Posted on 11/23/2012 12:02:53 PM PST by neverdem
By Steve H. Hanke
My 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 free-market (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, mega-projects, 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.
Source: Steve H. Hanke and Nicholas Krus, “World Hyperinflations”. Cato Working Paper no. 8, August 15, 2012. Forthcoming in: Randall Parker and Robert Whaples (eds.) (2013) The Handbook of Major Events in Economic History, London: Routledge Publishing. (expected publication date: Summer 2013).
Footnote: (*) As of publication, Iran’s end date of hyperinflation in unknown. Therefore, the highest monthly inflation rate and time required for prices to double may still be higher.
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 free-market 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.”
A death cult is always in a death spiral, but it wants to take the rest of the planet with it.
It can’t happen soon enough for me.
Die Mullahs!
What can’t happen soon enough, the death cult dragging the rest of the planet down with it? because unless we take the fight to them, they’ll certainly take their death wish to us.
We take the fight to them.
Very interesting post.
After a generation and a half under the Muslim theocrats, is the populace so “into” Muzzie doctrine that they’re willing to endure any depth of economic hardship to preserve their leadership?
I just don't see it.
The sanctions are not that powerful.
Iran's trade with Russia, China, and Pakistan has steadily increased.
Europe, and specifically Germany, have continued some level of trade with Iran.
The only reason Iran has hyperinflation is because Iran's Central Bank is printing massive amounts of currency, and Iran's government is using that worthless currency to pay its bills.
Scary and Terrifying!
Its what Obama HUSSEIN is working on causing HERE!
SOROS SAID SO IN A TELEVISED INTERVIEW THA GLENN BECK FOUND AND PLAYED ON FOX! Can anybody find that Interview now?
Thigs cannot be too bad, they have increased their centrifuges, and are working hard at their bomb.
Maybe the world will get lucky and Iranians will toss out the trash, but I doubt it.
Or maybe the E.U will take it to them, especially if they do blockade the Straight of Hormuz, or sink some GERMAN ships.
The Saudis may be betting that after so much time under the Shia flavor of radical Islam, the masses are more likely to turn to radical Sunni Islam than to abandon Islam.
How do we find the free-market (black-market) rate?
Is it listed in the WSJ? I must have missed it?
Do they have a black market currency pit?
History is not encouraging. In tiny countries without resources or neighbors, megalomanic despots come and go without much notice in the wider world, but when they have the resources, they tend to lash out. Example: The Paraguayan caudillo Lopez Solano, who intermeddled in an Uruguayan civil war and started a three-on-one war in which two-thirds of the manhood of Paraguay was killed on the battlefield, including the caudillo himself. Paraguay remained impoverished well into the reign of dictator Alfredo Stroessner in the 1960's.
As an odd coda, the end of Paraguay's struggle with Brazil, Argentina, and Uruguay saw a diplomatic struggle over territory that, by the agreement of all parties, the United States was called upon to mediate.
President Rutherford B. Hayes's proposed resolution was not overly harsh on Paraguay and left an important territory in their hands, as a result of which, in modern Paraguay, President Hayes has a special day dedicated in his name, in memory of America's friendship toward a prostrate and friendless people in the extremity of their humiliation. It is still a big deal in Paraguay, celebrated the way Cinco de Mayo is here in parts of the United States, with fireworks, illuminations, salutes, and parties.
thanks neverdem.
The Death Spiral of the Islamic Republic (July 2009)
http://www.freerepublic.com/focus/news/2300340/posts
The Death Spiral of the Islamic Republic II (August 2009)
http://www.freerepublic.com/focus/news/2327906/posts
Turkey is selling Iran Gold, and depositing their own currency in exchange - the USD is very hard for Iran to obtain right now:)
I was assigned to the Vung Tau Army Airfield Security Platoon before I requested a transfer. I wound up in Bravo 1-61 1/5th mech Vietnam. It wasn't hard to find the money changers in Vung Tau. I don't know about Quang Tri having many of them, but I wouldn't be surprised. IMHO, just about any city where you could go off post when you were off duty had them in South Vietnam.
Quang Tri?
I must have passed through for all of 20 minutes?
Then LZ Nancy, Sally, Sharon and many no name places.
Who could remember this stuff?
For the most part it may be better to forget.
Since getting out I have NEVER met another guy from the 5th Mech? Just had to be many of us? Not so many from Illinois.
DMZFrank was a tanker in Quang Tri, IIRC. Guess where he hailed from.
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