Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Iran's Hyperinflation Economic Death Spiral

Economics / HyperInflation Oct 22, 2012 - 05:07 PM GMT

By: Steve_H_Hanke

Economics

Best Financial Markets Analysis ArticleMy October 2009 Globe Asia column was titled "Iran's Death Spiral." In light of the recent events that have transpired in Iran, I think I might have been onto something back in 2009.

Since early September, there has been an accelerated slide in the value of the Iranian rial. This slide has been punctuated by dramatic collapses in the demand for the rial. With each collapse, there has been something akin to a "bank run" on rials — with a sharp rise in the black market (read: free market) IRR/USD exchange rate (see the accompanying chart). Ironically, Iranians are clamoring for U.S. Dollars.


It is worth mentioning that the black-market rate is an unbiased metric. In a land where the signal-to-noise ratio is very low, the black-market rate represents an important piece of objective information. It says a great deal about the state of the Iranian economy and the populace's expectations.

On 8 September 2012, the black-market IRR/USD exchange rate was 23,040. In the course of just under a month, after two big sell offs, the rate settled at 35,000 on 2 October 2012. That is a 34.2% depreciation in the rial, relative to the greenback. It was at this 35,000 IRR/USD rate that I first calculated the monthly inflation rate implied by the rial's depreciation. The implied monthly inflation rate was 69.6%. Since the hurdle rate to qualify for hyperinflation is 50% per month, Iran registered what appears to be the start of the world's 58th hyperinflation episode.

With that, the Iranian authorities swung into action and introduced a new multiple-exchange-rate regime. There is an official exchange rate of 12,260 IRR/USD, which is available for Iranians who are importing essential goods, such as grain, sugar, and medicine. In addition, there is a "non-reference" rate, which is available at licensed dealers and can be used by importers of non-essential goods, such as livestock, metals and minerals. This rate is purportedly 2% lower than the black-market rate, though it currently (as of 10 October 2012) sits at 25,480 IRR/USD — representing a significant discount relative to the black-market rate. And then, there is the freemarket (black-market) rate that is available to anyone willing and able to avoid the ever-watchful eyes of the police.

Among other things, the multiple-exchange-rate regime generates noise in the Iranian economy. Indeed, more than one price for the same thing creates prices that lie, and lying prices make it difficult for Iranians to determine the true cost of what they are producing and ultimately selling. The multiple-exchange-rate regime, therefore, is just one more monkey wrench that is being thrown in the wheels of the economy.

The announcement of Iran's hyperinflation aroused the priesthood. In addition to implementing the new multiple exchange- rate regime, the Iranian authorities have boosted the police presence in the bazaars of Tehran and cracked down on currency traders.

As the accompanying chart shows, Iran's hyperinflation has, of course, sent the Iranian misery index to the moon. Talk about a death spiral.

Before leaving the Iranian misery index, it merits mentioning that the index was elevated prior to the 1979 Revolution. Recall that, before the last Shah was pushed off the Peacock Throne, his visions of grandeur had led him to embrace Soviet-type schemes, such as five-year plans, megaprojects, rural collectivization, model towns (shahraks), and central planners. In short, the "Soviet" Shah, who was propped up by the United States, made a mess of the economy and kept the misery index elevated.

With the commencement of hyperinflation, we are left with an obvious question: "How long will Iran's hyperinflation last?" The accompanying table ranks the 57 known hyperinflations by the length of each episode. The average duration is roughly 12 months, with the longest hyperinflation being that which occurred in Nicaragua. It lasted four years and 10 months. At the other extreme, there are 13 episodes that fizzled out after one month.

So, how does one stop a hyperinflation? In my experience, as someone who has been involved in stopping 10 of the 57 known hyperinflations, there are two sure-fire ways: instituting a currency board or adopting a foreign currency (dollarization). In Bulgaria, where I was President Stoyanov's adviser, hyperinflation peaked at a monthly rate of 242%, in February 1997. On 1 July 1997, Bulgaria installed a currency board, under which the Bulgarian lev was issued. It was backed 100% by German mark reserves and fully convertible at a fixed rate with the mark. As the accompanying chart shows, hyperinflation stopped immediately and Bulgaria's misery index fell like a stone.

In Zimbabwe, President Mugabe simply looked the other way as the hyperinflation roared ahead. It peaked in mid-November 2008, reaching the second-highest level ever recorded in the world. At that point, the daily inflation rate was 98%, and it took only 24.7 hours for prices to double. Faced with this, Zimbabweans abandoned the Zimbabwe dollar, and the economy spontaneously, and unofficially, dollarized, eventually forcing the government to officially dollarize its accounts. With this, Zimbabwe's hyperinflation abruptly ended, and the misery index plunged (see the accompanying chart).

What course will Iran take? Neither the Bulgarian freemarket currency board nor the Zimbabwean spontaneous (and eventually official) dollarization appear to be in the cards. As long as the Iranians can sell some oil, the regime will attempt to muddle through.

But, there is a catch — a dangerous one — what if the sanctions advocates get their way and the screws are tightened so hard that Iranian oil exports dwindle to a trickle? The Supreme Leader might just play the ace he has up his sleeve and order the Straight of Hormuz to be blocked, among other mischiefs. This would cause more havoc than any bomb in the allies' arsenal. After all, 35% of the world's crude oil, and 20% of the world's liquefied natural gas, flow through the Strait of Hormuz.

If a diplomatic solution cannot be found (admittedly a very difficult task), then Iran promises to be one of those situations that produce a "horrible end" or a "horror without end."

By Steve H. Hanke

www.cato.org/people/hanke.html

Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. Prof. Hanke is also a Senior Fellow at the Cato Institute in Washington, D.C.; a Distinguished Professor at the Universitas Pelita Harapan in Jakarta, Indonesia; a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing; a Special Counselor to the Center for Financial Stability in New York; a member of the National Bank of Kuwait’s International Advisory Board (chaired by Sir John Major); a member of the Financial Advisory Council of the United Arab Emirates; and a contributing editor at Globe Asia Magazine.

Copyright © 2012 Steve H. Hanke - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in