Hyperinflation – Iranian Style

I’ve been getting a lot of emails and questions about Iran’s sudden spiral into hyperinflation. It actually hasn’t been that sudden, but it appears that way. In my opinion, the situation in Iran proves many of Monetary Realism’s core understandings exactly right. I’ll try to keep this brief, but to the point. Monetary Realism offers us a set of principles that help us better understand the economy and the monetary system as a whole. We begin with an institutional understanding of the macro “machine” and then dig down into the pieces of the machine. At the core of these understandings is learning how resources are the lifeblood of an economy. And an economy lives or dies on the way these resources are exchanged and produced. As I’ve previously mentioned, at the end of the day the economy is really nothing more than a system of flows much like the human body. The body either grows and nourishes itself through these flows or it perishes.

One of the keys to understanding this is understanding what Monetary Realism refers to as “acceptance value” and “quantity value” with regards to how a currency regime operates and is sustained.  Acceptance value represents the public’s willingness to accept something as the nation’s unit of account and medium of exchange.  Quantity Value describes the medium of exchange’s value in terms of purchasing power, inflation, exchange rates, production value, etc.  This is the utility of the “money” as a store of value.    While acceptance value is generally stable and enforceable by law, quantity value can be quite unstable and result in currency collapse in a worst case scenario.

Understanding these concepts is crucial to understanding the monetary system.  While a government can name whatever it wants as its currency it cannot force its citizens to use that currency.  That is, the government cannot control quantity value.  It can control acceptance value to a large degree.  It can even enforce it aggressively and maliciously as Robert Mugabe often did in Zimbabwe when his currency was crashing around him.  But a powerful regime cannot give a currency value merely by willing it or by enforcing it.  Monetary Realism shows us that resources precede taxation and that capitalism makes socialism possible.  Ie, a government cannot moves resources to the public domain if the resources are not in the private domain to begin with.  And an increasingly healthy and expansionary private sector allows the citizens of that nation to use this strength to potentially move more resources to the public domain for the (potential) good of the nation as a whole.

So, what does this all have to do with Iran?  Well, Iran is a classic case of an economy that is built around a single resource – oil.  And their dependence on this one resource makes them a very weak currency issuer.  They cannot be considered a fully autonomous currency issuer by virtue of the fact that their economy requires them to be far too dependent on the kindness of strangers.  And the strangers in this story don’t like Iran too much.  As Professor Steve Hanke notes in this Financial Post article:

“Since the U.S. and E.U. first enacted sanctions against Iran, in 2010, the value of the Iranian rial (IRR) has plummeted, imposing untold misery on the Iranian people. When a currency collapses, you can be certain that other economic metrics are moving in a negative direction, too. Indeed, using new data from Iran’s foreign-exchange black market, I estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation.

When President Barack Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in July 2010, the official Iranian rial-U.S. dollar exchange rate was very close to the black-market rate. But, as the accompanying chart shows, the official and black-market rates have increasingly diverged since July 2010. This decline began to accelerate last month, when Iranians witnessed a dramatic 9.65% drop in the value of the rial, over the course of a single weekend (Sept. 8-10). The free-fall has continued since then. On Oct. 2, the black-market exchange rate reached 35,000 IRR/USD — a rate which reflects a 65% decline in the rial, relative to the U.S. dollar.”

Now the Iranian economy is collapsing around the collapse of its resources.  And its government is collapsing as well.  It is powerless to control the people trying to escape the Rial into safer currencies.  In short, what we have here is a classic collapse in productive output.  As I noted in my paper on hyperinflation several years ago, this phenomenon is “more than a monetary phenomenon”.  This isn’t just a story about a corrupt government.  This is a story about an economy built primarily on the back of one unstable resource.  You didn’t need money printing to cause the inflation.  You just needed a collapse in output.  And once the productive output of an economy is gone there is really no purpose for that monetary system to exist.  The result – death of a currency.

For more on hyperinflation please see our understanding hyperinflation section.  



Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Nice.

    Has the Iranian government been printing money (at a higher rate than in the past) as well? If not, this could be a clean cut example for showing people how important productive capacity is for inflation.

  2. I think you need to be a bit clearer here. If I understand the situation right the government is losing massive revenue through the oil sanctions which has resulted in a loss in USD reserves which has made the central bank in Iran unable to defend the foreign exchange value. The ForEx value is declining and leading to a lack of confidence in the broader economy and leading to hyperinflation.

    So yes, it’s a problem of output, but it’s much more specific than you make it seem. This is a case of a major government revenue source going dry and forcing the central bank to print Rial to fill the gap in lost revenue sources. Isn’t this real monetization?

  3. Any guesses how this plays out? Other than the regime giving in to western demands (or possibly falling?), the wild card might be China.

    Could they step in to backstop the Iranian economy in exchange for preferred pr exclusive access to Iranian oil?

    I feel no love for this regime, but the instability here adds to my general feeling of apprehension.

  4. I’m actually not sure. I know tax receipts have declined as a result of the lost oil revenue, but I can’t find much accurate data on Iran’s economy. My guess is the CB is printing to make up for the losses. And that it’s all exacerbating the situation. But I can’t be certain and it’s really hard to find specific data. We know this stems from the loss of oil revenues though due to the sanctions so either way this is an issue that begins with worries over resources and output and spreads from there.

  5. The guy to talk to on this is Ramaman. He’s been talking about a scenario exactly like this for years. Everything he’s been discussing is basically happening here. Maybe he’s around?

  6. I like your description of acceptance value and quantity value, but cannot this be more intuitively described as supply & demand? Acceptance value for money is demand, quantity is supply. So if I understand you right, demand is high and stable in normal times, but can suddenly drop leading to hyperinflation. A drop in demand can be caused by a shock to production making money less useful. In away it seems the excess supply of money compared to goods that makes the demand for such fall, so supply affects demand in this case.

  7. I think phrasing it as supply and demand confuses the key concept which is to highlight the fact that a govt can control acceptance value (the laws and structure that define what a specific currency is) while quantity value is primarily controlled by how the private sector uses the currency.

  8. History has shown that strong regimes can survive hyperinflation. Zimbabwe is one example. North Korea another. Iran is having hyperinflation because they are not self-sufficient in food. They must import huge quantities. The whole point of the sanctions is to force a currency collapse. Of course China or Russia could help them out, but those countries are not known for their generosity. China keeps N Korea at a subsistence level, and there is no reason to think they would do much more for Iran.

  9. @Colin: wouldnt China be violating sanctions? with other countries US and Europe used the banking system to shut it down. So could china transact solely in yuan? and bypass the clearing system that other currencies use?

  10. The Iranian central bank can’t defend the currency because they can’t obtain foreign currency reserves. So they’re printing money and its causing hyperinflation. It starts with oil, but it ends in money printing.

  11. While it is true that the economy’s high dependence on oil revenues (+85% of the USD supply comes from oil revenues with less than 15% from exports of other goods and services)may have hit the rock bottom after the addition of pressures from sanctions, the problem seems to be partially an internal issue in the government leaders trying to oust Ahmadinejad from the position of power.

  12. Nice post MR C..

    I guess the addage that “Money Is Trust” holds true. Notice where people are putting thier trust? Into USD over there.. Haha, it’s funny how people in times of good burn the American flag, and in times of bad look to America and the green back with trust in thier life savings..

  13. They can’t obtain foreign reserves because they have very little production other than oil that the world wants. It all comes down to production.

  14. The reason why people are turning into USD is that the major revenue source for the government – OIL- trades in USD and it’s one of the most popular currencies available in the market. Other currencies in large volumes especially are tougher to find.

  15. I believe China and Russia have both been less than enthusiastic about sanctions – and I’m not sure what the west could do about it if they chose to ignore them.

