Tag: dollar

On the Great Inflation Canard

Charles W. Calomiris and Peter Ireland, two distinguished economists and friends, wrote an edifying piece in The Wall Street Journal on 19 February 2015. That said, their article contains a great inflation canard.

They write that “Fed officials should remind markets that monetary policy takes time to work its way through the economy—what Milton Friedman famously referred to as “long and variable lags”—and on inflation.” That’s now a canard.

For recent evidence, we have to look no further than the price changes that followed the bursting of multiple asset bubbles in 2008. The price changes that occurred in the second half of 2008 were truly breathtaking. The most important price in the world — the U.S. dollar-euro exchange rate — moved from 1.60 to 1.25. Yes, the greenback soared by 28% against the euro in three short months. During that period, gold plunged from $975/oz to $735/oz and crude oil fell from $139/bbl to $67/bbl.

What was most remarkable was the fantastic change in the inflation picture. In the U.S., for example, the year-over-year consumer price index (CPI) was increasing at an alarming 5.6% rate in July 2008. By February 2009, that rate had dropped into negative territory, and by July 2009, the CPI was contracting at a -2.1% rate. This blew a hole in a well-learned dogma: that changes in inflation follow changes in policy, with long and variable lags.

Milton Friedman was certainly correct about the period covered in the classic, which he co-authored with Anna J. Schwartz: A Monetary History of the United States, 1867-1960. Recall that the world of that era was one in which the fixed exchange rates ruled the roost. That’s not today’s world. Indeed, many important currencies now float. Since the world adopted a flexible exchange-rate “non-system”, changes in inflation can strike like a lightning bolt.

Argentina: Down The Tubes, Again

President Christina Fernández de Kirchner has turned up her left-wing rhetoric as the economy goes down the tubes. Indeed, GDP has contracted for the past two quarters; inflation is galloping at 56%, not the official 15.01%; and the country has defaulted on its debt, again. Never mind. The President claims Argentina’s financial system is “one of the most solid in the world.” She asserts that Argentina’s woes can be laid squarely at the feet of foreign “vulture funds” and greedy capitalists who have speculated against the peso. Yes, the peso has lost 42.6% of its value against the U.S. dollar on the black market since the first of the year, and for very legitimate reasons.

But, for realists like me, a fact check is always worth a peso. Recently, Bloomberg’s Charlie Devreux and Pablo Gonzales penned some most edifying reportage on one thing that’s booming in Argentina: criminality. Bandits have put cargos of grain headed for the port of Rosario in their crosshairs. And why not – grain is traded in greenbacks, not pesos.

Property’s worst enemy is theft: theft makes property insecure. And unless property is secure, it can’t be accumulated and it is wasted. The increasing incidence of heists on grain, Argentina’s most valuable export, indicates that property rights are becoming more insecure and that the economy only has one way to go: down the tubes.

As Congress Prepares for Vote, Syria’s Inflation Hits 257%

As prospects of a U.S.-led military intervention in Syria hang in limbo, the foreign exchange black market for the Syrian pound (SYP) has become increasingly volatile. In countries with troubled currencies, such as Syria, black-market exchange rates provide a reliable gauge of economic expectations. Judging by the erratic performance of the black-market Syrian pound/U.S. dollar (USD) exchange rate, the Syrian people’s expectations have been on quite the roller coaster ride, as the U.S. Congress prepares for what will likely be a very close vote on a Use of Force resolution.

  • Following Secretary of State John Kerry’s initial call for military intervention in Syria, on August 26th, the SYP experienced a one-day drop of 24%—reflecting Syrians’ heightened fears of U.S. military conflict.  
  • On August 29th, two events occurred that reversed this slide. In Damascus, the Syrian government renewed its attempts to crack down on black-market currency trading. And, over 4,000 miles away in London, the British Parliament voted down a motion authorizing military action in Syria. In consequence, the SYP rebounded by a whopping 26% over the course of two days.
  • The U.S. Senate Foreign Relations Committee’s consideration of a use of force resolution seems to have once again raised Syrians’ expectations of a U.S. military strike, as it set the SYP on another slide. Since September 3rd, the pound has lost 10% of its value.

For some perspective on how the West’s march to war has affected Syria’s currency, and ultimately inflation, let’s take a look at how things have changed over the course of the past month: On August 6th, the black-market SYP/USD exchange rate was 205, yielding an implied annual inflation rate of 191%. As of September 6th, the black-market SYP/USD exchange rate sits at 250, yielding an implied annual inflation rate for Syria of 257%.

For more on the Syrian pound, see the Troubled Currencies Project.

On Iran’s Inflation Bogey

With Friday’s Iranian Presidential election fast approaching, there has been a cascade of reportage in the popular press about that opaque country. When it comes to economic data, Iran has resorted to lying, spinning and concealment – in part, because of its mores and history, and more recently, the ever-tightening international sanctions regime. In short, deception has been the order of the day.

The most egregious example of this deception concerns one of Iran’s most pressing economic problems – rampant inflation. Indeed, while the rest of the world watched Iran’s economy briefly slip into hyperinflation in October of 2012, the Statistical Centre of Iran and Iran’s central bank both defiantly reported only mild upticks in inflation.  

