Tag: exchange rate

The State of War in Syria — In Two Charts

The fog of war, coupled with the output from multiple propaganda machines, makes it difficult to determine which side has the upper hand in any conflict. In Syria, it appears from recent reportage from Aleppo that President Bashar al-Assad’s forces are getting the upper hand. But are they?

The best objective way to determine the course of a conflict is to observe black market (read: free market) exchange rates, and to translate changes in those rates via purchasing power parity into implied inflation rates. We at the Johns Hopkins–Cato Institute Troubled Currencies Project have been doing that for Syria since 2013.

The two accompanying charts—one for the Syrian pound and another for Syria’s implied annual inflation rate—plot the course of the war. It is clear that Assad and his allies are getting the upper hand. The pound has been stabilizing since June of this year and inflation has been trending downwards.

China Has Chosen Instability

The plunging Shanghai Stock Exchange and the sudden reversal in the yuan’s appreciation have caused fears to spread beyond China’s borders. Is something wrong with the world’s growth locomotive? In a word, yes.

Indeed, China’s leadership has chosen instability. They have forgotten my golden rule: stability might not be everything, but everything is nothing without stability.

How did China arrive at this point — a point of high uncertainty and potential economic instability? A look at China’s exchange-rate regimes provides a window into these troubled waters. Since China embraced Deng Xiaoping’s reforms on 22 December 1978, China has experimented with different exchange-rate regimes. Until 1994, the yuan was in an ever-depreciating phase against the U.S. dollar. Relative volatile readings for China’s GDP growth and inflation rate were encountered during this phase.

After the maxi yuan depreciation of 1994 and until 2005, exchange-rate fixity was the order of the day, with little movement in the CNY/USD rate. In consequence, the volatility of China’s GDP and inflation rate declined, and with the yuan firmly anchored to the U.S. dollar, China’s inflation rates began to shadow those in America (see the accompanying exchange-rate table). Then, China entered a gradual yuan appreciation phase (when the CNY/ USD rate declined in the 2005-14 period). In 2015, the yuan began to experience weakness. In terms of volatility, economic growth and inflation rates, China’s performance has deteriorated ever since it dropped exchange-rate fixity.


So, why did China drop exchange-rate fixity in 2005? After all, China’s fixed-rate regime had performed very well. Pressure from the U.S. and many nonsensical mercantilist’s arguments, emanating from Washington, D.C., caused China to abandon fixity. Little did Beijing realize that it had chosen instability.

The Syrian Pound Zigs and Zags

Following U.S. Secretary of State John Kerry’s saber-rattling statements on the 26th of August, the value of the Syrian pound (SYP) has zigged and zagged. Indeed, the SYP lost 24.7% of its value against the U.S. dollar in the two days following Kerry’s announcement (moving from 225 to 270 SYP/USD). Then, yesterday, we saw a sharp reversal in the course of the pound. Over the past two days, the SYP regained 25.58% of its value, bringing the black-market exchange rate back down to 215 SYP/USD. At this rate, the implied annual inflation rate is 209.85% (see the charts below the jump).

So, what caused the recent strengthening of the Syrian pound? We have to look no further than the eroding support for a U.S.-led strike against Syria. Yes, the United States has lost support from important allies, the United Kingdom, Canada, and Italy.

In addition, Syrian authorities have cracked down again on black-market currency trading. In the past week, the authorities have shut down a number of currency traders; made “friendly” reminders to the public of the penalties of trading on the black market—imprisonment of 10 years and a hefty fine; and warned Syrians to stay away from “counterfeit” dollars that have supposedly been circulating. The authorities’ “get tough” policy followed speculation that the SYP/USD rate would surpass the 300 mark.

I have established a page to track current black-market exchange-rate and implied inflation data for the Syrian pound, as well as for troubled currencies in Iran, Argentina, North Korea, and Venezuela. For more, see: The Troubled Currencies Project.

Chavez: The Death of A Populist … and His Currency?

Although Hugo Chávez, the socialist presidente of Venezuela, has finally met his maker, the grim reaper is still lingering in Caracas. As it turns out, Chávez was not the only important Venezuelan whose health began to fail in recent weeks: the country’s currency, the Venezuelan bolivar fuerte (VEF) may soon need to be put on life support.

In the past month the bolivar has lost 21.72% percent of its value against the greenback on the black market (read: free market). As the accompanying chart shows, the bolivar has entered what could be a death spiral, which has only accelerated with news of Chávez’s death.


Shortly before his death, Chávez’s administration acknowledged that the bolivar was in trouble and devalued the currency by 32%, bringing the official VEF/USD rate to 6.29 (up from 4.29). But, at the official exchange rate, the bolivar is still “overvalued” by 74% versus the free-market exchange rate.

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