    (Russia does not have the financial resources that China does, and as an energy producer, they benefit from the boycott on Iranian oil, whereas China needs to import oil – and they don’t import it from N. Korea; they provide it to them.)

    China has plenty of dollars as well as Yuan, and could also provide eg food aid directly. They could justify the action by portraying sanctions as driven by support for Israel.

  16. And why is most oil traded in USD? Because the USA is the dominant currency in the world due to….wait for it…being responsible for 30% of world output….Weird how money as a tool keeps coming back to the output it can buy.

  17. Yes! But I’d keep it even simpler than that. Fiat money is a tool of exchange backed by the output it can purchase. When Iran’s primary export and most important resource became difficult to purchase with Rial’s the currency started to collapse.

  18. That’s true. No matter how much more quantitative easing uncle Ben does, USD will remain 1000 times more reliable for Iranians that Rials.

  19. PS: The Chinese would not want to alienate the Sunni Arab oil producing states – who generally oppose Shi’ite Iran, but also must be very nervous about instability just across the Gulf (and most have large Shia minorities in their oil producing areas).

    Add in the Syrian situation – the regime there with its Alawite base, a Shia offshoot, is a major Iranian client/ally and the conduit for its support for the Shi’ite Hezbollah in Lebanon (with Turkey and Israel also next door), as well as hosting the only Russian base in the region – and the picture gets very complex and unstable. China typically proceeds cautiously and methodically, but who knows what they are making of all this.

  20. Great piece. Perhaps this deserves a cross posting at MR?

    Also, you and I have different defintions of “Simpler”

  21. Hyper-Inflation ? A drop of 65% in the exchange rate isn’t Hyper-inflation. It’s Deflation (=a contraction of money and credit). I doubt whether Iran has a large and viable credit market. Yes, if the iranian central bank would resort to literally printing money (and I am sure they will do so in the near future) then and only then Iran will experience Hyper-Inflation. NOT now.

  22. Still drinking the “30% of world’s output” kool-aid ?

    The USD is the dominant currency because most if not all commodities are priced in USD. And that’s a legacy of the fact that up to say 1950 the US was, among others, a major oil exporter. Anyone who wanted to buy US produced oil was required to have USDs.

    Oil priced in USD has allowed the US to live way above it means since the early 1960s. If for example, the AUD had been the world’s reserves currency then the US economy would have been about 50% of its current size.

  23. “Has the Iranian government been printing money (at a higher rate than in the past) as well? If not, this could be a clean cut example for showing people how important productive capacity is for inflation.”

    Of course, its also very likely the CIA and the Israelis have gone into the counterfeiting business in a big way.

  24. Add to that the stock of money created by US and Israeli counterfeiting (unreal monetization?).

  25. I would never try to drink that much kool-aid. Do you even know how much kool-aid $16T could buy? A LOT. I’d have cavities and diabetes in no time!

  26. Cullen, what data are you referring to when you say the U.S. is responsible for 30% of world output? I’ve seen the U.S. share of global GDP cited as ~25% in recent times. Note to split hairs but just curious if you are citing another metric? Thanks

  27. Meant to post this down here:

    Cullen, what data are you referring to when you say the U.S. is responsible for 30% of world output? I’ve seen the U.S. share of global GDP cited as ~25% in recent times. Not to split hairs but just curious if you are citing another metric? Thanks

  28. Totally agree, and I certainly do not dispute your point. Just wanted to make sure I wasn’t missing something. Thanks for the prompt response.

  29. Um, the price of milk in Tehran rising 9 percent in one day is an example of deflation? Strange definition. Even the Speaker of Parliament estimated that inflation was 29%. Last week. http://ftalphaville.ft.com/blog/2012/10/04/1191231/from-gresham-to-giffen-in-iran/

    Iran needs to import food, etc. As Cullen points out, in the past they paid for these imports by essentially selling one product to the world that the world has decided not to buy. Why the USD is a reserve currency is irrelevant here, nobody is going to sell anything to Iran in exchange for Rial. Oil is being taken off the menu, so what would a food exporter then buy with those Rial? The currency is worthless to other countries if the sanctions hold.

