Tuesday, 6 March 2012

Historical Inflation in Iceland

This graph captures the reason why we are desperately looking for an alternative for the krona.

12 month inflation in Iceland and notable events regarding the krona. The devaluation of the krona is commonly blamed for the high inflation but the fundamental reasons are different: the simultaneous creation of debt and money by the banking system. Keep the creation of debt on a leash and the problem will be solved.

Now, the devaluations of the krona are normally blamed for the high inflation in Iceland.  But the reason for high inflation in Iceland is simpler and more obvious once one has looked a bit deeper under the surface. All the same, "what everybody knows is always the truth" and so the search for a currency "that doesn't collapse in value like the krona" has gained momentum since the 2008 Collapse.

No, the fundamental reasons for the historically high inflation in Iceland is not because of the devaluations of the krona. The reason for high inflation in Iceland is the expansion of debt and the simultaneous creation of money and purchasing power. One can trace this reason at least back to the early 1920s exchange rate crisis.

Edit: a short post on the connection between debt and ISK devaluations is here: The Icelandic krona and the Icelandic debt

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