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October 2019, No. 92


Management

More Control of Economy:
More Damage to the System!


The important and examinable issue was and is how and when each commodity or group of goods or any investment instrument finishes its price adjustment.


"When the foreign exchange market is controlled, the gold coin futures market is closed, the stock market is not transparent, and the share you have purchased cannot be sold for a long time; it’s natural that people would be directed to markets that have more freedom. One of these markets is the market for goods and the purchase of durable consumer commodities. Both freedom of action in the commodity market is high and its price is increasing.”

Morteza Imanirad, by making the above statement examines the dimensions of durable consumer goods turning into capital in inflationary conditions. The economist insists that “buying and standing in the queue to purchase durable consumer goods does not count as investment for all the people. Most people prefer to meet their needed sooner so as to stay immune from further inflation.”

Of course, he believes that “lack of numerous investment tools is effective in demonstration of such behavior by the people. All instruments of investment such as coins, gold, bonds, promissory notes, currencies and derivative notes have had less return than base and durable consumer goods groups. Therefore, in the absence of other investment instruments, it is natural for people to move towards the commodity market, because they would find no alternative in the market for them.”

Since the last year, markets have been severely fluctuating every now and then and the scope of turbulence has been extended to commodity markets, with the price of some consumer goods rising more than the price of the US dollar. This is to the extent that the price spike in commodity markets is higher than financial markets. What is the reason?

The underlying cause of inflation is the volume of money in circulation. This is a general rule. Therefore, this rule cannot be generalized to all conditions. In 1391-1392 (2012/13-2013/14) and in 1397 (2018/19), the apparent cause of inflation was the increase in the exchange rate. This phenomenon occurred several times in Iran after the 1979 Revolution. It does not need much proof. Changes in prices were made in such a way that first the exchange rate was high, and then the price of goods began to rise in line with the US dollar.

The important and examinable issue was and is how and when each commodity or group of goods or any investment instrument finishes its price adjustment. For example, gold is very fast in terms of time, and the price adjustment at the exchange rate is close to 100%. This is not the case for the building sector. The building sector would have had more than 200 percent price increase in 1397 if it had fully adjusted itself, while the price hike stopped at about 80 percent.

The same thing happened in the stock market. That some investment tools cannot match the US dollar’s changes relates to its pricing structure. For example, because the building sector provides part of its inputs from the inside, it was equally behind the US dollar in price adjustment. That some extract the price of US dollar from the stock market and the building sector, and compare it with the current dollar rates and then conclude that the stock market and the building sector still have room to rise are struck by a methodological mistake.

The adjustment coefficient and the adjustment time for each of these sections are different. What we experienced in 1397 was first an increase in the rate of US dollar which has its own reasons, and secondly the adjustment of investment instruments with that increase. But contrary to 1392, when the US dollar began to decline, up to the end of 1397 not only it did not decrease but began to increase due to lifting the exemption on Iran’s oil exports to eight countries. Because this increase was due to the decline in the country’s foreign exchange revenues, it was natural that it would disrupt the opening of L/Cs for imports. That is to say a long queue was created to open L/Cs but due to the lack of foreign currency this line was extended to 1398 (Persian calendar year started March 21, 2019), and we saw a dramatic drop in imported items. On the other hand, warehouses were gradually being emptied without being replaced by new imports.

On the other hand, the Central Bank of Iran (CBI) curtailed the foreign exchange market with its own special policies and thus, as in the past, the exchange rate did not have the potential to go up. The shortage of goods on the one hand created severe inflation in the commodity sector, and the control and management of the exchange rate caused that foreign exchange turbulences in 1398 not be as severe as they were in 1397. As a result, the price of the foreign currency was left behind by the price of goods and created the conditions that we see in the market todays. 

Is it rational and consistent with the logic of the economy for people to buy any commodities for their profit at times of economic crisis?

It is natural that the behavior of the people of our society in these inflationary conditions is not in any way consistent with global norms. The key issue is that in such a situation, this behavior of the people is reasonable because they respond to the current trends in the Iranian economy as they react to their biological reality. It’s also a response to the growing inflation that is tangible in people’s lives. Therefore, one should not complain as to why the people have changed their investment course and tools.

