credit creation or money creation, it can be used to, for example, try to build up domestic industries which are then later on manufacturing or producing goods and services which are either used to replace imports or to create export income in order to be able to use that export income to pay for imports later on. So that’s one thing that you can do when you have your own currency.

Another thing that you can do is you can allow the banks to create way too much of it and you end up in a current account deficit, which later only leads to the currency devaluing, inflation going up, etcetera. So there’s a set of possibilities that is available. When you have your own currency and this set of possibilities, you can misuse it and you can use it.

And in some cases, countries choose not to make the whole set available for them. They want to actually limit themselves to a very particular subset of economic possibilities by, for example, joining a common currency area. And that’s what the Euro is³. So when you have your own currency, you can develop your economy by very smart economic decisions, domestic investments that build up the production capacity of the economy.

Or you can use that currency to basically create a credit bubble, which then runs the economy to the ground. And some countries have decided we don’t even want to have that possibility. We are just going to follow a fixed exchange rate and we are going to be absolutely certain that we cannot create our own health.

[00:31:47.250] – Intermission

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[00:32:13.110] – Grumbine

It sounds like Iceland in particular, though it feels like Greece minus the Euro. You’ve got fishing, tourists, definitely a net importer. Is there any relationship there that you can draw between Greece and Iceland?

[00:32:30.990] – Margeirsson

The biggest difference, I think, is that the institutions and I mean the economic institutions, like, say, for example, the government and the tax collection, et cetera, even if they are not very good in Iceland, they are actually better than they were, at least before 2008 and 2010 in Greece. Iceland, to a large extent, copied its institutions from Denmark.

Like I said, we were a colony of Denmark. When we gather our first and only Constitution in 1874, we literally copied the Danish Constitution and we changed the word King out for the word President, because Iceland is a presidential Republic, and to a large extent, we inherited the economic institutions, the rule of law, the tax collection systems, et cetera, from Denmark.

Greece – the problem, of course, it has a very long, troubled relationship with its institutions coming from Turkey or the Ottoman Empire, et cetera. And so essentially, to a large extent, there was never this unwillingness to pay taxes in Iceland, which at the same time that unwillingness in Greece was palpable. And that, I think, is a bit different⁴.

[00:33:56.310] – Grumbine

It’s very interesting. I remember when Yanis and Syriza was going through the process of deciding what to do with the austerity that was implemented by the IMF and how that all played out. I wonder how a small island nation like Iceland is able to avoid those pitfalls, because whenever you are dependent on anyone outside, there’s so many variables that could destroy your entire economy.

How does Iceland balance the imbalance of the lack of sovereignty? How do they mitigate the impacts of global geopolitical factors? How do they buffer themselves from instability?

[00:34:42.510] – Margeirsson

So there’s a difference here between, I would like to say monetary sovereignty and political sovereignty. We have quite a strong political sovereignty and at the same time our monetary sovereignty, because we are such a small economy where we need to import so many things, is relatively low in comparison to many other larger economies, obviously.

Say, for example, the US is the easiest one, but say, for example, Switzerland as well, which also is a small economy on the world stage, but it has a better monetary sovereignty than Iceland. So that’s one thing. Iceland is a part of the European Economic Area, and we joined that in 1993. Also because of that, we have actually inherited many of the institutions that come from Europe and in many cases, for example, consumer rights.

They are, thanks to the fact that we joined the European Economic Area. So to some extent, we have actually piggybacked on some of the institutional development that has taken place within the European Union and Europe, essentially via our membership in the European Free Trade Agreement and our membership with the European Economic Area.

So I think us being able to balance the sovereignty and making sure that, for example, the IMF doesn’t come in and trample us to accepting too much austerity. That’s one thing. The second thing is important is that I think IMF was actually interested in using Iceland as a bit of a testing ground when they realized that the political fierceness and the anger was so high in 2008 and 9.

And this is actually just before the Euro crisis when they realized that it was so high that in order for having an operational government in place that was not going to fall into a spiral of political instability, they needed to make sure that the austerity level was acceptable within invested companies so they couldn’t actually push on too much austerity simply because if they had done so, the political instability that would have been the offspring of that would have been too high and they would have dug their own grave.

[00:37:11.550] – Grumbine

So much of what many people attribute to the US being a world power is its military. How does Iceland defend itself? Does Iceland have a standing military?

