excerpted from an article by Graeme Wood in the April, 2013, Atlantic
For cash poor people, the secret to an ultracheap international vacation is to do a Google search for the words “runaway inflation”. Those listed places should be your next destination. En route to the airport, visit the bank and withdraw US dollars in crisp new hundreds and fifties. At your beleaguered destination, the local currency’s value will be melting away like snow in July. Your greenbacks will remain pleasantly solid. Everyone at your destination – hotels, restaurants, tours – will covet them and cut you deals. For you, luxuries will suddenly become affordable. Until your return flight (assuming you make it back safely, and are not robbed by an increasingly desparate local mob), you will experience the best the country has to offer.
Economists name for truly berserk runaway inflation is “hyperinflation’. America’s most nightmarish bout of inflation, in recent memory, was at the end of the Carter administration, when prices rose by about 14% in 1980, the peak year. Hyperinflation, by comparison, is beyond nightmarish: a rise in prices of at least 50% a month. Thankfully it is rare. Since 1795, there have been 56 documented instances, ranging from a coparatively benign monthlong burst in Taiwan in 1947 (prices rose by a little over 25% in that month, then slowed), to a truly surreal year in Hungary in 1945-6 when at one point prices doubled every 15 hours. In Slovodan Milosevic’s Yugoslavia in 1994, hyperinflation stopped only when the presses in the national mint, overheated to their breaking point.
The most famous recent case of sustained hyperinflation is Zimbabwe in 2007-8, when prices, at the peak, doubled every 24 hours. It was the only case where the inflation completely ran its course, and the government just printed money until people just no longer used it. Eventually, after the inflation rate reached 80,000,000,000 (80 billion) percent a month, folks simpley stopped showing up at the central bank to pick up Zimbabwean dollars, and the US dollar and South African rand spontaneously became the countries primary curriencies. The key is to change your US dollars in small quanitities and spend the runaway currency as fast as possible.
The money becomes a collectors item to frame on the wall. A standard issue note from January, 2008 says in small letters “Pay the bearer on demand ten million dollars on or before 30th of June, 2008”. As inflation spiraled upward, people resorted to bartering blankets and goats; for the everyday transaction of paying minibus fares, token systems were devised, so that every minibus didn’t require a second minibus following it just to haul its passengers cash. Hyperinflarion uses up a lot of peoples’ time because they’re spending a great deal of their time not working, and instead trying to figure out how to unload currency that is melting in your hands.
Inflation happens for many reasons, but hyperinflation scenarios are nearly always the same: a government fails to get enough revenue to pay its bills – usually because a war has drained its treasury, or its poor fiscal policies have tanked the economy – as it prints money to make up the difference. Money is being spent much more rapidly than they’re raising in taxes, they can’t get credit from the private sector, and the central bank is producing a lot more money than people want to hold – then you are off to the races. Monetary supply outstrips demand and wild irresponsibility of the government scares everyone from saving cash. People buy whatever they can get immediately, and prices rise accordingly. Anyone caught with cash loses everything. And anyone with hard currency, the kind that doesn’t evanesce expensively, is sitting pretty.
If you want to experience the pleasures and opportunities of runaway inflation todya, there are two options, at least in theory. The first is to go to North Korea, where your dollars are welcome but you are not. No one is sure how fast prices are rising in Pyongyang, since the society is almost completely closed, but outside experts’ best guess is that prices are rising very fast.
The second option is the Islamic Republic of Iran. Its inflationary rate has, in the last year or so, reached runaway speed. Iran has long suffered from inflation rates that we in the west would consider unbearable, notably in the Iran-Iraq war, in the 1980s. Now sanctions in response to Iran’s nuclear pursuits are serious business, and the rate has ticked up towards runaway levels, exactly as the sanctions proponents hoped. The price of imports have skyrocketed and oil revenues have collapsed. Two-thirds of Iran’s government spending is typically financed with oil revenue, but now Iran has resorted to storing oil offshore in filled-up tankers, idling for want of buyers. The government has thus been faced with a choice: cut back on spending , or crank up the currency printing presses – already humming – even further.
For a couple of weeks in October, the inflation rate reached a level that if it had kept up for a month, would have qualified as hyperinflation. It has now subsided to a level that is merely unsustainable. Inflation is measured by the basket of goods used to track prices. As some of those goods, like chicken and bread are subsidized by the government, those prices remain low. Inflation has at least doubled the usual rate of 15% a year, and may be as much as 115% in 2012, but it is systematically underreported by the Iranian government. The Iranian rial trades semi-openly, and in March, 2013, was hovering under 40,000 to one US dollar, half as weak as six months earlier. Authorities tried to ban currency trading at the peak in mid October but they failed.
