Is $1.49 Rv too much for the worlds money supply?

[Bama]

THIS IS A BASIC EXPLANATION OF A VERY COMPLICATED SYSTEM. DO NOT READ MORE INTO IT THAN IS HERE.

To determine the answer, we first need to understand how money works.

Prior to 2003, Iraq did not have a unified currency that was accepted across the country and were using at least 4 forms of currency at the time. The Official Government money was "Sadam" Dinars, but the people traded Swiss Dinars, and dollars to name a few.

Once Sadam was deposed, the need arose to create a new currency, and that is the one we all own today.

In printing the new bills, Iraq established what is known as "Base Money". This is the money that the government officially recognizes and will accept for all debts due from its citizens. The "base money" is then distributed out to financial centers around the country to be held in reserve in order to facilitate small business and person to person exchanges, withdrawals.

With a base money system in place, financial institutions are now able to begin creating "bank money". These funds are created out of thin air when a person, business, or some other entity (government) needs to borrow money. A deposit is credited to an account digitally, thus increasing the money supply.

Everyone who can borrow money has the ability to increase the money supply at will. Credit Cards, Credit Lines, Bank Loans, etc all have the effect of increasing the money supply. When these loans are paid off, all of the money that was "created" once again disappears and the money supply decreases.

"Bank Money" has value because it carries with it the promise of being converted into "Base Money". In other words, I take out a loan and buy a car. For me, it is "bank money" but to the person who sold me the car, it becomes "base money". And so goes the worlds economies.

Now for Iraq. They have Base Money of between 8 and 14 Trillion Dinar, and for this discussion, the number is not important. Once it was created and accepted by other world governments, Iraq gained the ability to start dealing in "bank money" on a global stage.

So let's assume that Iraq needs capital like all governments do. What are their funding options? They can tax their people, but they are very poor. They can sell their oil, but they are under heavy sanctions. Another choice is to borrow money from other governments.

To do this, they sell CBI paper, or a promise to pay, thus creating "bank money". A foreign government buys the CBI Paper (notes that represent IQD's) but that are denominated in the foreign governments currency. Iraq get the money they need to operate, and the foreign government has an investment in an oil rich country.

This "bank money" is not the paper money you and I hold. This is the "created out of thin air money" that all us of deal in. When the "bank money" is redeemed at the CBI, only then is it turned into "base money".

So how does Iraq handle all of their debts? One way would be to revalue their currency so that it can be exchanged by these oil hungry countries for oil instead of their "base money" . By increasing the value of an IQD, Iraq can now use it's same supply of "base money" to pay off the foreign "bank money" debts as the IQD now has greater value. Foriegn Banks are ready and willing to exchange their money with their money for the new IQD as it gives them greater buying power to aquire oil.

The country holding the debt (owed to them by Iraq) then takes the money from the investors holding "base money" (the RVed IQD) and exchanges it (gives their currency to the investor) for their own or another currency. They then use the IQD to buy oil from Iraq. The CBI converts the "bank money" back into "base money" and the process starts over.

So, can the IQD revalue at a higher rate? The answer is yes, because the effect would be to create more buying power for Iraq to pay off their "bank money" debts with out soaking up 25% of the worlds money supply while at the same time almost eliminating their foreign debts in the process.

POINT OF FACT!!!! The foregoing is my opinion based on an understanding of how the money supply works. This has been a very elementary explanation of an extremely complex system and is NOT meant to imply that anything will happen on the RV front anytime soon.

[SBX]

Very good post.....I think most agree that theres no way to exchange ALL the outstanding Dinar for actual Ben Franklins....but I also think most understand that we work primarily on "electronic money" now days.

And the idea that no $$ will be turned over by Iraq makes a ton of sense...they will give oil for the Dinars out there and everyone will be happy.

[terr]

Explained very well.

[eddie48]

so its not no good now

[Bama]

Tough to say with out a better understanding of the Iraqi Banking system and their reserve requirements.

[Bama]

You could be right. I do not know if their currency is functioning as a Fiat Money system or a Commodity money system. If Commodity System due to the oil, they could handle a fairly large RV. If a Fiat System like ours, well, we're toast.

[Stickman924]

Bama,

What keeps Iraq from selling oil before an RV? I dont grasp why they have to RV and get loans from other countries.

[Bama]

Tough sanctions for one, lack of infrastructure in the oil industry for another. The oil production is almost back to pre war levels, how every delivery and distribution is still an issue. The primary concern has been security. Now that security has stabilized, infrastructure construction is in full swing. The oil is there, it is just tough to deliver. With money borrowed form foreign governments and investments from the same, a lot is getting done. An RV is not necessary, but would be favorable to all concerned.

