Because you have asked some very pertinent questions I've decided to open our discussion to the entire DinarAlert audience. I trust that after you read my comments you will not be offended for my having elected to expose our discussion to the entire team. Here, then, is my response to your email, which can be found at the bottom of my comments (in other words, folks, read the bottom first).
Thank you for taking the time to elaborate your concerns. I will try to deal with your questions in the order in which you asked them.
First, the staging rate is not a precursor to the RV. It IS the RV, after which the rate will rise on either a managed float or a free float until it reaches equilibrium. The CBI is on record that it will come out at "around a dollar." But it is also on record that it wants the value of the dinar to be at least what it was prior to Saddam' s regime, or $3.50.
A lot of the "gurus" make claims that China and the US have been exerting influence on the process leading to the RV. Unfortunately in every single case they have been shown to be incorrect when the RV fails to come about in spite of some supposed action by the US or China, such as a visit by Biden, signing some new oil contracts, etc.
I have consistently held the view that Iraq is a sovereign country and that they alone are in control of the timing and the rate of the RV. I have never found any credible evidence to the contrary. Having said that, however, I will say that Shabibi is in regular contact with the IMF, having worked for them 20 years ago, and he keeps them informed of his plans. I do not believe, though, that the IMF dictates to Shabibi in any way in terms of timing or the rate.
At one time we heard that up to 130 countries would revalue their currencies at the same time. For a short period I bought into this, until I thought it through. The simple fact is that many world currencies are already in a free floating mode. Russell was good enough to explain this to me, and others, one night on a call, and I got clarity on the issue from him. This means that they are already at their correct values. We see this daily as the pound, dollar, Euro, yen, and Canadian and Australian dollars fluctuate on the FOREX. Many other currencies do the same. Therefore we would have to ask this question: If they are already at equilibrium among themselves, how would a "world reset of currencies" improve things? The answer is that it would not improve things. Having said that, however, their are other currencies, such as the dinar, that are not free floating.
Therefore it would not surprise me to see several currencies revalue at the same time. It is my opinion, in spite of what Russell may opine, that the Iraqi dinar will be held as a world reserve currency after the RV. I am confident in this view because it was expressed directly by Saleh himself. Therefore I believe that I have a better foundation in holding that opinion than does Russell. I can certainly understand Russell's hesitation on the matter, given his knowledge of world currencies. However the CBI, through Saleh, has clearly expressed that it is their intention to make the dinar one of the strongest currencies in the world. They clearly have the resources, both in terms of reserves and in terms of underlying wealth, to achieve that goal, IMO (LOL).
You make a conclusion that because China, US, England, and France hold a lot of dinars as governments, "then they learly have a say in the timing and the rate." I do not believe that this conclusion is justifiable. China holds over $1 trillion of our money but can't force us to raise or lower our rate on any timetable that they set. Similarly, even though we are one of China's largest traders, involving hundreds of billions of dollars per year, we have not been successful in getting them to raise their rates, in spite of several attempts to do so. Therefore I do not believe that it follows that just because a group holds a lot of dinars that they are in a position to tell Iraq what to do or when to do it.
The role of the FED and the UST is not that complicated. The FED has the authority, granted by Congress, to issue money, to change the rate, and to change interest rates to affect the growth of the economy. The UST is simply the holding place for the government's money. Our dollars go in there, and the government pays its bills from there. Since we borrow $.40 of our budget to pay our bills, the government borrows the money from the FED to do so, thereby increasing the money supply (since the FED just prints the money) and weakening our dollar. The UST is not a currency speculator. It is a repository only of tax receipts, and issuer of checks to pay bills. The FED, on the other hand, is involved in "currency speculation" on a daily basis. It is in fact the single greatest currency speculator in the world. Unfortunately it has so much power that it can actually control the value of the dollar through its actions. In that sense it is even BEYOND speculation. However, it is now hamstrung because it has created a situation in which there is too much money in the world (dollars) and it is no longer able to exert its influence as it has in the past.
This brings us to the role of the RV of the dinar in world affairs. If, as stated by the CBI, they raise the value of the dinar to about $1 then there will be about $7 trillion worth of dinars outside Iraq, give or take a few trillion (!) that must be accounted for. KAP and I have stated, based on CBI articles, that the intention of Iraq is to make its currency a world reserve currency "for a long time" as Saleh has stated. How will this happen?
When we cash in, either through a facilitator or directly at our bank, we are credited with funds in dollars in deposits. Because of this action the effective money supply of the US will increase by that amount of deposits. Furthermore, it is possible that the money supply could increase up to 8 times more as the banks use the deposits to lend even more money, thereby creating more money through the "fractional reserve" system. Our dinars go to the central banks around the country and eventually to the FED's control (although probably to the UST). In addition, the taxes we pay on the gain will go directly to the UST. In either case, the funds ultimately go under the control of the FED, which is the last resort for foreign currency in America. Once it arrives there it becomes part of our foreign reserves, as Saleh has stated it would.
This will strengthen our foreign reserve position dramatically. At the same time the taxes that go to the UST will directly strengthen the holdings of the government. In theory the taxes could be used to reduce the debt. However, as I said in the call last night (and I am changing my position in this email/post), that is not going to happen because by reducing the debt the UST is also reducing the money supply. After thinking this through last night I've come to a conclusion that the TAX revenues might be used to reduce the debt without having a significant affect on the money supply. The tax revenues are only about 15% of the total of the cashing in process, presumably. The remainder goes directly to the FED as foreign reserves, thereby directly strengthening the backing of the dollar.
Therefore, IF the government took a portion of the tax revenue at the UST to retire some of the bond debt I doubt that it would have a significant enough affect on the total money supply to cause harm. I can say this with confidence because the OPPOSITE AFFECT, namely of increasing the money supply, will be happening simultaneously at the banks who will lend out money based on their new higher reserve portfolios from the cashing in process. The money supply INCREASE that will occur at the banks could be up to 8 times the total cashing in value, whereas the total of the tax revenues will be only about 15% (or 1/8th) of the cashing in value. In other words, if ALL of the tax revenues were used to reduce the debt, the reduction of the money supply would be only 1/64th of the INCREASE in money supply from bank lending. Therefore, we may safely state that paying down the debt by the UST will NOT have a negative affect on the overall money supply (in spite of my comments last night, which are now shown to be incorrect, IMNO [i.e. "in my NEW opinion"!) (LOL)
Furthermore, I can now conclude that the FED could also issue an order to the UST to reduce more of the debt of our country because of the large holdings of dinars that will come into the FED from cashing in. The FED would, of course, do this on a very controlled basis, monitoring the overall affect on the money supply (as it REDUCES the money supply at the same time the banks around the country are INCREASING the money supply). Since the influence of the FED's reduction would be 1/8 of the potential increase from the banks it seems clear to me now that a significant reduction in America's debt could be made.
