June 24, 2021

Iran's hyperinflation canary in the coal mine

I came across this video this morning on what hyperinflation looks like in Iran.  Iran was facing challenges already because of the sanctions imposed by president Trump.  The video, while informative I think misses the mark on the primary reason for the hyperinflation. Yes, sanctions do contribute to inflation. And the video below shows the impact on Iranians.

As sanctions are imposed it does become harder to get goods, particularly imported goods.  As a result, the scarcity causes prices to rise.  But Venezuela had hyperinflation long before the Trump sanctions started on it.

What else causes inflation?  The money supply.  As a result of COVID, governments around the world, forcing people to stay home, impacting jobs and the economy, started printing money to hand out.  Iran was no exception.
Iran Money Supply M2 was reported at 827.660 USD bn in Mar 2021. This records an increase from the previous number of 787.998 USD bn for Feb 2021. Iran Money Supply M2 data is updated monthly, averaging 223.363 USD bn from Dec 1999 to Mar 2021, with 256 observations. The data reached an all-time high of 827.660 USD bn in Mar 2021 and a record low of 40.504 USD bn in Mar 2002.

In January 2020, pre-pandemic lockdowns worldwide, the money supply in Iran was approximately 550 USD bn.  That means that in the following 18 months the money supply in Iran grew by approximately 50.5%.  Whether that was as a result of the pandemic or sanctions or a combination of the two is relatively immaterial.  The point is to look at what it has done to the economy and people in Iran.  

For hyperinflation Iran is the canary in the coal mine, not Venezuela.  Not because Venezuela doesn't show what hyperinflation can do to ravage an economy and impoverish a citizenry, it clear does show us that.  No the reason the Iran situation is the canary in the coal mine is because the change is relatively recent.  Further, Iran's money supply situation is not unique.  It's a bit extreme compared to some of the more robust economies around the globe but not drastically so.  I took a look at the growth in M2 money supply for the top 12 world economies since January of 2020, pre-pandemic lockdowns compared to the latest available data.  

Compare these numbers to Iran's 50% increase they don't seem too bad. Maybe not terrible for China, Japan and Germany, but the USA and Brazil are at 30%!   In the United States, 1 out of every 4 dollars in circulation has been printed in the last 15 months.  When you increase the money supply by 30% but the economy on COVID recovery is only growing by 6%, that means there are 30% more dollars chasing 6% more goods and services.  As a result, inflation is inevitable.

What does this mean for inflation in the United States? Will it reach levels being seen in Iran?  Probably not.  But will it be bad?  Probably.  Inflation could reach 10% to 15% in the U.S.  That's going to be a shock to the economy and those claiming the inflation will be transitory (like the Federal Reserve) do not appear to have a Plan B in case it isn't transitory.  They can't raise interest rates (which is a brake on inflation) because the U.S. government has generated so much debt it could not afford to pay the interest on the higher rates for its debt.  They are either stuck, or they have another way out (which is a discussion for another time).

The same  situation is true for the other 11 biggest global economies to varying degrees and it will all be exacerbated by smaller economies, many of which have more Iran-like money supply issues.  No one is going to be immune to the inflation because it will be on a global or near-global scale.  The United States did itself no favors by being among the most aggressive money-printers of the Big 12 but they will not be alone in suffering the consequences.  Where Iran has gone, others will surely be following.

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