Sanctions as a Tactic in Currency Wars

December 27, 2011

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Brazil made the term “currency war” part of the zeitgeist, insinuating the Federal Reserve is devaluing the dollar as a battle tactic. Jim Rickard’s book “Currency Wars” propelled the term beyond the financial ethos into the mainstream lexicon.

Until now, most currency tactics were covert, under the guise of some other mandate, like improving employment.

A more overt currency war tactic is being employed in Iran and could foreshadow more such tactics in the years ahead. Earlier this year, US led international efforts to toughen trade sanctions on Iran. This has pushed the Iranian Rial down 35% since March.

The forced devaluation raises domestic inflation in Iran. Higher inflation leads to higher social unrest, furthering US efforts to destabilize the Iranian regime. The US is not against Iran having nuclear power capabilities; it’s opposed to this regime having nuclear capabilities.

It’s amusing to hear David Cohen criticize the Iranian government for hedging their currency risk. Meanwhile, Bloomberg notes the unintended consequence; the weaker Iranian Rial is impoverishing the citizens, while the government becomes more powerful.

Additional points to consider: this will not endear the Iranian people to the US, a revolution will lead to higher oil prices in the US, and US help discredits the new government in the eyes of many. US military hegemony trump the needs of the people of the two countries, evidently.

Whether this result is intentional or not is dependent on one’s perception of the cleverness of US leaders, but for the few people in the world who use energy, it’s the end result that matters. The weaker Iranian Rial does put domestic pressure on the Iranian government through higher inflation and will succeed to some degree at destabilizing the government.

Additionally, we could this tactic more should it prove “successful,” depending on how you define it.

source : Iran Regime Profiting From Sanctions: U.S

Morgan Stanley Takes a Look at Iran and Previous Oil Price Spikes
Commodity Price Shocks and Government Debt
The Outlook for a Confrontation with Iran
Handicapping an Attack on Iran
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