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Benefits of a LOP


rockfl9
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10 hours ago, EverCurious452 said:

That implies just ticking the rate up slightly

 

Slightly? Could be......

But why go thru the hassle of going to the parliament, enact a new law,  change their monetary and fiscal policy when CBI could have easily adjust their exchange rate 'slightly' like they have done before (1170, 1166, 1184, 1190)? 

 

Mebbe they just like doing things the hard way I guess. lol!

 

 

 

 

 

 

 

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3 hours ago, zul said:

 

Slightly? Could be......

But why go thru the hassle of going to the parliament, enact a new law,  change their monetary and fiscal policy when CBI could have easily adjust their exchange rate 'slightly' like they have done before (1170, 1166, 1184, 1190)? 

 

Mebbe they just like doing things the hard way I guess. lol!

Yea no idea either. I also don't know what "change their monetary and fiscal policy" really means or even if the articles are accurate or if this is just some politicians view. My only point is that as long as the rise in value is aimed at making sure inflation does not start to be a problem, the amount of the rise will be very small (i.e. undoing the small increases you mentioned).

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6 hours ago, EverCurious452 said:

Yea no idea either. I also don't know what "change their monetary and fiscal policy" really means or even if the articles are accurate or if this is just some politicians view. My only point is that as long as the rise in value is aimed at making sure inflation does not start to be a problem, the amount of the rise will be very small (i.e. undoing the small increases you mentioned).

 

Like I said earlier, inflation rate in Iraq has been very very low (between 1.8% to 2%) for a few yrs now.

So this change of monetary and fiscal policy (aimed at raising the value of dinar) has nothing to do with (current) inflations.

But once done ( Parliamentary move to raise the price of the dinar and maintain the stability of inflation ) they want CBI to maintain the stability of inflation.

 

Meaning.....it is the other way round now: Increase the value of dinar, and then maintain the stability of inflation.

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17 hours ago, zul said:

 

Like I said earlier, inflation rate in Iraq has been very very low (between 1.8% to 2%) for a few yrs now.

So this change of monetary and fiscal policy (aimed at raising the value of dinar) has nothing to do with (current) inflations.

But once done ( Parliamentary move to raise the price of the dinar and maintain the stability of inflation ) they want CBI to maintain the stability of inflation.

 

Meaning.....it is the other way round now: Increase the value of dinar, and then maintain the stability of inflation.

Maybe.  But I would advise extreme caution when using nuanced parsing of broken english from an Arabic to English translation, as evidence for anything.  All the more so if it appears to be counter to the basic constraints on the operation of a pegged currency.

Edited by EverCurious452
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On ‎4‎/‎2‎/‎2019 at 7:53 AM, zul said:

 

Slightly? Could be......

But why go thru the hassle of going to the parliament, enact a new law,  change their monetary and fiscal policy when CBI could have easily adjust their exchange rate 'slightly' like they have done before (1170, 1166, 1184, 1190)? 

 

Mebbe they just like doing things the hard way I guess. lol!

 

 

 

Not so easy Zul.  To be sure the LOP is a pure neutral conversion they need a law to dictate how the conversion of wages, prices and accounts will legally take place and  penalties for failure to follow.  If you looked at the Turkish LOP the law was very detailed and took about 20 pages.  

Also we don't know how the MOF measures inflation and with all of the welfare and allowances given the average citizen the prices for normal food and fuel are kept flat.

 

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On ‎4‎/‎2‎/‎2019 at 11:19 AM, EverCurious452 said:

Yea no idea either. I also don't know what "change their monetary and fiscal policy" really means or even if the articles are accurate or if this is just some politicians view. My only point is that as long as the rise in value is aimed at making sure inflation does not start to be a problem, the amount of the rise will be very small (i.e. undoing the small increases you mentioned).

If they LOP the value of the term "  One Iraqi Dinar" would mean the equivalent  of $0.86  !  That would fit very well in international trade.

