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The Iranian Rial’s Economic Death Spiral

The Grim Reaper has taken his scythe to the Iranian rial (see chart below). The Islamic Republic of Iran remains in the ever-tightening grip of an economic death spiral. The economy is ever-vulnerable because of problems created by the last Shah, and added to massively by the theocratic regime. Indeed, the economy is more vulnerable to both internal and external shocks than ever. That vulnerability will become more apparent in the face of President Trump’s tearing up of the Joint Comprehensive Plan of Action (JCPOA), and the laying on of more primary and secondary sanctions against Iran. How fast the death spiral will spin is anyone’s guess.

 
The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar.  In Iran, the IRR/USD exchange rate, represents the most important price. By using active and available black-market (read: free market) data for the Iranian rial, I have transformed the black-market exchange rate into accurate measurements of country wide inflation. The economic principle of Purchasing Power Parity (PPP) allows for this reliable transformation, so long as the annual inflation rate exceeds 25%.

 

The chart below shows how Iran’s implied annual inflation rate has surged to an annual rate of 75.8% with the collapse of the rial’s value against the U.S. dollar. Indeed inflation has spiked in 2018.





So, what is to come of Iran’s economic death spiral? It can be summed up in one word: misery.

To get a sense of how miserable Iran is, we can look to Hanke’s Annual Misery Index. Back in February when the index was calculated, Iran ranked the 11th most miserable country, out of the 98 countries in the index. Using today’s surging inflation rate of 75.8% in our calculation of misery, Iran would a rank 3rd, just behind Venezuela and Syria.


Without meaningful reform in Iran, more of the same will be expected for its economy and the rial. In the words of George W. Bush, “this sucker could go down.”

 
by Steve H. Hanke of the Johns Hopkins University
Past Blogs

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May 07, 2018

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North Korea's Economic Crisis -- What Crisis?

May 03, 2018

Much ink has been spilled recently about how economic sanctions have crushed the North Korean economy and brought its leader Kim Jong-un to the bargaining table. Not so fast. For starters, there wasn’t much to crush. Never mind. And, contrary to repeated conjectures by experts in international affairs, whatever there is of a North Korean economy appears to be quite stable.

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Venezuela's Hyperinflation And The IMF's Faulty Forecasts

April 25, 2018

When it comes to inflation, I agree with Lord Kelvin. From a lecture the British physicist delivered at the Institute of Civil Engineers on May 3, 1883: “I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science, whatever the matter may be.”

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Hanke Weekly Inflation Roundup

April 19, 2018

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black-market (read: free market) for currency and the data are available, changes in the black-market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates—if the annual inflation rates exceed 25%.

more »