Reflections on the book ahead of the KåKå-economics festival, October 2019

High debt levels imply a risk of a financial crises. Without excessive debts there will be no financial crisis. 

Since the financial crisis in 2008, the total debt in the world has increased by about 50 per cent, from about twice the world´s annual value creation (GDP) to three times the annual value creation. Never has the amount of debt in the world been higher. 

In 2008, the third largest bankruptcy in world history occurred in a city of the same size as Stavanger, Uppsala, Odense, Oxford or Syracuse, to name some similar size cities to Reykjavik.

The three major Icelandic banks, Kaupthing, Glitnir and Landsbanki, collapsed in just 3 days. In previous years, they had raised money in the international money markets. The Swiss had spent three hundred years building a banking system seven times the size of its economy. The Icelanders spent five years getting to nine-times, illustrating the pace at which capital can move in today´s world.

Some of the money, about two thirds, was lent from the three banks to companies abroad. The rest was lent to Icelandic households and businesses, making them the world´s most indebted. 

With access to more loans, house prices could increase, share values ​​multiplied, and activity and government revenues boomed. Most people thought everything was well illustrating a general rule; financial bubbles can be seen from the outside but are harder to see from the inside. And, naturally, larger flows of funds can create ever larger bubbles.

However, within a few weeks in the fall of 2008, the three banks lost the opportunity to take out new loans and all collapsed.

After their collapse, the value of the Icelandic krone was halved. It was impossible and eventually forbidden to exchange money from the Icelandic krone to foreign currency. Unemployment doubled, the government and a debt crisis hit businesses and households.


The Icelanders met challenges hardly experienced in peacetime. The Icelandic University hospital struggled to buy oxygen for its emergency ward. The Central Bank counted its FX to see if the country could afford medicine and gasoline. Mastercard threatened to shut down the payment system. The British refused one of the banks to transfer money from the UK and found their legal basis in the terrorist laws. Landsbanki came on the same list as Al Qaeda. 

McDonald left Iceland. The symbol of globalization, “Big Mac”, found its place among the victims of the financial crisis. 

The Icelandic saga is spectacular. Iceland was hit harder than any other country. But, the country also recovered the fastest. Interestingly, as the only country that did not follow the prescribed cure, the country quickly recovered. 

Everything that was kept secret in other countries was revealed in Iceland. The United States, the United Kingdom and Norway imprisoned one for mistakes committed before the financial crisis. The Icelanders imprisoned 25, and the trials are still ongoing. In Iceland, the biggest financial bubble of all time had been blown up. No restrictions had helped, neither regulations, banks ‘and markets’ self-control, regulatory oversight, economic policy, nor the eyes of the financial analysts, accountants or auditors.

Many European countries; Greece, Italy, Spain and Portugal are still struggling with their government debt. The US state budget has never before shown similarly negative numbers in peacetime, considering where we are in the business cycle. Other major states, such as Japan, Brazil and India, are also struggling. In China, companies have large debts and many of them are losing money day by day. In the US and Europe, some funds specialize in debt-financed acquisitions, and sit on top of mountains of debt. All such imbalances are summarized in the last chapter of the book.