    So Iran then has two choices:
    -stop importing food, etc.
    -print ever more Rial to maintain at least a trickle of imports into the country.

    Either way there is a crushing shortage of basic goods, and… hyperinflation!

  30. I think a more macro look would say where would the worlds GDP be if America ceased to exist? China was nothing until we opened the door for them, In fact over the last 60+ years America one could argue was responsible for 70+% of the worlds GDP.
    Perhaps not directly but I would offer certainly indirectly.
    Heck look at all the Jobs born in America that have left for Asia, South America, Canada that are still contributing to world GDP.
    Just somthing to think about.

  31. the hypothesis appears to be a currency derives value from the output it can buy. And USA has the lions share of world output.

    Then why when you click here, there are 13 currencies worth more than the USD?

    The Jordanian Dinar, seriously? Seems to contradict hypothesis above.

  32. A high foreign exchange rate doesn’t necessarily mean the economy is better. There are too many moving parts in an exchange rate to make such sweeping claims. For instance, the Swiss central bank has pegged the Franc at 1.20 vs the Euro when in reality it should be much higher relative to the Euro. What does that tell us? It tells us the central bank is manipulating the currency. That’s about it. Countries often peg it lower to make the country more competitive even though it should be much higher. That doesn’t tell us anything except that the exchange rate isn’t the market price. Given that all central banks are in the business of manipulating the value of their currency I don’t think it’s fair to make such broad claims.

  33. I am still searching for a weblink to an article that accurately describes how oil priced in USD benefits the US.

    A LOT OF articles only “scratch the surface”. Anyone who wants to know should GOOGLE the word “PETRODOLLAR”.

    William R. Clarke, “Petrodollar warfare”.

    Other folks who know what’s going on:
    F. William Engdahl
    Michael Hudson


  34. I don’t think stopping the food/medicine import is a viable option – with 95% of the population near or at poverty, something as basic as bread requires importing wheat and sadly even the price of bread has grown so much that it’s becoming inaccessible for many – So in a way, the sanctions are like a genocide against the innocent citizens.. YTD, the currency has lost 75% of its “value”. It’s really sad and really easy for us to just sit here and judge the situation from afar.

  35. In Iran, money = oil. Now that the world will not accept its oil, it has no money.

  36. I’d say the Fed is in the business of manipulating Treasury rates, but not really the currency. The Swiss Franc manipulation scares me. Hopefully it ends well, but I wouldn’t bet on it.

  37. Cullen

    Why has the US dollar gone down so much in recent years. Is it because their “output” has dropped and/or the effect of QE. Can you give me a perspective here. Thanks!

  38. I did some simple math with 2011 numbers from the IMF. 23% for the US and(drum roll please…..) 25% for the EU. Meanwhile, ‘culture and histories of conflict’ prevent fiscal unification…

  39. Dont think Ramanan has done anything on Iran that ive seen (I might be wrong though) rather a unique situation as they have been kicked out of the Intl banking system, accounts frozen etc. I do a lot of biz with Iran (all legal i might add) and its difficult nowadays.

    The issue here seems to be the forex black market in Iran itself. So cant really see where his models would apply?

  40. Thanks internet friend!

    Can you pop over to the bridge and ask Roman to get the early matches changed to later times? Those earlier matches are 7:45 am my time, and I ALWAYS enjoy a magners or two while watching the Blues. I don’t like feeling like the words largest alcoholic….

  41. when India tried to bypass the sanctions, US and Europe threatened the banks that were part of the transaction. If the Chinese used one of their own banks to buy cheap Iranian oil with their dollar deposits, the transaction may not even show up on the world banking radar. I dont understand the banking system at the global level well but it seems like sanctions could be more effective if the world banking system was less porous.