The first rule of budget travel applies here: when there is runaway inflation, there are great deals for travelers with hard cash. Board a plane in Dubai for Kish, an Iranian duty-free-shopping and holiday resort in the Persian Gulf. The island is tiny and can be driven around in 30 minutes. Unlike every other part of Iran, Kish requires no visas from anyone, including Americans. Historically, Iranians have gone to Kish to buy goods from overseas and to relax in the sun. Foreign goods are increasingly expensive for Iranians, but the sun is free. The Iranian carrier Kish, flies MD-22 jets, raising the question how a country barred from getting new American made airplane parts, maintains its old American made plane. Most of the other passengers tend to be Filipinos on leave from jobs in Dubai, too poor to go all the way home to the Philippines. For a week, they could live like queens for a week. They all bring dirhams, the converible currency of the United Arab Emirates, pegged to the US dollar. Cash was king.
On arrival the women are led to a bin of scarves and formless blue tunics to cover up for the immigration officers. Passports are stamped with nary a question.
A hotel room at the 5-star Parmis was 370 dirhams or about US$100, including breakfast and lunch. The rates for Iranians were in Iranian rials look wrong, and the dots representing zeros extended far off to the right. The Iranian price was 1.8 million rials. Business was brisk with Iranians unable to afford to vacation in Dubai or Istanbul. At the hotel buffet, tourists were trampling each other to get to the food. At the shopping malls, foreign goods are hard to find. Apple stores aren’t possible in Tehran as no banks transfer profits home to Cupertino. Iranian merchants make trips to Dubai with suitcases of cash to return with suitcases of iPhones. Foreign made goods are at least a little cheaper in Kish for Iranians and there are no customs agents.
The malls are packed with foreign clothes, cellphones, computers, and chocolate. The few Iranian made goods are very cheap, at least in dollars. Services, like a haircut were $4 at the 5-star hotel. Many of the imported items were Chinese knockoffs (caveat emptor), and they were so cheap that inflation didn’t much matter. But the other imported goods, that ones that were expected to function normally – the rial prices were grotesque. Those shops were devoid of customers. Consumer electronics like iPods were unaffordable, and an iPhone cost 27 million rials, or almost $500 US, but when dollars were offered, the price sank to $200.
The beach is sex-segregated – a straight man on an all male beach – not much fun. To rent a Segway cost 10,000 rials a minute. Bought a year ago, they would be three times the price today. Cash had been traded for noncash assets that would earn rials at the new inflationary rate, and the debt, if bought on time, would have shriveled to half in real terms. Iranians with foresight and the ability to borrow have profited handsomely from the past years inflation. The most politically connected can get loans from Iranian banks, so there is serious inequity in the ability to profit off severe inflation. Credit is rationed and the interest rate is fixed at 21%. Thus an inflation rate of 30% means a real rate of return of 10% just for borrowing.
This dynamic, in which savvy borrowers win big, while people fixed incomes, like the old and retired, lose their savings, is one of the most cruel forms of government expropriation. If you bought a farm in Zimbabwe in 2000 and had a 30 year fixed rate mortgage, you could have paid it off with that framed 10 million Zimbabwean note and expected change back in the transaction.
In Kish, ordinary Iranians looked calm with no visible signs of impoverishment. Kish is more like an Iranian Las Vegas than an Iranian Nantucket, affordable as an annual or biennial holiday for all but the poor. An epic 7 hour show at the Kish Dolphin Park cost $16, and was crowded with Iranians from all over the country. Whatever toll near-hyperinflation had taken, it hadn’t plunged the Iranian people into a tailspin of misery – or at least not yet, and not here.
Which is not to say that the past year had been painless. The average Iranians savings had evaporated, and they couldn’t afford the holidays they had taken before. They are not sure what financial calamity will happen next. Pay is not keeping up with inflation. Life is very hard because of the sanctions. How badly the sanctions have ravaged the economy is hard to gauge. Unemployment in Iran is rising, and previously attainable luxuries like trips to Turkey and well-made electronic goods are prohibitively expensive. Middle and lower class Iranians have begun hoarding even basic household items, fearing that their prices will soon rise too. It’s unknown how inflation will affect the countrys politics, but the commander of the Revolutionary Guard recently issued a statement that the economic woes constituted a regional national-security threat.