On the contrary, I would like to ask our economists who predicted that commodity inflation would outmatch conventional investment instruments? Given that I read most of the economic analyses, I can say that no one was explicitly and analytically focused on this issue. But you see that people are queuing up to buy cars (advance sale). They also stand in lines for hours not merely for durable consumer goods but for some less durable commodities such as food. Apparently, in some ways, people understand economics better than some economists. Because economics for economists, or at least for most of them, is a mental phenomenon, while economy for people who see their savings gradually shrinking is an existential reality, and it is the latter which is authentic because their fate, excitements and emotions are tied to these economic facts.

To summarize, people’s investment tools have shifted to durable consumer goods because of the limitations of classical instruments. When the foreign currency market is controlled, the gold coin futures market is closed, the stock market is not transparent, and the share you have bought cannot be sold for a long time, it’s natural that people would move to markets that have more freedom. One of these markets is the commodity market and the purchase of durable consumer goods. Both the freedom of action in the commodity market is high and its price is increasing. In the end, I reiterate that buying and waiting in queues is not a matter of investment. Most of the people want to meet their needs sooner in order to remain immune against tolerating more inflation.

Is the situation the same in other countries?

It is true that people have not been educated on investment matters in our country but I do not think you need to have investment knowledge to solve the problem that was discussed in the previous question as well. The reason is clear: all investment tools such as coins, melted (scrap) gold, stock, promissory notes, currencies and derivative notes have returns less than basic commodity groups and durable goods. So it was very natural for people to move in that direction. As a result, education cannot change people’s behavior.

People act on the basis of market signals, not based on the training they have seen. This issue applies not only to Iran, but also to foreign and developed countries. But the difference is that there is no economic crisis in those countries, and if there is, the crisis will show itself in some investment bonds. For example, when stock markets fall and people sell their stocks, they quickly turn to the Japanese yen and the Swiss franc and buy them to keep their capital. So you do not need to enter the commodity market. If you look at investment instruments in developed countries, you see that there are good tools even for replacing durable consumer goods, so that you do not enter the commodity market to profit or maintain your purchasing power.

To sum it up, in Iran, we certainly need to provide investment education for the people, but more important than that is designing various investment tools to replace the real production of the economy. It’s natural that these tools do not fit easily and it takes time for people to earn the culture they need to invest. For example, the US stock market has more than $18 trillion and about $80 trillion in bonds that many people can buy.

Apart from these, there are various types of stock baskets (mutual fund) and numerous ETFs, and options tools and futures and forwards that you can invest in whatever you want to invest in. Not only are there many tools, but for a huge supply of tools that have made the market quite competitive. Therefore, the depth of the markets is very high and all the needs of investors are provided. Recently (in the past 20 years), a tool has been created under the name of CFD, which you can even buy or sell China (through the CFD Market). You can even buy CFDs for all tradable goods, and you can even buy Apple’s CFD stocks instead of Apple stocks. This tool has made it possible for you to circumvent the limits set by the industrialized nations and invest on any tools in those countries. When we do not have any of these tools, it’s natural for the people to move towards the commodity market because they do not find a replacement in the market. 

How effective are the government’s policy in controlling markets in creating this behavior among people?

Given the conditions prevailing in the markets, the government has no choice but to control. When you have been so thoughtless that your child is addicted, you cannot make him quit through freedom of action. Serious controls are needed. However, if we had worked from the outset on the basis of economics and its operationalization, then these controls would not be necessary. There is a general principle in complex adaptive systems. The principle says that in these systems, control would destroy them. Economy too is a very obvious example of complex adaptive systems, and the more control we exercise the more damage will be inflicted on the system. Obviously, sometimes control is necessary but it must be proportionate, timely, within a given period and with a specific purpose. Therefore, controls are temporary. Unfortunately, controls in the Iranian economy are neither proportional nor timely nor for a specific time! Controls are perpetual and for the same reason they continually destroy the economy!

 

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  October 2019
No. 92