Yesterday saw the largest drop to date of Iran's currency of around 17% to 3,650 toman. Today it regained some of the loss and was selling for around 3,350 last I checked online. Although there has been confusion as to the price as different websites have quoted varying rates.
I would like to share my views from what I see and hear as a trained business analyst. In Shiraz and as in other cities people are in a state of stress regarding the national currency. They are not sure when it will settle down and if they should actually buy dollars as both a way to cash in on the high returns or just to keep some in the house.
These individuals are your average folks, not any economists or business savvy people. Having said that, life goes on in Iran. There are no panic buyings or rush to grab essentials. That is for many reasons. One major reason is that there are alternative Iranian products for everyday needs. I can practically buy anything in my local supermarket that has a "made in Iran label." Of course, Iran does import raw materials and this has an impact on prices of even Iranian products.
The second reason life goes on is because all Iranian products have a price label indicating what one has to pay for that product printed from the factory. So there are no crazy price increases that any shop owner can push on his customers. Iran learned its lesson long ago with hyperinflation and getting trapped in the cycle of ever increasing prices and required all local products to have this mandatory label. This has helped tremendously over the years to keep inflation in check.
The problem we now have in Iran is panic buying of dollars. This means that we have individuals never buying dollars or needing to buy them entering the market and trying to purchase them. I had a friend last week call me up and ask me just that. He is the son of a bread baker in a small village near Tehran. This is exact type of person I am describing, someone who never in his life before saw a dollar bill. His family lives off the small income they make providing their neighborhood with their local bread needs. They live very sparse and see the least effect of dollar increases on their lives.
That is because they receive government assistance after energy subsidies were removed and they are not the typical Iranian family to indulge in foreign brands that have become more expansive. So they live a comfortable and inexpensive life with their primary purchases of local Iranian products.
Now, why does the Iranian government not simply come out and support the currency, by replacing the free market and selling dollars for the official price of around 1250 toman? The problem we have is even though there are more than enough reserves of foreign currency (estimates of over $100 billion dollars) to do so would mean that Iran would have to pump most of it $75 billion if each person would buy an average of $1,000 or $4,000 for a family of four.
This is a pessimistic estimate as most Iranian families have much more than this saved in their saving accounts. We are a nation of savers. We do not live off of credit or loans. Most people buy big purchases like homes and cars with cash. That is a lot of Iranian cash sitting in banks.
The alternative would be for the government to raise interests rates further which would push out some of these Iranians trying to make money off of the currency speculation. But there is a big BUT and that is this would drive up inflation. So in each of the scenarios there is pressure on inflation.
Now comes the scarier option that the Iranian government has... war. As the Western governments pushed by the US and Israel are salivating at the prospect of economic downturn in Iran, Iran is left with few options. War would be the one option of quickly ending things. The current economic blood letting that is being pushed on Iran is aimed at weakening her to a point in the future where a war would be easier for the West.
Whereby, for Iran to clearly call the West out and tell them that these embargoes are acts of war in themselves and they are ready for a fight would lead to a conclusion either way. Either there will be war or there won't. In each situation the game would change. In a war Iran would by definition of causing damage to the world economy and more damage than what the West can accept would be a winner. Yes, the West could win if they were willing to fight for years and trillions of dollars, but what would they really win at the end? Iran, in turn only has to survive and inflict damage, which it has prepared to do for the last 30 years.The USA Today, made this very clear last week in an article where they
talk about a recent study evaluating Iran's fighting power. "Iran's
high-flying ballistic missiles could overwhelm U.S. missile defenses in
the Persian Gulf, where much of the world's oil passes. Its fast-attack
boats could swarm a warship and sink it. And its fleet of hard-to-find
submarines carry torpedoes faster than any torpedo in the U.S. fleet."
For a country that is often accused of being radicals and reactionaries, Iran has been very subdued in its response till now. While only trying to bypass the sanctions they have not retaliated against them. The US and Israel on the other hand, have been all over the spectrum of reactions. Over the years they have called for crippling sanctions and threatening Iran with almost weekly claims of war. Then they spend a few weeks patting themselves on the back after they agree to new sanctions and then months later call for more of these crippling sanctions to push Iran further.
While often claiming that the average Iranian or the economy as a whole is not targeted (no one honestly believes this) they often claim that their sanctions are having huge impacts on Iran's economy.
The sad thing is that even during diplomatic negotiations they are not willing to accept any deal with Iran. This has been proved multiple times, one major instance was when Brazil and Turkey worked out the exact deal that the US wanted from Iran and the US Administration said no thanks. More recently in Baghdad, Iran offered to stop its higher enrichment of 20% for a start of the removal of sanctions and this too was rejected. What the West wants is complete capitulation.
In my opinion Iran is starting to see this and might just start something that will call for the West's complete capitulation. While the US sanctions have started killing Iranians for the first time, with lack of US medicines only produced there, Iran's final choice will bring about thousands of other deaths and they will not just be Iranians. Very quickly this could develop in a regional and global war as neighboring countries and other big players enter the fight.
The world economy will be heavily damaged as both the US and Europe will fall further and deeper into recession. So before the the West is too comfortable in their glee of the reduced Iranian currency's value they should look at the broader picture and truly decide if they are on the right course.
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