However, here is where Russell is absolutely correct. Much of the US debt is not something that can be simply "paid off" since it is a debt that is owed to the future in terms of pensions. He is more adept at explaining this than I am, but I have no doubt that he is correct on this matter.
We are now better able to understand the process after the RV due to this analysis. It is clear from what I have stated that there will be a significant increase in the value of the dinar due to the higher foreign reserves from the cashing in process. This will cause gold and silver prices to fall, possibly significantly, in the short to medium term. In addition, to the extent that the FED and UST use the new funds to retire debt of the US (such as buying back bonds from China) this will also improve the value of the dollar. The negative aspect of reducing the money supply by retiring the debt will be more than offset by the increase in money supply from NEW LENDING at the local banking institutions.
In the medium to long term, then, the increase in lending will have a significant positive affect on our economy. Similar positive affects will be seen in England, France, and China as well as other countries who have dinar holdings. This will lead to a world-wide strengthening of the economy. Because we are in a "lean and mean" position at this point worldwide it will not have a deleterious affect on pricing in the short to medium terms. Wherever there is excess inventory, it will dry up (such as housing, motor homes, cars, etc.). At the same time the flooding of new lending, as well as our own purchases, will lead to greater employment as more and more people are re-hired. Factories that have been mothballed will be re-opened. The entire world will benefit.
The question we have to ask is this: How long will this boom last? This is a tough question to answer, because the world has never had a stimulus as large as this, or even anywhere near this large. The fact that it will occur at the same time that WE will be increasing our purchasing (something that is direct and not under government influence) AND that the government might be reducing debt and actually begin "living within its means" will lead to greater confidence among small business owners. Add to that the fact that banks will have tremendous amounts of money to lend out (through fractional banking) and we can see that the boom will grow, and grow, and grow, possibly for many years.
However, as with all good things, this will again come to an end. Over the last 50 years we have had 4 boom-to-bust cycles and they have averaged from 9 to 11 years each, roughly. The stimulative affect of this new boom will be enormous, if I am correct, which means that the boom will rise faster than before and, ultimately, the fall will be even greater.
My recommendation to all dinar holders is to have you closely watch the price of gold during this next phase. Gold is the ultimate reserve currency. You may ask yourself this simple question: How many ounces of gold will it cost me to buy this item? In this manner you will get a clear understanding of what is happening in terms of inflation, regardless what the numbers from the FED are saying!
For instance, let's look at buying a house. In 1950 a house cost, say, $10,000. Gold was $35 per ounce. Therefore the house cost you roughly 286 ounces of gold. Now, suppose you want to buy a house today. The price of the house is, say, $150,000. The price of gold is $1500 per ounce. Therefore today you can buy the same house with only 100 ounces of gold, right? So, which is better, gaining 15 times in the value of your house, or paying almost 1/3 the money in gold for the same house 50 years later? Clearly you can see that while the value of the house went UP 15 times, but in terms of gold, THE REAL RESERVE, you will pay only 1/3 what you did 50 years ago.
In summary, by watching what GOLD WILL BUY as we move forward you will get a true gage of the VALUE of your money, whether it is in dollars, savings, housing, or something else. To conclude, then, I would caution you all that our "blessing" will not last forever. Do not be surprised to find that the value of your home increases 10 times in the next upward cycle. However, while you get excited about that rise in the value of your home, measure the cost in terms of GOLD and you will get the REAL change in value, as opposed to the change due to inflation, which is whittling away the value of the dollar in the future. In short, while it is important to have nice "stuff" after the RV, I strongly recommend that you NOT keep your new wealth in dollars for long. The short term will see the dollar rise in value, but the longer term (5 to 7 years) will see that value erode dramatically.
Let me first acknowledge the huge effort you continue to make to educate dinar holders. It is clear that there are periods when there is little real news – and then conjecture and speculation abound.
You, Kaperoni and Russell have done very well in defining terms like reinstatement, redenomination and revaluation. These are often used interchangeably by other commentators and confusion abounds. The term that Kap uses lately – staging rate – is interesting as it suggests that ‘one for one’ could happen anytime to benefit the national scene in Iraq only and is unrelated in time to an RV which would engage speculators out side of Iraq. What or who will trigger that change is the big mystery. All have implied that it would be the first step in a series that would lead to the full RV.
What is really unclear is who holds the power to make this happen. Is it simply politicians in a sovereign county that is newly democratic? Is it heavily influenced by the USA as a payback for the war and lost lives? Or is it part of a reset of the world monetary system involving all central banks managed by the BIS and the IMF?
If it is true that the UST holds trillion of dinar (and the same for several other key players like France, the UK and China) then they clearly have a say in the timing and the rate. How would anyone confirm that they really hold dinar? Russell is adamant that the IQD will not become a reserve currency held by central banks. I understand that the UST is not the Fed but who really understands how they interact around a matter like this? Could the UST be a currency speculator without involvement by the Federal Reserve?
And lastly, a huge percentage of people online are Americans and a large percentage of them are fundamentalist Christians interpreting the RV as an event of biblical proportions and significance. That helps many to deal with the long delays following the early hype of 2010 and 2011. It helps explain why only a fraction of the population is participating and will be ‘blessed’. It coincides with the emergence of strong leaders (some called gurus) who have loyal ‘followers’. It supports the idea of long sermons and frequent prayer sessions.
If you care to comment on my summary and respond to certain questions, that would be great.
All the best
September 9, 2012 at 12:31 AM
Last edited by BlueyesinLevis; 09-15-2012 at 03:16 PM.
