So I'm over at my father's tonight, and he's all excited about the Dinar re-valuation. After a good 10 minutes of arguing he showed me this user group and another one at another site which seems to compile posts as proof of his upcoming good fortune. I'm not here to bash anyone, but I'm just trying to understand. My old man is 70 and can barely turn on a PC, so I'm afraid that any link he clicks or page he hits is taken as gospel--no offense to any material presented within this board.
Iraq will re-valuate/denominate their currency, that's a fact. They have to to participate within the global economy. but it will in mo means appreciate 3000x overnight. It's just not possible and there is no precedent for this. My father keeps referencing the Kuwaiti dinar, but I assure you that new bills were printed to replace the ones stolen by the Iraqi regime, and they were re-denominated at the same time. Kuwaiti citizens were given a few months to exchange their currency. If a Kuwaiti citizen has enough currency in their pocket to buy a loaf of bread before the re-valuation/denomination, they had the same buying power after. I believe Kuwait then proceeded via a managed float, allowing some band of change per month (3-4%). this is typical within the currency markets and is what will happen in Iraq.
I asked my father to imagine what would happen if Iraqi currency suddenly rose in value 3000x overnight. My father keeps referencing the Iraqi bank wanting to re-valuate to reach their pre-war price of $3.22 (I have no clue if this is accurate, it what he keeps saying). So 1170 IQD : 1 USD ---> 1 IQD : 3.22 USD. That's a 3767x rise in the value of the IQD. Seriously? Some poor guy in the streets of Iraq goes to bed with 10,000 IQD ($8.50 USD) and wakes up with the equivalent of $32,020 USD? Can you imagine the chaos?
What of some Iraqi merchant selling widgets for 1,000 IQD. Widgets that cost him good money to produce would be sold at -3,767x of the cost to make them (referencing purchasing power here, follow it back through the economic chain). The entire country would have to change their pricing simultaneously with the increased purchasing power of the public. It just can't happen by a re-valuation of the same currency. Imagine the people who didn't get the message, paying 3,767x more or less for an item. Some poor goat herder would be mugged his first trip to town. Or his tent raided in the night for his stash of high denom dinar. Whatever happens to the IQD, the purchasing power of the Iraqi people will be relatively the same pre and post re-valuation/denomination. If you could barely buy a loaf of bread before, you can still only barely buy one after.
What Iraq will be able to do is introduce re-denominated bills in circulation for some time with the higher denomination bills, eventually removing the higher denominations from circulation. The lower denom bills will be equivalent to the higher ones, i.e. 10 IQD = 10,000 IQD, and so on. At some point, the lower denoms will be the standard of trade in-country. This re-denomination also serves as a re-valuation. Iraq may also attempt to manipulate or further re-valuate the physical price of the currency, but this is severely limited by the worldwide market makers. Generally a managed float is assessed, where the currency may trade in a limited band of value month to month. Hopefully, for all you that are invested, it appreciates higher each month to come, up towards the pre-war values within the next decade.
This is still an investment, but no one in the right mind should believe that $1,000 USD will become $3.7 million overnight. Even if that was possible there is no liquidity in the IQD market to exchange back into USD. Experienced currency traders are looking for the upper end of the float after RV and availability of contracts, hopefully 20% APR or more--which is a damn good place to put a portion of your investment portfolio. And professional traders don't buy physical currency from the internet at 40% premium and walk it to an exchange counter either, but currency futures contracts via the ForEx.
Is anyone on the same page here? I would like to direct my father to some realistic threads somewhere! He certainly doesn't want to hear it from me
JBD
