Tag: Iran

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 GOP’s Big Government Baggage

Brian Myrick / AP file

The Republican National Convention is just days away, so it’s relevant to point out that the longer big-government interventionists are associated with the GOP, the more terms like “limited government” and “free markets” will lose all meaning. One Republican who epitomizes the damage of this guilt by association is former Vice President Dick Cheney. He won’t be at the convention, but his message surely will be.Below are two arguments put forward by Cheney, the first about Iraq in 2002, the second about Iran in 2007:

Armed with an arsenal of these weapons of terror, and seated atop ten percent of the world’s oil reserves, Saddam Hussein could then be expected to seek domination of the entire Middle East, take control of a great portion of the world’s energy supplies, directly threaten America’s friends throughout the region, and subject the United States or any other nation to nuclear blackmail.

And on Iran:

There is no reason in the world why Iran needs to continue to pursue nuclear weapons. But if you look down the road a few years and speculate about the possibility of a nuclear armed Iran, astride the world’s supply of oil, able to affect adversely the global economy, prepared to use terrorist organizations and/or their nuclear weapons to threaten their neighbors and others around the world, that’s a very serious prospect. And it’s important that not happen.

What is so remarkable about this vision proffered by Cheney is how it fails to elucidate precisely how either country threatens America’s interests or economic well-being. If one were to challenge the validity of Cheney’s claims, questions would include:

  • What is the likelihood of such a hypothetical disruption?
  • What is the harm if America’s access to markets is closed, and for how long?
  • How would the perpetrators of the closure be affected?
  • How has America dealt with such disruptions in the past?
  • Would there be available alternatives?
  • And, most importantly, would the risks to America’s interests and economic well-being be worse if it took preventive action?

Cheney evokes the imagery of America spreading stability and peace, while his world view relies on aggressive militarism that destroys both. What is particularly appalling is his implication that the United States must protect “the world’s energy supplies” and “the world’s supply of oil.” Chris Preble has drawn on a rich body of literature that shows why such claims do not withstand scrutiny.

Remarkably, Cheney represents a Republican constituency supportive of free markets, and yet his world view contradicts basic free trade and free market principles. He believes that free markets thrive only when peace and stability are provided by the U.S. government—and there’s the rub.

Rather than a world of economic exchange free of the state and its interventions, government must enforce global order for free trade to occur. Cheney’s vision of free markets impels American expansion.

At its heart—and far from free market—the former vice president’s world view fulfills a radical interpretation of U.S. foreign policy. Cheney gives new life to the works of revisionist historians like William Appleman Williams, by propagating the pernicious notion that U.S. intervention abroad is required to control the flow of raw materials and protect America’s wealth and power.

Romney’s Foreign Policy Opportunity

Barack Obama and Mitt Romney will duel on foreign policy this week as they both address the national convention of the Veterans of Foreign Wars and Romney heads off toBritain,Israel, andPoland to burnish his foreign policy credentials.  It will be difficult for Romney to overcome Obama on this set of issues.  Denizens of neoconservatism scorn the president as a weakling on terrorism and other international issues, but that is not how most Americans see him.  The killing of Osama Bin Laden (as well as dozens of other high-level al Qaeda operatives) has largely inoculated Obama against the “weak on terrorism” allegation, and the public generally gives him decent marks on most other foreign policy issues.

In the two areas where there has been grumbling about the president’s performance—escalating and perpetuating the war in Afghanistan and doing little about the bloated Pentagon budget—Romney’s neoconservative allies advocate measures that most voters dislike even more than they do Obama’s approach.  If Romney is to seize the opportunity to score points against the president on foreign policy, he needs to break with the hawkish extremists in his party and take a very different tack than he has done so far in the campaign.  Unfortunately, his harsh statements toward China and Russia—including describing the latter as America’s principal global adversary—and his alarmingly bellicose rhetoric toward Iran suggest that he is taking his foreign policy positions from George W. Bush’s playbook.  That is a bad move both politically and in terms of good policy.

In his speech to the VFW, Romney should outline a new security strategy built on the foundation of cautious, national-interest realism—a position that once characterized the GOP and still finds some resonance among the party’s rank and file.  That move, though, would require him to challenge the neoconservative conventional wisdom on four major issues.

