Rising public interest in the stock market is good news for any economy, as it signals an improvement in production through market dynamics. However, in Iran, every time people turn to the stock market, a new wave of recession siphons off their money.
What are the reasons behind the turmoil in Iranian markets? Why are the five main markets facing constant volatility and turbulence? At present, the policymaker is trying to control prices in different markets despite the high growth of liquidity beyond that of production. This was stated by Mohammad Reza Monjazab, an economic expert, in a write-up for the Persian daily Ta’adol. A translation of the text follows:
Contrary to what the policymaker believes, ungovernable markets have strange price growths. The flow of liquidity is like the flow of water that enters several containers with the same pressure from above. If we make inflow outlet narrower, or block it temporarily, less water will enter, or it will not enter temporarily. However, water will enter the containers evenly and they will show the same level of water.
It’s the same with various markets in Iran, especially parallel markets; the entry of liquidity into the markets drives up prices equally in different markets. If the policymaker resorts to fixing the price of one or more goods artificially, the accumulated liquidity will eventually lead to a price increase (resulting from the increase in production costs and lack of supply at the mandated price, among others) in the market. That’s what happened in the foreign exchange, car, housing, gold and coin markets recently, and in the stock market over the past couple of years.
Factors Affecting Asset Markets
The impact of sanctions, inefficiency of officials, the growth of unsupported liquidity, the mandated pricing and budget deficit are among the most important reasons behind the current market instability. However, each market could have its own characteristics, depending on the faster or slower inflow of liquidity:
• Stock market: The shares of a company is affected by the economic conditions of the country and those of a specific industry, the quality of the company’s management, inflation, the quality of the government’s economic policymaking, budgetary, monetary, banking and exchange rate policies, foreign policy, high liquidity and risk.
• Gold coin market: It reacts to the foreign exchange rate and the global price of gold. It does not depreciate and has relatively high liquidity, showing no costs related to buying and selling.
• Foreign currency market: It is influenced by government controls. It grows more than the inflation rate in the long run. It has high liquidity and low risk, and does not have costs related to buying and selling.
• Car market: This market is also affected by government controls. Buying and selling cars costs money. It has moderate liquidity and its yield is higher than the inflation rate.
• Housing market: This market requires huge capital. Its long-term price growth is higher than inflation. Buying and selling homes costs money. Its risk is low and its liquidity is average.
• Banking sector: It offers a predetermined fixed interest that does not react to inflation and local currency depreciations. It is more vulnerable to inflation; the risk of not receiving the principal and interest is very low.
Given that the growth of liquidity in recent years was higher than the growth of production, price increases were witnessed in parallel markets. Price stabilization policies have short-term and sometimes destructive effects on the markets. One should look for the root cause of economic problems and implement fundamental solutions to solve them.