[awish30]

Very well explained, makes it easier to understand. Thanks again.

[Bama]

This is from a US Dept of Trade Report Released a few days ago.

You can read the full report here: http://www.trade.gov/static/Inv_Guide_2009.pdf

Iraq’s Banking System

There are 43 banks licensed to operate in Iraq. Of these,

36 are private banks, including eight Islamic banks and

those that are branches of foreign banks. The remaining

seven banks are state-owned (Rafidain, Rasheed, Iraq

Socialist Bank, Agriculture Bank, Trade Bank of Iraq, Real

Estate Bank, Industrial Bank).

Most banks have active Society for Worldwide Interbank

Financial Telecommunication (SWIFT) connections and all

banks are connected to the Iraq Payments System operated

by the Central Bank of Iraq and therefore able to transact

domestic payments.

Iraq has nine banks with full electronic funds transfer

(EFT) capability including SWIFT, domestic payments

systems, and core banking systems. These EFT capable

banks have almost 200 branches throughout the country.

ATMs and Point of Sale terminals are also being put in

place nationwide.

The minimum capital requirement to establish a bank in

Iraq is 100B IQD, approximately $85M USD.

Banking investments in Iraq are governed by the Law of

the Central Bank of Iraq, No. 56, 2004, and the Law of

the Banks, No. 94, 2004. The Central Bank of Iraq may be

contacted for more information: www.cbi.iq.

Currency

The unit of currency is the Iraqi Dinar (IQD). The exchange

rate in September 2009 was $1 USD: 1,170 IQD. The Central

Bank of Iraq has a policy of managed appreciation of the

dinar. In April 2008, the exchange rate was $1 USD: 1,203

IQD. The most widely recognized foreign currency is the

Banks with Majority Foreign Ownership

Bank Name Foreign

Participation E-Contract

Commercial

Bank of Iraq

49% Ahli United

Bank (Bahrain) www.ahliunited.com

Bank of

Baghdad

49% United Gulf

Bank (Bahrain)

www.bankofbaghdad.

org

National

Bank of Iraq

49% Capital Bank

(Jordan) www.nbirq.com

Dar Es-Salam

Bank 70% HSBC www.desiraq.com

Credit Bank

of Iraq

75% National Bank

of Kuwait

www.kubba-group.net/

creditbank

AI-Mansour

Bank

23.2% National

bank of Qatar info@mansurbank.com

EFT Capable Banks

Bank Name E-Contract

Commercial Bank of Iraq www.ahliunited.com

Bank of Baghdad www.bankofbaghdad.org

Al Warka Investment

Bank www.warka-bank.com

Dar Es-Salam Bank www.desiraq.com

Trade Bank of Iraq www.tbiraq.com

Ashur International Bank www.ashurbank.com

Credit Bank of Iraq www.kubba-group.net/creditbank

[scottiraq04]

THIS IS A BASIC EXPLANATION OF A VERY COMPLICATED SYSTEM. DO NOT READ MORE INTO IT THAN IS HERE.

The country holding the debt (owed to them by Iraq) then takes the money from the investors holding "base money" (the RVed IQD) and exchanges it (gives their currency to the investor) for their own or another currency. They then use the IQD to buy oil from Iraq. The CBI converts the "bank money" back into "base money" and the process starts over.

So, can the IQD revalue at a higher rate? The answer is yes, because the effect would be to create more buying power for Iraq to pay off their "bank money" debts with out soaking up 25% of the worlds money supply while at the same time almost eliminating their foreign debts in the process.

Excellent post Bama...now I am really glad I asked you to post this. Ok, I'm going to ask you some questions, or at least give you some food for thought. I don't want you to take this as a "bashing" session; because I really do want to hear your thoughts and see how you work out the issues. I think you are on to something here, but a few issues need to be work out first.

I have color coded the individual areas that I wanted to bring to your attention...here it goes:

Red section: As I understand this, the Investors/Speculators are holding "base money" (in IQD)...They then give this "base money" to the banks/FED for an exchange of USD given to the Investors/Speculators as "bank money" (electronic money deposited to our accounts). The banks/FED are now holding physical "base money" in the form of IQD. Is this correct?

