3 Great Global Challenges

I have been a fan of Thomas L. Friedman since I started reading the New York Times and then his books, The Lexus and the Olive Tree, The World is Flat, Hot, Flat and Crowded etc He has a knack to say the things that matter in the simplest of words and gets your brain working. His latest opinion with title "We Need a Second Party" is a classic. Although the message of the article is geared towards the Republican Presidential Candidate run-off, the take away for the rest of us is the challenges that he outlines. These challenges are not America's challenges these are Global challenges, every country, every citizen needs to be thinking about how they are being impacted by these challenges. No longer can we be complacent about our job, or position or title or education thinking that is going to save your future. The challenges are here and you better have a strategy to tackle them. Let me outline what those are:

"The first is responding to the challenges and opportunities of an era in which globalization and the information technology revolution have dramatically intensified, creating a hyperconnected world. This is a world in which education, innovation and talent will be rewarded more than ever. This is a world in which there will be no more “developed” and “developing countries,” but only HIEs (high-imagination-enabling countries) and LIEs (low-imagination-enabling countries)"


Wow! could he be more direct? where do you think Iceland ranks in this HIE vs LIE world? are we really making Iceland ready for the onslaught? believe me the competition is coming whether you like it or not, a billion people in India and China are raring to go, they are more motivated, they work harder and they want to win so badly that their lives depends on it. How can Iceland compete with that?


"The second of our great long-term challenges are our huge debt and entitlement obligations. They can’t be fixed without raising and reforming taxes and trimming entitlements and defense. We absolutely cannot just cut entitlements and defense. That would imperil the personal security and national security of every American. We must also reform taxes to raise more revenues."


I cannot emphasize enough the problem of entitlement, this is an epidemic and it is cancerous. There is only one way to solve this problem, arm every citizen with the tools to create their own wealth and their own future then they stop asking where's my beef. Entrepreneurs and sustainable entrepreneurial ecosystems enable that, are we creating a sustainable entrepreneurial ecosystem here in Iceland? I will follow up with the post on the Icelandic entitlement cost and I have written about the perception challenges in Iceland and Icelandic Governmental Resource Allocation problem. Of course Iceland does not have the problem of a huge defense spending but we have the challenge of very high levels of public debt. That in itself can suck the entire country and the standard living down.


"Our third great challenge is how we power our future — without dangerously polluting and warming the earth — as the global population grows from 7 billion to 9 billion people by 2050, and more and more of them want to drive, eat and live like Americans. Two billion more people who want to live like us? We can’t drill our way out of that challenge, which is why energy efficiency and clean power will be the next great global industry. Real conservatives — like Richard Nixon, the father of the Environmental Protection Agency, and George H.W. Bush, the author of the first cap-and-trade deal to curb acid rain — believe in conserving. The current Republican candidates are so captured by the oil and coal lobbies that they can’t think seriously about this huge opportunity for energy innovation."


Here Iceland has a clear lead, because Iceland is endowed with the gift of natural energy. We need to take the lead on policies that enhance this rather than build walls and stop progress. I am not saying not to take the Environment into consideration, there has to be a balance and we can make policies that enable investments in the Renewable Energy field that does not hamper the environment and leaves it in a better shape than when we found it. It can be done.


What do you think?

Is a bubble forming in Iceland?

This is from the publication of Statistics Iceland on Household Expenditure Survey 2008-2011 -

"Average household expenditure is 442 thousand ISK a month or 183 thousand per individual, i.e. 3.1% lower than in the previous survey per household. The expenditure per individual declined by 4.6%. The CPI rose by 5.4% between 2009 and 2010, hence the real household expenditure declined by 8.0%. This is equivalent to 9.5% decrease per individual in real terms. Disposable income rose by 3.6% per household and by 2.0% per individual."

The graph above shows the changes between years in CPI from 1988. What is interesting to note is that CPI has been going up irrespective of Capital Controls since 2008 and a hawkish stance from the Central Bank of Iceland. What this tells me is that the policy tools in Iceland employed by the Central Bank of Iceland does not work. How does one fix this problem? I have written about one solution. Inflation is a bad thing, one simple reason why this is the case is because it is like a cancer that eats into the asset values in an economy that is why every Central Bank takes an Hawkish stance to control the supply of money or not, like Zimbabwe or Greece before they joined the EU. Central Banks have the authority to print money but there needs to be something worthwhile against those printed currency if the economy does not produce valuable goods and services then it only leads to too much money chasing too few goods and services and result in Inflation. The trend is Iceland is giving me a heart burn. There have been no new industry or goods and services created, overall household consumption is going down, the government consumption is going up and change in CPI between years is upward trending, in addition to this the Real Estate market prices are being driven up by all the pent up currency before the collapse. All this can lead to only one thing rising prices of assets and which ultimately leads to a bubble and we all know what happens to bubbles.

