I sense many of us are breathing a little sigh of semi-relief, and anticipating a steady recovery from the current credit crisis/financial meltdown. I know I was.
Until I saw this.
The memories of the 80's still haunts me, as I fudged my land values to get the right answer, and my banker pretended not to notice. But we farmers were a small part of a big economy, and this is homeowners all over the US.
No I don't know how this will unwind. But consider the case of Iceland, which I mentioned earlier.
The details of the financial settlements in Iceland are still unclear but the FT reports that the International Monetary Fund plans to lend Iceland $6bn. The British government reportedly is contemplating lending Iceland £3bn, which the country must then use to compensate individual Icesave depositors in Britain. The Dutch have offered Iceland a similar deal, involving €1.1bn. And there are more loans and foreign obligations in the pipelines.
These loans correspond to a little less than one half of the support that Hungary is receiving to deal with its financial crisis. Hungary has a population of 10m; Iceland, 320,000. The government of Iceland has now been offered foreign loans that roughly equal the country's gross domestic product. The annual interest payments, say 3-4 per cent, approximately correspond to the country's annual economic growth. Additionally, the loans must be paid up.
The burden is unrealistic. The most likely consequences are: extremely high inflation, economic decline, mass emigration and political disorder. I am reminded of the situation facing Germany in 1919 following the Versailles Peace Treaty, which John Maynard Keynes famously analysed in Economic Consequences of the Peace. [More] [More]
The connection between the two? Both are unprecedented economic developments, and both have economists scratching their heads.
It seems they are better at autopsies than treatments.