Current monetary policy is not to  allow the dinar to trade outside the country.  A LOP and free trade could be what is meant .  But would that be only with the NEW DINAR ?  The reason for that is that it is suspected that a lot of IQD was stolen an exists somewhere outside of the country and they don't want to honor it even in LOPed form..  

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2 hours ago, rockfl9 said:

If they LOP the value of the term "  One Iraqi Dinar" would mean the equivalent  of $0.86  !  That would fit very well in international trade.

South Korea does not seem to have had any problems with international trade despite their exchange rate being 1 USD = 1134 Won.

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18 hours ago, EverCurious452 said:

South Korea does not seem to have had any problems with international trade despite their exchange rate being 1 USD = 1134 Won.

 

Of course they don't. They are exporting economies. They prefer low exchange rate. Good for their export. 

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10 hours ago, zul said:

 

Of course they don't. They are exporting economies. They prefer low exchange rate. Good for their export. 

No that is not correct.  If the rate changes downward, so stuff in their country becomes cheaper for buyers in other countries relative to the previous situation its good at least in the short term for exports. But that is only relative to the previous higher rate.  The Won has been at this general level for decades.  So exports are helped or hurt when their rate goes down or up again relative to the previous rate, but overall having an exchange rate in the neighborhood of 1000-1400 Won to 1USD has not hampered their economy or their ability export.  The absolute exchange rate has little to no bearing on trade (or the economy) at all, it's the change in the rate that matters.   This is why rate stability is the goal of every central bank.

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5 hours ago, EverCurious452 said:

No that is not correct.  If the rate changes downward, so stuff in their country becomes cheaper for buyers in other countries relative to the previous situation its good at least in the short term for exports. But that is only relative to the previous higher rate.  The Won has been at this general level for decades.  So exports are helped or hurt when their rate goes down or up again relative to the previous rate, but overall having an exchange rate in the neighborhood of 1000-1400 Won to 1USD has not hampered their economy or their ability export.  The absolute exchange rate has little to no bearing on trade (or the economy) at all, it's the change in the rate that matters.   This is why rate stability is the goal of every central bank.

 

U r missing the whole point. Exporting countries prefer low exchange rates as this will contribute to low cost of doing biz as a whole (meaning: low labor cost, low material cost, low production cost). Making the pricing of their products more competitive than other exporting economies.

 

Whereas importing contries like Iraq, Kuwait, Bahrain prefer to have high exchange rates because cost of imports will be relatively cheaper and 'less' outflow of money.

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14 hours ago, zul said:

 

U r missing the whole point. Exporting countries prefer low exchange rates as this will contribute to low cost of doing biz as a whole (meaning: low labor cost, low material cost, low production cost). Making the pricing of their products more competitive than other exporting economies.

 

Whereas importing contries like Iraq, Kuwait, Bahrain prefer to have high exchange rates because cost of imports will be relatively cheaper and 'less' outflow of money.

No, this is false.   This would violate the one price law in economics.

 

Consider two countries, A and B.  They are very similar with similar GDP, industrialization, living standards, education, tariffs, etc.  and both have a pegged currency (the Aye and the Bee). The Aye has traded over the past 50 years in a range of 900 Ayes = 1USD to 1100 Ayes = 1USD, while the Bee has traded in a range of .9Bees = 1USD to 1.1Bees = 1USD.  Both countries have widget manufactures that export widgets.  Which one will be less expensive in DOLLARS?  Answer, neither they will cost (roughly) the same.  If the price in dollars was significantly different then you could end up owing the world by simply going round and round buying from A and selling to B.

 

Driving the rate down will temporarily make things cheaper in Dollars until local wages and prices adjust.  But, that is only relate to the previous rate.  Its the CHANGE to the rate that matters, not the absolute rate.

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1 hour ago, Markinsa said:

 

That doesn't explain China...

In what way?