Related articles

• Some companies in Iceland benefited from 83 percent debt write off (icenews.is)
• Bauhaus to finally open its Icelandic store (icenews.is)
• Fairy (icelandeyes.blogspot.com)
• Group layoffs and bankruptcies continue in Iceland, despite some positive changes (icenews.is)
• Medical costs to increase in Iceland (icenews.is)

Is Iceland being perceived as a just society?

Read this article in Reykjavik Grapevine, it is a finding of a study being conducted by Jón Gunnar Bernburg @University of Iceland, Berglind Hólm Ragnarsdóttir @City University of New York and Sigrún Ólafsdóttir @Boston University. The title of the paper is "Subjective Injustice during the Icelandic Recession 2009-2010" where the authors have done a survey of 948 people representing a good cross section of the Icelandic population. If you want to read the whole report you can find it here. There were a bunch of graphs that I thought were very interesting.

• 81% of the respondents felt that it was necessary or quite important to "know the right people"!
• 75% agree that everything is so uncertain these days that it feels like anything can happen
• 50% think it is necessary or quite important to have political connection
• 15% think it is important to bribe somebody
• Over 57% of the respondents feel that their status in the society is unjust!
• 35% feel that their standard of living will get much worse in the near future
• 79% agree that everything is chaotic that it is difficult for people to know where they stand fro day to day
• 37% get angry or frustrated due to their status in the society

The authors hypothesis the following from the study:

1. We predict that under the circumstances of reduced living standards and uncertainty about future living standards individuals who have internalized high monetary goals will be more likely to experience status injustice. 
2. We predict that individuals having expectations about their future economic status tend to exhibit more subjective status injustice, again net of their actual economic position.
3. We hypothesis individuals who believe that the opportunities for achievement are corrupted by personal ties, political connections, or bribery will be more likely to experience subjective status injustice
4. We expect the perception of uncertainty and instability regarding social institutions to undermine subjective status justice

I think the consequences of those experiences and perceptions are important. 

This study is quite surprising to me. What do you think? Do you think Iceland is a fair and just society? What about starting a business here?

Related articles

• Hayley's year in Iceland (ablogabouticeland.com)
• Iceland interior minister complains about absurd laws, wants change (icenews.is)

Iceland Debt Position - Are we out of the water?

I find it very strange that everyone seems to think that Iceland is out of the water in terms of all its problems... I hate to be the bringer of bad news, look at the Government debt as a % of GDP figure below it stands at around 92%, if you combine this with the household debt (94% of GDP) which is again an interesting measure which usually gets ignored the world does not look that great. I don't care what the rating agencies are saying.

I am quoting the research report from Islandsbanki

Household loans written down by ISK 173 bn.

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The restructuring of household debt continues. In September the write-downs of financial undertakings, the Housing Financing Fund and pension funds amounted to over ISK 9 bn.  ISK 4.5 bn. of this amount was in write-downs under the 110% solution scheme, ISK 4 bn. were written down as a result of recalculated loans and ISK 0.5 bn. were written down under special debt adjustments. This is according to information, which the Icelandic Financial Services Association (SFF) has collected from financial undertakings, the Housing Financing Fund and pension funds, and which was published yesterday. Total write-downs on individual loans since the financial crash amount to ISK 172.6 bn., which corresponds to around 11% of the estimated GDP for this year.  

Most write-downs due to recalculations 

The lion's share of the write-downs there have been in the Icelandic financial system since the collapse of the banks are due to the recalculation of illegal loans, since a total of ISK 96 bn. has been written off in this manner, i.e. 55% of the whole. A total of 13 thousand housing mortgages have been recalculated and subsequently written down by ISK 57.5 bn. Some 57 thousand car loans have also been written down by ISK 38.5 bn. Write-downs under the 110% solution scheme amount to ISK 31.7 bn. and write-downs through special debt adjustments amount to ISK 6 bn.Even though a lot of progress has been made in the restructuring of debt, the process is still far from over. The length of time this process has taken has a negative impact, since uncertainty with regard to the debt position and slow restructuring have delayed the recovery of the economy. According to the figures published by the Icelandic Financial Services Association, one quarter of the applications for the 110% solution are still being processed, i.e. 4,300 applications. The processing of special adjustment applications has also gone slowly, since 40% of the applications for debt mitigation, i.e. 552 applications, are still being processed. Finally, over 3 thousand households still had frozen loans at the end of September. All this demonstrates that the financial restructuring of households is still in progress, more than three years after the financial collapse. Despite these write-downs of Icelandic household debt, debt levels are still very high by international standards. At the end of June, household debt amounted to around 94% of the estimated GDP for this year, although it has decreased since its peak in 2008 when it was almost 130% of GDP. It is clear that this high level of Icelandic household debt will significantly limit the prospects for growth in private consumption and household investment, and restrict economic growth in Iceland in the years ahead.

How can one expect economic growth when there is an over-hang of debt at the Governmental level (the biggest spender) and all the households (the second biggest spender) the total investments or capital expenses that have been made in Iceland account for a very small portion of the overall current account. The only saving grace has been the tourism industry and in my opinion that is going to slow as well as there is a global slow down as predicted by many nodal bodies.

Euro Zone Debt Crisis

I think this picture says a lot about what is being discussed in the main stream media about the Euro Zone Crisis. High Debt to GDP is only an issue when the GDP is not growing fast enough to pay for the Debt. IMHO, that should be the discussion and not the level of debt. The second important point and I think this is more relevant that anything else is how are we going to grow the GDP? Iceland did it by devaluing their currency. How is Greece going to increase its competitiveness in the global market place? There is no short term answer, GDP growth always takes time to implement and structurally change the economy. It took India 12 to 15 years to get GDP growth at a rate that would make an impact in the economy and it took China over 25 years to attain the rate of growth of around 10%. If the political machine in Europe can implement policies that would get Europe to grow at 3 to 5% again the crisis can be averted. Of course there is going to be hick ups in the short term, it depends a lot of how bad of a hick up we have or a major heart attack. I am certain the policy decision of ECB is very important, they need to cut the interest rates to make the Euro economies to grow again and also stand behind supporting the confidence in the market. Failure to achieve either of those things we are going to have a deep and severe recession in the Euro Zone and the above Debt to GDP ratio is going to get worse.

Tax cuts better than Deficit Financing better than Tax increase!

Well, I have been shouting in Iceland if anyone would listen:

Tax Cut is better than Deficit Financing is better than Tax Increase for dealing with Recession and stimulate GDP growth. Of course what have the current Icelandic Government done? INCREASED TAXES! yes, folks go figure! Whats up with all these advisers? Don´t believe me read the note by Dr.Greg Mankiw the Harvard Economist who is talking about the same thing for the US economy here

Policy implications if we use Power Law distribution

I have been working on my first paper with the title "Can Power Law help us avoid highly improbable tail events?" the premise of the argument is that if some economic variables fall in the Power Law distribution then policies associated with those economic variables need to be handled differently. For example, I am taking the problem of the Icelandic Krona, I have written about the Icelandic Krona before and I am convinced that it follows a Power Law distribution.

If we know that ISK follows a power law distribution and future fluctuations in ISK are going to follow the Power Law distribution should the Icelandic state still use the currency in its current form? or should it switch over to a more stable currency say the Euro? this debate is on-going in Iceland and I am afraid people are viewing this decision with their political lense and not the economic lense.

Just a simple switch in the probability distribution of the ISK has some serious policy implications. Lets do a simple thought experiment: The Financial Supervisory Authority of Iceland used a 20% devaluation of the ISK as a basis to stress test the banks in Iceland, why did they choose 20% because they thought ISK followed a Gaussian Normal Distribution and a 20% devaluation is a 2 or 3 sigma event or a very low probability of occurance, however if we change the distribution to Power Law a 20% devaluation of the ISK has a much higher probability therefore they would have chosen a much higher deviation for the stress test say 50% this would have shown the true color of the Icelandic banks capital adequacy and vulnerability to wholesale funding. The question is if the stress test had been done in 2006 when Iceland had a mini crisis, the FSA could have put a stop to the aggressive borrowing by the Icelandic banks which in turn would have reduced the leverage of the companies in Iceland and the citizens.

