Iran Through The Fire And Flames

That loud imploding noise you heard over the last week or so was Iran's currency, the rial, going KA-BOOM as US and EU sanctions on Iranian oil has all but collapsed Tehran's economy.

The freefall suggests sanctions imposed over Iran's nuclear programme are undermining its ability to earn foreign exchange and that its reserves of hard currency may be running low.

The rial traded at 34,200 per dollar according to currency-tracking website Mazanex, down from about 29,720 on Sunday. It was trading at 24,600 last Monday, according to website Mesghal.

There is no clear sign that economic pain in Iran has reached levels that would prompt the government to compromise on its nuclear programme, which Western nations say aims to develop an atomic bomb but which Tehran insists is peaceful.

However, the currency crisis is exposing President Mahmoud Ahmadinejad to criticism from enemies in parliament.

The rial's losses have accelerated in the past week after the government launched an "exchange centre" designed to supply dollars to importers of some basic goods at a special rate slightly cheaper than the market rate.

Instead of allaying fears about the availability of dollars, the centre seems to have intensified the race for hard currency by linking the special rate to the market rate, meaning that even privileged importers will face sharply higher costs.

"The government's initiative ... brought to the surface a tremendous lack of confidence in its ability to manage the currency," said Cliff Kupchan, a Middle East expert at the Eurasia Group, a political risk research firm. "The attempt to fix it triggered a worse crisis via market psychology."

The rial's sinking value will fuel inflation, officially running at about 25 percent; economists estimate the real rate is even higher. Rising costs could worsen the job losses which Iranians say are hitting the country's industrial sector.

We're not quite to Zimbabwe's 100 billion dollar bills yet in Iran, but things are rapidly getting ugly if the rial is losing 20% in value per day like it did on Friday.  The sanctions are going to hurt the people far more than they are going to hurt the mullahs, and what happens next, well we get into the whole "unpredictable" part of the probability tables.

Imagine if you will that since your last paycheck two weeks ago, the price of food, gas, basic supplies all more or less doubled.  Imagine that the speed of that doubling is picking up pace and that prices will double again next week, then in 4 days, then in 2, then 1.  That's hyperinflation, and that's Iran right now.  Needless to say, the danger level in a situation like that is pretty awfully high.

Is this America's "October Surprise"?  We're about to find out.