Cold As Ice

I've seen it before, it happens all the time
You're closing the door, you leave the world behind
You're digging for gold, you're throwing away
A fortune in feelings, but someday you'll pay
--Foreigner

Iceland's problems continue to escalate. On the surface, you'd think that the U.S. is headed down the same path. Massive borrowing destined to end in a bust with a currency that gets destroyed.
Not so fast. I haven't wrapped my head around the situation totally, but studying some of the data suggests a couple of salient differences between Iceland and the US right off the bat.

One is that Iceland had literally been printing money for years as narrow money aggregates had been (and still are) growing nearly 20% annually for a decade.

More importantly, however, is that Iceland banks took on a ton of debt denominated in other currencies. By borrowing dollars, yen, et al, Iceland investors were short foreign currencies big time. When their carry trades went bad, no short squeeze developed in the domestic currency as investors didn't need to buy back krona. Instead, the short squeezes developed in the foreign currencies themselves.

This squeeze occured not from Iceland's short covering, but from a worldwide margin call on risky asset trades last year. As folks around the world, not just Iceland, scrambled to close $trillions of dollar denominated debt projects last year, the rip higher in the USD smoked the krona.

The US, however, has been in a situation where it has been able to borrow money from other countries in its own currency. We're short dollars in huge size. When we want to cover our massive carry trade liabilities, we need to buy back dollars. This demand puts a floor under the USD that the krona does not enjoy.

Iceland is certainly experiencing characteristics of deflation similar to other countries. Contracting debt/credit, falling asset prices, reduced consumption. The one divergence is the currency.

The moral seems to be if you're gonna borrow big, make sure you get your foreign creditors to denominate the debt in your own currency. That way, when you go bust, your currency doesn't instantly turn to dust.

position in gold, USD