“What do you think of Iceland?” asked my publisher Bill Bonner this morning. “They’re paying 15% interest rates right now. Don’t tell me that doesn’t tempt you!” he grinned.

I admit it, that’s a juicy figure. But I’m wary of it, and here’s why: For years we’ve had the yen carry trade – investors borrowing in Japan at zero or near-zero interest rates and investing abroad where the yield is much higher. A lot of this money found its way to Iceland.

Now people are starting to talk, only half-jokingly, about a dollar carry trade. The greenback’s in a tailspin, so is it a good idea to borrow in the US, where the Fed have cut rates to 2.25%, and stick your money in Iceland?

“No!” says Garry White. “Their economy is crumbling.” Indeed, writing in yesterday’s Telegraph, Ambrose Evans-Pritchard likened Iceland to a “Nordic hedge fund masquerading as a country”. But he warned that there was more to it than that – its economy is in deficit, and as the yen carry trade unwinds Iceland is suffering as investors take their money out.

Add in the fact that the asset base of the Icelandic banking system is now a world record eight times GDP, and there are serious question marks over the country’s investment potential.

“Is the Icelandic government – which presides over an economy the size of Bristol – big enough to underpin its encephalitic banks if push ever comes to shove?” asks a sceptical Evans-Pritchard.

So while there may appear a good case for Icelandic bonds – a currency which has depreciated recently, high rates which, if they come down, spell a nice capital gain – we urge caution.

The Icelandic krona is very volatile, so any gains could by wiped out by currency fluctuations. And we prefer our investments to be underpinned by strong economic fundamentals, something sorely lacking from this story. Of course, you could make a fortune in Iceland… but you could say the same about playing roulette.

From Ben Traynor of Fleet Street Daily