[00:37:23.950] – Margeirsson

No, we do not. We have a SWAT team, and that’s the only weaponized force in Iceland. I’m not sure exactly how many members are in the SWAT team, but I would guess maybe 15 to 20 people and that’s it.

[00:37:37.070] – Grumbine

Wow.

[00:37:37.840] – Margeirsson

We are a member of NATO and we are actually a founding member of NATO since 1949. And a large driver behind that is the fact that Iceland was occupied by the Brits in World War II. May 1940, Britain actually comes and sets up a small military base to make sure that the Germans don’t have a back door into the British Isles. Britain actually built the Reykjavik airport, which is the domestic airport in Reykjavik.

In 1951, the United States takes over the defense role of Iceland and builds the Keflavik international airport. There was a base, a military base from the US Army in Iceland until 2006. And Iceland was an important station for the US Army to monitor the Soviet “Empire,” or whatever you want to call it, during the Cold War.

[00:38:37.810] – Grumbine

Sure.

[00:38:38.800] – Margeirsson

And importantly, Iceland was the country that got the most out of the Marshall Plan. Per capita. Again, we always win when it comes to per capita. It’s only 350,000 of us. So it’s very easy to have something per capita in Iceland.

[00:38:58.590] – Grumbine

We talked about currency being of the law, and law requires enforcement. And you tell me you have no standing army and you maybe have 22 SWAT members for 350,000 people. It’s very interesting because in the United States, you probably have that many people in one block in New York City for police. How does one maintain law and order? Is everybody just happy and they got good benefits? How do you maintain law and order like that? I think it’s great. I’m blown away. It’s so different than the US.

[00:39:36.750] – Margeirsson

So exactly like I said, we inherited our institutions, including societal structure from the Nordics, in particular from Denmark. And that, I think is a really important reason. Like anybody else, Icelanders complain about high taxation and paying taxes, etc. Everybody does that. But we pay them. And taxes in Iceland are high. They are high because we have publicly financed institutions like the universities.

The schooling system is all public. The police is obviously public. There is no private army. There are very few small private security firms, et cetera. And we have public health care as well. And when the financing for those institutions, those societal institutions, come from the government, somehow you need to reduce the amount of money in the economy again.

And you do that by taxing it back to the government, essentially. Taxing it back to the fiscal coffers⁵. That is society’s agreement, essentially. It is accepted that we are going to have a strong welfare state. It is accepted that we are going to have high minimum wages. It is accepted that we are going to make sure that everybody has access to basic but still good health care.

And because the government finances this, there’s a lot of money that slushes out from the government coffers which then needs to be taxed back⁶. And because society accepts it, taxation works. Even if you do not have a mechanized army or a tank pointing at you.

[00:41:28.950] – Grumbine

This brings up a great point. In the US, we’ve spent so much time explaining that the currency issuer doesn’t require taxes to fund their spending, but they require taxes to drive the need for the currency. Walk me through government spending in Iceland and the role of taxes, because the states in the United States, the currency users in the states, rely heavily on tax revenues to maintain their institutions at the state level because of our federal system. What is it like in Iceland? It seems like it’s a little bit different.

[00:42:07.830] – Margeirsson

It’s almost exactly the same as in the US. So, the Iceland currency – the Icelandic Krona – was created by law in 1871. In 1885, the government starts printing its own currency, as in notes, which is then used to pay the wages of, say, for example, government officials back then. And likewise, at that day in 1885, there was a law put in place which allowed the public to pay taxes using this very same currency. Before 1885, it was actually possible to either pay your taxes with a Danish currency or even simply with livestock in many cases.

[00:42:55.430] – Grumbine

Interesting.

[00:42:56.550] – Margeirsson

Now, after 1885, that wasn’t possible anymore. And the only acceptable medium of payment when it came to taxes were the notes that the currency issuer, as in the government had already printed. It obviously needed to get that money into circulation first. And the way it did that was first of all by putting it into the banks, which then lent it out exactly the same way as an American Bank works.

You go into a bank, you ask for a loan, you are either rejected or accepted as a debtor. You then have a deposit created in your name. And when you withdraw that deposit, you get paid in currency. And it was that very currency, that little note that had been supplied to the banks by the government in order to get that note into circulation.

That note was then used by somebody in the economy to pay taxes. It works exactly the same way as in the US. The currency issuer needs to get the currency, the notes, into circulation before they can be used as a payment of taxes. And that was basically established in Iceland in 1885.