First, he needs to advocate a prompt withdrawal of U.S.forces from Afghanistan, even faster than the Obama administration’s alleged commitment to have U.S.forces out of that country in 2014.  The intervention in Afghanistanis the poster child for how a limited and justified punitive expedition against a terrorist adversary (al Qaeda) can morph into an open-ended, nation-building crusade on behalf of an inept, corrupt Third Worldgovernment.  Unfortunately, it is difficult to discern whether Romney has a policy regardingAfghanistan.  To the extent he has said anything substantive on the issue, it creates worries that he may want to keep American troops in that snake pit indefinitely.

Adopting a new, smarter position onAfghanistanleads to the second point Romney should emphasize in his VFW speech: a repudiation of nation building as aU.S.foreign policy goal.  It is bitterly ironic that, beginning with the Bush administration, Republicans seem to have become more enthusiastic than Democrats about humanitarian interventions and nation-building ventures.  Republicans rightly used to scorn such crusades as wasteful, utopian schemes.  Condoleezza Rice once remarked that it should not be the mission of theU.S.military to escort children to school in foreign countries.  Romney needs to return the GOP to that wise skepticism.

Third, Romney should advocate a complete reassessment ofWashington’s overgrown network of formal and informal security commitments around the world.  It is absurd for theUnited Statesto continue subsidizing the defense of allies in Europe andEast Asiatwo decades after the collapse of the Soviet empire and nearly seven decades after the end of World War II.  Those allies shamelessly free ride on America’s security exertions, choosing to under-invest in their own defenses and refusing to make a serious effort to manage the security affairs in their respective regions.  Even if theU.S.government was cash-rich and running chronic budget surpluses, the current policy toward obsolete alliances would be wasteful and ill-advised.  Maintaining such a policy whenWashingtonhas to borrow money fromChinaand other foreign creditors to do so, borders on insanity.

Reassessing alliances and other security commitments points to the final change that Romney should advocate: a willingness to cut military spending.  The United Statesspends nearly as much on the military as the rest of the world combined.  The House of Representatives just voted to appropriate $606 billion for defense—and that figure does not include $11 billion to pay for the nuclear arsenal, a budget item housed in the Energy Department.  Instead of promising to increase military spending to four percent of GDP—an extra of $2.5 trillion over ten years—Romney should reverse course and support cutting that bureaucracy’s budget as part of an overall austerity program for the federal government.  And as noted, the overseas missions should be trimmed or eliminated to match the capabilities and budget of a smaller force.

Such an agenda might not please the attendees at the VFW convention, and it certainly would not please the junior varsity from the Bush-Cheney administration that Romney has been relying upon thus far for advice on foreign policy.  But it would appeal to a wide swath of American voters and put Barack Obama on the defensive.  Most important, it would be a wise policy alternative for the American republic.

Cross-posted from the Skeptics at the National Interest.

What Is Waltz Up To on Iranian Nukes?

Paul Pillar, writing at the National Interest, has already mentioned the provocative Kenneth Waltz essay on Iranian nuclear weapons that has inflamed the segments of the Beltway foreign-policy establishment who bothered to read it. But I wanted to expand on a couple of additional points Waltz raises.

It probably bears observing, first, that when Waltz writes that Iranian acquisition of a nuclear arsenal “would probably be the best possible result,” he is defining “best possible result” in the exact opposite way that the Beltway foreign-policy establishment does.

As Waltz wrote in his debate with Scott Sagan on nuclear optimism versus nuclear pessimism, “a big reason for America’s resistance to the spread of nuclear weapons is that if weak countries have some they will cramp our style.” Iran is a weak country who, with a nuclear arsenal, would cramp our style. Waltz opposes America’s style. As he put it in a 1998 interview, “I’ve been a fierce critic of American military policy and spending and strategy, at least since the 1970s.”

Read in this context, then, what Waltz sees as a feature of an Iranian weapon is what the American foreign policy establishment sees as a bug: the fact that an Iranian bomb will cramp our—and Israel’s—style. The foreign-policy establishment desperately wants to preserve the option of doing an Iraq—or Iran—war every so often if they feel like it. An Iran with nukes makes invading Iran a totally different ballgame.

