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Generational Dynamics Web Log for 15-Aug-2009
Iceland begs for mercy as Europe turns the screws

Web Log - August, 2009

Iceland begs for mercy as Europe turns the screws

This could be telling us the future of China and the U.S.

Thousands of Icelanders protested outside the Parliament on Thursday, objecting to Draconian economic measures by the European Union (EU) and the International Monetary Fund (IMF) requiring Iceland's taxpayers to reimburse depositors in the UK and the Netherlands.

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The economic measures were imposed in the wake of last October's failure of Iceland's banks, and then of Iceland's national bonds. Many Europeans, especially in Britain and Netherlands, had deposited their savings into Iceland's bank in an "Icesave" program that provided interest rates of well over 10%. When Iceland defaulted, these depositors lost their money, and Iceland was forced to agree to reimburse the depositors.

Because of the crisis, Iceland's Prime Minister Jóhanna Sigurđardóttir wrote the following for Financial Times on Thursday:

"In its efforts to conclude negotiations over compensation for foreign savers in failed banks, Iceland has been accused of a tendency to imagine a British or Dutch conspiracy behind any bad news.

Iceland has no such tendency. It is battling the effects of severe banking and currency crises and a recession that is affecting our part of the world as much as any other. ...

Icelanders, who do not feel responsible for the global banking crisis, are willing to make sacrifices to secure normal relations and trade with the world. But they are angry at having to take on the burden of compensation for the Icesave savings accounts of Landsbanki – a failed, privately owned, commercial bank, which attracted hundreds of thousands of UK and Dutch savers with high interest rates. The amount to be shouldered by Iceland is huge – about 50 per cent of our gross domestic product. Assets against this debt will substantially lower the net amount, but there is much uncertainty about the valuations and forecasts underpinning such calculations.

Last October, when Iceland was in deep crisis, UK authorities froze the assets of Landsbanki, and placed the bank (and for a while Iceland’s government) alongside terrorist organisations on the official UK Treasury list of entities subject to asset freezing. Kaupthing Bank, which had just been granted a government loan amounting to 5 per cent of GDP, then collapsed after its subsidiary in London was seized by the Financial Services Authority. Despite a critical report in April by the House of Commons Treasury Select Committee, no satisfactory explanations have been given for the UK’s actions.

Last October, when Iceland was in deep crisis, UK authorities froze the assets of Landsbanki, and placed the bank (and for a while Iceland’s government) alongside terrorist organisations on the official UK Treasury list of entities subject to asset freezing. Kaupthing Bank, which had just been granted a government loan amounting to 5 per cent of GDP, then collapsed after its subsidiary in London was seized by the Financial Services Authority. Despite a critical report in April by the House of Commons Treasury Select Committee, no satisfactory explanations have been given for the UK’s actions.

The EU deposit insurance directive that places this burden upon us is seen by some as aimed at the failure of individual banks rather than a systemic collapse, as was the case in Iceland. A strong argument has been made for Iceland being the coincidental victim of defects in this directive, which have been ignored.

Icelanders are striving to fulfil their obligations but cannot, and should not, ignore the lessons to be learnt from this crisis regarding potential flaws in banking regulation and deposit insurance schemes affecting the EU and European Economic Area.

The FT has reported how the Dutch opposed the IMF lending to Iceland in order to enforce their demands on Icesave, claiming the UK and Germany as allies. The perception is that Treasury officials in the UK and the Netherlands used their bargaining power against a much weaker party when the Icesave deal, now being debated in the Icelandic parliament, was struck."

Sigurđardóttir's statement is both a plea for mercy and a bitter denunciation of EU and IMF policies.

In order to see why Icelanders are so angry, let's make a list of the indignities that Iceland has suffered, according to an analysis by Eva Joly, Norwegian-French magistrate who investigated the Icelandic bank collapse:

Britain and the EU claim that they have no responsibility in Iceland's default, but that claim is laughable. According to the analysis by Joly, the European countries invited Icelandic banks into their countries, and were required to exercise the same level of oversight into Icelandic banks in their own country as for their own banks.

Well then, is it possible that Gordon Brown, the Europeans and the IMF were caught by surprise by the collapse of Iceland's banks? It's hard to see how they could have been surprised.

In February, 2006, there was a major international currency crisis triggered by Iceland's policies. I wrote about this at the time in "Sudden collapse of Iceland krona portends bursting of 'carry trade' bubble." The crisis occurred in conjunction with an announcement by Fitch Ratings that it was revising the outlook for Iceland's banks from "stable" to "negative." According to Fitch, the new ratings "[took] into account Iceland's macro-prudential risks, including rising inflation, rapid credit growth, buoyant asset prices, a steep current account deficit and escalating external indebtedness."

