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.
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Kevin van Aelst

For years, I have been advising my cash-poor friends: the secret to an ultracheap international holiday is a Google News search for the words runaway inflation. The place listed in the dateline of any recent articles including that phrase should be your destination. En route to your home airport, visit the bank and withdraw U.S. dollars in crisp hundreds and fifties. At your beleaguered landing place, the local currency’s value will be melting away like a snowman in July. Your greenbacks will remain pleasantly solid. Everyone at your destination—hoteliers, restaurant staff, tour guides—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 desperate local mob), you will experience the dismal science at its most cheery.

Economists’ name for truly berserk runaway inflation is hyperinflation. America’s most nightmarish bout of inflation—in recent memory, at least—came and went at the end of the Carter administration, when prices rose by about 14 percent in 1980, the peak year. Hyperinflation, by contrast, is beyond nightmarish: a rise in prices of at least 50 percent a month, according to the generally accepted definition. Thankfully, it is rare. Steve Hanke, an economist at Johns Hopkins University, has documented 56 instances since 1795, ranging from a comparatively benign monthlong burst in Taiwan in 1947 (prices rose by a little more than half in that month, then the increase slowed), to a truly surreal year in Hungary in 1945–46, when at one point prices doubled every 15 hours. In Slobodan Milošević’s Yugoslavia in 1994, hyperinflation stopped only when the presses at the national mint, in Topčider, overheated to their breaking point.

The most famous recent case of sustained hyperinflation is Zimbabwe in 2007–08, 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,” says William Masters, an economist at Tufts University. Eventually, after the inflation rate reached 80,000,000,000 percent a month, folks simply stopped showing up at the central bank to pick up Zimbabwean dollars, and the U.S. dollar and South African rand spontaneously became the country’s primary currencies.

In 2001, I spent a few months in Zimbabwe, just as the warm-up act for that country’s hyperinflationary episode was taking the stage. Already, the currency’s loss of value could be observed by the day. I changed my U.S. dollars in small quantities and spent my Zimbabwean dollars as soon as I acquired them. For the first time in my life, I could stay in just about any hotel I pleased: I recall renting a cozy room in the Eastern Highlands for $1.50 (U.S.) a night, including a full English breakfast. For less than $7, I took a sleeper train first-class from Mutare to the capital, Harare, and marveled at the thread count of the bedclothes, the fancy place settings, the frosted double-R logo on the windows, still there from when the train was run by Rhodesia Railways. On my return trip to Mutare a few weeks later, the curtains and curtain rods had been stripped from the windows, almost certainly by the railway employees themselves, whose wages no longer covered living expenses and had to be supplemented by stealing bits off the trains.

Masters has various pieces of Zimbabwean currency framed on a wall in his office, for novelty, including a standard-issue note from January 2008 that 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 with blankets and goats; for the everyday transaction of paying minibus fares, they improvised token systems, so that every minibus did not require a second minibus following it, just to haul its passengers’ cash. “Hyperinflation uses up a lot of people’s time,” Hanke says, “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 their hands.”

Inflation happens for many reasons, but hyperinflation scenarios are nearly always the same: a government fails to harvest enough revenue to pay its bills—usually because a war has drained its treasury, or its poor fiscal policies have tanked the economy—so it prints money to make up the difference. “The central bank is just producing a lot more money than people want to hold,” Hanke says. “They’re spending much more money than they’re raising in taxes, and they can’t get credit from the private sector. At that point, you’re off to the races.” Monetary supply outstrips demand, and the wild irresponsibility of the government scares everyone away from saving cash. Instead, people buy whatever they can get, immediately, and prices rise accordingly. Anyone caught with cash loses everything.

And anyone who has hard currency—the kind that doesn’t evanesce expensively, like smoke from a Cohiba—is sitting pretty.

If you want to experience the pleasures and opportunities of runaway inflation today, you have two options, at least in theory. The first is the hermit kingdom of North Korea, where your dollars are welcome but you are not. No one is really sure how fast prices are rising in Pyongyang, since the society is almost completely closed, and North Korea’s Central Bureau of Statistics consists of little more than a man wearing a Kim Il Sung lapel pin and giving a thumbs-up sign. Almost no one gets into or out of the country, but outside experts’ best guess is that prices are rising very fast.

The second option is the Islamic Republic of Iran. Its inflation rate has, in the past year or so, reached runaway speed. Iran has long suffered from inflation rates that we in the West would consider unbearable, notably during the Iran-Iraq War, in the 1980s. Recently, however, as the United States and the European Union have become progressively more serious about sanctions in response to Iran’s nuclear pursuits, the inflation rate has ticked up toward ruinous levels—exactly as the sanction proponents hoped. The price of imports has skyrocketed. What’s more, oil revenues have collapsed. Two-thirds of Iran’s government spending is typically financed with oil revenue, but as sanctions have pinched more tightly, 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 radically on spending, or crank up the currency printing presses—already humming—even further.

