Tag: Hanke

The Duration of Iran’s Hyperinflation?

Since I first estimated Iran’s hyperinflation at 69.6% per month, many people have asked, how long will it last? To answer that question, I have posted my “Hanke Chart of the Day” and will let the data speak for themselves.

 

On second thought, perhaps I should offer some “tweet-able”  hyperinflation-duration takeaways:

  • The average duration of hyperinflation is roughly 12 months.
  • The longest duration of hyperinflation is 58 months (4 years and 10 months), which occurred in Nicaragua from June 1986 until March 1991.
  • The shortest duration of hyperinflation is one month (see numbers 46-57).

When it comes to Iran and the probable duration of its hyperinflation, the specter of  “a horrible end” or “a horror without end” comes to mind.

For the latest news on Iran’s hyperinflation, follow my Twitter: @Steve_Hanke

Iran’s Lying Exchange Rates

On September 24th, the Iranian government announced that it would adopt a three-tiered, multiple-exchange-rate regime. This wrong-headed attempt to exert more control over the price of domestic goods and combat inflation has failed (and will continue to fail). Since the rial began its free-fall in early September, international observers and the Iranian people have struggled to understand the implications of this exchange-rate regime.

Iran has a history of implementing a variety of multiple-exchange-rate regimes – with mixed results, to say the least. Indeed, at its peak of currency confusion, the Iranian government set seven different official exchange rates. As the accompanying chart illustrates, the story of Iran’s hyperinflation has been one of divergence between the official and black-market (read: free-market) exchange rates.

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This divergence is a product of the declining value of the rial – freely traded on the black market. In consequence, prices are rising dramatically in Iran – by almost 70% per month, according to my estimates. That said, in order to make sense of this phenomenon, it is necessary to understand the system whose failure we are witnessing.

Currently, Iran has three exchange rates:

  • The Official Exchange Rate: 12,260 IRR/USD
  • The “Non-Reference” Rate: 25,480 IRR/USD
    • Purportedly 2% lower than the black-market rate
    • Available to importers of important, but non-essential goods, such as livestock, metals and minerals
  • The Black-Market Exchange Rate: Approximately 35,000  IRR/USD
    •  The last freely-reported black-market rate was 35,000 IRR/USD (2 October 2012). The most recent anecdotal reports confirm this number as the current exchange rate.
    • The Iranian government (read: police) has recently cracked down on currency traders and has also censored websites that report black-market IRR/USD exchange rates.

This complex currency system results in lying prices that distort economic activity. By offering different exchange rates for different types of imports, the Iranian government is, in effect, subsidizing certain goods – distorting their true price. In consequence, any fluctuations in the black-market exchange rate – and, accordingly, in the price level – will be amplified to different degrees for different goods. The end result for Iranian consumers is confusion and mistrust, which, as we have seen, are feeding the panic that has been driving the collapse of the rial and Iran’s hyperinflation.

For the latest news on Iran’s hyperinflation, follow my Twitter: @Steve_Hanke

The Iran Hyperinflation Fact Sheet

For months, I have been following the collapse of the Iranian rial, tracking black-market (free-market) exchange-rate data from foreign-exchange bazaars in Tehran. Using the most recent data, I now estimate that Iran is experiencing hyperinflation – a price-level increase of over 50%, per month.

In recent days, Iranians have taken to the streets in protest over the collapse of the rial. In response, the Iranian government has cracked down on the protestors and shuttered Tehran’s foreign-exchange black market.  Moreover, it has effectively cut off the supply of reliable economic information. Indeed, the signal-to-noise ratio in the Iranian economic sphere, which is normally quite low, is now even lower than usual.

To address this, I have prepared a fact sheet of the top 10 things you should know about Iran’s hyperinflation.