Kaperoni - Has there been a change in the plan? 9/12/2012
Ok, I am going to toss out a theory…You may or many not agree, but based on actions within Iraq and other events. It may be very close to what we will see happen in the near future.
I believe the plan always was to release the dinar at a “staging rate” at or about 1 to $1. There are many documents that reference that from Dr. Fadel, to the SIGIR report. So we can say with high probability that was, or should have been the plan.
The issue is, if that was the case, some liability falls on the CBI and Iraq. They must be able to sustain this rate. Remember as much as 10 trillion dinar may have been sold outside the country for what Saleh said, “will be held as a foreign reserve currency...for a very long time.” What that means is that the world’s central banks would, in essence, be funding the RV. We have discussed this before as central banks around the world, through “inter-banking,” would buy/sell the dinar creating benefit to each central bank holding it. Where this becomes sticky is the magnitude in which financially the world would become dependent on Iraq to sustain that initial rate. To have a GOI stable enough, to continue to progress economically and open to the world investment firms waiting to come into Iraq. One wrong move, possible violence, and the dinar could plummet leaving these central banks holding the bag on a near worthless currency.
So we see Shabibi has attempted, on at least two occasions, to bring his dinar to the international level (June, 2011 and again in April, 2012). To launch this initial rate, only to be denied by the GOI and CoM. After much thought, I have come to the conclusion that as corrupt as the GOI and CoM is, their reasons I am sure are selfish in nature (many of them hold lots of dinar)…knowing under the current conditions, the probability of failure is too great to risk with the currency - currency they hold. To bring the dinar to the international level to only have it fail.
Therefore, as time passes, the CBI is caught in a difficult situation. Economically, Iraq needs the RV yesterday. We have seen several articles pertaining to the advancement of the economy, the poor living conditions or lack thereof, investment into agriculture, manufacturing, etc. So the CBI has a real dilemma…
Do they launch the dinar at this rate?…And take the risk of collapse of the GOI, etc., taking Iraq back into a sectarian war?…Which would create a situation in which the CBI could not sustain the rate, dropping it’s value creating a setback of 2-10 more years? Leaving central banks around the world holding a worthless dinar? Or is there another solution?
Shabibi has a decision to make. Due to the current political conditions, demand economically in Iraq for advancement, and global financial conditions, time is not something Shabibi has to just sit and wait this out. His people are starving, investment is waiting, and economic growth is standing at the doorway. Shabibi can put people back to work, rebuild world class structures, and see his country prosper at least financially from the wealth of the country…But how?
Answer: The CBI can toss the responsibility back to the international community.
We have talked recently about ECNs or Market Makers. We see from the Iraqi Banking and Investment Conference, banks, hedge fund, and private equity institutions are all going to this event scheduled for Sept 18-19th, 2012. Clearly, these types of companies all have something in common...They are good at making money supporting currency...especially one with great potential such as the Iraqi dinar. We know the CBI wants to develop a world-class financial industry in Iraq, and these players can help Iraq get there.
So my theory is a switch in the plan. From a risky sustainable .86 or 1 to $1 rate to a aggressive possible free float starting at 1166 or so, letting the global market dictate the rate. Letting the world raise the value of the dinar based on what it “sees” as progress in Iraq. This creates a situation where the CBI is now “off the hook,” sort of speak it does not have to be concerned with failure. And as the GOI resolves it’s differences, mandated issues become resolved, the world will see…and the dinar will rise. The greater the progress in Iraq, the faster it will rise. The more open Iraq becomes to the international community, the greater the benefit to Iraq. The key here is…the risk of collapse and risk of global loss by central banks is now eliminated...or at least minimized.
I think it is entirely possible we may see the dinar come out on the world market, rising to .10 almost overnight. It may rise to 1 to $1 within weeks if the GOI can resolve issues. There is no way to tell for sure until it happens…there is no way to know how fast or how high the dinar will go, but this plan takes a load off of Shabibi and rests it on the world’s financial market's shoulders.
In a best case scenario, the plan will go forward as documented…with the “staging rate” of 1 to $1 or about. In a worse case, we must watch the dinar rise gradually as Iraq’s political stability takes hold. The rate you choose to cash out is then something you need to consider.
BTW, I agree with Senator Lindsey Graham. The blame falls sole on the US on this one. Lack of direction, commitment, and leadership is why we are even still discussing this issue.
wgw, I don't want to make this a political discussion, but the US failed miserably with it's foreign policies in Iraq. Going back to the elections, Allawi's block won the election which should have given him the right to form the new GOI.. Maliki's political block lost, refused to leave office and yet we did nothing to support democracy and the results of this election. We stood and watched as he played games for an additional 7 months. Until finally we went over and suggested a "power sharing" deal (Erbil) which everyone knows to this day has yielded little results in stability - yet another failure. So you will have a hard time convincing me that the "policy" was correct.
Sunspot, exactly...The way a currency rises in value is when there is greater demand than product. And in this case, the CBI controls the product...the flow of dinar. When the central banks begin buying and selling (inter-bank) with high demand for it, and low supply the rate will climb no doubt. Therefore, I don't expect it to sit at a low rate for long. But this will clearly be profitable for all parties involved which is key. As the dinar rises, some consumers holding paper dinar may cash in (through a facilitator), creating liquidity in the inter-bank fund slowing the rise in value. Eventually, it will reach a equilibrium of sufficient flow and demand and settle at an "international" determined rate. That is the very just of what I wrote…Shabibi may want the world to set the rate.
As for .10 rate…You are misunderstanding what I am saying. Though I suggest .10 cents, If Shabibi goes with this plan, I do not expect a RV at all…simply an appreciation of the rate from 1166 on upwards. I tossed in that rate as IMO it will go so fast, that we literally will not notice until it is at .10 cents or higher.
The below post is from a friend of mine who read Kap's post and shot his response in an email over to me. ...........
Finally, someone who actually makes sense and provides the most intelligent and credible proposal I have finally read, ever! I concur 100% with Kap's analysis. I base my comments on my history of studying business and investments in college, both nationally and internationally. I have made a living as an investor, trader, and business owner. My family’s business, which my great-grandfather founded, was first listed on the NYSE in the 1930’s. It grew to be in the top 50 of the Fortune 500. Therefore, even though I have had a wonderful background, I consider myself to be neither a novice, nor an expert, but someone with more investing experience then most including the school of hard knocks. I learned more with failures, and then all my successes combined.