[00:44:16.290] – Grumbine

Very good. So the way Iceland is set up, how is the hierarchy of government division done? Is it just one government for the entire place or is it broken down into smaller sections?

[00:44:32.850] – Margeirsson

You have a closer relationship between the federal level and the individual. There is only one level of laws. For example, it’s the federal level of laws. There are no municipality or state laws, even if we have municipalities and we have elections within those municipalities where basically you have different parties running and different politicians and so on.

But those politicians are only part of the executive branch of government, and in fact, it’s only the government at the municipality level. And not the federal level. There are two judicial levels actually in the country, but the law is always made at the federal level. So there are no state laws like you have in the US. That’s one thing.

Importantly, when it comes to the monetary system or the financial system, there is also just one branch of the central bank. There’s only one central bank and they are not the regional central banks like you have in the US. And the payment system in Iceland is actually a bit special. It has only one level. Essentially, you have the central bank sitting at the top and the central bank is the final and the only government institution – and in fact the only institution within the payment system that can clear payments.

So when you go to a bank and you are going to pay a friend of yours 50 Icelandic Krona or say 50,000 Icelandic Krona, you would go to the bank and you would say, I would like to transfer my money right here on my bank account over to my friend’s account and here is the bank account number. If the bank account happens to be within the same bank, then obviously the clearance just happens within the bank itself.

That’s easy enough. But if the bank account of your friend happens to be in another bank, what happens then is that the bank that you have, your bank basically, needs to go to the central bank and say Steve is actually transferring money over to his friend. Here is the bank account of the friend. Can you please transfer some money from my reserve account at the central bank over to the reserve account of the friend’s bank at the central bank and then central bank basically tells the receiving reserving account Bank, Steve was paying his rent, this is the bank account.

Can you please credit his account? So the clearance is only at the central bank level. There are no intermittent banks in between, like in, say, for example, the United Kingdom, where the bank of Scotland or Nat West or HSBC are the intermittent of payments for the smaller building societies and smaller banks in the UK.

And this was important when everything collapsed in 2008 because when 90% of the banking system, when it went bankrupt in ten days in 2008, basically the central bank was capable of taking over the whole of the payment system and just run it from its own balances, even if the three major banks went bankrupt in such a quick manner.

Basically what happened was that overnight there was a new balance sheet established where your deposit in a failed bank was created out of thin air on the new balance sheet which was in the ownership of the old failed bank. And then the central bank plucked that new balance sheet, that new bank straight into its own reserve account system and you as a customer of the banking system, were still even able to use your own same credit card, you were able to use your own debit card and basically everything was still flowing.

All the payments were actually still flowing, even if 90% of the banking system went bankrupt in ten days. And that was a feat. And that was something that I think Iceland can actually teach other nations with regards to making sure that the security of operations is strengthened in such a way that even if your banking system goes bankrupt, the payment system still works.

[00:49:12.090] – Grumbine

Very interesting. So let me ask you one final question. We know anybody can create money. The issue is, can you get it accepted? However, in the US, we are loaded with shadow banking. It seems like shadow banking is happening all around the world in different forms. Is shadow banking an issue in Iceland? And if so, what is it manifest as?

[00:49:36.280] – Margeirsson

Not anymore. After 2008, it basically collapsed. It was a problem before 2008. There was a lot of balance sheets of companies that were basically creating credit. And the crush ownership, actually of credit and debt in Iceland was a huge problem before 2008. And one of the reasons why, if a problem popped up in one company that was maybe importing cars or whatever it was doing, or maybe it was just speculating on the stock market or whatever, if a problem in that company popped up and it couldn’t pay its debt to another company, that perhaps was in the ownership of a previous company and then it was partially even owned by a bank at the same time, et cetera, et cetera.

That shadow banking system basically led to a huge net of debt and liabilities, and the house of cards that was created by having it was a huge reason for why it was so difficult to make sure that financial stability in Iceland was of an acceptable level. It created a network, a mesh where you could have a shock starting in one company which spread out like an atomic bomb throughout the whole net, so that it was a domino effect throughout the whole shadow banking and the banking system out of that, and everybody knows it, that there was a lot of owners of the banks, a lot of politicians that had friends within the banks, etc.

