Topic: Economics
Iceland Fights Inflation In contrast to the US Federal Reserve, the central bank of the northern Atlantic island nation of Iceland raises its rates to 15% on inflation fears. My crystal ball says the US will do the same in about a year.by Bob Nightingale
(libertarian)
Wednesday, March 26, 2008
Bloomberg.com reported yesterday (3/25/08) that Iceland raised its rate to 15% by raising its repo rate by a huge 1.25% in one day. From its website, Icelanders are facing an inflation rate of about 7%. Its central bank has a goal of maintaining an inflation rate of 2.5%. The Icelandic krona had been in steady decline against the euro, from about 100 ISK per euro at the beginning of the year, to its nadir of 125 on Mar19. Yesterday's interest rate hike had the effect of moving it to about 116 from about 122 the previous Friday. Iceland made news previously in August, 2006 when it increased its interest rate to 13.5%. The krona was then trading at a stronger at 90 to one euro.
Iceland's national debt is over 320 billion krona, which is roughly about $4 billion US dollars. That's huge, considering that's about a quarter of their GDP. The US public debt is now over $9.2 trillion, and will probably increase at a rate of $800 billion per year. The US national debt is about 36% of GDP.
In contrast to Iceland's actions, the U.S. central bank ignores the specter of inflation by continuing to push interest rates even lower. The Fed is bowing to political pressure to keep recession at bay by pumping more dollars into an economy where consumers are exhausted from their giddy spending spree.
The bills are coming due, but there is no more new money to pay for them. Household prices, such as food and fuel are on the rise. Those credit card offers come every week as well. If you haven't been affected yet, you will.
Although the average consumer price index reported for last year was about 4%, the current producer price index on crude goods, such as food and energy, is over 20% from this time last year. So far, prices to consumers have only been felt in the areas of transportation (9%) and energy (about 19%), with most other areas hovering around 4%.
Instead of protecting the value of the dollar by increasing key interest rates, the Fed lowered them by three-quarters of a point last week (3/18/08), making the Fed Funds rate 2.25% and the discount rate 2.5%. From the wonderful chart maintained at The Privateer, the Fed had cut the Fed Funds rate six times since last August, from a high of 5.25%, and the discount rate eight times from 5.75%. The stock market usually responds immediately, because it knows that more money will come into the system. But the effect on consumers is usually six months or a year behind. Combine artificially low interest rates with the stimulus checks being issued in May, we're looking for a new round of inflation this summer.
The economy will have to absorb $168 billion dollars of new money, courtesy of the U.S. Treasury, with no increases in productivity. I'll cash my check like everyone else. I have credit cards and medical bills that I need to pay off. I've had to heat my house this winter and put gas in the tank to get to work. I expect the Fed to keep cutting interest rates because the stock market has already priced in the knowledge of the upcoming stimulus package. The market will react downward afterwards to the fact that consumers are so worried about their existing debt, that they won't want to acquire more stuff. Stock prices will fall after a bump in some new spending. The credit card companies will see a sharp decline in their assets, as consumers try to pay off this debt. On the up side, they will see fewer write-offs, because default rates will slow. Inflation will continue upward because there is more money in the economy, with higher prices for fuel and food.
For those of us who watch interest rates for fun, we have this smug satisfaction in knowing that the Fed will have to reverse this trend of artificially suppressing interest rates in about a year. When it does, it will overreact to double-digit inflation with double-digit rates. I'm sure that Paul Volker's playbook is gathering dust on the shelf right behind Ben Bernanke. If he can't find it there, he can just look north.
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The views expressed in this
article are those of Bob Nightingale only and do not represent
the views of Nolan Chart, LLC or its affiliates. Bob Nightingale is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
I think you need to buy a new crystal bal. It is now June 2009 and the current interest rate is 0-0.25%. Showing once again that econimic preditions are only worth anything for those who get paid to make the forecasts.
>>In contrast to the US Federal Reserve, the central bank of the northern >>Atlantic island nation of Iceland raises its rates to 15% on inflation fears. >>My crystal ball says the US will do the same in about a year.
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