  1. Iran is experiencing an implied monthly inflation rate of 69.6%.
    • For comparison, in the month before the sanctions took effect (June 2010), the monthly inflation rate was 0.698%.
  2. Iran is experiencing an implied annual inflation rate of 196%.
    • For comparison, in June 2010, the annual (year-over-year) inflation rate was 8.25%.
  3. The current monthly inflation rate implies a price-doubling time of 39.8 days.
  4. The current inflation rate implies an equivalent daily inflation rate of 1.78%.
    • Compare that to the United States, whose annual inflation rate is 1.69%.
  5. Since hyperinflation broke out, Iran’s estimated Hanke Misery Index score has skyrocketed from 106 (September 10th) to 231 (October 2nd).
    • See the accompanying chart.

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  6. Iran is the first country in the Middle East to experience hyperinflation.
  7. Iran’s Hyperinflation is the third hyperinflation episode of the 21st century.
  8. Since the sanctions first took effect, in July 2010, the rial has depreciated by 71.4%.
  9. At the current monthly inflation rate, Iran’s hyperinflation ranks as the 48th worst case of hyperinflation in history.
  10. The Iranian Rial is now the least-valued currency in the world (in nominal terms).
    • In September 2012, the rial passed the Vietnamese dong, which currently has an exchange rate of 20,845 VND/USD.

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.

The Grim Reaper is Relentless — Unfortunately

Last October, the Grim Reaper cut down my long-time colleague and friend, Bill Niskanen – Chairman Emeritus of the Cato Institute. If Niskanen’s loss wasn’t bad enough, I learned in April that I had lost another friend and brilliant economist, Ralph Turvey. On September 14th, we will celebrate Ralph’s life at the Reform Club, in London. For this event, I prepared the following, a “remembrance.”

I feel as though I cut my economic eye teeth on “Turvey.” Yes, I even wrote two articles with titles that contained the word “Turvey:”

 

and

 

But, my favorite remembrance of Ralph wasn’t from economics, per se. Once, after Ralph had abandoned his regular duties at LSE in the 1960s, I asked him why he still embraced the title, “Professor.” He immediately replied, and with twinkle in his eye: “Well Steve, in London, the title ‘Professor’ can still pull the first table in a proper restaurant.”

We both then had a very good laugh and resumed our intense discussion on the beauty of water meters.

Topics:

Clinton and Obama, Polar Opposites

Last night, Bill Clinton introduced President Barack Obama as the Democratic nominee. He went to great lengths to stress their similarities, but failed to mention their divergent views on the appropriate size of government.

When President Clinton took office in 1993, government expenditures were 22.1% of GDP, and when he departed in 2000, the federal government’s share of the economy had been squeezed to a low of 18.2%. As the accompanying table shows, during the Clinton years, federal government expenditures as a percent of GDP fell by 3.9 percentage points. No other modern president has come close.

 

And, that’s not all. During the final three years of the former President’s second term, the federal government was generating fiscal surpluses. Clinton was even confident enough to boldly claim, in his January 1996 State of the Union address, that “the era of big government is over.”

When it comes to the appropriate size of government, Clinton and Obama are polar opposites.

Swiss Monetary Policy: Dangerous Contradictions

The Swiss National Bank is conducting a bizarre, contradictory, and potentially dangerous set of monetary policies.

During the past year, the SNB has mandated the imposition of super-high bank capital requirements. Indeed, the SNB, in its annual Financial Stability Report, even admonished Credit Suisse for not building up a big enough capital cushion. The Swiss capital mandates have caused the rate of growth in money created by Swiss banks (bank money) to plunge.

As can be seen in the accompanying chart, Swiss bank money was 25 percent lower in July 2012 than it was in July 2011. This should be alarming because bank money is, by far, the biggest component of the total money supply. In fact, since the beginning of 2003, bank money has, on average, constituted 89 percent of the total Swiss money supply.

Bank regulations in Switzerland and elsewhere, have resulted in, you guessed it: very tight bank money.

Not being one to sit on its hands, the SNB has turned on its money pumps. Indeed, Swiss state money—the money produced by the SNB—was 305 percent higher in July 2012 than in July 2011.

This explosion in state money has been more than enough to offset the contraction of the all-important bank money component.

In consequence, Switzerland’s total money supply grew at a 10 percent year-over-year rate in July 2012. With double-digit money supply growth, and overall prices declining, it’s little wonder that prices in certain asset classes, such as housing, are surging in Switzerland.