  42. Paris, Choices have consequences, their human nature chose the regime they have in place back in 79. So they Can Reap What THEY Sow.. Now you can argue that we Americans were part of the problem by supporting the Shaw, But the basic questions of life are really as Patrick Henry said, give me Liberty Or Death. Why is that So difficult for people to gather?
    I Know why, It’s one of a spiritual nature that talks/ deals with man being of a two part being.. Both an Animal of physical nature and a Spiritual Creature of the heavenly realm. However, we have allowed the carnal nature of man so assert himself into our being that we are devoiding ourselves of our dual nature.

    I think thogh in the end, the ship will wright it’s course.

  43. Could one make a similar MR analysis of the Argentine situation? A few years ago it looked like their deficit spending was making positive impacts on people’s lives. (They had more time?). But now things seem to have gone terribly wrong (See the Eonomist story this week).

  44. Vincent, isn’t Japan already past this statistical point of return you state?
    “Hyperinflation is a market response to government debt over 80% of GNP and deficit over 40% of spending”

  45. I’ll have to research the specifics in Argentina some more. I know many of the LatAm hyperinflations in the last 25 years have been due to pure govt ineptitude. Remember, MR doesn’t necessarily say govt spending is good or bad. It just describes how a nation can and can’t utilize certain institutional structures for its benefit.

  46. This fella: Djavad Salehi-Isfahani an Irania born Havard edumicated professor talks about a tierd or “multiple exchange rate system” thus allowing the Govt to exchange it’s reserves at a much discounted rate vs the private money exchangers rates.

    This multiple exchange rate system allows the iranian Govt to support Chickens in every pot for the poor masses in order to maintain cotrol over the largest part of the populace, the poor. he says they pain is inflicted on the rich and middle class. He says the sanctions are only giving the regime more poower over the populace. Pretty good read, not sure how accurate he is but interesting.


    He posted a furthur clairification on his blog:

  47. I agree totally. We’re just trying to figure this out. I just thought your Iran MR study and these comments were very good at understanding fiat currency in Iran and how it’s going down the tubes and trying to figure out why. Maybe you could start up a similar MR study of Argentina. It is a bit off topic here anyway….

  48. Exactly.. with the sanctions severely reducing the supply of needed imported food, the shortage of food & other needed imports severely causes huge inflation

    The US is the largest exporter of food to the world (and the EU & Australia & South America also exports large amounts of food) that Iran is no longer getting

    Hyperinflation is more caused by shortages & low supplies of production(in this case, food) & NOT gov money creation.

    Originally, even in countries that had trade sanctions like Iraq, the US allowed US to export food/medicine to them (and most of Europe never restricted food/medical trade to Iraq either)… but not in this case, severe sanctions like this also cuts off food/medical to Iran

  49. Cowpoke,

    I don’t support the poeple who voted for the change in the regime back in 79 but I also happen to know that their ignorance and lack of knowledge in what the new leadership would bring + unhappiness with the monarchy (Shah) were both reasons why people wanted change at the time. It happens all the time in all countries still to this day. People making promises they don’t deliver… At the time, people were thinking any change is good but they were wrong.

  50. Yep, Japan is at 200%+ debt…and Singapore is at 118%+ debt.. both govs have their own soveriegn currency they issue that’s floating exchange non-convertible currency (ie, like the US, Australia, Canada & opposite that of EURO)

    …they also have greater deficits & have 4% to 5% unemployment & low 0% to 2% inflation & mostly positive GDP growth (but low because their deficit spending is still too low) ..

    and all for the past 10-15+ years…

    if you count China’s $1-$2 trillion in yearly loans to fund their infrastructure projects & factories/construction in various industries by their gov banks as deficit spending(money creation), then China’s debt/deficit levels tops them all

  51. Argentina has commodities food prices increasing (speculation as well as increased demand/decreased supply to record drought wsince commodities prices are now sold on the world market)
    due to huge demand for meat & soybeans (which it exports) and the fact, which figures into it’s inflation since it’s also suffering from drought as is the rest of China & Russia (so is the US.. record drought & heat in most places in the world)

    (CHina & Russia is suffering from record drought & heat, which is causing shortages & them importing more & increasing prices for meat & soybeans.. ie, increased demand & competition for the same commodities that Argentina is used to getting for cheap..

