Hyperinflated Iran Is Still Dangerous

31 Oct

Hormuz-300x231It won’t mollify neocon hardliners in the United States, but Iran, according to Steve H. Hanke, is the 58th country to experience hyperinflation.

On 8 September 2012, the black-market IRR/USD exchange rate was 23,040. In the course of just under a month, after two big sell offs, the rate settled at 35,0 00 on 2 October 2012. That is a 34.2% depreciation in the rial, relative to the greenback. It was at this 35,000 IRR/USD rate that I first calculated the monthly inflation rate implied by the rial’s depreciation. The implied monthly inflation rate was 69.6%. Since the hurdle rate to qualify for hyperinflation is 50% per month, Iran registered what appears to be the start of the world’s 58th hyperinflation episode.

Tightening sanctions on Iran as it fights off hyperinflation is a clarion call for war.

…the thing that is concerning to me about sanctions in Iran is that not only can they be counterproductive, but they can be outright dangerous because the Iranians control the Strait of Hormuz. And if the sanctions get tighter and tighter and tighter, and oil can’t be sold–any oil can’t be sold by the Iranians–they have virtually nothing to lose by shutting down the Strait. If they did that, 35% of the world’s crude oil comes through the Strait; and 20% of the liquefied natural gas [LNG] in the world comes through the Strait. So, the mullahs, in short, have an ace up their sleeve. And we don’t want them to ever play it. We don’t want the Strait of Hormuz to ever be shut. Because we really would have an economic mess on our hands if we had all of a sudden 35% of the world’s crude being cut off and 20% of the LNG. Russ: Well, I think we know how that ends up. Guest: Yes. Russ: They don’t end up controlling the Straits, but that’s war. Guest: Well, I think what you end up with then is unless we can figure out some kind of diplomatic solution to the Iranian problem, we simply have something shaping up that will have either a horrible end or a horror without end.

What would such scenarios look like concretely? As in China, anti-access is a strategy Iran could deploy.

Tehran… can put Washington on notice that it will pay a high if not unacceptable price for access to the Gulf region. A U.S. president might hesitate before making a decision of this gravity in times of strife; he might modify U.S. deployment patterns, forcing U.S. airmen and seamen to fight inside the Persian Gulf from aircraft carriers and land bases outside the Strait of Hormuz; he might abjure the effort altogether. Tehran would either prevail or, more likely, gain time to accomplish its goals. That could be a win from the Iranian standpoint. Americans must not assume the mismatch between U.S. and Iranian military capabilities guarantees automatic victory in the Gulf.

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