This article has been written originally in Farsi by donyayebourse.com
Complex Systems; what is the motive behind USD jumps in Iran Economy?!
The unleased hike of USD/IRR and Bahar Azadi gold coins in Iran Economy to their all-time record high has raised unanswered questions in minds of ordinary people let along the economic experts. Despite all the attempts to blame non-economic factors and conspiracy theories for the national currency collapse these days, a closer look at “complex systems” theory will bring the reality into our eyes. Moreover, a scientific approach to the current situation reveals alarms for policymakers with regards to the future of this market.
Behavioural economy and complex systems schools of thoughts can help with today’s riddle in Iran Economy where general theories of John Maynard Keynes and others are no longer true and the country’s FX regime led to a loss of more than 50% on the nation’s purchasing power. It is widely believed that only by analyzing economic shocks in this critical situation we can see the true nature of current herd behaviour that eventually ends with a catastrophe.
“A complex system is a system composed of many components which may interact with each other. In many cases, it is useful to represent such a system as a network where the nodes represent the components and the links to their interactions. Complex systems are systems whose behaviour is intrinsically difficult to model due to the dependencies, relationships, or other types of interactions between their parts or between a given system and its environment”
Despite simple systems which have a definitive structure, complex ones have interwoven and unpredictable characteristics. These systems will simply obey the following rules:
- First, complex systems are not vertical. There are ceaseless and never-ending interactions between its components.
- Second, the whole is more than the sum of its parts! Said interactions can cause some kind of ripple effect and lead to synergistic behaviour.
- Third, the produced energy in complex systems can grow in an exponential fashion. If the system gets bigger by 10 times, the produced energy could easily grow by a 1,000.
- Fourth, these systems are prone to have dramatic and catastrophic falls!
In summary, complex systems are creating offhand, have unpredictable behaviour, use all the resources to their last drop and will collapse ugly.
But how these systems will fall into a trap? How will they become critical? Contrary to the general belief, economic experts are certain that rare economic events, generally known as back swans, have a tendency to repeat themselves in an undeniable manner. This means that black swans of an economy are happening frequently, yet since they will end in catastrophe once in a while, general thoughts are mistaken about their repeatability level.
Black Swans will cause crisis only when a critical state has been formed previously. The last snowflake on a mountain will cause the avalanche if and only if a previous snow accumulation prepared the bed beforehand. Once a critical condition is set, then it only takes just a tiny push for the system to experience a rapid phase shift. The financial crisis of 2008 is the perfect example of this.
What happened in Iran Economy?
Before we get to the roots of what causes the current situation, it would be good to draw a realistic picture of the complex systems and its herd behaviour to see the depth of the mess it can make. According to herd behaviour, due to lack of knowledge, some people will follow the footsteps of others once they face a challenge. Considering the different reaction thresholds a society have (some people will react later than others), the outcome of a tiny change would be various. In a nation with low reaction threshold, it will only take a tiny push to set the system out of its balance.
It is safe to say that Iranian households have fallen into the trap of herd behaviour and the society’s threshold was very low. Once the movements of FX rate have been started amid the nation, a huge wave of domestic demand came for USD currency only for fear of keeping their income value steady. But what were the black swans of Iran Economy that triggered the fire under ashes?
- Suppression of USD/IRR in 11th administration caused a more than expected demand for the US currency;
- People fell into this trap like a domino;
- Surpassing of FX rates from mental boundaries cause yet another currency crisis in Iran Economy!
All in all, now it’s the time to perform a long overdue surgery in the Iranian economy. Unless economic reforms happen right away and without the slightest doubt, the growth of this catastrophe can be mushroom-like and soon it will infect the whole body of our nation in a way that can be treatable any more. We are not neglecting the effects of current FX war or even the problems caused by rents in our economy, however, the false FX policies shall blame the most.