Iceland: What Happens After Imploding?

Recently Iceland imploded. See the post Iceland Melts, 77% Single Day Drop for some charts that point straight to hell. So what happens afterwards?

The simple answer: Nothing pleasant…

Iceland Central Bank Raises Key Interest Rate to 18% (Update2): “Iceland's central bank unexpectedly raised the benchmark interest rate to 18 percent, the highest in at least seven years, after the island reached an aid agreement with the International Monetary Fund.

Policy makers raised the key rate by 6 percentage points, the Reykjavik-based bank said in a statement on its Web site today, taking the rate to the highest since the bank began targeting inflation in 2001. It will publish the reasons for today's move at 11 a.m. local time.

The central bank is raising rates as Iceland, the first western nation to seek aid from the IMF since the U.K. in 1976, faces a prolonged contraction, coupled with possible hyperinflation and rising joblessness. The economy will shrink as much as 10 percent next year, the IMF forecasts. Iceland will receive about $2.1 billion in aid from the Washington-based fund, according to a deal struck on Oct. 24.”

A sudden 6% overnight increase by the central bank has got to mess with local mortgage rates. Inflation in Iceland is expected to hit 75% because the economy is heavily import dependant and the currency has collapsed. This has instnatly tripled the costs of everything entering the country.

“History shows that attempts to save currencies from plunges by raising interest rates are prone to failure. The U.K. on Sept. 16, 1992, boosted its benchmark rate by 5 percentage points in two moves to 15 percent in a doomed effort to keep the pound in a European exchange-rate system. Britain gave up the attempt the same day and canceled the second rate rise; the pound lost 22 percent against the dollar in the final two months of the year.

During the 1997-98 Asian financial crisis, the International Monetary Fund advocated high rates to help restore confidence in sliding currencies. Central banks from Indonesia and Thailand to South Korea and Singapore lifted borrowing costs. South Korea took its main rate to 30 percent in December 1997.

The strategy failed to prevent exchange-rate collapses across the region. South Korea's won lost 47 percent against the dollar in 1997, the Thai baht fell 45 percent and Indonesia's rupiah plummeted 56 percent.”

Clearly, nobody ever learns anything. Looks like more of the same all around.

Close Call for Obama: Skin Head Assassins

These neo-nazi freaks were going to drop Obama wearing tuxedoes and top hats…

The news may also have dropped the market suddenly into the close.

ATF Says It Broke Up Tennessee Plot to Kill Obama, Other Blacks: “Federal agents in Tennessee broke up what they called a plot by two men identifying themselves as white supremacists to assassinate Democratic presidential candidate Barack Obama as part of a “killing spree” of black people.

The two suspects, Daniel Cowart, 20, of Bells, Tennessee, and Paul Schlesselman, 18, of West Helena, Arkansas, were accused of discussing a plan to rob a gun dealer of weapons and ammunition and commit murders at a predominantly black school, Lawrence J. Laurenzi, the U.S. attorney for western Tennessee, said in a statement.

The suspects' “final act of violence” would be an attempt to kill Obama during which they both expressed a willingness to die, the statement said. The two men told authorities they planned to wear white tuxedos and top hats while carrying out the assassination, according to court papers.”

I’m not sure how this accomplishes anything or why the numbers are so particular, but hey… maybe they’re just plain crazy.

“The two talked of killing 88 black people and voiced a desire to decapitate 14, Roland said.”

Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats

“Forget about inflation. There has never been in the history of the world an inflationary run while land prices were declining. The amount of debt being destroyed as the monster of a debt bubbles implodes will suck down all asset prices and just absolutely collapse the velocity of money.” -TheFinancialNinja, 09/10/08

It would appear the institutions AND individuals are hoarding cash and cash equivalents. The percent change for M1 over the last 3 months (June 2008 to Sep 2008) has spiked to 19.5%. The six and twelve month percentage change is 11.4% and 6.4% respectively. Clearly this hoarding behavior is quite sudden and recent. M2 for example isn’t increasing nearly as fast at 6.8%, 4.0% and 6.2% over the last three, six and twelve months. (Data: Money Stock Measures)

I mentioned recent hoarding behavior in the post Bernanke Bailouts Not Working, Banks Hoarding.

