SearchIran's Futile Gesture Mirrors Venezuela's Economic Idiocy

Iran's Futile Gesture Mirrors Venezuela's Economic Idiocy...
forbes.com 24/04/2018 Economy

Keywords:#AP, #Ali_Khamenei, #American, #Ayatollah, #Ayatollah_Ali_Khamenei, #Enterprise, #Forbes, #Forbes.com, #Great_Satan, #Health, #Iran, #Iranian, #Islamic, #Islamic_Republic, #Khamenei, #Nicolas_Maduro, #Supreme_Leader, #Tehran, #University, #Venezuela, #Washington


By Simon Constable , Contributor
Iran's leaders seem to have contracted a case of economic idiocy.
Let's hope it's not infectious.
Mid-April, the Islamic Republic announced it would start to denominate its holdings of official assets in euros instead of U.S. dollars.
The news comes during a period of fast-deteriorating diplomatic relations between Tehran and Washington, which makes the currency denomination change look like a way for the Iranian leadership to snub the U.S.
Unfortunately, for people of Iran, the decision would seem to be both futile in the near term and one that would auger yet more pain for the already beleaguered economy in the future.
Iranian supreme leader Ayatollah Ali Khamenei (Office of the Iranian Supreme Leader via AP)
Iran's announcement seems as ridiculous as that of Venezuela's socialist leader Nicolas Maduro. In March that country decided to tackle the nation's wealth-withering hyperinflation by eliminating three zeros from the currency, the Bolivar. As one might expect, it had little if any effect on the inflation, but it did serve to expose the regime as patently illiterate in matters of economics.
Since, I wrote about the matter, late last month, Venezuela's inflation has jumped from an annualized rate around 8,000% to almost 19,000%, according to data from Steve Hanke, professor of applied economics at the Johns Hopkins University, and an expert on hyperinflation. He tweets the data regularly. See details here.
https://t.co/bICO7NTfrcpic.twitter.com/G4ANaBe5zL
Iran echoes Venezuela
Iran's new move seems just as empty as Venezuela's. It's well known that Iran sees the U.S. as "the Great Satan." But deciding to denominate the country's reserves in euros, rather than dollars as do most do most nations, doesn't change much either for Americans or for the residents of Iran.
If you doubt that, then consider how I calibrate my height. If I measure in centimeters instead of inches, then am I suddenly taller than I was previously? There are more centimeters in my height than there are inches. But still, I am no taller than I was before. If I sum up my wealth in dollars and convert the values on a balance sheet into euros, then has anything actually changed to my net worth? I think not.
Likewise, changing the denomination from dollars to euros will do nothing to curb Iran's inflation. The country's inflation problems aren't as severe as Venezuela's, yet. But at close to 60% a year, (Hanke's estimate from mid-April) the problem isn't good, and it's making life increasingly hard for country's people. Remember, inflation inflicts real hardship when the dwindling purchasing power of money means households must cut back on necessities such as food and electricity. The inflation comes on top of a youth unemployment rate of close to one-in-four (24.4%), according to data from TradingEconomics.com, which reflects official statistics and therefore may understate the true size of the problem.
Is there worse in the pipeline?
However, the matter could get even worse. That will happen if Iran's leaders decide that denominating national accounts in euros is but a mere way station on the road to selling oil in exchange for euros rather than dollars. Oil is the country's primary export. That could be an economic disaster in the making.
Such a currency switch would be an economic disaster in the making for Iran.
The reason is simple and perhaps best looked at through the lens of why many oil-rich countries make sure that their currency moves in line with the U.S. dollar and not the euro. In other words, oil-rich economies, such as those in the Gulf Cooperation Council, peg their currency to the dollar.
The dollar moderates the effects of the up-down oil cycle on the economy of an oil exporter
The overall effect of adopting the U.S. dollar is to reduce the economic impact of the boom-bust cycle of the oil industry. It works like so:
The value of the dollar and the price of oil (in dollars) are inversely correlated to a high degree (around minus 80-90%). When the dollar goes up in value, the cost of a barrel of oil tends to decrease. That means that when the revenue from pumping a barrel of oil falls, the dollars gained from the sale buy more in the global market than they did previously.
When the dollar falls, then the price of oil tends to increase. And although there are more dollars gained in the sale of the oil when that happens, it is also true that the greenbacks won't buy as much as previously. In short, the gains of one part of the equation are offset somewhat by the other part.
The euro exacerbates the effects of the up-down oil cycle on the economy of an oil exporter
However, when a country adopts the euro (which is the second most important currency in the world after the dollar), then the effects of the boom-bust oil cycle are not moderated. Instead, the ups and downs are exacerbated. When the dollar rises, the price of oil falls, and so does the value of the euro.
Any oil-exporting country that adopts the euro as its currency (either literally or through a euro-peg) will find that when oil prices are high, then the value of the euro will be high. It will be a double economic boom. Likewise, when the price of oil is low, it will coincide with a weak euro for a much more severe economic downturn than would otherwise occur.
Few economists would suggest that any country should adopt a system that is almost guaranteed to make the economic cycle more pronounced than it would be otherwise. And yet, that's precisely what pegging Iran's money to the euro would do for Iran, at least for as long as oil is essential to Iran and the global economy.
Whether the country's leaders do that is another matter, but the country's recent history of economic mismanagement suggest that hatred of the all things American may outweigh practical issues, such as economics.
Simon Constable | Author | Broadcaster | Journalist | Commentator | Speaker. I'm a fellow at the Johns Hopkins Institute for Applied Economics, Global Health and the Study of Business Enterprise. My first book, The WSJ Guide to the 50 Economic Indicators that Really Matter, which I coauthored with Robert E. Wright, was an economics category winner in the 2012 Small Business Book Awards at Small Business Trends. It has sold over 80,000 copies in multiple languages.

---The matter could quickly get even worse if Iran's leaders decide that denominating national accounts in euros is but a mere way station on the road to selling oil in exchange for euros rather than dollars. ---
...

Read more from Source »

Related articles based on keyword density
IRAN NUCLEAR TALKS STUMBLE, EXTENDED UNTIL JULY ...
hosted.ap.org 24/11/2014 News
BY MATTHEW LEE AND GEORGE JAHN ASSOCIATED PRESS VIENNA (AP) -- Still facing significant differences between the U.S. and Iran, negotiators gave up on...View Details»

GLOBAL TOP 1000 WEBSITES 2016 – Ratak IT...
ratak.ir 16/03/2017 News
Ratak introduces global Top Websites of 2016 Data for table Top201702 1 1host2u.ir 1host2u.ir,Abarkooh,Armenia,Bahram 2,Bahram 3,Britain,Caesar,Carus,...View Details»

Media Scam? Iran and America Join Hands in Waging “The Global War on T...
globalresearch.ca 01/07/2014 Politics
By Prof Michel Chossudovsky Global Research, June 21, 2014 Following the incursion of jihadist rebels of the Islamic State of Iraq and the Levant (IS...View Details»

The Woman Shaping Iran’s Oil Future - Bloomberg Business...
bloomberg.com 14/01/2016 People
Can Elham Hassanzadeh get Iran’s oil flowing again? By Peter Waldman *** Elham Hassanzadeh, in Tehran.Photographer: Fatemeh Behboudi for Bloomberg B...View Details»

Tehran International Conference on Disarmament and Non-Proliferation...
1host2u.ir 17/04/2010 History
(Wikipedia) - Iran convened a conference titled "International Disarmament and Non-proliferation: World Security without Weapons of Mass Destruction" ...View Details»


EOF