For a couple weeks in October, according to Hanke’s calculations, Iran’s inflation rate reached a level that, had it kept up for a full month, technically would have qualified as hyperinflation. Inflation has since subsided to a rate that is merely unsustainable. How we measure inflation depends entirely on the basket of goods we use to track prices, and because the prices of some goods, such as chicken and bread, are subsidized by the government, these prices remain low. But Djavad Salehi-Isfahani, an Iranian American economist at Virginia Tech, says that inflation has at least doubled the usual rate of 15 percent a year, and Hanke thinks the rate is even higher—as much as 110 percent in 2012—but is systematically underreported by the Iranian government. The Iranian rial trades semi-openly, and as this magazine went to press, its value was hovering under 40,000 to one U.S. dollar, weaker by nearly half compared with six months earlier. Authorities tried to ban currency trading for a few weeks in October, when the inflation rate peaked, but they failed. Finally they just asked money changers not to advertise the depressing new rates in their windows.

Wood’s First Rule of Budget Travel applies here: where there is runaway inflation, there are great deals for travelers with hard cash. So in January, I boarded a flight from Dubai to Kish, an Iranian duty-free-shopping and holiday resort in the Persian Gulf. The island is tiny—small enough to circumnavigate by car in about half an hour. Unlike every other part of Iran, Kish requires no visas from anyone, including Americans. I hoped to find a place where foreign and domestic currencies converged, and where Iranian tourists could tell me a little about what their rials could still buy them. Historically, Iranians have gone to Kish to buy goods from overseas and to relax in the sun. But a collapsing currency means that overseas goods have become significantly more expensive, even if the sunshine is still free.

From Dubai, I flew on the Iranian carrier Kish Air, aboard an MD‑82 jet packed with foreign holidaymakers. We arrived safely, though upon takeoff from Dubai, I had wondered how a country barred from getting new American-made airplane parts maintained an old American-made airplane. The other passengers were mostly Filipinas on leave from jobs in Dubai. Kish, they told me, had emerged as a preferred holiday destination for those too poor to go all the way home to the Philippines. After just a short flight, they could live like queens for a week, having toiled as scullery maids for a year or more without vacation in Dubai. On the island, they lounged in modest rented apartments, drank juice by the sea, and biked among the palm trees. At the airline office at Fish Roundabout, a traffic circle in Dubai, I had asked Filipinas who had visited Kish previously what I should bring for my trip. They all said dirhams—the convertible currency of the United Arab Emirates, pegged to the U.S. dollar—and nothing else. Cash was king in Kish: with just a little bit of it, everything you could really want for a weekend jaunt would be available for a pittance.

At Kish’s single-runway airport, under the owlish stare of a portrait of Ayatollah Ali Khamenei, the women were led aside to a bin of scarves and formless blue tunics, so anyone who arrived in risqué attire could cover up before meeting the male immigration officers. When I got to the front of the line, the officer planted a big wet kiss of an entry stamp in my passport and waved me through to the baggage claim with nary a question. I exited the airport into the warm gulf night and headed straight to my hotel, the Parmis.

The first sign of rising prices was the hotel rate card. I had agreed over the phone to pay 370 dirhams, or about $100, for a night at a five-star hotel, including breakfast and lunch. (I had originally been told that the hotel had no vacancies, but when I asked again in English, with the implication of payment in foreign currency, a room materialized.) The rates for Iranians were quoted in Iranian rials, and to me—I had not been in Iran in more than three years—they looked not high but simply wrong. A zero in Persian writing is represented by a dot, and here I saw dots leading far off to the right, as if someone had left an ellipsis on the rate card instead of the full price. The Iranian price was 1.8 million rials. I asked the desk clerk whether prices had gone up, and he smiled and said “Up, up, up!,” with his hand gesturing to the ceiling or to God. “Not so bad,” he added, optimistically. Not for him, anyway—the decline of the rial had made it harder for Iranians to vacation abroad in places like Dubai and Istanbul; many were keeping their trips affordable by coming to Kish instead. The crowds were most apparent at meals, when the hotel buffet overflowed with Iranian tourists trampling each other to get at the last bit of chelo kebab.

The next morning, I wandered around the shopping malls to see how much things cost. Because sanctions limit Iran’s financial transactions with the West, foreign goods are hard to find. (You can’t run an Apple store in Tehran if you can’t use a bank to transfer your profits home to Cupertino. Iranian merchants are reduced to taking trips to Dubai with suitcases of cash, so they can return with suitcases of iPhones—ideally without attracting the attention of customs agents.) The duty-free status of Kish makes the malls there attractive to mainland Iranians, because foreign goods are at least a little cheaper and easier to get. (Iran treats Kish as a foreign country, for tariff purposes, so there are no pesky customs agents.)

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.

Graeme Wood is an Atlantic contributing editor.
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Graeme Wood is a contributing editor at The Atlantic. His personal site is gcaw.net.

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