I suggested to others several months ago, something similar but without the sophistication Kap brought to the Dinar table. My thoughts were based upon the sheer numbers of Dinar in possession (stuffed under our mattresses, lol!) of the Dinar outside of Iraq, including the billions of Dinar continuing to being pumped daily by the dealers little guru's. From a pure economic approach, there was no way in our lifetime and our children’s that the rate could or would come out as high as so many of these little guru’s have stated, time and time again.
The CBI could not nor would not support an unrealistic rate that many have thrown around, which could lead to a complete bank/country economic failure. I first projected a rate up to.10 cents and then over time increasing to a 1:1, which might take years to accomplish, then eventually get back to the rate of pre-Saddam days, but it would be suicide to start high.
I certainly support Kap's theory with a free float, then letting the market drive the rate. This takes the pressure off the CBI and GOI to not only back the rate internally, but gains the support with all the other Central Banks. It’s like having a relief valve on the pressure cooker and is similar to IPO's, which lets the market determine the price at which it is to be traded. In other words, the little guru doesn’t set the price, the world market does!
Kap's proposal will probably upset many, maybe even my posting of my comments to his. If you don’t believe me that the little guru’s have constantly pumped the Dinar, then research for yourself the little guru’s posts of one year or two years ago or more. Same little guru’s same predictions, same results! Reminds me of the barrage of ads in the 70’s, 80’s and 90’s when so many self-proclaimed gold gurus pounded the gold table prophesying their gold predictions. Buy now or it will be too late, yet it took several decades for their self proclaimed prophecy to be fulfilled. Sooner or later, the little guru’s prediction of the RV from their crystal ball’s will come true and they can then pound their chests and take credit for “I told you so”. Remind you of any little guru’s today? I know and understand how many today are living in the pain of their economic situation. However, way too many today are living in an unrealistic fairy tail world having been pumped by the dinar dealer's front men, known as the little guru's to buy, buy and buy more, jeopardizing their home and family. Has anyone discussed how the Dinar dealers have changed how one can buy on reserve? They tweaked the program to suck people in by allowing the buyer to keep their reserve deposit, which buys a commensurate amount of Dinar with that deposit allowing the buyer to keep their reserve deposit purchase even after the reserve time frame expires, simply amazing! And, one can even buy Dinar on their credit card. How incredibly STUPID! When people talk about the Dinar being a Scam, what I just described is the scam, not the Dinar itself.
Kap, thanks again for your boots on the ground thoughts on the RV! Now, if you would pass on to Shabibi for all of us that we fully support the staging of the RV like you have suggested, then let's all kick back, relax and expect great things on the 18th/19th in London........!
Because the KAP THEORY is becoming a long thread (5 pages now) I’ve decided to open a new thread called ENORRSTE COMMENTS ON KAP’s THEORY. I trust that you will be as evocative in responding to my views as you have to KAP”s.
I am certainly pleased to see that KAP has gotten the attention of many of our members. He and I have been bantering around various possibilities for a few weeks now. In fact, it was I who first broached this theory. I did so with this comment on my “Answers to Doug” post from a few days ago:
“This brings me to a new thought. Suppose that later this month the facilitator is named and that a "live" market for the dinar is created. Further suppose that the opening rate is .00086 which is the current rate, but that Shabibi does not interfere in this market at all. In THEORY, Shabibi could control the rate because he controls the supply. But if he does NOT interfere, then the supply is fixed, right? This means that is likely that there will be increasing pressure upward by those holding dinars outside Iraq. Those dinars, however, could only come from HOLDERS OUTSIDE IRAQ since Shabibi's goal within the country is to REDUCE THE MONEY SUPPLY.”
KAP has clearly moved the ball forward a good deal with this basic theory in that he explains how it will insulate the CBI and Iraq itself from potential negative affects of a higher RV.
Thank you, Rad Lady, for recognizing the familiar topic when you said, “I read similar posts and theories from The Professor.”
KAP and I have been on the same wavelength for some time now, thankfully. Therefore I’d like to add some new thoughts that might help to embolden and/or adjust his/our view.
First, I’d like to say to Joeg that you certainly have persistence, even if you are a bit repetitive. I think one way to change your thinking about Iraq’s potential for investment is to consider the “old West” in America at the end of the 1800s. At that time there was little law, and the law that did exist was sometimes quite corrupt. Crime was rampant and yet people came in droves to the West to “make their fortune.” I believe that 140 years later that basic drive still exists among people who are willing to take a “measured risk.” As Dr. Nan has shown above there are a number of MAJOR firms who are willing to take that risk. Add that to the fact that Iraq holds a commodity that all major countries MUST HAVE in order to survive. Therefore, like it or not, they will jump in, if for no other reason than to get there before their competitors do!
However, I personally believe that the RV or lack thereof is not dependent upon future investment, even though it will benefit from it. The simple fact is that the RV will benefit Iraq, regardless of the investment potential. This is clear from the fact that imports become less expensive as the value of a currency rises. That is just simple
economics. Therefore, as interesting as his rants are, Joeg is, in my opinion, off base, or at least skewed in his thinking. Investment in Iraq will be a “boon” to the country FROM making the IQD tradable internationally. This is true REGARDLESS of the rate.
I would now like to address how I believe it is definitely to the benefit of the CBI to open the currency at the current rate to the world. I still hold the HOPE that they will avoid the tortuous journey from .0086 to $1 for the IQD. I also believe that we may be premature in throwing out the many articles from the CBI itself that indicate clearly that it is their goal to have the dinar at parity with the dollar. So I am going to “suspend” all of my following comments under the banner of “theory only.” In this sense I am with KAP as well.
Before I move on I must clarify for you all that KAP did NOT state that he felt the opening rate would be 10 cents. In fact he said he thought it might RISE to 10 cents quite rapidly. Therefore, our theories are joined at an opening at the CURRENT rate (again, as a starting point for a theory).
Before I go farther into the expansion of my original theory by KAP I’d like to restate what I believe is a key element of this theory (in addition to KAP’s key element, which I will discuss shortly).