    Argentina producers can export for greater profits than sell domestically, reducing domestic supply.. this also increases domestic money supply, exacerbating the situation.

    …Also, the commodities market, like oil market, has seen huge rises in prices ever since deregulation allowing speculators to bid on prices & contracts (who’s profits are rolled over & reinvested in the same commodities) ever
    the Futures & Commodities Act of 2000 that went into effect in 2001 (it was signed by Clinton in December but pushed by mostly Republicans & libertarians like Alan Greenspan, especially Republican Senator Phil Gramm, who added more riders that banned regulation of derivatives & Credit Default Swaps also)

    In related commodities news, In the 1990s, gasoline was so cheap (50 cents to $1.50 a gallon) & low profits that the gasoline companies closed down ~300 refineries to cut the supply of gasoline & thus increase profits by reducing supply..

    a few years ago, Chevron tried to close down another refinery to further reduce supply (and increase profits) in California in Bakersfield because they claimed they couldn’t find a buyer until Democrats intervened & found a buyer within 1 day. LOL

    Documents unearthed by reporters & stored at theMemoryHole.org (whistle-blower site, google it) showed gasoline memos & emails discusingg price manipulation since the 1990s & decreasing supplies on purpose to increase prices (and profits)

    In any event, OPEC is a huge cartel/oligopoly of oil-producing nations (mostly Middle Eastern) who meet every couple of months to set prices & have publically stated their target price is at least $80-90/barrel
    they thus set production levels to maximize profits by cutting supplies if they feel prices/profits are too low (ie, a few years ago, they cut production by about 5 million barrels a day)

    In the 1970s/80s, they cut production by 15 million barrels a day (which led to 400% increases in gasoline prices & huge inflation/stagflation in the 1970s/eary 80s until the US switched from burning oil for electricity to natural gas instead).

    Western oil companies like Chevron/Exxon,etc don’t really care since they have revenue-sharing agreements with OPEC/oil-producing nations (ie, they get a percentage of the price so the higher the price, the greater profits for oil companies too) since they partner with OPEC

    And as you stated, the US actually exports oil to other nations

    The major reason why oil prices skyrocketed after 2001 is that the Futures & Commodities Act of 2001 (and further deregtulated in 2003 & 2004) allowed speculators to bid & jackup oil prices..

    before that, only those who would actually use oil (such as airlines, railroads, refineries, heating companies, etc) could bid & buy oil contracts.. nowadays, investigative reports by multiple newspapers, MSNBC,
    gov show that over 70% of oil contracts are owned by speculators & sovereign wealth/hedge funds (who buy it like gold/house flippers to speculate on the premise that oil prices will go up,
    which is a self-fullfilling prophecy as they roll-over & re-invest & buy more oil contracts)

    …before 2001, those funds/speculators were banned from doing so & driving up prices…

    more so, those sovereign wealth/hedge funds are often owned by OPEC & MiddleEast investors/countries! (ie, they are bidding up prices on their own oil contracts!)

  52. here’s related very informative article on Argentina:

    “World’s Worst Central Banker?”

    OK, I know you think this is yet another critical column on Chairman Ben Bernanke.

    Nay, I just returned from a conference held by the Central Bank of Argentina—“Central Banks, Financial Systems and Economic Development” held in Buenos Aires on October 1st and 2nd. Yours truly gave a talk on Modern Money—and the powerpoint will appear below (not magically—I’ll probably need professional help so your patience will be required).

    In attendance were what appeared to be about 200 central bankers from across the globe, plus a smattering of reps from international financial institutions like the IMF and as well a few from academia.

