Debunking Paul Krugman's Icelandic Miracle

asiablues's picture

By Dian L. Chu, Economic Forecasts & Opinions

With op-ed pieces such as "Budget Deficits: Spend Now, Save Later", it is of no surprise that Paul Krugman declares--Iceland--a "Post-Crisis Miracle."

In an article dated June 30, Krugman wrote:

"...although Iceland is generally considered to have experienced the worst financial crisis in history, its punishment has actually been substantially less than that of other nations."

To back it up, Krugman provided a chart (below) comparing the GDP of Iceland to Ireland, Latvia, and Estonia since the 4th quarter of 2007.  The chart does seem to support his view, as it illustrates Iceland appears to be enjoying much higher growth rate than the other three European Union (EU) members.

Based on this, Krugman then concluded:

"The moral of the story seems to be that if you’re going to have a crisis, it’s better to have a really, really bad one."

While this NYT article probably has recruited a few newbie Keysians, it is totally screaming for a rebuff….considering Iceland pretty much went belly up in 2008 with the collapse of its three largest banks, and has been in crisis mode ever since.

As expected, here is a rebuff by Council on Foreign Relations (CFR).

CFR finds that Krugman's "Icelandic Miracle" is "an illusion" created by simply choosing a starting date to make it fit into his "debt is good" mantra.

CFR generated the same GDP chart, but shifted the starting period by one quarter--from Q4 2007 to Q3 2007--the quarter before Latvia and Estonia’s GDP peak.

The result - Iceland’s GDP picture looks a lot less impressive.

Here is another chart by CFR moving the starting date back to the beginning of 2000, which totally crushes the "miracle" story of Iceland.

Part of Iceland’s economic progress may be attributed to a massive currency devaluation and "technical defaults", which seems to be what Krugman is intimating as the “solution” to “a really, really bad crisis.”

However, in Iceland’s case, the devaluation and refusal to pay has not resolved its fiscal mess.  Now, the island could face a second round of bank failures. The government, already on $4.6 billion life support from the IMF, recently warned that a second bank bailout would be a “severe blow” to its finances.

Iceland did secure a $500 million currency swap deal from China in June. However, rather than a vote of confidence for Iceland’s economic recovery, this handout most likely serves as a strategic interest of Beijing amid the ongoing international squabble over the Arctic oil.

So, the moral of the story is that anyone —a nation, a state or even an individual—who does not make an effort to get spending and financials in order will face a vicious cycle -- rising borrowing costs, more debt and deficit, and worse credit risk.  (Iceland currently ranks ninth in sovereign risk by CMA.)

Eventually, beggars can't really be choosers when it comes to lender of last resort.  Moreover, currency devaluation and debt default will not absolve all spending sins. 

Greece vowed not to be the next Iceland, other nations should take notes--including the United States.

Economic Forecasts & Opinions

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Captain Willard's picture

This is good stuff. Not only does he pick an arbitrary starting point, but he neglects the future. What really matters is the confidence people have in the Icelandic system going forward. That's hard to measure.

But the deeper issue is this: How can you extrapolate massive default to the world system and to bigger countries?

Small countries can default, de-value and adjust. The costs are small relative to the world economy.

If the US or UK tried this, it would cause a global debacle. Why economists miss this obvious "fallacy of scale" should baffle us all.

lynnybee's picture

my 82-year-old uncle who came from the Soviet Union & now lives here in the U.S. truly believes that we are now living under tyranny.   he says it reminds him of being back in the Soviet Union.     I'm not kidding, this is what he said to me a few weeks ago, "Evil is now here."    And, it was the way he said it, too.    My Uncle Walt was serious, he truly believes that the country is going to implode with "evilness now running this country. " ........... you know, when an 82-year-old guy who's seen it all says stuff like this, it makes your hair stand on end ............ evil is here in this country.

barkingbill's picture

i think this is a bit unfair to iceland. they were screwed by the bankers and IMF like everyone else, you make it sound like they behaved badly. most people in the country had no idea what was going on. also their refusal to pay some of what was demanded of them took courage. and you want us to see that CFR gets the right picture do you? like we are supposed to support the same conclusion that CFR makes? oh yeah, and satan also has some good charts. 

besides $499 to iceland? sounds good to me. if it's anything like norway ill have a great time :-)

RagnarDanneskjold's picture

Even economists can hide the decline.

Privatus's picture

Nothing on Krugman's Japanese Miracle? Oh wait a 'sec, there wasn't really a miracle was it? More like a generational debacle. Keep swinging, Paul.

Fishhawk's picture

Lynnybee, if you think the banksters care how much suffering they cause, you just don't understand the strategy of the political elite.  They engineered this financial crisis to further their own power, so they can implement the New World Order (one world, run by money, controlled by us).  Part of that plan is to reduce the world population by two thirds, which shows the arrogance of the elite, who treat the voters like cattle (or maybe poultry).  See this article by Nimmo at Infowars for more on the bankster strategy:   A key part of the plan is to bankrupt the government, so the entitlement society can be dismantled without the politicians being blamed.  So yes, lots of lives will be ruined by the destruction of the currency: the middle class will be impoverished.  This is their fate for believing anything any politician ever said, and for buying into the 'something for nothing' strategy of using the government to steal from their neighbors.  The smart people made their own arrangements for retirement, as it has been clear for many years that Social Security is a ponzi scheme, and will eventually collapse.  It has only become clear recently that the dollar will be inflated to nothingness quite soon.  Your only defense against that is to own hard assets.

Cathartes Aura's picture

sorry, you lost me when you used the Council on Foreign Relations charts and quotes. . .

