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Good morning, DinarVets! This one took me a bit to write up, and I'll be candid here - it was the most fun I've had writing an update in quite some time! Like many of you, I do fairly frequent "check ins" on my feelings about this investment... and I have questions, just like everyone else. "Is this still worth waiting on? Did the bus turn around and it's time to get off?" An Iraqi RV is not a guarantee, so these are fair questions any sane and intelligent person should ask themselves once in a while. I'm happy to state that today is not the day I'm getting off the bus. In fact, I'm pulling the seatbelt tighter! There was a question posed a couple weeks back about "sterilization". The CBI employs a procedure called "sterilization" as a monetary policy, but that is different than what may have been being asked... which is why I asked for clarification on it. I wanted to go deeper into the topic, but my post on CBI Auctions and the Iraqi Budget was already getting a bit lengthy. As of this morning (Friday 13 March 2020), there is a lot of "sterilization" talk - and most of it is not related to monetary policy, but actual disinfecting. The CoronaVirus is currently causing chaos in the markets, creating instability and fear that is likely to last a bit longer (but not forever), and it's always good to "get back to the basics". You know - a "check in". In these crazy times, are we the crazy ones? Are we crazy for sitting this ride out a little longer? Should we be throwing in the towel, selling all our dinar, and spending all of our money on toilet paper and hand sanitizer? I think the answer lies at least partly in the following subjects, so let's get into it! The topics today are as follows: CBI Auctions, and the Iraqi Budget. Before we do a little bit of a deep dive, I have a couple of opinions that may seem contrary - namely, the Budget and the Auctions, while important to Iraq, will probably never have a significant impact on (when or if) the RV. In spite of that, the seatbelt just got tighter, and my smile got bigger. These are complex topics, I'm going to simplify a little and I'm only covering a few of the aspects, but these are major parts of the topics and therefore a major factor in the size of my current smile. The summary, which you'll understand if you can make it through this entire post, is simple. Despite these scary and crazy times we are living in, Iraq and the Iraqi Dinar still have incredible potential. The rate of a currency is generally set by the countries Central Bank, not the IMF or anyone else. Iraq's rate is set by the CBI (Central Bank of Iraq). Ready? Here we go! CBI Auctions. These are used by the CBI to regulate the money, control the money, maintain the money - specifically, the rate and the amount in circulation. Actually, the CBI is selling USD at the auctions... but this will turn into a 7 hour read if I go too deep into that! It's helpful to understand where Iraq comes up with the USD to sell at the CBI auctions. The short version is this: Iraq's primary source of revenue is OIL. Payments are made in US Dollars, paid to the DFI (Development Fund For Iraq). The USD is then transferred to the Ministry of Finance (MoF), and the MoF sells it to the CBI in exchange for Dinars - the same Dinars that the CBI collected through the Auctions of USD. image source See how that all came full circle? Money in, money out, easy peasy. (This will take us to the Budget later.) (Fun fact! Dollars go to the DFI account rather than directly to the MoF to prevent the money from immediately being confiscated to pay reparation debts... kind of like using an IBC to protect assets.) We can expect the auctions to continue while the Dinar is pegged to the dollar, undervalued, and the circulation needs to be controlled. There are some people who believe the Auctions in Iraq need to stop, and there's good reason for that - few countries have had success with them. For example, South Sudan (who knows where that is?) tried it four times after they devalued. South Sudan, which is known as one of the most underdeveloped nations in the world, and who's primary export is timber. That's no knock on wood, the world needs wood... but wood isn't oil, and South Sudan isn't Iraq. (Sudan and South Sudan don't even make the top 100 in the world for oil reserves.) Iraq is obviously different, both in potential here and in the successful practice of having auctions. Other countries to do currency auctions include Jamaica, Uganda and Sierra Leone. Like South Sudan - none of them are Iraq, and none of them carried Auctions as long as Iraq... in fact, the auctions in those cases were failures. With those examples in mind, of course we'd like to see the currency options stop. And they probably will, at some point. But most likely not until after the RV. Since the auctions aren't stopping, and Iraq is not the same as the countries that failed at auctions... what can we expect during a major rate change? Fantastic question! I'll take a stab at it, using examples to make the point. At the auctions, the CBI operates buy/sell at about a 2% difference, which is an effective start of the spread that will affect every single one of us. If the rate were changed today to 1IQD per 1USD and the IQD returns to the global market (it will, at any significant increase in rate), then we will be trading in at the rate stated by the CBI minus middlemen fees - what it costs to actually get the money through the various institutions and into your account. (This isn't Bitcoin, you know!) If the CBI is using a 2% spread, they will "buy" at .98 and "sell" at 1 per US dollar. I fully expect that to fluctuate, perhaps wildly. They may pay .99 at first to show their confidence, and then lower it to .90 or further. (The bigger the differential, the more beneficial it is to them for the day profits.) They may quickly move to a flat 1:1 "Auction rate" simply to reinforce