It is, therefore, rather surprising that the major international news outlets have continued to report the official inflation data without so much as questioning their accuracy. Even today, with official data putting Iran’s annual inflation rate at a mere 31 percent, respectable news sources faithfully report these bogus data as fact.

As I have documented, regimes in countries undergoing severe inflation have a long history of hiding the true extent of their inflationary woes. In many cases, such as the recent hyperinflation episodes in Zimbabwe and North Korea, the regimes resort to underreporting or simply fabricating statistics to hide their economic problems. Often, they stop reporting economic data all together; or, when they do report economic statistics, they do so with such a lag that the reported data are of limited use by the time they see the light of day.

Iran has followed this course – failing to report important economic data in a timely and replicable manner. Those data that are reported by tend to possess what I’ve described as an “Alice in Wonderland” quality. In light of this, it is fair to suggest that any official data on Iran’s inflation be taken with a grain of salt.

So, how can this problem be overcome? At the heart of the solution is the exchange rate. If free-market data (usually black-market data) are available, the inflation rate can be estimated. The principle of purchasing power parity (PPP), which links changes in exchange rates and changes in prices, allows for a reliable estimate. Indeed, PPP simply states that the exchange rate between two countries is equal to the rates of their relative price levels. Accordingly, if we can obtain data on free-market exchange rates, we can make a reliable estimate of the inflation rate.

In short, changes in the exchange rate will yield a reliable implied inflation rate, particularly in cases of extreme inflation. So, to calculate the inflation rate in Iran, a rather straightforward application of standard, time-tested economic theory is all that is required.

Using this methodology, it is possible to estimate a reliable figure for Iran’s annual inflation rate. At present the black-market IRR/USD exchange rate sits at 36,450. Using this figure, and a time series of black-market exchange rate data that I have collected over the past year from currency traders in the bazaars of Tehran, I estimate that Iran’s current annual inflation rate is 105.8 percent – a rate almost three and a half times the official annual inflation figure (see the accompanying chart). 

Iran’s Inflation Statistics: Lies, Lies and Mehr Lies

The Mehr News Agency is now reporting that Iran’s annual inflation rate has reached 31.5%. According to the Central Bank’s official line, Iran’s annual inflation rate has bumped up only 1.3 percentage points from February to March.

Never mind that this official inflation statistic is well below all serious estimates of Iran’s inflation. And yes, Iran’s official inflation statistics are also contradicted by the overwhelming body of anecdotal reports in the financial press.

Since September 2012, I have been estimating Iran’s inflation rate – which briefly reached hyperinflation levels in October 2012 – using a standard, widely-accepted methodology. By measuring changes in the rial’s black-market (read: free-market) U.S. dollar exchange rate, it is possible to calculate an implied inflation rate for Iran.

When we do so, a much different picture of Iran’s inflation emerges. Indeed, Iran’s annual inflation rate is actually 82.5% – a rate more than double the official rate of 31.5% (see the accompanying chart).

As I have documented, regimes in countries undergoing severe inflation have a long history of hiding the true extent of their inflationary woes. In many cases, the regimes resort to underreporting or simply fabricating statistics to hide their economic problems. And, in some cases, such as Zimbabwe and North Korea, the government simply stops reporting economic data altogether.

Iran has followed a familiar path, failing to report inflation data in a timely and replicable manner. Those data that are reported by Iran’s Central Bank tend to possess what I’ve described as an “Alice in Wonderland” quality and should be taken with a grain of salt.

Hyperinflation Has Arrived In Iran

Since the U.S. and E.U. first enacted sanctions against Iran, in 2010, the value of the Iranian rial (IRR) has plummeted, imposing untold misery on the Iranian people. When a currency collapses, you can be certain that other economic metrics are moving in a negative direction, too. Indeed, using new data from Iran’s foreign-exchange black market, I estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation.

When President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in July 2010, the official Iranian rial-U.S. dollar exchange rate was very close to the black-market rate. But, as the accompanying chart shows, the official and black-market rates have increasingly diverged since July 2010. This decline began to accelerate last month, when Iranians witnessed a dramatic 9.65% drop in the value of the rial, over the course of a single weekend (8-10 September 2012). The free-fall has continued since then. On 2 October 2012, the black-market exchange rate reached 35,000 IRR/USD – a rate which reflects a 65% decline in the rial, relative to the U.S. dollar.

The rial’s death spiral is wiping out the currency’s purchasing power. In consequence, Iran is now experiencing a devastating increase in prices – hyperinflation.  As Nicholas Krus and I document in our recent Cato Working Paper, World Hyperinflations, there have been 57 documented cases of hyperinflation in history, the most recent of which was North Korea’s 2009-11 hyperinflation. That said, North Korea’s hyperinflation did not come close to the magnitudes reached in the recent, second-highest hyperinflation in the world, that of Zimbabwe, in 2008, nor has Iran’s hyperinflation – at least not yet.

How to Destabilize the Hong Kong Dollar

Mr. Joseph Yam, former chief executive of the Hong Kong Monetary Authority, has proposed a package of policy changes that, if implemented, would undermine and destabilize the Hong Kong dollar—a unit that has been rock solid ever since Hong Kong established its currency board in 1983.  And if you doubt that dire conclusion, reflect on the fact that Argentina blew up its famed convertibility system (OK—it wasn’t a currency board, but only an unusual pegged setup) in 2001 by adopting a series of Yam-like measures.