CFR??? seriously??? if any one's not familiar with their *cough* members, do a quick wiki. . . and if you don't know their agenda, best get up to speed.

beat up Krugman all you like, who cares, but my god - could you not find a more credible stick to whack him with?  were the Bilderberg Group busy???

honestly incredulous.

divide_by_zero's picture

My thoughts exactly, Rubin is one of the head guys at the CFR. Looks like some sort of false flag event.

Fishhawk's picture

Krugman is a worm.  Keynesianism has been disproved as junk economics many times.  Krugman sold his professional credibility by embracing the fraud, to provide cover for the banksters.  In return, he gets to become rich (wife's money) and famous (Nobel).  I tend to agree with mpower that the miracle is that Iceland still exists.  The voters had the good sense to repudiate the banksters fraudulent demands; this was an early test of the process: banks make bad loans, go bankrupt, transfer the debt to the taxpayers, then loan the govt the money and charge interest on it.  This captures the excess GDP of the whole country in perpetuity.  The taxpayers rightly concluded that they have no interest in paying off someone else's bad loan.  You lost all your money?  Too bad, guess you are out of business, and good riddance.  But the IMF managed to get them on the hook for $5B, so the scam worked anyway.  And Da Boyz learned an important lesson: don't ask the voters if they want to take on fraudulent bad debt.  Iceland's problem is that without banking, their real economy is exporting a few fish; otherwise they have a tourist trade that keeps their little rural economy running at 20% of the level the banksters were working.  Their austerity program involves getting the govt whittled down to the level needed to entertain tourists and export fish. 

nmewn's picture

"Their austerity program involves getting the govt whittled down to the level needed to entertain tourists and export fish."

And therein lies the key to contentment in societies across the globe.

Excellent post.

JLee2027's picture

Are there any countries out there who are financially sound?  Whose banking systems are not creaking with debt?



lynnybee's picture

but, what about the older americans, those people who have spent a lifetime saving & being a good & responsible person ?   what about those people who lived a frugal lifestyle so they could reap the rewards of saving for their older years ?  


anony's picture

They now know how little they really know about our government and who really controls it. Surprise, it's a group of semites from around the world.

I'd list all of them for you but instead, just imagine their names are all Sicilian and I think you will get the point easier.

knukles's picture

Krugman is the poster boy for Syllogistic Logic founded upon faulty assumptions.

DoctoRx's picture

Thank you asiablues for bringing this common sense rebuttal to our attention.  And good work, Dr. (?) Chu.

Does Krugman know that his recommendations serve the banksters' interests first and foremost?
Which would be worse:  that he is a witting accomplice of them or an unwitting one?

anony's picture

You bet he knows. He's one of them, and their mouthpiece.

RockyRacoon's picture

I agree, nice article.  We need some BS filters in the U. S. economic reporting.

Check out the graphs in this latest Dr. Housing Bubble post.  I'd like to see Krugman manipulate these!

Don’t bet on a 2010 economic recovery. 10 stunning charts showing no housing recovery moving forward and weak employment growth. Employment, construction spending, commercial real estate, home prices, and consumer sentiment.

anarkst's picture

Iceland is a model case for every bad thing that can happen to your country if you allow the banksters to take charge.  Check out Michael Hudson, who has written extensively on the Icelandic catastrophe.


RockyRacoon's picture

"Lies, damned lies, and statistics"

Only problem is that statistics don't come out of the blue, like thunder.

They are generated by damned liars.

agrotera's picture

I am not a Krugman hater, but this propaganda is making Krugman look like a f@#$%^& idiot shill for the Fed cartel. 

Moral of his story--"It's OK if our government "needs" to takes your IRA, 401k, 403B and Pensions and gives them back to you on an annuity basis--Iceland seems to be Ok with it!"

Krugman is a F!@#$%^ peddling propagana!!!!!

lynnybee's picture

i never charged a damn thing in my life, cash all the way or i didn't buy it.    why am i being sacrificed for the vanity of the central banker !!!  I'm mad as hell & not going to take it anymore.   ! 

tom a taxpayer's picture

  1. lynnybee - I too am outraged. So is commenter mpower on the CFR site post on Krazy Keynesian Krugman.
  2. "July 14, 2010 at 12:37 pm
  3. mpower responds: 
  4. "Perhaps the miracle is that Iceland still exists at all?
  5. "Iceland threw out the international banksters & deleveraged their economy, yet the sun rose in the east, chickens laid eggs, and life went on…
  6. "Compare the Iceland experience (tame, benign) with the “end-of-the-world” scenarios sold to americans by Paulson/Geithner/congress when they extorted trillions in public funds to bail-out Wall St.
  7. "The US can and should do EXACTLY what Iceland did… throw out the banksters and the rigged markets, and start over with a sound money system. The world will not end, the sun will rise… we’ll just have a few less criminals (banksters) among us as a new day dawns."

Pope Clement's picture

Ich bin ein Icelander - Fuck you Barclay's and of course Krugman too and that Nobel scheissewagen he rode in on...

pros's picture

sorry to burst your bubble, and the CFR's, but

countries that sharply devalue after a crisis always have a snapback rebound...

so both sides miss the point

LeBalance's picture

The only thing more clueless than a Econ Ph. D. is one with a Nobel.

nmewn's picture

It's a miracle...LOL.

"The only thing more clueless than a Econ Ph. D. is one with a Nobel."

That's another thing that bug's me about Krugman. He got his Nobel not from any original concept or theory.

He got it, basically, by placing the dot on the "i" in the word oligarchy. And this is touted by other elites as a resume' enhancement...ROTFL.



deadparrot's picture

AMEN! Nothing scares me more than some tweed-wearing ivory tower academic who would rather die than admit his theories are wrong. Pity the poor taxpayer who is sacrificed for the vanity of the central banker.

bugs_'s picture

Fit that curve Krugman.

suckapump's picture

Lies, damned lies, and...what was that third one again?