For the hyperinflationists out there, a massive increase in money supply IF IT IS HOARDED would still result in deflation.

Recent world equity market declines have wiped $10 trillion of wealth clean off the planet. That amount alone, without factoring in the secondary and tertiary effects, is so deflationary as to make the inflationary and hyperinflationary arguments a hilarious little joke.

In the post Inflation, Deflation, Money Velocity and Gold I argued that we cannot avoid deflation. Regular readers know that I’m firmly in the deflationist camp.

I repeat: “As soon as the fear and panic subsides, the easy money will be made SMASHING gold short as people finally realize that inflation is what we HAD and that deflation is what we will HAVE.”

$1000 was the high. Since then the last to major 'lifts' failed, with each successive lift failing to meet or exceed the previous high... and that is despite some of the greatest panic EVER. De-leveraging forces or not, if Gold was meant to go, surely it should have gone now of all times...

Over at Afraid To Trade Corey acknowledges the technical damage to the daily and weekly charts for Gold but is more constructive on the monthly chart in A Monthly View of Gold Prices.

The Tinfoil Hat crowd can't figure this out of course and turns to 'it must be a giant global consipracy theory' arguement. My personal favorite are the clowns over at GATA, where they postulate the greatest, most complex manipulation theory and cover up ever as the only explanation for the failure of gold to go to infinity and beyond.

Money Stock Measures Definitions:

Federal Reserve Statistical Release:
H.6
Money Stock Measures

1. M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Seasonally adjusted M1 is constructed by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

2. M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds. Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.

Equity New Lows, Treasury Yields: Better?

Even as equities continued their plunge (NYA, grey area) into the Abyss, yields on the 10 year US Treasury (UST10Y, red, black line) did not break the lows made in May. From the September low, yields have been making a series of higher lows. Although a giant increase in treasury supply is definitely being priced in, it can also be argued that the bulk of the flight to quality trade has already taken place. In fact, some brave souls may now be reversing out of Treasuries and nibbling at equities.

Support for this theory can be found in the fact that despite new price lows in the NYSE Composite (NYA, grey area), the number of new lows (NYLOW, greay bar) have not spiked over 1000. Market internals are improving from hysterical levels. It would appear that bargains are being picked up and that fewer and fewer stocks are falling to new lows...

'Big-Time' Economic Erosion, More Rate Cuts

Looks like rates will be dropping below 1% sooner rather than later…

Bernanke Battles `Big-Time' Economic Erosion With New Rate Cuts: “Less than three weeks after the Federal Reserve's emergency interest-rate reduction was, in the words of its vice chairman, “overwhelmed” by the collapse of financial markets, Ben S. Bernanke is about to try again.

The outlook has worsened since the Fed last acted on Oct. 8, and analysts now say the economy may shrink more than 2 percent in the final quarter of 2008, its steepest decline in at least 18 years. “We're heading south big-time,” says Lyle Gramley, a former Fed governor who is now senior economic adviser at Stanford Group Co. in Washington.

As a result, Fed Chairman Bernanke and his colleagues may eventually have to drive the benchmark overnight rate close to zero to resuscitate the economy. The next installment comes Oct. 29 when, says Gramley, “the Fed is going to cut rates a half percentage point.”

That would reduce the central bank's target for the federal funds rate, which commercial banks charge each other for overnight loans, to 1 percent. The official rate hasn't been that low since 2004, and has never been lower since the Fed began trying to control it in the late 1980s. More cuts may follow if the economy doesn't recover.

Bernanke, 54, and his colleagues are carrying out what Vincent Reinhart, former Fed director of monetary affairs, calls a “great monetary experiment” in attacking the financial crisis -- and the credit crunch it spawned -- on three fronts: lower rates, increased liquidity and purchases of assets that banks and investors don't want.”