What It Looks Like When You Run Out Of Money

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This short Planet Money item on Iceland running out of foreign currency is excellent, both on its own term and also because it’s a useful illustration of exactly why the US isn’t “going broke”:

The problem the hedge fund guys had spotted was in fact, the joke that John Cleese commercial: Iceland is a very small country. It’s the smallest in the world to have its own currency. And it had borrowed huge amounts of foreign currency. Normally that wasn’t a problem. Icelandic banks could always change their domestic currency, the krona, for dollars or euros on the world market. But now the world was worried. And no one wanted krona. In a bigger country, banks might get some foreign currency from their own central bank. But Iceland’s central bank also ran out of dollars and euros.

“The central bank used all it had in a desperate attempt to save one of the banks,” the economist Gylfi Magnússon says. “But that only kept the bank afloat for another couple of days.”

The point here is that while we frequently use words like “money” and “yen” interchangeably, these are different things. The krona is a kind of money, but while Iceland can’t run out of krona it can run out of dollars and yen and euros. And since Iceland is tiny this is a huge problem. Small countries can’t host large banks.

The United States is very different. Global demand for dollars appears to be in some kind of longish term decline related to the rise of China’s export machine, but in periods of crisis demand for dollars goes up:

Lucky for us! That’s why it’s nice to be a big country with a stable political system and deep and liquid financial markets.