    An unusually large number of presentations were given by economists who can loosely be charged with heterodoxy: Jamie Galbraith, Anwar Shaikh, Stuart Holland, Jane Knodell, Jayati Ghosh, John Weeks, William Lazonick, Dirk Bezemer, Fernando Cardim de Carvalho and many others.

    What the heck was this motley crew doing at a Central Bank conference? One cannot imagine them at Jackson Hole.

    Well, here’s the deal. The head of the Argentine Central Bank—Mercedes Marco del Pont–has been awarded the distinction as “the world’s worst central banker” (http://www.businessinsider.com/the-10-worst-central-bankers-in-the-world-2012-8?op=1).

    By whom, you might ask? Well, by Wall Street’s sycophantic press. Wall Street hates Mercedes. The woman, not the car.

    Why? Well, for one thing she’s a woman. Wall Street hates female heads of central banks (take a look at the list of the top ten worst—3 out of 10 are female; then take a look at the 10 best, of which all but one are males.)

    But that’s not anywhere near the most important reason. Ms. Marco del Pont kicked off the conference with a rousing talk, defending her central bank’s recent move away from a single mandate (inflation target) to pursuit of multiple mandates: financial stability, employment creation, and economic development with social equity.

    Boy does Wall Street hate that.

    Stability? Where’s the profit in stability? Employment creation?—Wall Street is a job destroyer.

    Economic development? Nay, Wall Street wants de-development, a return to a feudal economy as finance plays the role of wealth-extracting feudal lord.

    Social Equity? You’ve got to be pulling my leg. Wall Street is overseeing the greatest concentration of wealth in the hands of the new oligarchy that the world has ever seen.

    No wonder they hate Mercedes.

    Moi? I’ve seen the perfect replacement for Ben Bernanke when his current term ends. I do not know whether a foreign national can be picked to head the Fed, but if not we ought to be working on removing the restriction.

    Governor Marco del Pont’s presentation was the most eloquent defense of the multiple mandate that I’ve seen.

    She laid out the need to rethink the role of central banks—to push them to directly provide finance for development and to ramp up their historic role of cooperating with the treasury to finance needed public spending.

    When she mentioned her “award” given by the lapdog press, she clearly relished the battle. Later that evening I (unfortunately) was seated at dinner with a former IMF economist, now a central banker in India.

    He confidently predicted that Argentina will be “kicked out” of the IMF any day now because of the incompetence of its government and especially of its embarrassing central bank.

    (Sure enough, the IMF’s Christine Lagarde has threatened a “red card”—soccer speech for expelling a player—to which Argentina’s feisty President Kirchner replied: “My country is not a soccer team. It is a sovereign country and, as such, is not going to accept a threat.” http://www.foreignpolicy.com/articles/2012/10/04/argentinas_deadbeat_mom If there is anything Wall Street hates more than a country with a female Governor of its Central bank, it is a country that puts women in charge of both government and the central bank!)

    My immediate thought as I listened to the Indian central banker’s smug assessment of Argentina’s fate: that’s like being kicked out of a motorcycle club or drug cartel for insufficiently enthusiastic raping and pillaging of innocents. There are some clubs you just don’t want to be a member of.

    The twinkle in the Governor’s eye told me she appreciates the irony that her central bank’s concern with the 99% is what makes her incorrigible in the eyes of the IMF’s flunkies.

    (Oh, and as an aside, this IMF official/India Central Banker went on to claim there is no longer any poverty in India, that the caste system is actually a thinly disguised scheme for social advancement—sort of like Aristocratic Polo Clubs for everyone–and that India is the greatest land of opportunity the world has ever known, with all Indians “free to choose” whether to be rich—or poor—according to individual tastes, and thus the globe’s most perfect example of democracy to which all others ought to aspire.

    Such is the ecclesiastical orthodoxy we mortals encounter in central banking circles.)

    So what is the basis of the international attack on Argentina, aside from the fact that its leaders are thumbing their noses at the IMF? Well, Argentina has “high” inflation. How high? Well, it depends on how you measure it. The government’s numbers come in around 10%; the right wing press claims 25% or so.