In my opening salvo I speculated that upon opening the currency to the world (either directly through FOREX or, more likely, through an ECN as we have discussed previously), the CBI still remains in control of all currency within Iraq and within the CBI itself. As I stated, UNLESS Shabibi agrees to issue more currency to the outside world, then, the supply of dinars outside Iraq is strictly limited to investors who already hold the dinar, and to dinar dealers. This is a very important point. KAP mentioned it twice, tangentially, but it is key to understand the IMPACT of a limited supply.
Remember, the CBI is on record that it wants the dinar to eventually reach a level that existed prior to the Saddam Hussein regime. We know that level was $3.33. We also know that the plan was recommended by the then Minister of Finance, Al-Zubaidi, and was accepted by Shabibi on behalf of the CBI. Furthermore we know that this plan was initiated in early 2007 and that the time frame was to be 5 years for completion. We also know that in 2009 and again in 2010 it was stated that the plan was “progressing” according to the original plan. Then in 2011 the CBI began to talk about 3 phases leading to implementation of the RV. During that year we heard that they were “ready” but wanted greater participation from the GOI and Parliament. Then this year the rhetoric increased until Shabibi finally announced, through Saleh, that the plan would go forward without the approval of the GOI. At that point the Parliament was already in his back pocket.
Now, I’d like you all to notice that in this review there has NEVER been a statement that the plan was being changed. In fact more and more details have been released, including that the “staging rate” would be “about $1” and that there would be an entire new currency issued as a part of the “removal of the three zeros” project. We have most
recently been told that the process would “begin” in some new sense in September, this month, and that the removal of the three zeros would begin in 2013 and run through 2014. We’ve heard that the new currency will be issued either early in 2013 or in July of 2013. In any case, as I have stated before, this need not concern us because our main goal is cashing out at the RV, not getting our currency changed for a new one.
I know that I have taken some time here in review, but it is important that any theory that we advance must take into account the history that has led us up to this point.
This brings me to KAP’s advancement of the theory. I will start with KAP’s view that an opening rate of $1 will increase the liability of the CBI and Iraq. He makes a statement that “one wrong move, possible violence, and the dinar could plummet leaving these central banks holding the bag on a near worthless currency.”
I’d like to explore this for a moment with you all. In order to do so I have to refer, again, to the CBI and its own stated plans. The CBI has stated that it will reduce the money supply of Iraq from the current 32 trillion dinars to about 25 billion dinars after the “remove the three zeros” project is completed, or by the end of 2014. Clearly, as I’ve shown in an earlier post, this cannot include the dinars being held in foreign central banks. At the same time, Saleh has stated that those dinars outside Iraq will become “foreign reserves for a long time.” This is an important statement. If KAP’s view is correct, then Saleh’s statement could be held hostage to internal Iraqi violence. Therefore we must ask ourselves this question: Is it possible that Saleh’s statement could be correct IN SPITE of the potential problems in Iraq?
I submit to you that the answer to this question is “YES”. I say this because I believe that the REAL VALUE of the dinar is what will be driving this, even to the EXCLUSION of internal political issues. How can I say that? The answer is really simple: the world will not allow Iraq to fail. Why? The answer is again simple: oil.
I realize that my statement is placing me “on a limb,” especially with the current turmoil in the Middle East. But it is my firm belief that the WORLD will not allow this to devolve into chaos that would destroy the value of Iraq’s currency. I may be wrong on this, but I don’t think so. The history of the Middle East shows that we are committed and have been for 50 years. Furthermore, France, Germany, England, Japan, and China are equally committed (as is Russian and India, incidentally). I cannot see a situation in which total chaos would overtake Iraq. Also, it would take total chaos to destroy the value of the currency.
However, having said that, I also don’t believe that the value of the dinar is determined by the political situation in any case. It is determined by the underlying wealth of the country, which is enormous.
Therefore, I respectfully disagree with KAP on this part of his expansion of our theory. Coming out at $1 with an RV is no more or less risky for foreign central banks than an opening to the international market at .0086 is.
So now we must ask who benefits, assuming that risk is not a primary factor, with an entry at a lower rate. Clearly, assuming that all dinars will become foreign reserves, as Saleh stated, the largest beneficiaries are the central banks that receive those dinars. The more they receive at lower rates, the greater their “wealth” as the rate rises.
The CBI, however, will NOT benefit from an entry at .00086 any more than it will with an RV at $1. Why? Because, as Saleh said, the dinars do not come home. Neither will the dollars paid for the dinars. The CBI has ALREADY SOLD these dinars. It will not be paid AGAIN for them, since they won’t be coming back home to Iraq. So the CBI does not benefit, regardless of the rate, when the dinar goes international. Perhaps, though, they may benefit in another way. Stay with me.
Those who DO benefit are the people of Iraq themselves. They will benefit because their imports will become less and less expensive as the dinar rises in value. Their dinar, quite simply, will buy more “stuff.” There will also be a SECONDARY benefit from going international with the dinar. This will come about through increased investment in Iraq. However, the RV is not necessary for that investment to begin; instead it only needs to go international. The market will make the dinar rise and those looking to invest in the “New West” of Iraq will climb aboard wagons and head there.
Now, we are back to KAP’s theory advancement. Unfortunately he has stated that the RV is being “withheld” by the GOI and COM. Knowing him as I do this is not what he meant. He knows that Maliki has expressed reservations and has asked for a delay. He also knows that the COM attempted to “delay indefinitely” the project. And finally he knows that the CBI has stated clearly that they will move forward with or without their participation or approval. We just may differ in that I do not believe that Shabibi is fearful anymore of taking action. I say this based on the articles, not just on speculation.
This brings me, then, to KAP’s view that the CBI might not want to fail. He bases the low entry theory largely on this “risk reduction” view. While he may be correct (I have no way of knowing independently) there is no evidence that I have seen to indicate that the CBI is getting “cold feet” on the $1 rate.