the rate and show that they are going to ditch the auctions soon - a lot of this is going to depend on the market. It is a business, after all. A 2 cent difference may not seem like much, but bear with me... It is important to understand the spread! I'll keep using the 1:1 number. For example, Iraq announces that the dinar is equal to the US dollar, the CBI is backing it, the IQD goes on the global market, and the rate sustains itself after a short time due to market demand. At this point, a lot changes, but those are different (and much longer) conversations. When we exchange, we are not going to the CBI - we are going to a bank that will trade IQD for dollars (or any currency). That bank will rely on the CBI buy rate first, which means they are getting a max of .98 USD per 1 IQD. Then they have to pay tellers and all their other expenses, so they add their spread on top of that - and this is assuming the bank you use is buying (selling) direct with the CBI. (They won't be.) By the time it gets to you, the CBI may have an advertised rate of $1, but you're only putting .70 in your pocket (before taxes). That "spread", or "cost", is unavoidable. We are not going to get the full "rate". Of course, you will get a better rate (money in your pocket) if you're VIP here at DinarVets, but that's not the point of this. The point is the Auctions will continue, and looking at past auctions - even yesterday's or today's auction - will not give us clues to if Iraq will RV today or tomorrow. (If we could see tomorrow's auction, that would be a different story!) The Auctions are good to see, in Iraq, because they are proof that Iraq is stable, still in business, and functioning. But the CBI Auctions will not give us the RV date until after you get my text message. The Iraqi Budget. The Iraqi Budget is important to Iraq because it defines how they spend money - and yes, it's the same money that was mentioned above, which comes mostly from oil sales. The MoF distributes IQD to each department according to the Budget. The Budget allocates resources to specific departments, based on a percentage of revenue or a fixed amount, and the individual departments spend their portion accordingly - just like giving your kid an allowance. A Budget works the same way in most places, and Iraq is no different. Politicians lobby for their departments, asking for more money always, and this is why a "tripartisan" government is so important and mentioned so much in the current Prime Minister debacle. If a Prime Minister came in and seated all members of one political group, it would be like the US having only Democrats or only Republicans in power. The reason we hear about the Iraqi Budget so much is simple - they are all fighting for money. (Or power, but it's really the same thing.) The reasons I say the Iraqi Budget doesn't matter are pretty simple. You've made it this far, stick with me just a little further! 1. Whether a specific Department (Defense, Education, etc) is on the Iraqi Budget for a percentage or a fixed money amount, there is a dollar/dinar amount that can be assigned to it based on the current price of oil x demand for oil = projected income / department allocation = $ for Department. This is a simple calculation that can be done in 2 minutes on a 1 page presentation. It's literally 2nd grade math. 2. Regardless of any rate change, that dollar amount can be estimated and stay the same with a simple Amendment. Imagine a late night Parliament meeting - called at the last minute after 8PM one night, emergency, mandatory! One item on the agenda - doors are locked, cell phones left outside - the ONE ITEM is this: We are going to raise the rate at midnight provided everyone signs this Budget Amendment. The Budget Amendment, in this case, states that the previous passed Budget is fixed at the old rate and all Departments receive an immediate 10% bonus due to the CBI exchange rate adjustment. The rest of the money that becomes available is held in reserve until further modification of the Budget... EVERY SINGLE POLITICIAN is a hero and has almost unlimited job security at that point. Not one of them loses. It's the biggest slam dunk in Parliament history. Of course they wouldn't magically start to get along, but that's an offer even that bunch of hooligans couldn't screw up. OR: 3. Bypass the late night meeting and just pass a Presidential declaration stating the same. It accomplishes the same thing, and by the time anyone could complain, the rate would have been in effect long enough that it wouldn't matter. The President knows this. The CBI knows it. You know it. I know it. The bottom line here? It doesn't matter what the Budget says, because all the Budget really does is allocate money to departments. The rate, based on the global fiat currency exchange program, controls how many wing dings and knick knacks they can buy with their money because of it's international status... but the Department of Wing Dings is still going to have $X of the Budget, the Department of Knick Knacks still has $X, regardless of the rate, and that's the way it works. Fiat currency isn't an "Iraq" thing - it's a WORLD thing. OIL isn't an Iraq thing. Budgets aren't an Iraq thing. Currency manipulation isn't an Iraq thing. NONE of this is unique to Iraq - all of this is "business as usual", and when Iraq changes their rate, that's what it is - business as usual. Conclusion: There are plenty of good reasons for intelligent people to discuss the Budget and the Auctions. It's important that Iraq continue to be successful in the Auctions, pass their Budget, and continue doing business. While the world demands OIL, those who have it will always have credit. Iraq has proven itself capable of utilizing Auctions as a form of monetary control, and I don't believe their Auctions or Budget are a hindrance to increasing the value of the Dinar. In fact, it looks quite the opposite. And on that note, I say... GOOOOO RRRRVVVVV!!!!!