    To be sure some of this is just about measurement: inflation is measured as growth of some price index so it matters critically what you put into the index, how you measure inflation of the individual components, and what weighting you give to each.

    This always surprises students—who think that the CPI numbers are handed down by heaven.

    In truth, they are constructed, by fallible humans, and are always subject to controversy. (If you want to read up on construction of the USA CPI, you can take a look at this: http://www.levyinstitute.org/publications/?docid=302)

    But here’s the more important point. Argentina has been growing very quickly since its financial crisis in the early 2000’s.

    It abandoned its currency board fix to the US dollar, it adopted a job guarantee program (Jefes), it defaulted on its dollar-denominated debt, and it told the IMF to take a long hike to hell.

    Rapid growth was thus inevitable.

    Unemployment and poverty plummeted and living standards rose.

    The currency stabilized and wages and prices started to inch up.

    More recently, the global commodities boom that resulted from Wall Street’s speculation drove up prices of Argentina’s main commodities outputs: soybeans and beef.

    These are both major exports and major components of the domestic consumer basket.

    Believe me, an Argentinean without massive quantities of beef served at the table at least three times a day is not a happy Argentinean.

    It is thus understandable that Argentina faces double digit inflation; indeed the result was entirely predictable. Imagine that your country is both a producer and a major consumer of a scarce commodity—say gold.

    In a speculative boom, gold prices rise quickly but that does little to quell domestic demand for gold. Indeed, as prices rise, domestic consumers bid prices ever higher as they try to get their share of output.

    Government policy will most likely turn against exporters due to the political necessity of conserving a share for local consumption.

    And then imagine that a natural disaster (earthquakes destroy some of the mines) reduce local supply. Inflation and some degree of social discomfort would be inevitable.

    That’s more-or-less what happened in Argentina recently, as bad weather reduced soy and beef output. (And politics made the shortages worse by further restricting supply.)

    Rising global prices as well as falling domestic output (and thus employment) squeezed consumers who insist on keeping beef in the consumer basket.

    It is not at all surprising that Argentina is experiencing inflation—somewhere between 10% and 25% depending on how you measure it and who you believe. And that consumers are pissed.

    But inflation will come down quickly. Prices are up mostly due to global speculation in commodities. I’ve written about that before—this is by far the biggest commodities speculative bubble in human history—so won’t go into it here except to say that what bubbles up to record highs will collapse into unfathomable lows. Presto-Change-O, Governor Marco del Pont’s main thorn in the side disappears.

    (To be clear, I do not think the road ahead will be free of bumps. The coming next great recession in the developed world is going to hurt Argentina’s exports so it has got to find sufficient domestic demand to replace that.)

    At the end of the conference, Argentina’s Vice President Amado Boudou joined the Governor to defend the maverick approach taken by Argentina’s government. He insisted that the Governor at the helm had brought a “breath of fresh air” to the central bank.

    He recounted his recent attendance at a G20 conference on “new ideas” at which he proclaimed there were no new ideas. He also ridiculed the currently fashionable view that central banks must focus only on preserving the “value of the currency” through inflation targets: a money anchored to the bottom of the sea will cause the boat to sink in the first serious storm.

    What really counts, he rightly insisted, is unemployment: with higher unemployment you get more debt, more poverty and less economic growth. That is why you need jobs, not single-minded devotion to stable prices.

    We are, he said, at a crossroads in economics. Not only in terms of what goes on in the world, but also in terms of how we look at the world. In recent years we have put the financial system in center stage—to our detriment. We need, instead, to put employment and development first.

    And to do that we need to stop listening to the multi-lateral institutions (and, I’d add, to the central banker lapdogs) who offer the same tired recipes that have always failed.

    If Argentina has got the world’s worst central banker, what we need is a race to the bottom.

    The Powerpoint of my presentation should appear below–if not now, then soon: