9-6-2012 SWFloridaGuy: How can the CBI revalue their currency 100,000%, what will the recovery duration be and and how will Iraq sustain this growth? This is the fundamental question, which goes to the very core of our investment. The NID (new Iraqi dinar) has never been on par with the USD, only the old Swiss dinar (named after printing plates) held those levels and has long since been demonetized. In order for the NID to RV to equal to one US penny, they’d have to remove 90% of the IQD from their M2. Half of their M2 is digital, which also convolutes matters. Iraq has $62 billion in currency with $100 billion in GDP which puts them at 62% of their GDP. The US has a $14 Trillion GDP and a M2 of about 10 trillion dollars. Iraq has a GDP of $100 billion and a M2 of 72 trillion. Countries with a floating exchange rates usually have a money supply around 50-200% of their GDP. A 1 to1 rate on the IQD would give them $72 trillion in currency with a $100 billion GDP. Their money supply would then be 720x their GDP. Compared to other countries that max out at 2x, it's quite a stretch. The other possibility is that the CBI's numbers are fabricated and that there are really "2 sets of books," which would suggest a deliberate move where the CBI works in tandem with the IMF and World Bank to conceal the true numbers from speculators and protect their plan. I would imagine that if Iraq is truly preparing to pull off a historic revaluation, furtiveness would be by far the most crucial element due to the potential for abuse and corruption. The fact that we are talking about these numbers in chat rooms does lead me to believe that if (and that's a HUGE "if") a historic large currency appreciation is indeed on the way for the IQD, "Fixing the books" would be a smart move. Europe, whose false public finance data helped usher in the latest round of global financial turmoil, the Enron scandal and China's recent "alleged" massaging of their growth numbers comes to mind. There is no independent replication of GDP numbers so we will never be sure. I am not saying for sure that this is what the CBI is doing, I would have no earthly way of knowing that and have no evidence that this is the case.
If Iraq continues to increase oil production and their GDP, the IQD can increase in value giving them additional purchasing power. It's my opinion that if Iraq was planning a straight redenomination with no significant rate increase they would have never spent this much time studying the long term effects, in-country (and out) security issues, counterfeiting, effects of dedollarization and how to institute a market-based economy where they are respected as a borrow in the eyes of global capital markets. The IQD is currently pegged to the USD as a defensive measure while Iraq rebuilds. The auctions supply the market with dollars and stabilize the IQD rate against the USD. I believe eventually (when we having a power-sharing GOI), the CBI will make their move and peg directly to the relevant commodity (which is oil) or do a hybrid solution. Oil prices fluctuate so a basket peg would not solve the problem. The CBI could set the daily price of IQD in direct proportion to the daily price of a barrel of oil in terms of USD. That would stabilize the price of oil in domestic terms and promote integration into world markets. They may take it one step further with a broad-based commodity standard where they are not just limited to a single commodity such as oil or gold, which would help average out fluctuations.
Iraq must choose between capital mobility, monetary policy autonomy, and exchange-rate stability. Nominal appreciation must lead to sustained real appreciation (this facet in particular is a tough one for me). Economic policy is influenced by international capital markets and foreign central banks and I certainly don't pretend to know the motives behind those that would influence either. The hope is that it's also in their best interest to see Iraq recover, reassert monetary sovereignty, dedollarize and give Iraqi citizens confidence in their own currency because there is no way that Iraq can pull this off on their own. Many corporations, foreign governments, banks and powerful organizations have all aided in Iraq's reconstruction because they also see Iraq's potential. Bloomberg recently released a video where they said "Iraq is a great opportunity for investment. They have a quickly growing GDP, there’s a great deal of growth in Iraq and we think the market will reflect that. American investors should be looking to put money and resources there." The DMCC (the leading commodity and currency derivatives exchange in the ME, with electronic trading accessible from anywhere in the world) also just recently reported that the IQD has attracted their attention and they are looking forward to the inclusion of the IQD (along with other currencies) into the global commodities exchange market.
Eventually, I do believe that we are going to prosper from this investment. Whether the CBI takes a more long term approach with several incremental adjustments as the recovery process (economic and political) continues or best case scenario, we witness a historic large currency appreciation "shock" where the CBI changes the peg, redenominates around January 2013 (or sooner), and simultaneously increases the value of their currency. As previously mentioned, the main questions serious investors have are by what mechanism can they achieve this, what will the recovery duration be and how will Iraq sustain this growth? Hard questions to answer. Although I signed up for this investment under many false pretenses, I feel extremely privileged to be involved and I'm in it for the long haul. Iraq presents a very unique economic situation (opportunity), and has come along during a very desideratum time in history. Some would say that is by design. These are just my opinions, which may or may not be correct.