Yes, gentle readers, I’m back! Been busy the past couple of weeks, traveling and dealing with friend and family stuff. But I’m back, and ready to talk about my favorite topics…

Let’s start with current events in things financial. While the European Central Bank (ECB) and the Fed are doing their darndest to avoid a deflationary spiral, the situation in Iran is quite the contrast. A few weeks ago Ahmadinijad and company implemented a “foreign exchange stock market” that gave vendors the opportunity to exchange their rials for hard currency at about a 2% discount to import “necessary goods”, i.e. meat and other items for which there are shortages.
The government expected this small subsidy to stimulate the so-called “private sector” in Iran to increase the quantities of these goods.

All of this is a reflection of the impact of sanctions placed on Iran last year by the U.S., and subsequently by Europe in July of this year. The sanctions were placed on Iran because of its refusal to abandon its allegedly peaceful nuclear ambitions, as well as its support for terrorist activities. The currency stock market has only been in place for 3 weeks, and has had exactly the opposite effect from the government’s desired outcome.

What is occurring this week is wholesale flight from the rial into other hard currencies – particularly US dollars. The result of this panic and hoarding of dollars is a huge debasement of the Iranian rial – somewhere between two-thirds and three-quarters of its value.

If you go to any website for the “official” exchange rate, it’s around 12,200 rial to the dollar. The going rate in Tehran these days is between 36,000 and 38,000 to the dollar. This equates to an inflation rate of 50 to 60% per month. The impact on the average Iranian is to devastate the value of their savings and buying power. There are stories about college age children being recalled home because of parents’ inability to pay their schooling expenses in the U.S., Britain and Canada. There have been demonstrations in the streets. The bazaar, long a power-broker in the country and supporter of the government, is shut down and will remain so until Saturday.

Picture, if you will, the impact on you as an individual were the same thing to happen here. $12.00 for a gallon of gas. That’s $120.00 to fill the tank of your Honda Civic – $300 to fill your Chevy Suburban!

But that isn’t the biggest problem. If you’re a baker in Tehran, you’re hesitant to quote a price because your next batch of flour will cost 3 times what you paid for the last one. And people have stopped buying meat, because they can’t afford it, so they’re buying bread – that the baker may not be willing to sell.

So what will be the likely outcome of this? The government blames ‘enemies of the state’ and even money changers for the problem, obviously taking no responsibility for the impact of their own policies. Their solution is more government money changers. That would work if they weren’t surrounded by other countries that can supply the hard currency everyone wants. Afghanistan is getting into the act, and I imagine Iraq will in the next week or so. As long as there is panic and dollar hoarding, the crisis will continue to get worse. Where will it end?

Erik the Younger says this will inspire the Iranian government to expedite their nuclear ambitions. I think he’s likely correct. But if the public perception is correct, and there is a shortage of hard currency to pay for the expense of setting up this program – who will help them? The last week in September, the Iranian government said they’d found explosives planted in equipment purchased from Siemens in Germany. Siemens denies they have sold anything to the Iranians since 1979. So obviously the Iranians bought used equipment from Ebay, no doubt using PayPal to pay for it. But even PayPal would cut them off if the exchange rate is so volatile! (OK, small amount of levity here…ahem..)

So I think Iran is on the verge of imploding. All the Ayatollah’s Revolutionary Guards can’t put this genie back in the bottle. Will China and/or Russia step in to help? Not likely – even China is cancelling oil field development contracts in Iran because the contract conditions are too onerous and they can’t make a profit. Are Iranians angry over the government’s sending arms to shore up Assad in Syria? You betcha.

This story will continue for the next couple of weeks. Will it have an impact on the upcoming election? We’ll see – timing is everything. Who will be the big winner coming out of all this? Barak. No, not Barack H. Obama. Ehud Barak of Israel. More about that in the next post!