Now what we see by 2009 and 2010 is actually negative inflation or
deflation, something that is extremely rare with fiat non-metallic money.
So everybody now in Ireland who borrowed to buy a house during the boom period,
is now facing the same mortgage that they had before, but lower on average wages.
In Iceland on the other hand, they devalued their currency.
When you devalue your currency, everything that you import, and
in Iceland, being a small country, doesn't make everything that it consumes.
Everything that you import is now going to cost more in your local currency
than it did before.
This is a one time attempt to say we're going to cut the value of our currency,
so now we used to perhaps be able to buy
1 Euro with 10 unit of our currency
Now it requires us 12 or 13 units of our currency to buy one Euro.
Anyone who's in that kind of a situation means they, themselves,
are gonna have to pay more in their currency to get anything
that they've imported from a place where that is produced paying in Euros.
That's going to cause inflation, and
the inflation rate in Iceland jumps up in 2008 and 2009.
But that inflation rate subsequently makes all Icelandic goods and
services more competitive when sold abroad.
So if it used to be, just as the prices of imports go up,
I'm now going to import less, and the price of my exports now goes down, because
producing them in my country, paying my wages, which are going to have a lower
value relative to the Euro, is going to make it easier for me to sell abroad.
That simple type of adjustment, which makes it easier to export, and
makes it more expensive to import,
shows up in the inflation statistics that you can see in this picture,
are exactly what it takes for a country to be able to restore competitiveness.
The alternative is to just instead of deciding to pay everybody less
all at once, to slowly grind down everybody's wages and
prices until you become competitive, which runs into the problems of exactly what
we've talked about with regards to the debt that exists in that country.
[MUSIC]