The latest in world-needs-more-Canada news (Nordic dep't) -

The latest in world-needs-more-Canada news (Nordic dep’t)

Is Iceland longing for the loonie?


I learn from a sister publication that a handful of economists in Iceland is recommending that the volcanic statelet adopt the Canadian dollar. News from Iceland is always of special interest in Canada, where the Icelandic diaspora has given us legitimate world-historical notables like William Stephenson and, er, the other William Stephenson. The inherent vulnerability of Iceland’s own currency, the króna, has had Icelanders looking at the euro as a refuge, but that option has been yanked off the table for the time being, and may be permanently unavailable within weeks.

One of Canada’s contributions to humanity, as it happens, is the theory of optimum currency areas. The loonie-ization advocates argue that the Canadian dollar is a good choice because Iceland is dependent upon commodity exports and thus has a business cycle more or less in sync with Canada’s. Iceland is also part of the EFTA, with which Canada has a rudimentary free-trade agreement. But that agreement doesn’t cover services and credentials. Mundell’s test for optimality would require free movement of labour between the countries, a common language, and, ideally, some fiscal-transfer mechanism to smooth out the differential effects of the single exchange rate. There is a strong presumption that a currency area should actually be a contiguous area, or very nearly one.

From the Icelandic point of view, however, this raises a tricky question: what the hell is a small sovereign state to do when it’s not part of any optimum currency area? Iceland has appeared on the world stage lately as a tiny, obstreperous gang that banded together to shed financial obligations and swindle British lenders. But when you contemplate its situation, it is hard to see how else Iceland could act in a crisis; we’re talking about 318,000 people, almost all of them each other’s cousins, huddled together on a godforsaken cluster of pumice. Under pressure, of course they will unify to fleece outsiders rather than each other. From this standpoint, the hypothetical power of Icelandic state fiat is never going to be very attractive to investors.

Iceland doesn’t have the power to make the world use its notes; all it really has control over is the unit Icelanders get paid in and use at the corner shop to buy poetry books and kegs of herring. The choice is between the króna, which is a glorified poker chip, or some other unit that has a protective floor value—one established either outside Iceland by someone else’s central bank, or by “nature”, like gold. The pound sterling, sometimes suggested in the past, seems less suitable than ever for a fanatically de-financialized Icelandic economy. Perhaps notes backed by the aluminum Iceland produces in enormous quantities might be the answer? (The mind reels at the possibilities. Could this involve claims on large, physical Yap-esque aluminum megacoins? Or stamped sheets of aluminum foil?) It’s an unnatural choice in theory, but what in the name of Eyjafjallajökull is the natural one?

The Bank of Canada refuses to comment on a foreign country’s monetary affairs, but has indicated it will be happy to provide Icelanders with as many coins and notes as they wish to buy. If Iceland loonie-ized, the seigniorage would actually provide a minor ongoing windfall to the Canadian federal treasury. Unfortunately, I saw a comment on one Icelandic blog that raises a significant objection to the idea: anti-British loathing is, and will be for the foreseeable future, so strong in Iceland that the populace would be psychologically reluctant to accept notes bearing the face of the Queen. When you’re designing or adopting a currency, such “animal spirits” considerations do count.


The latest in world-needs-more-Canada news (Nordic dep’t)

  1. Aluminum would be better as money than digits or pieces of paper. Fundamentally, money is a popular PRODUCT used as a medium of trade. It’s a PRODUCT with a primary use in society, and for that reason people accept it since they know others want it. No one uses digits or paper as a necklace for a night on the town, but they do use gold, and they use aluminum for many applications. Aluminum was never chosen as money because it’s quite heavy compared to its value. 

    The loonie and other national currencies such as the krona, pound, euro, us dollar, etc. are all worthless digits and paper forced upon the people by governments that use these fiat monies to tax people, by creating more of the digits, which steal value from all existing digits. Governments vary in how much they tax their subjects and Canada’s ruling party has been kinder than others. 

    Moving to the loonie from the krona would be a step up, though still a step in purgatory. A step into honesty would be moving to a product and if aluminum is the only option, so be it. People will use credit cards and electronic transfers to trade aluminum, making weight a non-issue in this modern times. 

    • If a frank commodity basis were being considered seriously, you would probably not make it aluminum-only, but create a basket of assets (Iceland also produces silicon, for example). The central bank does still have 64,000 ounces of gold in the vault at Threadneedle St., assuming the outraged English haven’t “misplaced” it…

      • Yes, a basket of goods would be better. And even better would be to exclude government from an individual’s choice of money. Choosing one’s money is like choosing one’s investments, because money is an investment–if a person accepted bananas as money, the value would decompose quickly; everyone has a different opinion on what asset will retain value. 

