The Iceland Scenario: What Can You Do?

For those of you who don’t follow international news very closely, Iceland suffered a very rough year in 2008. As recently as early October 2008, Iceland was the sixth wealthiest nation in the world. On October 6, 2008, the prime minister of Iceland addressed the nation, informing the people that they were taking extraordinary efforts to avoid a national bankruptcy. Iceland then nationalized all of their banks (meaning the government directly took control of them) and their currency dropped like a rock compared to other currencies like the Euro. The end result? The people of Iceland are facing double digit unemployment, inflation that’s well into the double digits (and into the triple digits depending on your source, meaning prices on everything are doubling annually), and uncertainty that the nation will even survive this crisis.

What brought this on? The largest banks in the country were unable to handle the economic downturn of the last year and had to be nationalized (bought by the government in order to survive). Much like in other nations (like the United States), so many businesses relied on the survival of these giant banks that they couldn’t be allowed to fail or else many other businesses would be sucked down along with them.

For a lot of people, this reflects the “bank bailout” that the United States passed late last year. Instead of having the government directly purchase the banks to keep them from failing, the United States simply gave bailout money to these large banks to prevent their failure.

This leads to a question from Adam:

I have a lot of family in Iceland and I’m worried that what happened in Iceland will happen in the United States. What can I do to protect myself?

In essence, the question Adam is asking is what can I do to protect myself against hyperinflation and huge unemployment? Both hyperinflation and rampant unemployment occur when financial systems begin to collapse, as has happened (relatively gently) in Iceland and (relatively fiercely) in Zimbabwe.

Here’s what I would do to protect myself.

Work on self-sufficiency. Plan a large garden for the coming summer. Consider renewable options for your home energy needs – solar panels and so on. Buy a deep freezer and stock it. If there are things in your home that need repair, now would be a good time to repair them. Make sure your vehicles are in excellent working order. Make sure there’s extra food in the pantry. Doing things that increase your self-sufficiency means that if an economic crisis does come, you’ll be less reliant on a currency that’s losing value.

Diversify your investments. Make sure that the investments you hold aren’t entirely held in investments in your own country. Include some index funds of foreign investments in your investments. This simply ensures that your financial future isn’t entirely tied to the economic future of your own country, but instead tied more to the economic future of the world. One government’s mistakes won’t entirely sink you.

Build good relationships with the people around you. In a period of rapid inflation, people often turn to bartering for many of their needs. They’ll trade with their neighbors, swapping skills and items to take care of what they need. The best thing you can do right now to build up your value in that regard is to build those relationships now. Even if a bad situation never occurs, you may find many situations where that relationship is beneficial to you anyway.

Don’t be too proud. So often, I see people showing a misbegotten sense of pride, telling themselves that they’re above certain jobs or certain activities. You may find yourself in a situation where the best solution is to take that job or do that activity. Don’t be proud. Instead, take the situation and run with it.

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