They were part of the shadow banking system and the asset owner companies that were set up in order to speculate on the stock market and on the housing market. And it was this big complicated mess that created the channels that financial stability or financial instability could travel via, making it so difficult to basically support the whole system when the shock actually originated.

[00:51:42.870] – Grumbine

Very good. I really appreciate this. What did we miss about Iceland that would be really valuable for folks that are learning MMT or interested in MMT or just interested in Iceland? What didn’t we cover here? What would be your final parting words as it pertains to what we should know about Iceland?

[00:52:02.790] – Margeirsson

I think one of the biggest key elements like I was trying to highlight earlier is that it is a very small country. It’s a very small economy, but it still has its own independent currency. It has been able to use to a large extent this because it has a bit of monetary sovereignty thanks to its independent currency. It has a larger set of public possibilities that it can use or can follow thanks to its own currency.

But exactly because this set is so large, it can be used for good things like building up the economy, like making sure that the production capacity of the companies are in place, like making sure that basically the economy can produce or sell the goods that are needed in order to make sure that life is good within the economy.

This set of economic possibilities can be used to do this, but this set of economic possibilities can also be misused to create a horrible dynamic of financial instability that basically ends up blowing up the whole economy. And it is the institutions within the economy. It’s the legal system. It is the checks and balances between the public and the politicians and the business owners that make sure that it is the former dynamic that prevails over the long run.

Where the independent currency, where their own currency is used to build up the positive economic possibilities for the public in the short and in the long run rather than the other dynamic where you end up in creating financial instability and credit bubbles. The institutions need to be in place in order to make sure that the set of economic possibilities is used and not misused. By the way, there is one thing that might interest you as well.

[00:54:19.430] – Grumbine

Sure.

[00:54:20.240] – Margeirsson

We did a Debt Jubilee. So it was shortly after the crisis. Because of the huge anger – and I mentioned the loans, the mortgages where the principal of the loan basically goes up with the CPI. So if the CPI goes up or if inflation is 10% over a year, the principal goes up by 10% as well. This led to so many house owners being underwater, 40% or so, right after the crisis.

Shortly after, there was a suggestion where the government would basically finance a Debt Jubilee for the homeowners and that in the end was actually executed. So Iceland actually back in 2012, if I remember correctly, actually had a partial debt Jubilee for homeowners, proving the point that an economy that has its own currency can finance whatever it wants to.

If it wants to finance a Debt Jubilee for people, it can finance a Debt Jubilee for the people. Will it have economic consequences? Obviously. People will see their income grow, and demand for goods and services will go up. If the economy doesn’t have the production capabilities in order to produce all those goods and services that debt jubilee may actually lead to inflation.

But if that production capacity is in place, the debt jubilee may actually be really beneficial and lead to people’s and households’ finances to become more stable and more beneficial than they were before. So it goes back to the point that MMT always hammers on. If the problem is money, it’s not a problem. If the problem is inflation it is a problem and that’s something that actually I think Iceland has proven as well. Repeatedly.

We created way too much money before 2008. We ended up in a current account deficit. We ended up having a devaluation of the Krona, we ended up having a financial crisis because we created too much money and we ended up running the real economy to the ground. Exactly because of that. But nevertheless even after the crisis only a few years later we were still able to finance a Debt Jubilee for the people.

[00:56:52.410] – Grumbine

That is amazing. So let me ask you one final question. Where can we find more of your work?

[00:56:59.970] – Margeirsson

I’m actually on Patreon. You can find me on patreon.com/icelandicecon. Most of my articles are still in Icelandic but for example I generate a monthly economic overview of what’s going on in Iceland for anybody who is following me on Patreon.

[00:57:20.670] – Grumbine

Well look, Olaf, it has been an absolute pleasure having you on, learning so much about Iceland, also getting to finally talk to you. It’s been a while. And I really appreciate you taking the time. I really enjoy learning and I think the biggest AHA moment for me years ago was that this MMT thing really isn’t a US phenomenon. It is a global phenomenon and it’s a fiat phenomenon. Wherever there’s fiat there is MMT.

[00:57:48.130] – Margeirsson

Yes there is.

[00:57:49.040] – Grumbine

And understanding Macroeconomics as a whole has been quite a journey and I appreciate you helping us out on that journey here sir. Thank you so much. My name is Steve Grumbine with Olafur Margeirsson and with that I’m going to say take care, have a great day and we’re out of here.

[00:58:31.380] – End credits

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts, and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.

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