The Money Report April 2013

My Hyperinflation Vacation

A trip to the Iranian resort island of Kish illuminates the pressures, limits, and strange consequences of economic sanctions.

The malls were packed with clothes, cellphones, computers, and chocolate from overseas. The few Iranian goods on sale were very cheap, in dollars. I bought a movie-theater-size cup of pure pomegranate juice, produced by a company in Shiraz, for about 60 cents. (Services were likewise available, island-wide, for pennies on the dollar. I got a $4 haircut at my five-star hotel.) Many of the imported items were Chinese knockoffs that all but screamed “caveat emptor,” and they were so cheap that inflation didn’t much matter: zero multiplied by two still equals zero.

But for other imported goods—or at least the ones that might be expected to function properly—the rial prices were grotesque. A shop that sold kitchen appliances from the Italian manufacturer De’Longhi was tidy and gleaming but totally devoid of customers. Non-Chinese consumer electronics, such as real iPads—bounty from across the Persian Gulf—were similarly unaffordable. One mall had a white cuboid storefront that called itself the Kish Island Apple Store. Inside, a current-generation iPad sold for 27 million rials. At the current exchange rate, that was almost $900, but when I offered to pay in U.S. dollars, the price magically sank by $200.

That afternoon, I walked briefly along the beach. Swimming and kiteboarding didn’t much entice (Iranian beaches are sex-segregated; as a straight man at an all-male beach, I was reminded of the Simpsons episode in which Homer swears off beer, goes to a baseball game, and, after staring incredulously for a while, says, “I never realized how boring this game is”), so I rented a Segway, sturdy enough to ride on the sand and broken concrete of the beachfront, for 10,000 rials a minute. I darted around the island in the company of a bald young Iranian—I’ll call him Parviz—who was an engineer by training but had come to Kish more than a year earlier as a Segway-rental manager. He had about half a dozen Segways tied up by his hut on the beach.

“The owner bought these more than a year ago,” he told me, gesturing at the scooters beneath us as we pealed down the road, dodging Filipina cyclists with their borrowed veils flowing behind them. “If he bought them today, they’d be three times the price.” Parviz’s boss had invested at the right moment: by front-loading his spending, he had traded cash for noncash assets that would earn rials at the rate dictated by inflation. And if he’d gone into debt to finance his Segway business—I didn’t ask—that debt would have shriveled, in real terms, by about half.

In Slobodan Milošević’s Yugoslavia, hyperinflation stopped only when the presses at the national mint overheated to their breaking point.

As in all cases of runaway inflation, there are winners among the losers. Iranians with foresight and the ability to borrow have profited enormously from the past year’s inflation. Many Iranians complain, Salehi-Isfahani of Virginia Tech told me later, that only the most politically connected people get significant loans from banks, so there is an inherent iniquity in the ability to profit off severe inflation. It’s easy to see why credit is rationed in Iran: the interest rate facing borrowers is fixed at 21 percent, so an inflation rate of about 30 percent means an automatic real rate of return of nearly 10 percent, just for borrowing.

This dynamic, in which savvy borrowers win big while people on fixed incomes, like the old and the retired, lose their savings, reproduces exactly what we’ve seen in previous inflation episodes elsewhere. “Hyperinflation is among the most cruel forms of government expropriation,” William Masters says. “If the government says it’s going to take your farm away, at least there’s a kind of visible honesty to that.” If you bought a large farm in Zimbabwe in 2000 and had a 30-year fixed-rate mortgage, in 2008 you could have paid that mortgage off with the 10-million-Zimbabwean-dollar note framed in Masters’s office, and expected change back in the transaction. But if you’d been in the more common situation of eking out some small savings, over many years, you’d find that your industry and foresight had been nullified, your thin cushion of savings yanked from under you.

Iran isn’t Zimbabwe, of course—it’ll take a lot more zeroes on the hotel rate cards for that—and on Kish I saw plenty of ordinary Iranians, the kind not lucky enough to own a fleet of Segways, biking around calmly, enjoying a holiday without visible signs of impoverishment. Yes, Kish has five-star hotels, but it is more like an Iranian Vegas than an Iranian Nantucket: affordable as an annual or biennial holiday to all but the poor. I attended an epic seven-hour show at the Kish Dolphin Park (total cost: $16, including a commission for the concierge at the Parmis), and had a splendid time alongside Iranians from Tehran, Isfahan, Kashan, Shiraz, and Mashhad. The show was remarkably diverse—in addition to the dolphins, there were clowns, magicians, reptile wranglers, and a man who extinguished candles with the crack of a bullwhip. Whatever toll near-hyperinflation was taking, 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. At the dolphin show, I sat next to two sisters, Mina and Mona, both in their early 20s and from Tehran. We laughed and joked and promised to send each other digital photos. But they also told me that their savings had evaporated, they couldn’t afford the holidays they had enjoyed before, and they weren’t sure what financial calamity might happen next. Mina is an accountant at a paint factory in Tehran, and she watches her money closely enough to know that her pay isn’t keeping pace with costs.

