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Iceland wants to swap the Krona for the Canadian Loonie: No Surprise
May 18, 2012 by prospectingjournal · Leave a Comment
COMMENTARY–ProspectingJournal.com–Few were hit by the voracity of the 2008 financial collapse like Iceland was. In the chaos that ensued, Iceland’s local currency, the krona, saw its value deplete to a fraction of what it once stood for. This was accompanied by a total meltdown of Iceland’s entire banking sector, one that had its roots in lump sums of foreign debt. Such is the size of Iceland that the country was heavily reliant on imports, and 90 percent of debt was held in foreign currencies that were fast feeling that effects of inflation. This was a catastrophe of unparalleled proportions, and one that is yet to be repaired today.
The Iceland of 2012 is painfully subject to stringent capital controls that have prompted new lows in both real income and investment. It is a regime that is detrimental to the economy, but many felt the strategy was one of painful necessity. The problem is two-fold. Maintain the status quo and continue to watch inflation rise at the cost of real consumption power. Or remove the capital controls and risk an abrupt and unwelcome return to the past. There seemed no wait out. However, in recent times the tide has yet again begun to swing in favor of reform. To the credit of some creative local innovation, there is now a third option, one that is rapidly gaining the votes of the local majority. Abolish the krona, and adopt the Canadian loonie.
When Icelandic ministers first proposed the idea, many were perplexed. Why the loonie and why not the US dollar, or something even beyond the fiat currency, such as gold? In an era composed of chronic currency devaluation, the gold standard seems a viable option. Peter Krauth, a global resources specialist at Money Morning, argued, “with a gold standard, inflation, budget deficits and debt are all but eradicated, since the supply of gold becomes the limiting factor”. Adopting a gold standard would also allow Iceland to retain control of its monetary policy, a power that would otherwise be renounced in adopting a currency. However, one suspects that reliance on the metal would subject Iceland to gold’s immense price volatility. On the one hand gold provides a more assured storage of wealth, especially during crises. On the other, everyday wealth would be determined by global market conditions that could in fact hinder price stability. There might also be additional and unforeseen drawbacks associated with going gold, given that no country has attempted the feat in recent history. In doing so Iceland would prove the guinea pig. It is a risk they are perhaps unwilling to take.
The US dollar also comes across as a feasible choice for adoption. The majority of Iceland’s commodities are already priced in this currency, and after all, it is the traditional powerhouse in global trade. But if recent history has taught us anything, the US financial system is all but stable. And given the brutal lessons learnt at home, stability is everything. In gold, the US dollar, and the euro, there are many plausible options. But even so, there is more compelling reason to believe that the Canadian currency well and truly represents the best bet.
Canada’s banking system has consistently been ranked the best in the world for over half a decade. There is an underlying sense of prosperity amongst the majority of its inhabitants, and it comes as no coincidence that Toronto and Vancouver rank amongst the very top in standard of living indexes. According to the 2011 Credit Suisse Global Wealth Report, the median Canadian’s net worth is US$89,014, roughly 70 percent higher than that of the United States. Many of the calls to reform in the Occupy movement in the US never resurfaced in Canada because, for the most part, such reformations had already been implemented. And even more compelling is the notion that Canada is still very much in its infancy.
Manik Talwani is a geophysicist at Rice University. He estimated that Canada already boasted the world’s second largest crude oil deposits. He also gave consideration to even more oil that may be lying untapped in the Arctic north. He stated, “the north of Canada is very, very favorable [to oil and gas deposits], in geological conditions”. It is estimated that Canada’s far north is host to up to 90 billion barrels of oil, and 45 billion barrels of natural gas liquids. Beyond that, Canada is rapidly ramping up its trade of other natural resources, from timber to uranium to potash. Even more telling is its lessening reliance on the United States. With pipelines planned, Harper has recently bridged differences with powerhouses such as China. If anything, this should provide Canada with less dependence on the United States, and more credibility in its ability to weather an economic storm.
Besides that, Canada and Iceland share similarities. They are both resource-based economies with similar business cycles, and crucially, they share underlying interests in the Arctic Circle. Favoring the loonie is perhaps a decision that reflects forward thinking, and in truth, should come as little surprise.
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Jason Staeck
ProspectingJournal.com
