The value stored in money does not disappear when inflation is high; it is transferred from savers to  1/8  BIS - Central bankers' speeches  debtors. So a 20% negative real rate meant that a fifth of Icelanders' savings shifted from depositors to debtors each year, eating quickly into principal. The 1970s saw one of the biggest transfers of wealth in the history of Iceland - from depositors and pension funds to borrowers and debtors, and from the older generation to the younger. This runaway inflation laid the foundations for the 1968 generation's asset formation while eroding elderly Icelanders' assets, even pushing them into poverty, while simultaneously subsidising the operations of many large companies in the country. It was precisely in 1979[, during the tenure of Prime Minister Ólafur Jóhannesson,] that broad-based price indexation of savings and loans was adopted in Iceland with what came to be known as Ólafur's Law, passed by Parliament five months before the publication of the above-cited Reykjavík Letter. In some respects, indexation was a gesture of defeat - it was perhaps more an adaptation to circumstances, in that it enabled the economy to function during an episode of high inflation. It was based on the same fundamental premise as my lambs and my deposits to the co op: the value of money was pegged to actual value. Inflation certainly had yet to rise still further, though. On an annualised basis, it hit an all-time record of 130% in February through May 1983.
We live in a small open economy and are forced to import inflation through our purchases of necessities from abroad. Because of this, we must trust that our trading partners will take decisive action to bring inflation down within their own borders. Iceland is now reaping the rewards of the ironbound policy formulated during its reconstruction following the 2008 financial crisis - a policy that insisted on a secure financial system with strong lines of defence against external instability. Icelandic banks have extraordinarily strong capital in historical and international context, and they are under close financial supervision. Moreover, the news from abroad confirms that merging the Central Bank and the Financial Supervisory Authority back together at the beginning of 2020 was the right decision. The merger and, in particular, the increased power the Bank has been granted in the area of financial stability have been of vital importance in ensuring that the current fluctuations in demand, interest rates, and financial conditions do not give rise to a credit bubble or excessive risk-taking in the financial sector. Iceland carries very little household, corporate, or government debt in comparison with other countries. It is clear that these conditions provide monetary policy with full flexibility to act. There are no handcuffs here. Honoured guests: I don't know whether any of you have gotten lost in the fog, found yourselves going around in circles, and been convinced that water flows upstream. I have never gotten lost in the Icelandic outback, but I have often done so in foreign megacities.