“Life is very hard now for us,” she told me. “Why?,” I asked. She struggled for the English word and instead offered the Persian one, tahrim, and told me to look it up. I didn’t have to. Tahrim shares a root with the English word harem—another place that, like Iran, is closed off from the rest of the world. And it means, simply, “sanctions.”

I left Kish the next day and returned to Dubai, the land of high but predictable prices. It was clear to me, at least, that Iranians were suffering, though just how badly the sanctions had ravaged the economy was hard to gauge. There are signs that unemployment in Iran is rising, and unease has rippled through the Iranian middle class, now that previously attainable luxuries like trips to Turkey or well-made electronic goods are prohibitively expensive. According to some observers, the middle and lower classes have begun hoarding even basic household items, fearing that their prices will soon rise too. It’s unknown how these bad inflationary vibes will affect the country’s politics. The day I left Kish, the commander of the Revolutionary Guard, Brigadier General Nasser Shabani, issued a statement warning that Iran’s economic woes constituted a regional national-security threat.

This is hardly the first time that U.S. economic warfare has caused, or intended to cause, destabilizing price jumps. The decades-long blockade of Cuba has certainly inflated prices there, though never at hyperinflationary rates (and with nothing to show for the effort, politically). The United States has even used more-direct forms of inflation attack: in the Second World War, General Douglas MacArthur ordered that bogus currency be sent ashore into the Japanese-occupied Philippines, to dilute the value of Axis bank notes. (The efforts played a minor role, if any, in the defeat of the enemy.) And in Vietnam, the CIA distributed fake currency to destabilize the Communist government. Of course, the ultimate goal of the sanctions against Iran is not solely to pump up prices: they are supposed to embarrass, ostracize, and humble the Iranian leadership. But high inflation is one major manifestation of the distress that sanctions produce, and it might be expected to further those larger goals.

Or maybe not. Other countries with severe inflation have achieved depressing levels of political continuity. Robert Mugabe, for instance, celebrated 33 years of power in Zimbabwe this year. On the list of 56 hyperinflationary episodes that Steve Hanke compiled, many countries underwent dramatic change soon after—think Weimar Germany—but few governments, if any, collapsed directly because of hyperinflation. Expensive flatscreen TVs have never caused a revolution. Eventually, solid currency like the U.S. dollar flows in to replace the worthless native currency (economists call this phenomenon Thiers’s Law: good money drives out bad money), and hyperinflation typically ends with the government forced, in effect, to adopt someone else’s money—say, by pegging its flailing currency to a solid one. That doesn’t end the predation, of course. In the case of Zimbabwe, the Mugabe regime just stole money in other ways, such as by taking over mines. The government has weakened—in January, Finance Minister Tendai Biti told reporters that his country’s public account contained exactly 217 U.S. dollars after payrolls had been met—but it’s still in power.

That might be because the citizens most capable of instigating revolution are the least affected. “Politically connected people [in Zimbabwe] were able to weather it well,” William Masters says, in part by getting import licenses that allowed them to sell at inflated prices goods they had bought at artificially low prices overseas. “They made out like bandits, because they were.” Hanke says he knew members of the Royal Harare Golf Club who would order their beers before playing a round, in case the price went up while they were on the course. They were, however, still members of a golf club, so clearly the hyperinflation hadn’t ruined everyone. Some clerical leaders of Iran are, for their parts, widely believed to be fantastically wealthy. The politically connected there will almost certainly survive and prosper, although the Islamic Republic’s amour propre would surely suffer a gut punch if the country had to abandon its own currency and adopt, say, the Turkish lira or the euro.

It’s not yet clear whom the Iranian working classes will blame for destroying their retirement savings. During my trip, no one mentioned any hatred for America—I’m Canadian, so they might have confided safely—or blamed America for the country’s ills. It’s at least plausible that Iranians would attribute their suffering to their own government. “Everyone knows there is corruption, and that the economy is mismanaged and inefficient,” says Mohsen Milani, a professor of international relations at the University of South Florida. “The big question is whether [sanctions] will have an effect on nuclear issues. And I believe they will. Elections are controlled and manipulated, but the candidate who can promise to end the sanctions is likely to win.” Salehi-Isfahani, the economist at Virginia Tech, points out that wages have mostly increased quickly to keep up with prices—although government-employee salaries have increased at only half the needed rate, and the economic situation has worn down optimism. “People are adjusting to lower real incomes,” Salehi-Isfahani told me. “But I doubt very much that they have adjusted to the lack of hope. The government can’t supply that just by keeping chicken cheap.”

In any case, no wages could ever really keep pace with very severe inflation of the sort that might be retriggered by sanctions, or a further closing of Chinese or Russian markets to Iranian trade. Iran’s foreign-exchange reserves are thought to be dwindling. In the absence of a new infusion, we can expect continued flight from the rial, a rise in prices, and finally the temptation that governments under stress have faced at least 56 times before: to print far too much money in order to pay the bills.

A key point in any hyperinflation scenario is a government’s moment of moral self-discovery, when it realizes that it is willing—under pressure of its own making or from external forces—to finance itself at its most vulnerable citizens’ expense. To see the direction Iran is taking, we might consider monitoring not only the imports of uranium, but also those of printer ink.

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Graeme Wood is an Atlantic contributing editor.

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