This is not the first time that US economic warfare has caused destabilizing price jumps. The decades-long blockade of Cuba has inflated prices there, though never hyperinflationary rates, and with nothing to show for the effort politically. In both WWII in Japanese occupied Philippines, and in the Vietnam War, fake currency was distributed by the US to try to destabilize the governments. Of course, the sanctions in Iran are intended to embarrass, ostrasize , and humble the Iranian leadership. However, other countries with severe inflation have continued along. Rober Mugabe celebrated 33 years of power in Zimbabwe in 2013. On the list of 56 hyperinflationary episodes, many countries underwent dramatic change soon after, but few governments collapsed directly because of hyperinflation. Expensive flat screen TVs have never caused a revolution. Eventually, solid currency like US dollars flows in to replace the worthless native currency. Economists call this Thier’s Law – good money drives out bad money, and hyperinflation ends with the government forced, in effect to adopt someone elses money – say, by pegging its flailing currency to a solid one. That doesn’t end the predation, of course. In the case of Zibabwe, Mugabe just stole money in other ways, such as taking over mines and farms. The countries foreign minister, in January, 2013, stated that the country’s public account contained exactly $217 US after payrolls had been met – but it is still in power.
That might be because the citizens most capable of instigatig revolution are the least affected. Politically connected Zibabweans weathered it well, in part by getting import licenses that allowed them to sell at inflated prices, goods that they had bought at artificially low prices overseas. Members of the Royal Harare Golf Club oredered their beers before the round, in case the price went up while they were on the course. Some clerical leaders in Iran are widely believed to be fantastically wealthy. The politically connected will almost certainly survive and prosper, although the Islamic Republics image would surely suffer if the country has to abandon its own currency and adopt, say the Turkish lira or the euro.
It is not clear whom the Iranian working classes will blame for the mess. No one mentions hatred for America, or blamed America for the country’s ills. All Iranians know there is corruption, and that the economy is mismanaged and ineffecient. It is unknown if sanctions will have an effect on on nuclear issues, but they probably will. Elections are controlled and and manipulated, but the candidate who can promise to end the sanctions will probably win. Wages have mostly kept up to keep pace with prices, although government employees have increased at only half the needed rate, and the economy has worn down optimism. People have adjusted to lower real incomes, but probably have not adjusted to the lack of hope. No wages can really keep pace with very severe inflation, especially if Chinese or Russian markets close to Iranian trade. Iran’s foreign-exchange reserves are dwindling, continued flight from the rial is expected, prices will rise, and the government will be tempted to print more money in order to pay the bills.
A key moment in any hyperinflation scenario is the realization that it is willing – under pressure of its own making- to finance itself at its most vulnerable citizens expense. To see the direction Iran is taking, consider monitoring the imports of printer ink.
December, 2014. The price of oil has dropped to $68/barrel and Iran needs the price to be $130 to balance its budget. The recession is deepening. Talks to limit the production of nuclear weapon grade uranium are stalled although some concessions have been made and some sanctions limited. Iran has responded by raising the price of bread by 30%!
LIST OF COUNTRIES WITH THE HIGHEST INFLATION RATE AS OF March, 2013.
1. Syria – 49.5%
2. Sudan – 47.9%. In midst of civil war since establishment of South Sudan in last year.
3. Iran – 39.46%
4. Malawi – 37.9%
5. Venezuela – 25.13%
6. South Sudan – 24.1%
7. Belarus – 22.2%
8. Guinea – 14.4%
9. Eritrea 13.5%
10. East Timor – 11.6%
11. Sierra Leone – 11.4%
12. Serbia – 11.2%
13. Argentina – 10.6%
14. Ghana – 10.4%
15. Lebanon – 10.1%
16. Nepal – 9.95%
17. Mongolia – 9.8%
18. Bhutan – 9.54
19. Burundi – 9.4%
20. Angola – 9.11%
21. Jamaica – 9.1%
In Venezuela, it was an interesting experience dealing with the money issue. When going bring as much US dollars as you can – only crisp new $100 bills, (the old 100’s have a small Ben Franklin). The official exchange rate in May, 2012 was 4.2 and the black market rate was as good as 9 especially in Santa Elena with new $100s. In Caracas, the “deals” were secretive in bathrooms etc, but in Santa Elena, the transactions happened out in the street in the wide open.
The whole black market exists because of the inflation rate, and it is impossible to get stable currency like the dollar anywhere. At 27% inflation, paying over 100% of value of the Bolivar is the only hedge. It would be possible to finance one’s entire trip by going to Venezuela first with $5000US, exchange it all as you need it, use it on your trips (all priced in black market dollars), and then exchange the Bolivars when in your next country. No country allows one to bring in more than $10,000.
In December 2014, with the price of oil at $68 per barrel, the annualized inflation rate had increased to 60% deepening the recession and causing revolts in the streets. What a mess.