I noticed as I was writing this that there is a new article lambasting the idea of a free float. It was a quote from Mohammed Khalil who is on the Parliamentary Finance Committee and is a supporter of the “remove the three zeros” project. We cannot rely on his statement as a position of the CBI. On the other hand, he is the first person to talk about floating the currency. This could be a reference to the “remove the three zeros” project generally, which has been stated will raise the value of the currency. It could also be a reference to “going international” with the dinar, which the CBI is on record that it wants to do. I would lean with KAP on this and speculate that this man has heard somewhere that they plan to “float the currency”. He is adamantly opposed to it, although he doesn’t explain why.
If KAP is correct on this, then, we may see some evidence that in fact the CBI is planning to do a float of the dinar. This would run counter to its statement of February 8 2010 to the IMF in which he said that when he would go international it would be on a “managed float”. Two and one-half years have passed and KAP may be correct that plans have changed.
This brings me to this question: Why would the CBI change the plan, having refused to do so for 5 years now? A couple of possibilities occur to me. First, this could be a “subset” of the overall plan, meaning that it was always in the plan to have a free float at some point and we just weren’t made aware of it. Under this view, then, the free float could exist at the beginning, as KAP theorizes, and then a managed float would take its place at, say $1 or so, keeping in line with Shabibi’s statement to the IMF.
It is also possible that the CBI has simply changed its mind. After all, this is their ball game and they can make the rules any way they want. This brings up the next question: How does the CBI benefit from a free float? I am now back to the CBI and the question I deferred from up above: How then does the CBI benefit from a free float?
I have explained already that as long as the CBI does not sell dinars outside Iraq they will NOT benefit financially from the rise in the value of the dinar. Therefore, the free float will not benefit the CBI financially. I’ve also implied that the CBI is a very sophisticated operation and that Saleh’s statement that the dinar will become foreign reserves indicates that the CBI is not afraid of a collapse in the value of the dinar. So why would they make this change in the plan?
The best single idea to answer this question that I can arrive at, at least thus far, is that this is an attempt to do an “end run” around Maliki and the COM. In other words, this may be the METHOD by which he has decided to move ahead with or without their approval.
Simply put, by opening the dinar to the international currency market he is NOT doing an RV. Therefore he does NOT need approval of either Maliki or the COM. Of course we know that he could do the RV at $1 without their approval, since it is clear from the 2004 CBI law that he has that authority. At the same time, this method appears to alleviate any possibility of his getting “flack” from the government. As KAP has so rightly stated, “The CBI can toss the responsibility back to the international community.” Of course in KAP’s view the responsibility is for an economic collapse causing the value of the dinar to crash. In my scenario the responsibility that is being passed is the CBI not having to deal with Maliki and COM anymore on this issue. This, then, is the true benefit to the CBI: they do an end run around the government, entirely legally.
The international market, then, would be allowed to come into play. We expect an ECN to handle the cashing in and the “market making” process, although details are sketchy.
This finally brings me to the issue of “inter-bank” exchange with an ECN versus free floating on FOREX and how this would affect individuals cashing in. This came up at the end of the last thread that began this discussion. The ECN, or Electronics Communication Network, is a fancy name for what I call a “facilitator” or what KAP calls a “market maker”. Both of our terms are accurate. It is KAP’s understanding that the ECN will be communicating mainly with banks. Hence the term “inter-bank”. I am not clear where we go to cash in under this scenario. In any case, the other position, free floating on FOREX, is basically the same thing that will occur between the ECN and the banks. In other words the ECN will be the “market maker” and the banks will buy/sell dinar through the ECN, just as large institutions buy and sell currencies on FOREX.
Under this view, apparently, it will become clear at some point that we will be given opportunities to cash in. Whether that will be at various banks around the country, or at dinar dealers, or directly at the ECN, has not been made clear. However, what does seem clear is that, under this theory, the banks will participate and will be instrumental members in a free floating market. Under that scenario, then, we would go “somewhere” to trade our dinars in for deposits. The banks would communicate regularly with the ECN in order to determine the rate for the day that they would offer. In this sense they would be middle men between us and the ECN, but it would be the ECN who would be the true market maker, since all banks would report their supply/demand to the ECN, who would adjust the rate accordingly. According to the definition of ECN this entity would ensure the “best rate” available for all concerned.
Notice in this theory (with my addition to it in speculating that the CBI would not sell dinars) the supply is almost entirely in America (assuming ECNs are located in other countries as well). The CBI would be out of the picture, watching, risk free, as the value of their currency rose due to increased demand and limited supply.
As I wrote in my last post on this theory, I believe that the dinar would rise quickly in value. I speculated that current holders would “re-buy” under the belief that they’ve always felt it would go to at least $1. In addition, more traditional currency investors would finally see this as their opportunity to get involved. To the extent that the ECN and/or the banks involved would allow electronic investments in dinars, as opposed to physical money investment, the growth could be explosive. I agree with KAP that we could go from .0086 to .10 in a matter of days, or weeks at the most. I also believe that $1 could be reached prior to the new year (this, I believe is a goal of the CBI, although not stated directly yet).
I will conclude with this simple assessment. KAP and I have come up with a single theory that has two possible motivations behind it. One deals with fear of collapse of the currency and the other with an “end run” around Maliki and the COM. However, and this is VERY important, we have come to the same conclusion: it will not surprise us one bit if there is NO RV and that the CBI elects to go international with the dinar at the CURRENT RATE. What makes this so important is very simple as well: the “reason” for the change in plan is irrelevant! Whether KAP or I am right, the result is still the same. That may bear some serious thought.
You now have my 50 cents worth on this theory.
Of course I could be wrong.
I do have one question Steve; in regards to the banks possibly being the go between between us and the ECN.
Do you have an example of anything else in the US Financials market, involving currency, where this occurs?
No disrespect, but the banks trading with and going directly to the ECNs to get a trading price is extremely abnormal. Futhermore, there are strict trading laws that govern Forex trading in the US. So, the ECNs would have to conform to those laws or the laws in the US would have to be re-written to accommodate the ECNs. Finanlly, the banks and the Federal Reserve share control and power with no one, so I struggle with the theory of the banks getting the rate from the ECNs.
These are all theories coming from all of us, so no one is necessarily right or wrong. It's great that we are all finally sharing our thoughts.
Thanks Steve for the theory analysis, and thank you for being here with us.