 

China takes a long time for wages and prices to adjust to a new exchange rate as the government runs the whole country like one business moving profits around to subsidize other sectors.  The complaint about them relative to currency (as opposed to stealing IP, not opening their markets etc) is that they were artificially lowering their exchange rate.  Like I said, that will at least in the short term (and for China more like the medium term) make their products less expensive in dollars than they were at the higher rate.   But the primary reason that it is inexpensive to manufacture in China is not their exchange rate but the cost of labor which is mostly driven by the cost of living.

 

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7 hours ago, EverCurious452 said:

No, this is false.   This would violate the one price law in economics.

 

Consider two countries, A and B.  They are very similar with similar GDP, industrialization, living standards, education, tariffs, etc.  and both have a pegged currency (the Aye and the Bee). The Aye has traded over the past 50 years in a range of 900 Ayes = 1USD to 1100 Ayes = 1USD, while the Bee has traded in a range of .9Bees = 1USD to 1.1Bees = 1USD.  Both countries have widget manufactures that export widgets.  Which one will be less expensive in DOLLARS?  Answer, neither they will cost (roughly) the same.  If the price in dollars was significantly different then you could end up owing the world by simply going round and round buying from A and selling to B.

 

Driving the rate down will temporarily make things cheaper in Dollars until local wages and prices adjust.  But, that is only relate to the previous rate.  Its the CHANGE to the rate that matters, not the absolute rate.

 

Why do u think some advanced economies have factories outside of their countries? Wouldn't it be better to have them in country as these wld provide employment and other benefits to their own ppl? 

 

The answer is simple: low cost labor, low cost materials, low cost productions therefore low competitive pricing. Even a diff of 5 or 10 cents wld make a huge diff if we are talking huge volumes.

 

 

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10 hours ago, zul said:

 

Why do u think some advanced economies have factories outside of their countries? Wouldn't it be better to have them in country as these wld provide employment and other benefits to their own ppl? 

 

The answer is simple: low cost labor, low cost materials, low cost productions therefore low competitive pricing. Even a diff of 5 or 10 cents wld make a huge diff if we are talking huge volumes.

 

 

I agree.  It's due to the low cost of labor which is (mostly) due to the low cost of living.  Materials cost is less of a factor as that is less country dependent and materials are easy to ship around.  Again China is an outlier in that they can offer materials cheaply as the state run companies do not have to show a profit.   But low costs of labor, living, etc. are not due to the exchange rate.  that's all I'm saying.  

 

Interestingly, low labor costs are become less of an issue with robotics that are even cheaper.  How that will all play out is as yet unknown.

 

This topic started by my reply to Rock's claim that a LOP moving the exchange rate of the new dinar to 0.86 USD would "fit very well with international trade", and I responded that traders do not care about the exchange rate, as long as its stable.  RVer's have made a similar claim, that Iraq can not enter international markets as long as their exchange rate is so low.  These statements are false.  Its rate stability that is desired not a particular value.

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2 hours ago, EverCurious452 said:

I agree.  It's due to the low cost of labor which is (mostly) due to the low cost of living.  Materials cost is less of a factor as that is less country dependent and materials are easy to ship around.  Again China is an outlier in that they can offer materials cheaply as the state run companies do not have to show a profit.   But low costs of labor, living, etc. are not due to the exchange rate.  that's all I'm saying.  

 

Interestingly, low labor costs are become less of an issue with robotics that are even cheaper.  How that will all play out is as yet unknown.

 

This topic started by my reply to Rock's claim that a LOP moving the exchange rate of the new dinar to 0.86 USD would "fit very well with international trade", and I responded that traders do not care about the exchange rate, as long as its stable.  RVer's have made a similar claim, that Iraq can not enter international markets as long as their exchange rate is so low.  These statements are false.  Its rate stability that is desired not a particular value.

EC of course you are correct ,  rate stability is the target for all Central banks.  My point was that if Iraq would go thru with the issue of a completely new currency they should use a 1,5,10,20, etc distribution like the dollar , euro and other modern currencies .  Sure the rate would take a big jump with the LOP internally but Internationally it would be 1USD= .86 IQN = 1.12.Euro = 1.56 GBP etc.  Certainly easier to convert.

 

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