Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Life Sciences Biotech Smaller Cap High Risk Stocks Investing Binge - 24th Jun 21
Central Banks to Keep Buying Gold - 24th Jun 21
Will Gold Survive Hawkish Fed? - 24th Jun 21
The Clean Energy Compound That Could Change The World - 24th Jun 21
Everybody's Getting Rich (and Having Fun) Except Me - 24th Jun 21
WESTERN DIGITAL WDC Stock Trend Analysis - CHIA! - Risk 1 - 23rd Jun 21
AMC Is the Best-Performing Stock in America: Don’t Buy It - 23rd Jun 21
Stock Market Calling the Fed‘s Bluff - 23rd Jun 21
Could Bitcoin Price CRASH Target A Bottom Below $7500? - 23rd Jun 21
Bitcoin and cryptos: Your 'long-term investment'? - 23rd Jun 21
Unlocking The Next Stage Of The Hydrogen Boom - 23rd Jun 21
USDT Ponzi Scheme FINAL WARNING To EXIT Before Tether Collapses Crypto Exchange Markets - 22nd Jun 21
Stock Market Correction Starting - 22nd Jun 21
This Green SuperFuel Could Change Everything For the $14 Trillion Shipping Industry - 22nd Jun 21
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 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