Sunday, October 7, 2012

Iran on the brink

Iran's internal instability continues to pose significant risks to the region. As discussed earlier (see post), the currency collapse has triggered hyperinflation.
Bloomberg/BW: - The run on the rial has exacerbated inflation that had already been pushed up by the removal of subsidies on energy and food. The official rate rose to 23.5 percent in August. The real rate, which adjusts for the currency depreciation, is three times that, according to Steve Hanke, a professor of applied economics at Johns Hopkins University in Baltimore.

“We’re getting into what is technically hyper-inflation,” with an “implied inflation rate” of about 70 percent a month, Hanke said.
As a result Iranians with money are trying to preserve their wealth by buying gold. Gold sales to Iran have spiked.
Bloomberg/BW: - Turkish sales of precious metals to Iran jumped to $6.2 billion through July from $21.9 million in the same period last year. Wealthy Iranians in Turkey are collecting gold and exporting it to Iran, the Istanbul-based Zaman newspaper said July 11. Iranians in Dubai and India are also collecting gold and sending it to the central bank, Zaman said, citing a Turkish economy administration official it didn’t name.
These developments may be a precursor to a sharp increase in social unrest. As the well-off Iranians have the ability to preserve their wealth (at least in part), the gap between the rich and the poor widens. In the late 70s similar conditions (including high inflation and gold buying by the wealthy) preceded militant anti-Shah demonstrations and ultimately the 1979 Islamic revolution.

Once again, the mass media doesn't seem to be focused on these developments - in part due to lack of understanding of history. One doesn't need to focus on the history of Iran to appreciate how dangerous the situation has become. Currency debasement and inflation were responsible for hostilities through the ages. Here are a couple of well known examples (h/t Josh):

1. In ancient Rome the dilution of the currency (reducing the silver content of the coins) led to widespread anti-Christian (and other types of) violence in the early 300s AD.

Source: SocGen (click to enlarge)

2. A hyperinflationary environment in Britan in the late 1500s to mid 1600s sparked increasing incidence of witch trials. Note that in the chart below "1" on the left-hand axis stands for 100%
Source: SocGen (click to enlarge)

Whether it was Christians in the Roman era or women in the middle ages, someone was blamed and terrorized in times of collapsing currencies and hyperinflation. This pattern repeated itself numerous times throughout history. 1000% inflation (in the summer of 1917) ignited the Russian revolution and the hyperinflation in Germany after WW-I had well known disastrous consequences.

Iran is no exception. In the 70s the Shah and his regime was to blame. The only question now is who will be the target of people's rage and desperation this time.
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