And so, I knew that Iceland's banks were in trouble. Fitch Ratings knew that Iceland's banks were in trouble. Apparently the only ones who didn't know there was a problem were Gordon Brown, the Europeans and the IMF.

Furthermore, Iceland's abusive fiscal policies didn't stop when the crisis ended, according to Asgeir Jonsson, chief economist of Iceland's top bank, Kaupthing. Iceland was bailed out by banks and hedge funds around the world, but the whole thing collapsed only after the Lehman Brothers collapse in October, 2008.

And so, Gordon Brown, the Europeans and the IMF could have blown the whistle on Iceland at any time. The facts were well known, and widely available. And yet, they were ignored. Why?

Because Gordon Brown, the Europeans and the IMF were participating in the same debauched, depraved abusive financial policies as Iceland. Whether in Reykjavík, London, Frankfurt or Wall Street, banks and financial institutions were all perpetrating fraud on investors, and were not stopped by any politicians, whether in Reykjavík, London, Brussels, or Washington. This continues to the present day, as exemplified by Obama administration adviser Larry Summers, who personally made millions of dollars benefiting from the frauds that created the financial crisis. (See "Stories of massive generational fraud and corruption continue to pour out.")

Whether in Reykjavík, London, Frankfurt, Wall Street, Brussels, or Washington, if the politicians can find a scapegoat, they'll use it. The stench of corruption continues unabated.

A template for China / U.S. relations

Students of Generational Dynamics, as well as long time readers of this web site, are already well aware that the vengeance that the Europeans are inflicting on Iceland as a coverup to their own complicity is the kind of thing that leads to war. That doesn't mean that tiny little Iceland will be going to war against Europe, but it does provide a template for understanding the future relationship between China and the U.S.

As I've written many times, I believe that the 1932 book, "The bubble that broke the world," provides a template for understanding what's going on in the world today. The U.S. led the rest of the world in trying to bail out Germany in 1931, and the bailout failed. Today, as the level of public debt increases exponentially, there will come a time when America will face a currency and financial crisis similar to Iceland's, and the Chinese will be forced to try to bail out the U.S. in order to save themselves.

The Iceland situation provides us with further guidance in predicting how this coming crisis might unfold.

First off, the Chinese are fully complicit in any future financial default by the U.S. I've been writing for six years that America's level of public debt was increasing exponentially, and that a default was inevitable. And we all know that the Chinese have higher IQs than the Americans, so if I could figure that out, then they could figure that out.

Instead, China created its own internal asset bubble, supported mostly by purchasing debt from the U.S., and using it to stimulate China's factories into producing products that could be sold to the United States. And as I wrote recently in "China's bubble economy becomes increasingly unstable," China itself is very close to a major financial crisis, quite apart from (though related to) America's financial crisis.

Will China be as vengeful and vindictive as the British and the Europeans toward Iceland? There's no doubt about it.

We can see a sample of China's vengeance in their policies towards the Australian company Rio Tinto, the second largest mining company in the world. For years, Rio Tinto sold iron ore to China at high commodity bubble prices, where the bubble was caused by China's own abusive credit policies, which were just as debauched and depraved as those in the West.

Earlier this year, China sought to sign a joint venture with Rio Tinto, which would have been China's biggest ever foreign investment. However, Rio Tinto spurned the offer, instead signing up with one of its competitors, BHP Billiton, the world's largest mining company.

The Chinese were furious, and in recent weeks have arrested four employees of Rio Tinto in Shanghai. At first it appeared that the employees would be charged with stealing state secrets, which would have been punishable by death. But after international pressure, led by the Australians, the charges were reduced to corporate espionage and bribery.

This incident provides just a tiny taste of the kind of vengeance we can expect from the Chinese in the case of an inevitable default by the U.S. The Chinese will angrily agree to "bail out" the U.S., by forgiving some of America's debt. But the Chinese will also jail Americans on various charges, and will make onerous fiscal demands on the U.S., as well as demands for greater international control over the dollar currency. This will frighten and infuriate the American people, and the charges and counter-charges will eventually spiral into full-scale war.

From the point of view of Generational Dynamics, a war between America and China is 100% certain. The scenario of the preceding paragraph is NOT certain, but is only one of several possible scenarios, including war over Taiwanese independence, a war that begins between Japan and China, and a war that begins in central Asia. But "all roads lead to Rome," in the sense that all scenarios lead to the same place -- a Clash of Civilizations world war, with China versus the U.S. in the lead.

(Comments: For reader comments, questions and discussion, see the China thread and the Iceland thread of the Generational Dynamics forum.) (15-Aug-2009) Permanent Link
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