Just as banks trade foreign currencies today for the major countries we expect them to do so for the dinar as well. There is nothing abnormal about going to BofA and buying or selling currencies. I have personally purchased foreign currencies directly from banks. Therefore I don't believe any new laws are required. It comes down to an individual bank making a decision whether to deal in the currency or not. The ECN will be "hidden" from the normal person just as FOREX is "hidden" unless you are a professional trader in currencies.
Since we are dealing with physical and not electronic money it is likely that we will be forced to "turn in" our currency to a bank at some point. This seems to me to be the simplest solution.
I am not a professional currency trader. I do know that banks have "screens" on which they determine what price to charge you for, say, a Euro. I suspect that the dinar will be added to that screen. I see no reason for complicating this. Just how an ECN works with FOREX or banks for that matter is not really something that I think we need to concern ourselves with. Clearly there is a procedure for other currencies. Therefore that procedure will be applied to the dinar, IMO.
add in this article..
and it makes a LOT of sense.
I am pretty stoked about our chances!
rab Monetary: 3 currency exchange systems and countries 'cooperation' dependent mech
Confirmed the Arab Monetary Fund, the drainage systems prevailing in the global economies and Arab currencies, including 3 types first "floating fully" and that left to market forces by identifying currency exchange rate, as countries rely other system "peg a single currency or a basket of currencies" including states "cooperation", Jordan and Lebanon, as well as drainage systems combine the two systems ex. said Dr. Ibrahim Alkrasna head of training in the Fund during the "financial stability", which concluded yesterday at the Fund in Abu Dhabi "are diverse exchange in the Arab countries to 3 types ", pointing out that both of Jordan, Lebanon and the GCC countries peg its currency to fixed exchange rates against the dollar." he added, linking Libya and Syria their currencies unit SDRs, while Morocco linking exchange rate DRAM basket undeclared currency, where the Euro weight largest in the basket and determined central bank exchange rate Moroccan dirham daily, and selecting the minimum and maximum exchange rate of the dirham. explained that linking to a basket of currencies are choosing linkage system to a basket of currencies available, such as special drawing rights and baskets of other currencies, which is based usually currencies most important trading partners of the state. added Alkrasna adopt all of Iraq, Tunisia, Algeria, Mauritania and Sudan system "floating orbit of exchange", where value is determined currency in the market, according to the forces of supply and demand, and the government to intervene when necessary to re-route the exchange rate, in line with a group of standards including the status of the current account and foreign currency reserves, while dependent both Egypt and Yemen system floating exchange. pointed out that "free-floating" leaves the exchange rate freedom change continuously over time, consistent with market forces, and limited interference by the authorities in this case to influence The pace of change in the exchange rate only, and not to limit that change. said Alkrasna "refers literature on systems exchange rate that there impact of exchange rates on economic growth and have that influence either directly through the affected exchange rate or indirect impact of the exchange rate on each of the investment and trade and financial sector development. " indicate the economic theory that the effectiveness of countries to deal with the trade shocks depends primarily on the drainage system adopted in these countries, which in turn is reflected in the country's economic growth. "In case prices fall exports State, the reflection that economic growth depends on the exchange rate regime, whether fixed or floating, pointing out that the low price of exports will reduce state revenues, which will lead to a decline in economic activity, as well as in employment. " and "In the case of the adoption of the state rate system fixed exchange it requires the state to intervene to keep the exchange rate of the local currency by starting to buy the local currency, will reduce the availability of these currency, to grant facilities and investments, which will negatively impact on economic growth. " and stated that in the event of the adoption of the state to a flexible exchange rate or floating, The State is committed to intervene to raise the exchange rate results in a lack of foreign currency and lead to a further decline in the price of the local currency which will reflect positively on exports and thus an increase in economic growth. explained that the impact of the exchange rate regime based on the level of sophistication in financial markets, Since the flexible exchange rate is usually coupled with fluctuations high and that could have a negative impact on the economy unless the financial system is able to absorb shock and provide dealers with tools hedge occasion, so thought it must be a system developed financial if take advantage of the price flexible exchange.
How to Understand the Free Float Article - Enorste
Since it is Saturday afternoon and I have nothing else to do I thought I might add some comments regarding this very interesting “revelation” that appears to confirm KAP’s and my theories on a possible “free float” for the dinar in the near future.
So here goes:
"Confirmed the Arab Monetary Fund, the drainage systems prevailing in the global economies and Arab currencies, including 3 types first "floating fully" and that left to market forces by identifying currency exchange rate, as countries rely other system "peg a single currency or a basket of currencies" including states "cooperation", Jordan and Lebanon, as well as drainage systems combine the former regimes.”
This paragraph offers the following incontrovertible facts: first that the Arab Monetary Fund, which is a subset of the Arab Leaque, has CONFIRMED what is stated farther on. This is important because it comes from a highly respected organization. In other words, this is NOT an opinion piece.
Second, the goal of the Arab Monetary Fund, among other things, is to bring balance among the 20 Middle East country members in terms of finances and trade. We may therefore read here the word “currencies.” In fact, the AMF is on record that they are attempting to reach a goal of a single Arab Currency (a la the GCC discussion from a couple of years ago, remember?). Therefore, and again this is important, for this organization to be talking about adjusting currency rates, or letting them float, this is BIG.
Finally, this paragraph describes the 3 types or methods of currency control: “floating fully,”, “pegged to a single currency” or “pegged to a basket of currencies.” We are only interested in the first method. The Iraqi dinar currently falls under the second method. It is a “fixed rate” currency that is “pegged” to the dollar. It is “pegged” at 1166 per dollar and has remained that way for about 2 years. The remainder of the article, as far as Iraq is concerned, deals with moving from the second method above to the first, “floating fully.”
“Said Dr. Ibrahim Alkrasna head of training in the Fund during the ‘financial stability’, which concluded yesterday at the Fund in Abu Dhabi ‘are diverse exchange in the Arab countries to 3 types,’ noting that both Jordan and Lebanon and the Gulf Cooperation Council (GCC) linking currency fixed exchange rates against the dollar.’ "
In this paragraph we see that Alkrasna, who is head of training at the AMF appeared at a “Financial Stability Conference” held in Abu Dhabi. It was held 2 days ago. He states that the 20 members of the Fund are “diverse” in that they use all 3 types described above. In particular he notes that Jordan, Lebanon, and the GCC currently use the “pegged” rate against the US dollar.
