Iceland: a preview of our future?

The tragic events in Iceland should be a clear warning as to what lies ahead for many western nations. Years of excessive debt, leverage and reliance on a service based financial economy has resulted in a collapsing house of cards. At the core this is a currency crisis. Over time the crisis manifests itself as a range of financial, economic, social and political problems. Here's a simplistic view of the various stages:

Stage 1 - loose domestic monetary policy
Stage 2 - easy access to foreign credit
Stage 3 - asset bubbles in stocks and housing
Stage 4 - booming financial services economy
Stage 5 - asset price growth decelerates
Stage 6 - foreigners start to withdraw credit
Stage 7 - government compensates with monetary and fiscal stimulus
Stage 8 - currency weakens
Stage 9 - asset prices start to decline
Stage 10 - unemployment increases
Stage 11 - foreign credit withdrawal accelerates
Stage 12 - monetary and fiscal stimulus accelerates
Stage 13 - foreign credit withdrawal accelerates
Stage 14 - currency decline accelerates
Stage 15 - interest rates increase
Stage 16 - domestic prices for food and basic necessities increase
Stage 17 - asset price declines accelerate
Stage 18 - scarcity of foreign imported goods
Stage 19 - scarcity of basic necessities
Stage 20 - civil unrest
Stage 21 - government legislated price controls
Stage 22 - chronic food and basic necessity shortages
Stage 23 - hyperinflation
Stage 24 - economic collapse
Stage 25 - riots and social structure collapse
Stage 26 - political instability and demand for change
Stage 27 - rise of an extremist leader
Stage 28 - legislative/constitutional change giving government more power
Stage 29 - blame is externalised
Stage 30 - external conflict

The following article from Bloomberg would suggest Iceland is around stage 20. Where do you think the US, UK, Australia and New Zealand might be?

(Bloomberg) -- It was the week before Christmas in Reykjavik, and all through the town Eva Hauksdottir led a band of 60 whistle-blowing, pan-banging, shouting demonstrators.

“Pay your own debts,” they yelled as they visited one bank office after another in Iceland’s capital. “Don’t make the children pay.”

When she isn’t leading one of the almost daily acts of protest in this land devastated by the global financial meltdown, Hauksdottir sells good luck charms made from the claws of ptarmigans, a local bird, and voodoo dolls in the form of bankers. She says she expects to lose her home, worth less than when she bought it two years ago, after the amount she owes jumped more than 20 percent.

Unrest following the end of a five-year economic boom is overshadowing the holidays in a country of 320,000 near the Arctic Circle, where the folklore is filled with magic, trolls and elves. Expansion ended with the collapse of the U.S. subprime mortgage market. The fallout in Iceland may presage civil disruptions elsewhere, as job losses multiply and credit bills come due. Few nations can count themselves safe, says Ian Bremmer, president of the New York-based Eurasia Group, which analyzes political risk for businesses.

“As people have their expectations changed radically, you can have protests come out of nowhere,” even in developed countries, Bremmer said.

‘Maybe Axes’

Riots in Greece this month, sparked by the police shooting of a teenager, became tinged with economic dissension. A group of Kuwaiti equity traders marched on the emir’s office in October to demand the closing of the stock exchange to stem losses. Even in U.S. cities, civil disorder is “conceivable” if unemployment rises above 10 percent from November’s 6.7 percent, Bremmer says.

Hauksdottir, the owner of a Reykjavik witchcraft shop, says over a cup of thyme and juniper tea that only civil disobedience can force banks to stop collecting debts that people can’t pay.

“We’ll use our voices, and then if we have to we’ll use our hands, and maybe axes,” Hauksdottir says.

At Reykjavik’s half-built concert hall, a symbol of the good times that juts from the harbor toward the North Pole, the visitor center is closed to visitors. The principal owner, Landsbanki Islands hf, failed in October. Marketing director Thorhallur Vilhjalmsson says he’s making ends meet on severance pay.

“Iceland right now is like Chernobyl after the blast,” Vilhjalmsson says. “It looks normal, but there’s radiation.”

Kicking Down Doors

The protests may escalate as bills come due and severance pay runs out for those who lost jobs at the three biggest lenders, including Landsbanki, the second-largest, says Stefan Palsson, a historian. He once led the Campaign Against Militarism, opposing NATO bases in the 1960s.

He said he’s surprised ordinary people are backing activists once considered “hooligans.” There was public outrage three years ago when environmentalists poured yogurt over aluminum representatives to protest a new plant.

“Now you have protesters kicking down doors at police stations, and respectable elderly people saying ‘Well, they’re young and full of enthusiasm, and anyway, they’re right!’” he said.

Inflation rose to 18.1 percent this month, and the International Monetary Fund predicts that Iceland’s economy will shrink 9.6 percent next year. The Washington-based global lender of last resort put together a rescue package for the country worth as much as $5.3 billion last month.

No-Debt Ethics

The decline in the krona and surge in prices are creating a triple whammy for borrowers whose home loans are typically linked to inflation or foreign currencies. Households owed more than double their disposable income at the end of 2006, almost twice the level in the U.S., according to the IMF.

Some Icelanders say the easy money of the past decade eroded the island’s traditions. A sheep farmer in the 1934 novel, “Independent People,” by Iceland’s only Nobel laureate, Halldor Laxness, preferred freedom from debt to any material comforts. His motto was: “I don’t owe anyone a penny.”

That philosophy may return, says Birgir Asgeirsson, 63, the priest at Reykjavik’s Hallgrimskirkja Lutheran church.

“I grew up learning that you work for what you get, but kids today just get what they want,” Asgeirsson says. “Now I can hear parents say ‘No, my little boy, it’s not that easy.’”