Thursday, October 4, 2012

Was Hyperinflation the Intended Outcome?

The Wall Street Journal reports on the protests sweeping through Tehran:
Protests over the plunging Iranian currency erupted on Wednesday around Tehran's main bazaar, the country's commercial hub, as escalating economic woes become a rising political challenge.

The demonstrations marked the first time in three decades that the conservative merchant classes, a backbone of the Islamic Revolution in 1979, have publicly turned against the government.
Steve Hanke shows that the currency plunge is closely tied to the imposition of sanctions and that the extent of the plunge amounts to a new case of 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.

Move over Zimbabwe, Iran is the new poster child of hyperinflation.

Question: was this hyperinflation part of some grand plan coming out of the CIA/Defense Department/State Department?  Did economists in these institutions foresee that the sanctions would eventually push the state into creating a hyperinflationary environment?  Was it part of the plan?


  1. David - is it just that the demand for the rial has dried up with the oil sanction? I don't know the literature well but I thought sanctions had mixed efficacy historically... if you could always cause hyperinflation, that seems like a very potent weapon!

  2. Correlation or causation? Would be curious to know how previous sanctions affected IRR/USD.

  3. It would be interesting to see what Iran's nominal GPD has been doing. An increase in Iran's GDPn growth rate would mean either their money supply has been growing too rapid or there has been a reduction in demand for their money causing an increase in the velocity of money.

    Another explanation is that the Iranian economy has been hit with a large productivity shock brought about by the sanctions. The best thing here that the Iranian central bank can do would be to keep GDPn growth path steady and let their currency float.

  4. I agree it seems odd to place hyperinflation at the feet of the sanctions. Hyperinflation is always the result a state weakening to the pont that it must turn to to the 'printing press' for financing. Maybe the Iranian regime was already so weakened that the sanctions were the straw that broke the camel's back.

    A negative productivity shock would increase the price level, but it would not by itself trigger a sustained rise in the price level required to creat hyperinflation. It might help unmoor inflation expectations, but something more wojld be needed for it to persist.

  5. My limited experience with foreign policy types is that they are not that much into monetary economics. I think the Iran situation is beyond them.

  6. I suspect this is luck (possibly of the good variety, though we shall see) more than anything. I looked back a little further. Iran has had roughly 14% inflation per annum since 2000 - and those are the official figures. The inflation rate was 21.5% in Mar, before the sanctions took hold fully. I think David is probably right - the sanctions might have been the tipping point for a very unpopular regime.

  7. Here is an idea that may help the Iranian economy. Iran is having hyperinflation and it is also one important oil producer. Iran could start selling oil at an attractive discount if the oil is paid in the Iranian currency. The discount would be calculated using the current exchange rate with EUR. In this way, several countries would rush to sell products to Iran in order the get the Iranian currency to later pay for the oil. This will increase the demand for the Iranian currency and could even completely reverse the hyperinflation.