Iceland moves to abolish capital and currency controls

Some very, very good news out of Iceland. This is from a press release from the Icelandic Ministry of Finance:

Individuals’ and companies’ freedom to transfer funds to and from Iceland and to carry out foreign exchange transactions will increase greatly, according to the bill of legislation that the Minister of Finance and Economic Affairs will present before Parliament tomorrow.

The bill is part of the authorities’ capital account liberalisation strategy, introduced on 8 June 2015. With it, important steps are being taken to lift the capital controls in full. The bill has been prepared in accordance with recommendations from the International Monetary Fund (IMF), with economic stability and the public interest as guiding principles.

Read more on the details here.

In my view this is a decisive move towards the total liberalisation of capital and currency mobility in and out of Iceland. Finance Minister Bjarni Benediktsson deserves a lot of credit for getting this through.

I am very happy to see this and  I am optimistic that this will have significantly positive effect on the long-term growth perspective.

The question of course is how the global financial markets will take this. Overall I believe that the Icelandic króna is trading fairly close to what we could think of a “fair value”, which should reduce the risk of currency outflows over the medium-term. In fact the free movement of capital will make Iceland significant more attractive as a destination for foreign direct investments. Furthermore, it should be noted that Iceland presently is running 5% current account surplus.

The graph below shows the real effective exchange for the Icelandic króna. The red line is the average value for exchange since 2000.




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Can Stephen Moore justify Donald Trump’s economic policies?

Today Donald Trump unveiled his team of economic advisers. Interestingly enough there are very few economists among the economic advisors and only one who can be said to have any free market credentials – the Heritage Foundation‘s chief economist Stephen Moore.

Stephen Moore claims to be a free market economist, but then he needs to explain why he is a Trump supporter.

So my question to Stephen Moore is please explain why Donald Trump’s following positions are good free market policies:

45% tariff on trade with China

Default on public debt

10 dollar minimum wage

Keynesian activist fiscal policies 

And the utter and complete erosion of the Rule of Law

In fact it could be very interesting to hear Stephen Moore explain what would happen to the US’ ranking on the Heritage Foundation’s Index of Economic Freedom if these Trump policies were indeed implemented.

And finally, I wonder if Stephen Moore thinks that Donald Trump would be able to explain the tax plan that Stephen Moore has put together for Trump with Arthur Laffer and Larry Kudlow?

I look forward to the answers.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail:


Markets are mostly efficient

I just stumbled on this interesting discussion between Eugene Fama and Richard Thaler – they talked about whether markets are efficient or not.

Thaler argues that markets are not efficient. Fama agrees, but nonetheless are argue that we have no better model of the world. It shouldn’t be a surprise to my readers that I agree more with Fama than Thaler.

What I particularly notice is just how little evidence Thaler is able to present that markets are not efficient. Yes, he comes up with anecdotes, but that is not evidence. With billions of investors and billions of different markets and prices you will always be able to come up with some example of pricing behavior, which in someway looks inefficient or irrational, but that does not mean that you generally can say markets are inefficient rather than efficient.

My own view is very much based on my experience from working more than 15 years in financial markets. So even though I theoretically always have had a lot of sympathy of Euguene Fama’s thinking about financial markets it is not really the theoretical arguments that convince me these days.

It is simply my experience that I never meet anybody in the financial markets who consistently have been able to beat the markets. I met a lot of people who think they can beat the market, but that is not the same as they are right (they are not).

Obviously with billion of people around the world making decision and investments some will for periods do better than others, but this is essentially down to luck (or inside information!).

One thing that particularly has convinced me that markets are mostly efficient is my empirical work on exchange rates. The models I have build over the years has shown me that the more information about the world I get into the model the better the models are. The interesting thing has been that the more information I have incorporated into the empirical models the closer the “forecast” from these models have come to market expectations of future exchange rates.  Furthermore, my experience with the typical bank analysts’ forecasts of exchange rates I have learned that they rarely outperform market expectations.

This has shown me that most available information mostly is also reflected in the exchange rate and as a consequence I have had to come to the conclusion that I probably not will be able to beat the markets. And try to think about it – with billions of people trying to forecast the future exchange rate why would I be able to do better than the average forecast? What information do I have that they don’t? The Efficient Market Hypothesis (EMH) essentially is about being humble about your own abilities.  

What do both Fama and Thaler miss? I notice that both of them completely miss the importance of changes in policy – particularly in monetary policy. Simple forward-looking behavior of for example the stock markets or FX markets will show that even fairly small changes in the expected future growth rate of consumer prices or nominal incomes can have very large impact of for example the spot exchange rate if prices are rigid.

An example of this is Dornbusch’s famous overshooting model for exchange rate determination. In Dornbusch’s model there can be large fluctuations in the exchange rate, but it does not reflect inefficient markets or irrational behavior, but completely rational forward-looking behavior.

Believing that markets are mostly efficient is not assuming somekind of superhuman abilities. It is simply a matter of acknowledging the fact that billions of peoples’ knowledge are very well reflected by the price system. There is no better mechanism for aggregating information and there exist no better mechanism for aggregating information than the price mechanism.

As Eugune Fama stresses – the Efficient Market Hypothesis (EMH) – is a theory and as such is not 100% correct as it is exactly a theory, but so far no economist has come up with any theory that describes the world better than EMH and I see very little reason to think that that will change anytime soon.

Update: Apparently somebody are able to beat the market in a dramatic fashion. Just see the impressive trading performance of US Democrat Congresswoman Judy Chu. I am not making any judgements here other than noting that this is a politicians and not a regular trader. Another Democrat also once had a fantastic trading record.

The scary rise in protectionism

Over at Geopolitical Intelligence Service (GIS) where I am a regular commentator I have a comment on Protectionism’s scary rise.

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