Glass Pyramid Exclusive

Iceland shows Australia how to fix a broken Monetary System


It seems that Iceland remains determined to be the only country that is prepared to chart an independent  course in a world of high finance and private and public debt gone mad.

In March 2015 the government of Iceland received a report from its own members of parliament proposing that control of the money supply be taken away from private banks and returned to public control.

The reason being that the Icelanders have recognised that allowing private banks to control the money supply has a long, long  track record of causing booms, busts, inflations, devaluations and massive amounts of unproductive debt secured by rapidly inflating asset prices.

Australians should spend an hour or two and read this clear and persuasive document for one simple reason – the monetary system in Australia is essentially exactly the same as the one the Icelanders have decided is fundamentally broken and in the next few years we are going to have to choose between simple and sensible reforms like the ones the Icelanders are considering or entering a recession / depression as our current monetary system breaks down.

In short the problems with the current Australian Monetary system can be summarised as:

  • The majority (over 90%) of our circulating money supply is created when our private banks create loans (mostly home mortgages).  This means that the growth of our money supply requires banks to create lots and lots of mortgages.
  • The banks are happy to oblige as when they create a loan they are also creating a tasty series of trailing commissions we know as interest payments on the loan.  Not a bad source of income for creating some loan accounting entries!!
  • Unfortunately this process has resulted in household debt in Australia reaching record levels.  In turn this has forced the RBA to desperately keep cutting the target interest rate closer and closer to zero because the RBA knows that the demand for debt (i.e. mortgages) is now only being kept alive by relentlessly dropping the price of debt.  The RBA knows that if the private bank Debt Machine stops growing the level of debt, or at the very least maintaining the current level of debt, the money supply will start to contract as people pay off their existing debts and that will cause a recession or depression.
  • The downside of driving interest rates toward zero, when most ‘normal’ people are unwilling to take on more debt, is that the speculators and gamblers move in and take ‘a chance’ that the RBA has no choice but to keep cutting rates.  When interest rates are cut the prices of assets rise – often quickly – (Hello Sydney!) or at least are less likely to fall and the wealthy speculators are gambling that will happen.  The RBA know this but beggars can’t be choosers when it comes to flogging debt in a debt saturated market.  The RBA tries to calm the public by saying that at least these rich speculators are a better credit risk than those who sensibly are standing on the sidelines as the Debt Machine blows smoke.
  • Another downside is that the government tries to help the Debt Machine by attracting other speculators (from other countries) into the market for assets in an attempt to keep the prices rising and punters flocking to the Debt Machine to grab some fresh debt and ‘ave a ‘punt’ on house prices.  The Rudd government tried this trick after the GFC but then the trick got out of control and interested overseas buyers were popping up at auctions all over the country, recently there has been some ‘coughing’ from the current government and assurances they would do something, maybe, sometime. Expect plenty of smoke and mirrors (but hold the action) as those foreign speculators are ‘needed’ by the Debt Machine.
  • What you end up with is an economy where most of the ‘money’ created by private banks has been driven into the price of assets (like land and existing residential housing) and the unproductive industries that are involved in/ feed off the trading/speculation on asset prices (real estate, finance broking, conveyancing, renovations etc) but relatively little of it flows into the real economy or towards productive investment (i.e infrastructure, investment in factories, capital assets, etc).
  • Even worse, the inflated prices of assets like land and housing feeds into the cost structure of the entire economy and renders the nation less competitive.

If all of this sounds pretty familiar, you will be pleased to know that Iceland knows all about these problems and where the process ultimately ends and is thinking about doing something about it.  Best of all they have kindly published what they are thinking of doing about it in English as well.

Of course most Australian’s generally think Australia is unique and has nothing to learn, so the chances are we are going to have go through a lot of the pain that other countries have already gone through before we open our minds and start talking about how to fix the problem.

At the moment the level of debate in Australia is so primitive that most people seem to think that when the RBA cuts interest rates to drive more household debt that is a good thing rather than a sign of desperation.


4 replies »

  1. Sounds like Frosti may have been speaking for himself and we should not get too excited about Iceland trying something new under the sun.

    See this Alphaville article comment for more details.

    “…Sigrún Davídsdóttir 3 days ago
    For those interested in monetary systems the new report – Monetary Reforms; a better monetary system for Iceland – by Icelandic MP for the Progressive Party Frosti Sigurjónsson may be of some interest. It is however farfetched to assume that this report indicates a new monetary system policy in Iceland; it does not.

    As stated, the report was commissioned by prime minister Sigmundur Davíð Gunnlaugsson, leader of the Progressive Party. Early last year Gunnlaugsson set up a commission to explore options regarding monetary systems. Sigurjónsson was its chairman, together with two experts, Kristrún Frostadóttir og Davíð Stefánsson.

    After the commission had finished a joint draft, which only needed some finishing touches, Sigurjónsson offered to do the necessary work. However, when he presented a rewritten final version to the other two Frostadóttir and Stefánsson felt it no longer presented their views and resigned from the commission, according to a statement from Frostadóttir.

    Consequently, Sigurjónsson then chose to present the report on his own…….”

    Liked by 1 person

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