So choosing the right probability distribution matters! atleast that is the basis for my PhD thesis lets hope the thesis could influence some policy choices.

McKinsey agrees...

Here is the latest article from McKinsey Quarterly, the summary is Power Law works in the Economic field and the implications for policy choices are very serious to ignore. Just what Dr.Taleb, Mandelbrot and others have been saying for decades. Listen to the video below where Mandelbrot explains his theory... fascinating stuff!

The Crisis and The Response - An interesting panel debate

Here is a very interesting debate by Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, Robin Wells et al.

My Summary:

1. The US banks have to be nationalized

2. We need better regulations around derivatives and bank capital norms

3. The US needs to grow through normal sustainable means like investing in technology and innovation and increasing productivity

4. The US consumer would have to scale back on their consumption and increase savings, at the same time the rest of the world needs to increase their consumption and decrease their savings

5. All the stimulus in place would have to be reversed at the first sign of reversal as it has huge implications to the US balance sheet and its credit worthiness

Icelandic Government & Choices before it & some modest suggestions...

I saw a very disturbing development in the news in Iceland, the Government is thinking of cutting cost in schools and education. This is precisely what one of the MP said that they will not do before the election, but of course they have a change of heart when they are in the Parliment.

Here is a perspective of the debate before the election, I think Icelandic government has a lot of tools in front of it to deal with the burden of debt, for example if a case could be made to the public of Iceland that a 5% increase in tax is needed to maintain and build the Education System, Infrastructure, Healthcare and Elderly care services everyone will pay up without any question. The increase in tax could be temporary, say for the next 2 years or 3 years until a majority of the burden is resolved. 

Where do I think the Icelandic government needs to cut its expenses? Here is a no-brainer:

Oil imports - put a tax on car owners and oil users, I think Iceland is small enough to provide incentives for people to switch on their mode of transportation. You can even get creative, have the tax during the summer months when the weather outside is not as bad as when it is during Winter. Almost every household that I know has atleast 2 cars, whereas you can get by with one... We have been living in Iceland for the past 3 years and we have got by with one car not because we cannot afford one! On the contrary it makes us plan ahead and coordinate our days so we can do all the things with just one car. I don't understand why this cannot be adopted in Iceland for every household. I mean if you want to own more than one car then you just pay a higher price, which I think is a fair bargain.

There were so much talk about Iceland becoming Oil independent in the past, here are all the links... 

1. The World's First Oil Free Economy (Iceland) - July 2008

2. Iceland Plans to End Oil Usage - Feb 2005

3. Iceland the first country to try abandon Oil - January 2005 - ABC News

4. Hydrogen puts Iceland on road to oil free future - May 2002

I think Iceland will be a very interesting candidate for the Pigou Tax

Depressing news this morning in BBC

I was listening to BBC report that in a global scale Terrorists are winning! In Afghanistan to Iraq and America. I am quite depressed about this! What is going on? Are we such spine-less people! to let such extreme idealogies win over Freedom, Liberty, Justice and the rule of law...

NNP = GDP - Natural Resource Depreciation

New way to calculate the wealth of a nation. Joseph Stiglitz talks about changing the equation we use to measure a country's wealth! interesting discussion... wonder if it will ever be implemented.

Repeat After Me by Greg Mankiw WSJ

Repeat After Me by Greg Mankiw I wish the politicians and Lou Dobbs would read this and bang their heads against the wall when they argue against it!

It is so simple and drives home the point, government should try to maintain Peace, levy easy taxes and establish a tolerable administration of justice... when your government stops doing this try to remind the people around you to read "Repeat After Me"

Framing - everyone should learn to decipher this

Greg Mankiw's Blog: Ip is caught framing.
Greg talks about how statistics and number can be "Framed" to push your cause whether political or otherwise. I think everyone should learn to read between the lines on political debates and well as companies publishing numbers, one can really play with the words and bias the conclusion.

Making India a hub of venture capital | CNET News.com

Making India a hub of venture capital CNET News.com, as I wrote in my earlier post India is undergoing some rapid change and development. The article above describes the flow of Venture Capital funds into India, it has increased 400% to $3.6 billion. I personally think India will beat China in this funds race due to the Indian governments great strides in establishing Intellectual Property.

The new India
Cisco to inject $1billion in India
Intel investing in new India
Rediff.com branches into other
CNET.com big picture view