“He added, linking Libya and Syria their currencies unit SDRs, while Morocco linking exchange rate DRAM basket undeclared currency, where the euro weight largest in the basket and determined central bank exchange rate Moroccan dirham daily, and selecting the minimum and maximum exchange rate of the dirham.”
In this paragraph he explains that Libya and Syria also use a “pegged” rate but that their rates are pegged to the SDR which is a “form” of currency used by the International Monetary Fund (we have talked about this before). Then he names Morocco, which is “pegged” to a basket of currencies known as the DRAM. It is tangentially interesting to note that the actual currencies in the DRAM basket are not named, although the Euro is most heavily weighted in that basket. In the case of Morocco we also see that he describes a “managed float” for the Moroccan dirham, meaning that it can only go up or down a limited amount per day.
“He explained that the linkage to a basket of currencies is to choose a system linked to a basket of currencies available, such as SDRs and other currencies baskets, usually based on the currencies of major trading partners of the state. “
In this paragraph he simply states that most “baskets” have a major trading partner as the most heavily weighted currency in the basket, such as the Euro or the dollar.
“He Alkrasna adopt all of Iraq, Tunisia, Algeria, Mauritania and Sudan system ‘floating orbit of exchange’, where value is determined currency in the market, according to the forces of supply and demand, and the government to intervene when necessary to re-route the exchange rate, in line with a set of criteria including the status of the current account and currency reserves foreign, depends both Egypt and Yemen floating exchange system. “
This paragraph affects Iraq and is therefore very important. He lumps Iraq with Tunisia, Algeria, Mauritania, and Sudan. This is actually amazing, since none of these countries are undergoing the turmoil in the region that we have seen the last several days. In other words I would wager that these are among the most “stable” Middle East countries at this time, and he is grouping Iraq with them. In any case, he is clearly stating that these four countries are going to “adopt” a “system ‘floating orbit of exchange’”. He goes on to define what that means: the value of a given currency is determined by supply and demand forces in the international market. He qualifies that by saying that the central bank of a given country will “intervene” to adjust the currency rate according to a set of criteria. The criteria include the “status of the current account and currency reserves foreign.” This is extremely important for our investment because Iraq HAS THE HIGHEST FOREIGN RESERVES! This would mean that the Iraqi currency would remain free to float to equilibrium, because it has plenty of reserves to back it up. The last part of the last sentence is somewhat ambiguous, however, because it says “depends both Egypt and Yemen floating exchange system.” The question then would be: Does this then depend on the TYPE of floating exchange system these countries have? This gets us much closer, since both Yemen and Egypt have a basically “free float” system. While the government has put in place some controls in these countries and even has an “official” government rate, the “real” rate that you and I see, which is the commercial rate, is freely determined by the market. Therefore we see that Alkrasna is stating that the “floating fully” system for Iraq and these other four countries will be what we call a “free float” with little or no interference from the CBI.
“He pointed out that ‘free-floating’ leaves the freedom of exchange rate change continuously over time, consistent with market forces, and only the intervention of the authorities in this case to influence the pace of change in the exchange rate only, and not to limit that change.”
He then expands on this thought in this paragraph by saying that the changing of the rate will be entirely up to the free market forces. He limits this by stating that the only influence that will be made by the CBI is to limit the PACE OF CHANGE and NOT to LIMIT THAT CHANGE. This is extremely important as well, because through it we know that the dinar will be allowed to reach “equilibrium” at some point in the future. In other words, it may be wise to hang on to some of your dinars until the rate stops rising.
“And said Alkrasna ‘indicate the literature on exchange rate regimes that there impact of exchange rates on economic growth and influence either directly through influenced by the exchange rate or indirect impact of the exchange rate on both investment and trade and financial sector development.’"
Here Alkrasna is stating that the “literature” confirms that exchange rates have an impact on economic growth. I have dealt with this briefly before. Rising rates lower import costs, which puts more money in the people’s pockets, meaning they can buy other and more things, and thereby the economy grows. Lowering rates has the reverse affect.
“Economic theory indicates that the effectiveness of countries to deal with the trade shocks depends primarily on the exchange system adopted in these countries, which in turn is reflected in the country's economic growth.“
This paragraph simply states that some countries do better than others in dealing with “trade shocks” through exchange rate policy, and that how well they do determines how well the economy performs. Of course for the Iraqi dinar this is not important, since the currency will not be interfered with by the CBI (it will “float” freely).
The next few paragraphs deal with the effects that come about through interference by the CBI and do not need to concern us, since the currency will be allowed to float freely.
“He explained that the impact of the exchange rate regime based on the level of sophistication in financial markets, as the flexible exchange rate is usually coupled with fluctuations high and that could have a negative impact on the economy unless the financial system is able to absorb shock and provide dealers with tools hedge occasion, so thought that there must be a sophisticated financial system if I want to take advantage of the flexible exchange rate. “
This last paragraph is good for educating us, because it is open in stating that flexible (floating) exchange rates tend to be volatile (go up and down a lot) which could affect the economy adversely unless a financial system is in place to allow “hedging” which dampens those effects. Not coincidentally, Shabibi has been trying to get the Iraqi banking system more and more sophisticated so that it can handle just this sort of fluctuation properly.
In summary, we see that the Arab Monetary Fund has announced that it is ADOPTING a free floating system of exchange rates for Iraq and four other countries on the order that currently exist in Egypt and Yemen. I would not be surprised if there were no announcement from the CBI, although it would be nice to get one. In any case, this is clear and authoritative evidence that what we suspected might happen in Iraq is in fact taking place as we speak. As far as actually “seeing it” in the market place is concerned, I would suggest that all of us keep a sharp eye on the IQD on any and all foreign exchange markets we can find. Don’t be surprised, however, to find that a special Middle East exchange system might show up. After all, this article deals with 20 countries, all in the Middle East. Having said that, however, several of those countries are linked to the dollar, so any new market that would arrive would have to have the dollar as a “player” along with the dinar and other ME currencies.
I know that this article wasn’t as difficult to read in translation as some others have been, but I thought that some might find it helpful if I gave a more understandable summary.