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Keynesian Economics: Investing in a World of Devalued Currencies
Pinnacle Digest writes: Paul Krugman has long been the poster boy of Keynesian economics, parading around on every talk show and news program that will take him, claiming the benefits of inflation and devalued currencies. Iceland has been his shining star of late as the perfect example of what can happen if a country's currency is devalued strategically.
The CRF or Council on Foreign Relations shot Krugman down, stating,
"...Once again, Krugman has relied on a Potemkin-Village graphic to illustrate his wider claim, which is that Icelanders derive unambiguous net benefits from their government obliging them to hold and transact in a national currency that their trading partners will not accept."
The Economist stated in one of its reply’s that,
"....the Baltic economies remain substantially poorer than Iceland and most euro-zone members and should therefore be expected to have a much faster rate of underlying growth thanks to the potential for catch-up. That they've essentially kept pace with rich Iceland rather than catching up points to the advantage of adjustment via devaluation, as does Iceland's good performance relative to Ireland."
All eyes are now on Iceland to see if it can sustain growth without runaway inflation. Iceland enjoyed 4.5% GDP growth in Q1 of 2012. The scary side affect to that growth was 5.4% inflation, which was reported as early as June of this year. Iceland has had to raise its interest five times since last year to keep inflation in check. Although Iceland did not volunteer to be our currency war guinea pig, they are well ahead of the inflation curve and the world will be watching very closely as the result of competitive currency devaluation continues to play out. You just never know, Iceland could be the biggest win this century for Keynesian economics and Paul Krugman.
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