Blue section: I get the point of the USG paying for oil with their new collection of IQD "base money" (although their is nothing stating they will; given the large amounts of IQD they will be in possesion of), and I even somewhat understand the CBI then taking their "bank money" (promised to the USG as a debt) and then turning it into "base money"...but this doesn't solve the problem of the original IQD "base money", held by the USG, flooding back into the Iraqi economy. In order for the USG's "bank money" (debt owed by Iraq and CBI's promise to pay) to be converted to "base money", the CBI has to buy back their "base money" with an exchange of USD at whatever rate it is currently set at. This transaction could be physical or electronic, either way the "base money" makes it's way back to Iraq...the faster this happens the worse off Iraq is. Also, for all "base money" printed, Iraq must back up it's value with something. Currently this is done with Gold Reserves. I have seen one article that shows they have 3 Tons of Gold in reserves in order to back the value of their currency...but the "golden question" is how high can the exchange rate go with the Gold Reserves still being able to back it? In 2007, as the article states, the Gold Reserves allowed the IQD to appreciate from 1500 IQD's to the USD to 1170 IQD's to the USD. Unfortunately, this same article stated that if they LOP'd the zeros then the IQD could be 1:1 with the USD. This leads me to believe that the current Gold Reserves could not withstand an appreciation/RV at such a high rate without a LOP. Everyone likes to speculate that oil is also backing their currency...until I see proof of that this speculation is false. Oil revenues, I think, are about 95% of their GDP (if my memory serves me correct). These revenues are what is mainly paying back their world debts; hence why they have had to take Loans and Grants to help with the reconstruction process (in the past that is). Until they can significantly increase their GDP, lower the percentage of oil revenues within the GDP (by increasing production and agriculture exports) they won't be able to "float" their currency on the secondary market (FOREX) at such a high exchange rate. That last sentence is just my opinion and not currently based on any facts. Can you please give me your opinion on this? and don't beat around the bush, if I've made a mistake on something then let me know please.

Olive section: This purchasing power, unfortunately, can also be accomplished with a LOP and RV above a 1:1 rate. So, again, we haven't elimated the possibility of a LOP with a high RV (something equal or above the 1:1 ratio). Despite that fact that it would cost Iraq around $100 million to reprint the IQD after a LOP, this could be amortized out over a period of time and easily factored into a yearly budget. I always here the argument that "they won't LOP because it's too expensive to reprint and Governments of the World would be pissed because of all the IQD they hold and the money they invested would be worthless". On the contrary, if 1,000 IQD = $1 USD when you bought them and Iraq LOP's three zeros and RV's at 1:1, then your IQD are worth exactly what you paid for them. How does that become worthless? In fact, if they RV higher than 1:1 and you gain; albeit not very much. What are your thoughts on this?

Also, If I am correct, Iraq's currency is considered "Fiat" money. Please take a look at this link and let me know if this is incorrect: http://en.wikipedia.org/wiki/Fiat_currency

I look forward to your responses...thanks!

[Bama]

Excellent post Bama...now I am really glad I asked you to post this. Ok, I'm going to ask you some questions, or at least give you some food for thought. I don't want you to take this as a "bashing" session; because I really do want to hear your thoughts and see how you work out the issues. I think you are on to something here, but a few issues need to be work out first.

I have color coded the individual areas that I wanted to bring to your attention...here it goes:

Red section: As I understand this, the Investors/Speculators are holding "base money" (in IQD)...They then give this "base money" to the banks/FED for an exchange of USD given to the Investors/Speculators as "bank money" (electronic money deposited to our accounts). The banks/FED are now holding physical "base money" in the form of IQD. Is this correct?

Blue section: I get the point of the USG paying for oil with their new collection of IQD "base money" (although their is nothing stating they will; given the large amounts of IQD they will be in possesion of), and I even somewhat understand the CBI then taking their "bank money" (promised to the USG as a debt) and then turning it into "base money"...but this doesn't solve the problem of the original IQD "base money", held by the USG, flooding back into the Iraqi economy. In order for the USG's "bank money" (debt owed by Iraq and CBI's promise to pay) to be converted to "base money", the CBI has to buy back their "base money" with an exchange of USD at whatever rate it is currently set at. This transaction could be physical or electronic, either way the "base money" makes it's way back to Iraq...the faster this happens the worse off Iraq is. Also, for all "base money" printed, Iraq must back up it's value with something. Currently this is done with Gold Reserves. I have seen one article that shows they have 3 Tons of Gold in reserves in order to back the value of their currency...but the "golden question" is how high can the exchange rate go with the Gold Reserves still being able to back it? In 2007, as the article states, the Gold Reserves allowed the IQD to appreciate from 1500 IQD's to the USD to 1170 IQD's to the USD. Unfortunately, this same article stated that if they LOP'd the zeros then the IQD could be 1:1 with the USD. This leads me to believe that the current Gold Reserves could not withstand an appreciation/RV at such a high rate without a LOP. Everyone likes to speculate that oil is also backing their currency...until I see proof of that this speculation is false. Oil revenues, I think, are about 95% of their GDP (if my memory serves me correct). These revenues are what is mainly paying back their world debts; hence why they have had to take Loans and Grants to help with the reconstruction process (in the past that is). Until they can significantly increase their GDP, lower the percentage of oil revenues within the GDP (by increasing production and agriculture exports) they won't be able to "float" their currency on the secondary market (FOREX) at such a high exchange rate. That last sentence is just my opinion and not currently based on any facts. Can you please give me your opinion on this? and don't beat around the bush, if I've made a mistake on something then let me know please.