        • Nothing’s stopping any individual from using whatever he likes as money.

          • Except that other individuals must also recognize that it is “money”.

          • Alas, yes.

        • Isn’t that an argument *for* a single currency and *against* the barter system? There seem to be pretty freaking high transaction costs to converting from units of bananas on one’s credit card or bank account to something else such as aluminium.

          • Unless you’re an American, in which case everything you say suddenly makes sense. In Canada, buying elections is frowned upon.

    • Taxation existed long before fiat currency, and tended to be enforced more brutally.

    • Sounds like we have another reader of Hazlitt’s fairy tale here. Governments have lots of means to tax, and no one is FORCING you to denominate your assets in dollars, put your savings into gold and just cash out when you need to buy something. It’s an extra step, but on your model it’s supposed to be a guaranteed investment, so why not?

      • Government’s tax you TWICE if you use anything but their forced currency. If I trade aluminum for a meal, the government will apply sales and capital gains taxes to a percentage of the aluminum and a percentage of the meal. If I use the forced currency to purchase a meal, taxes only apply to the meal. 

        Who brought up Hazlitt? Using a product–something that already has a use in society–as money occurred well before Hazlitt. It’s common sense. 

  2. They could still use the krona, just by backing it with Canadian dollar foreign exchange reserves, redeemable for a fixed amount of CAD.

  3. lost a post to the censor bot …is this the Don Cherry seven second delay?  :)

  4. Been following this for a while – EU is not looking as attractive right now as there are rules imposed as well – Iceland is fighting right now over fishing quotas.  
    “The group is appealing to hearts as well as minds, pointing out a huge wave of Icelanders once emigrated to Canada, and there is still an active community in Manitoba. Relations have always been good between the northern nations, which cannot be said of Iceland and other countries.
    The strangest reason for adopting the loonie is Arctic sovereignty. There are eight countries in the Arctic Council, including Canada and Iceland. A common currency could help Canada gain clout in the council, the group argues, and it could gain even more if Greenland comes on board, which they recommend. (To think that Canada, Iceland and Greenland can hold sway over the U.S. and Russia might be, well, very 2007.)
    For now, the idea remains exactly that. The Progressive Party does not have a big presence in parliament, and the coalition government wants to complete the EU application process. Gunnlaugsson, the Progressive leader, is hoping for a nod of approval from Canada. “If there were some signs from Canada of willingness to look into this issue seriously, it would mean that the government cannot ignore the idea,” he says. Help probably isn’t forthcoming. The group approached the Canadian Embassy in Reykjavik to ask how Canada would feel about a switch, and earlier this year the question was relayed to the Bank of Canada. According to a Canadian official who requested anonymity, the central bank answered that a unilateral currency switch wouldn’t mean much for Canada—all it has to do is supply the notes and coins purchased by Iceland—and the country was welcome to do it. However, it emphasized Iceland would have zero input into policy decisions. The Bank of Canada and the embassy declined to comment, but the Canadian official says, “I think they only heard what they wanted to hear.” If Iceland ditched its currency, it wouldn’t have control over monetary policy to boost the economy, leaving layoffs as the primary way to deal with downturns. That’s tricky in Iceland. “It’s a very closed, tight-knit system,” says the official. “Everybody is somebody’s second cousin.” The devalued króna is also a key reason the country is crawling out of its hole: exports, predominately fish, are cheap.”

    • That strange reason you speak of is what gave me a willingness to look at this idea.  But I also take TonyAdams’ point that, if they are discarding the Krona because they’ve mismanaged it out of value, why wouldn’t mismanagement of their Canadian dollars have an effect on our currency?

      And by the way, you are referencing the exact same story Colby links to at the start, only the one you referenced is nine days later than the original.  I read it over at Canadian Business when it first came out, but I’m amazed it was so long ago.  It feels like two weeks or so.

      • Teach me to open the link before posting, lol – I assumed it was from the G&M or CBC articles.  Forgot that Canadian Business is a sister pub – should have known as I get Money Sense.  Just happy CC chose to put it up for discussion as it is interesting.

        Iceland would benefit from adopting the Canadian currency as our BoC hero Carney would never have let the banks run interest rates up like they did based on speculation.  Canadian currency is based on our economic strengh using multiple market indexes.  Just yesterday he was tut-tutting Canadians for going into debt, that cheap borrowing would not last forever.  I was glad to read our banks are now limiting the number of investment properties they will mortgage per customers.  They are following the most important rule in lending “the ability to service your debt”.