What Waltz is after is “stability.” He has long argued that nuclear balances produce stability because the prospect of escalation to war between nuclear states is so harrowing that states seeking survival—which he argues all states tend to do—peer into the abyss and back away.

Deborah Boucoyannis wrote a fascinating article in 2007 arguing that Waltzian realists, by dint of their appreciation and support for balancing power—and antipathy for unbalanced power—are in fact classical liberals in the same sense that America’s founding fathers were classical liberals. They were obsessed with drawing up a constitution that would balance the branches of the American government against one another, not because the presidency, or the Congress, or the courts was itself inherently malign, but because unbalanced power is dangerous anywhere. One can even see this theme in the writing of early American leaders’ thinking on foreign relations. Thomas Jefferson wrote in 1815 of his desire that nations “which are overgrown may not advance beyond safe measures of power, [and] that a salutary balance may be ever maintained among nations.”

This is what Waltz sees in the Middle East today: unbalanced power. If what you value is stability, then pushing the region toward balance, where no one can start a war with anyone else without risking his own survival, looks good.

Two other points. First, in order to get Iranian nukes to act as a stabilizer, Waltz has to argue that the Iranian regime is not suicidal, and that the primary reason it might like a nuclear weapon is for survival. I agree with this argument, and it bears pointing out that people as far away from realism as the neoconservative writer Eli Lake seem to agree as well. Unfortunately, the din of nonsense emanating from Washington seems to have convinced the American people that Iran would nuke Israel. In the recent poll from Dartmouth’s Benjamin Valentino, 69 percent of those surveyed said that Iran would be “very likely” or “somewhat likely” to use nuclear weapons against Israel.

Finally, this has been a useful insight into how detached popular commentary in America is from scholarship on the subjects pundits discuss. It was precious, for example, to see Commentary’s Ira Stoll scrambling to figure out who Kenneth Waltz was. For those with interest, he ranked third in a survey of international relations scholars that asked for a ranking of scholars “who have had the greatest influence on the field of IR in the past 20 years.” It’s a good thing that our architects and bridge-builders have a closer relationship with the engineering field than our foreign-policy pundits do with international relations scholarship.

Cross-posted from the Skeptics at the National Interest.

More Skepticism on Romney’s Military Spending Promise

On Sunday, Defense News published a good article by Kate Brannen that looks into Mitt Romney’s plans for military spending. This is not the first examination of Romney’s lofty campaign promise to spend at least four percent of GDP on the Pentagon’s base budget. Since October 2011, when I first crunched the numbers on his plan, others have followed with their own estimates.

In my first analysis, his plan totaled $2.046 trillion above projected defense budgets based on CBO totals from FY 2012 to FY 2021. That total does not include war costs, nor does it take into account the possibility of military action toward Iran, which Romney has made clear is on the table, with or without Congressional approval. My number one question at the time—beyond the fact that GDP is not the proper guide for military spending—was: Where is this money going to come from?

In April, I recalculated Romney’s gimmick, adjusting my numbers with the help of my colleague Charles Zakaib, based on the Obama administration’s latest 10-year projections. We presented the data in the graph below:

The conclusion: Romney’s four percent gimmick would now necessitate $2.58 trillion in additional military spending above the new baseline. I tried to put this in context:

Romney’s Four Percent Gimmick would result in taxpayers spending more than twice as much on the Pentagon as in 2000 (111 percent higher, to be precise), and 45 percent more than in 1985, the height of the Reagan buildup. Over the next ten years, Romney’s annual spending (in constant dollars) for the Pentagon would average 64 percent higher than annual post-Cold War budgets (1990-2012), and 42 percent more than the average during the Reagan era (1981-1989).

Does Romney genuinely believe we have enemies that approach the Soviet Union’s might, let alone ones that are 42 percent more threatening? We would be wise to question his judgment if so.

Back in the realm of the reality, further cuts to military spending are fast approaching as sequestration looms. The debate in Washington is now largely focused on how much to cut from the defense budget and in what manner. This is consistent with what the majority of Americans favor and has sidelined those arguing for ever-greater military spending. And yet Mitt Romney remains committed to his Four Percent idea. In this instance, Romney should embrace his supposed conservatism and leave the spendthrift gimmicks to the opposition.

Much more in the podcast below: