Iran Economic Collapse

I tend to avoid watching the news and focus the bulk of my reading to aggregators or sources outside traditional media for a variety of reasons.  I am going to presume that many are not that Iran is, or could be, on the brink of an economic collapse as I haven’t really heard it discussed.

Regardless, I have seen an explosion of Iran related articles and blog posts over the past few weeks (I believe it started with The Atlantic) and here are some facts:

• Iran’s monthly inflation is roughly 70%.  This is considered hyperinflation based on a widely accepted definition (> 50% a month).
• This means prices double in 40 days.
• $1 bought you 24,600 Rials (Iran’s currency) on 09/24 in Iran’s Black Market.  On October 2^nd  39,000 Rials is what you got for $1.  The Rial is least valued currency in the world relative to USD.  The official value is 12,260 Rials for a dollar.
• Sanctions began in Summer 2010: since then the Rial has depreciated 70%+ vs. USD and the monthly inflation rate has risen to 70% from 0.70%. 

And why they are having hyperinflation:

1. Iran is heavily dependent on oil exports.  The sanctions are de facto do business with Iran (mid 20s in comparative size) or do business with the US (largest economy in the world).  Thus, production takes a hit while currency in the system stays the same or increases.  Less production + more currency = less demand and greater supply of currency = inflation.
• Simplistically, if an economy produces $100 worth of goods and has currency supply $102 then overnight only has $50 worth of goods there are now $50 less of output to soak up the currency.  As a result, the excess currency goes to purchase the remaining $50 of goods, pushing up prices.
2. As #1 happens, whoever is holding Rials wants to convert those to something with a store of value – USD.  But since the USD is essentially cut off from Iran, the supply of USDs fall rapidly as people begin converting the Rial ASAP.  This reinforces #1.

So what is happening now?

• Hoarding.  Buying goods now instead of later before the price goes up.
• Rioting.  If you can’t buy bread for your family, what else can you do?
• Withholding of goods.  Why sell today when tomorrow’s price will be higher?
• More black markets.  If you want the USD why go to central bank when a guy in alleyway will give you 3x that?
• Outlawing exchange.  Prices rising, currency collapsing, so try and prevent USD demand to prop up Rial.

So now what?  Next post I will touch on this.