  5. Hey, this is odd. Isn’t it the case that some Canadian Economists say that Canada should be more like Nordic countries? hmmm
    In any event, I don’t buy the simple analysis, originating in your sister mag Canadian Business, and repeated here that: the Canadian dollar is a good choice because Iceland is dependent upon commodity exports and thus has a business cycle more or less in sync with Canada’s.
    Well, yes and no. Iceland’s competitive advantage is its abundant geothermal and hydro-electric power. Low carbon (and renewable) energy.
    This is why bauxite (alumin(i)um oxide) is shipped there in such large quantities and smelted into aluminum (see wiki “bauxite” for sources – Iceland not even in top 15).  It imports its hydrocarbons.

    It has competed in the past with Canadian provinces like Quebec and BC to attract similar smelting investment by the provinces offering subsidized electricity. Of course, with Iceland being where it is, selling the energy to other countries/industries is not an option (unlike BC and QC).
    And if you were to dwell further into Iceland’s economy – it has attempted to diversify into secondary manufacturing etc. (wiki “Economy of Iceland”)
    Kind of the opposite of what Canada has been up to the past 10-15 yrs – where we develop our primary extraction (bitumen for example) and then ship it off, not quickly enough for many, elsewhere for processing.
    I don’t take this proposal too seriously. Remember Turks and Caicos?

  6. They do not have reserves of bauxite to process into aluminum, they have a massive hydroelectric plant on the practically uninhabited east side of the island which is useful for the large electrical base load requirements of aluminum processing.  Canada actually has mineral reserves in the ground to take out and use as backing for the Loonie.   Switching to the Canadian dollar does not make sense because Iceland would have to buy it from the Bank of Canada.  If  Iceland isn’t going to use the krona, what are they going to buy the Canadian dollar with?  Borrowed Canadian dollars?  That’s going to go well given their recent credit history.

    As an interesting note about the gold standard of metal currencies, gold, I can not provide a source, but some African central banks have recently been shocked to find that what they thought were bars of gold were in fact very sophisticated duds made of tungsten alloy with a gold coating.  What can you trust these days?

  7. I hope they do it.

  8. Annex them. Then take Greenland.

    • We’d have to take Denmark too, as they govern Greenland. Ah what the hell, let’s take all of Scandinavia, including Finland. 

  9. I don’t know enough about currency and how it works I guess but this sounds suspicious to me. 

    I often feel Canadian bureaucrats have no idea what they are doing but I will trust Bank of Canada,   and Cosh’s and blog comments academic discussion, that Iceland using our money is not a problem for Canada. 

    If the males of Iceland decide to act as wide boys again and they are using Canadian $$$, why wouldn’t that affect our money/economy? 

    And God help the world if world’s in need of Canada.

    Michael Lewis ~ Wall St On Tundra:
    “What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown.”

    • No one is proposing to let Iceland participate in Canadian monetary policy–that is, to create Canadian dollars. From our standpoint it’s pretty much just a print job.

      • “No one is proposing to let Iceland participate in Canadian monetary policy …. ”

        I understand that part but I worry about animal spirits of currency investors or somesuch.
        I know other countries do this kind of thing but I don’t understand why it wouldn’t affect value of Canadian $$$ if Iceland went on exact same binge in future using our money. 

        Wouldn’t Canadian $$$ be worth less, or trade disrupted, if a country went bankrupt using our $$$? Another ghost in my machine, I assume.

        • Iceland could print IOUs redeemable in any convenient equivalent to one Canadian dollar and distribute those. That wouldn’t affect our money supply. Obviously. It’s just a unit of account.

        • Similarly, I don’t have an expert understanding of these things. But, as far as I do understand it, Iceland would have to actually purchase our dollars. So, in year one, they purchase 1Billion CAD, in year 2, if they’ve screwed their economy and only have the GDP capacity to purchase 1Million CAD then that’s all they can get.
          There would be no agreement or treaty or combined policy, just a straight transaction. Their ability to buy CAD would be dependent on their own economic strength.

  10. I think interest in Canada for currency sans the face of the British Monarch would be high as well.

  11. They didn’t “swindle” British lenders.  British lenders were stupid enough to trust Icelandic banks.  There is no sign the Icelanders weren’t equally stupid.  That isn’t swindling.

  12. does adopting CAD  make Iceland a Canadian terrritory

    • Fairly obviously no. Many sovereign countries use US Dollars as their currency, for example.

  13. If they’re willing to submit themselves to full provincehood, I’d say let ’em have it.