Iceland Without the Ideology

In theory, any country with a sovereign currency can do this. Argentina did this early in the last decade, and it prospered for a while. It is a bit like the trick of the magician blowing himself up -- you can only do it once -- but once it's done you re-boot from that lower base.

Jeff Nielsen of BullionBullsCanada did a piece on this at TheStreet a week ago. At BullionBullsCanada he writes about dark days for the U.S. -- hyper-inflation, economic collapse. He thinks that collapse has already begun.

It's true that, with a lot of sovereign debt held by U.S. banks and institutions, and with the U.S. position as a creditor nation, we are going to take a big part of the hit if other countries follow Iceland's lead. An IMF official told BusinessWeek that Iceland has yet to lift its capital controls and there will be further economic pain from that. Despite modest growth, Iceland will have to raise interest rates to enable this.

But four years into its crisis, Iceland is recovering, while Europe is still kicking the can down the road. Managed devaluations will drive economies down in the near term, but the return of the drachma is not the end of the world.

Take the politics out of it and there is a way forward. When Andrew Mellon famously said "liquidate," he also meant the banks. Write down the bad loans and let the bad banks go under, but also protect the people. As a BusinessWeek history published in January shows, by 1932 Mellon wanted government to protect workers, and even supported the march of "Cox's Army" to demand intervention.

If Europe takes Iceland's way out, I wouldn't want to have any money in a big bank -- or a big bank's stock. But I wouldn't call it a victory for conservatism, and I wouldn't call it the end of the world. I'd go with a phrase from technology, the area I've covered most of my life: It's a control-alt-delete.

Reboot the system and it will run fine.