Olive section: This purchasing power, unfortunately, can also be accomplished with a LOP and RV above a 1:1 rate. So, again, we haven't elimated the possibility of a LOP with a high RV (something equal or above the 1:1 ratio). Despite that fact that it would cost Iraq around $100 million to reprint the IQD after a LOP, this could be amortized out over a period of time and easily factored into a yearly budget. I always here the argument that "they won't LOP because it's too expensive to reprint and Governments of the World would be pissed because of all the IQD they hold and the money they invested would be worthless". On the contrary, if 1,000 IQD = $1 USD when you bought them and Iraq LOP's three zeros and RV's at 1:1, then your IQD are worth exactly what you paid for them. How does that become worthless? In fact, if they RV higher than 1:1 and you gain; albeit not very much. What are your thoughts on this?

Also, If I am correct, Iraq's currency is considered "Fiat" money. Please take a look at this link and let me know if this is incorrect: http://en.wikipedia.org/wiki/Fiat_currency

I look forward to your responses...thanks!

Great questions Scott. Let me see if I can address the points you made.

Once the base money comes back to the CBI in exchange for USD, Oil, or Petro Dollars, the CBI is in control. They can choose to inject the currency back into the system to stimulate growth if necessary but building up the banks reserves and which allows for the creation of more "bank money". The more likely scenario is that they would need to fight Inflation and possibly Hyper Inflation by keeping the base money out of the system and raising interest rates. This has the effect of causing money more difficult to borrow which slows the pace of expansion and erases the "easy money" syndrome where too many dollars are chasing too few products or projects.

While it is preferable to have a hard asset backing a large percentage of a country's currency, it is simply not the way the world functions any longer. All major monetary systems in existence function as a Fiat Money System as laid out in Britton-Woods when the US went off of the Gold Standard. The only thing backing the USD and all currencies to one extent or another is the belief that the money has value. The value is implied for 2 reasons. The first is that the government that issued the currency has agreed to take that currency as payment for taxes owed by it's citizens. The second reason is that I, knowing that you can pay your taxes with it, can use it as a medium of exchange in order to buy what you are selling. You can then do the same or save it to pay your taxes. Either way, value is established. The only thing needed to make a currency viable is the continuing belief that it will be accepted. As for oil backing the IQD, it is immaterial. Whether true or not, if that is the common belief held across the globe, the belief is enough, hence "Fiat Money".

GDP will increase as oil production increases with the development of new fields and infrastructure and as investments in other industries and agriculture begin to pay off in the form of a more diversified GDP. This takes time to accomplish, but it must happen for Iraq to move forward.

In dealing with FOREX, it depends on the peg. A currency pegged to the Euro gains the advantage of not being traded solely on it's own merit, rather on the agreement that it can be exchanged for the Euro. In the triple peg system where the SDR is the unit of measure, the currency is now on a level playing field with other global currencies by always being accepted as redeemable at the going rate of the SDR ( the basket of goods being measured).

I completely agree with your assessment. A Lop is not out of the question, however it just does not seem to be the most desirable option in my opinion.

I don't know if any of this helps, but it is just the way I see it.

[Captain Terry]

I am totally blown away folks!!!! This has got to be one of if not the best explaination of the value of the Dinar I have ever heard. This explaination has rekindled the fire I have had for this investment and believe me I was down to embers!!!!

Thank you folks, that was great

[Bubba569]

If they want to trade "Oil money"for the "Base money" RVed IQD...then it does not seem like a good thing for us investors that Iraq has made these multibillion dollar contract to these other countries for the oil before RVing...does it?

[avenger380]

so its not no good now

Mr. Phonics, where are you when we need you?