Rate determined by dollarization tactic?

[DinarSeeker]

Dollarization? Here is the definition.

Dollarization

Dollarization means adopting the US dollar as the currency of choice in a foreign country. Many countries today are already dollarized unofficially. Where the purchasing power of the local currency has been volatile, as in Latin America and in the former Soviet Union, people often hold dollars as a store of value. In those cases the domestic currency is commonly used in small transactions, but the dollar is preferred in large transactions and in savings. Official Dollarization

In some countries, using the dollar in transactions is perfectly legal, in others it is not. In a very few, the US dollar is the official currency, mostly in small or developing countries. Panama has been officially dollarized since 1904. Other countries have on occasion considered moving to an official dollarized system.

Under official dollarization the local currency is completely replaced by the dollar, with the possible exception of coinage. That means domestic banks only accept dollar checking accounts and issue dollar loans. Federal Reserve notes are legal tender and the only form of paper money recognized by the government.

Before its latest political and economic crisis, Argentina operated under a currency board system that maintained an exchange rate of 1:1 between the dollar and the peso. That required holding sufficient dollar reserves to fully back the pesos in circulation. The dollar was recognized as legal tender along with the peso. Argentina has since abandoned the peg to the dollar and gone to a floating exchange rate for the peso.

In the wake of the Asian and Brazilian economic crisis, Ecuador was unable to avoid a deep recession and banking crisis. In March 1999 the government froze deposits in the entire banking system as the value of the sucre dropped. A year later, after much political turmoil, and with the help of the IMF in structuring its financial system, Ecuador adopted the US dollar as its official currency. This will be an important test of dollarization under very difficult conditions.

The US Position

There is nothing to prevent a country from unilaterally moving to an official dollarized currency, although the Fed has recommended that it be consulted in advance. At the very least, the Fed would need advance notification of the extra notes that it would have to make available.

The Fed has stated that under no conditions would it act as a lender of last resort to foreign banks, nor would its monetary policy be contrary to the best interests of the US. So far, US officials have taken a neutral position, neither encouraging nor discouraging dollarization. However there are many issues, pro and con, for the US and a dollarizing country that deserve careful consideration. Here are a few:

A Stabilizing Factor

A country with its own currency, typically issued by a central bank, can exercise its own monetary policy. In theory this enables it to manage its money supply, interest rates, and to some extent the exchange rates solely in its own self-interest. In practice however many developing countries have experienced serious problems in their monetary affairs, lacking the institutions and experience needed. It is likely that official dollarization would significantly improve price stability in those countries with a history of monetary problems.

Loss of Independent Monetary Policy

On the other hand dollarization means that the country can no longer tailor its monetary policy to suit its own needs. Unless its economy closely tracks the US economy, that can be a serious limitation at times. Nevertheless the discipline required might be worth the loss of flexibility. The added stability should offer a better environment for planning business expansion and new enterprise. Under dollarization the central bank would no longer be able to create money, but it would still retain the important task of administering banking system regulations and ensuring sound banking practices.

Seigniorage Effects

The US gains added seigniorage benefits as countries increase the use of dollar currency. The annual cost to the US of creating and servicing its currency is now less than 0.1% of the face value of currency outstanding. The notes however are sold at face value. Thus notes that are purchased for use overseas are the equivalent of nearly cost-free imports of goods and services to the US.

If the US wished to encourage certain countries to officially dollarize their economies, it could easily afford to share some of the seigniorage benefits. That seems a reasonable tradeoff, since dollarization would enhance trade with those countries, to the advantage of both.

Political Considerations

An important political issue is the effect on national pride. Most people see their currency as a symbol of national sovereignty. Losing their own currency could be difficult for many to accept. It could foster the 'imperialist Yankee' reaction, particularly when some incident strains relations. Also their politicians could find it convenient to lay the blame for their own mismanagement and poor economic conditions on US monetary policy. These, rather than purely monetary issues, appear to be of primary concern to the US.

Heres my take and is JMO..... Dollarization was for two reasons. One, keep the Iraqi economy from imploding completely. USD and Dinars work side by side, coexist, and have been since the defeat of Saddam. Two, the dinar was intentionally deflated to 1170 for one reason only, dinar reinstatement. The USD is the only REAL model that could measure the dinars rate increase success over a long period of time. It was duing the study of this model by the UST and CBI, that the precise percentage of inflationary measure had to be met to institute a successfull reinstatement of the dinar back into the Iraqi economy at the correct value. However, there have been many, many, unforeseen problems along the way. Two of the top ones are this: One, the CBI, over the course of a few years could successfully deflate inflation from over 30% to 4% but could only hold it there for so long. Once the objective was reached, it was imperative to implement the plan into play according to the model. Two, Al Nuri-Maliki has been a thorn in the side of many during his struggle to maintain power. Since the 2010 March elections, Maliki has done everything he can to benifit his position, and power. All futile attempts, he has done nothing more than make this very painful for this program to come to fruition. I belive that we are straight on target, and all of the events that have taken place, that lead us here today, all happened in the sequential order that it needed to. This "sequential order", IMO, could have started just after the elections, instead, we see it dragged out over 15 months or so with bits and pieces coming to us each week. So in closing, today we see inflation has been on the rise in the last months. How does the successful implementation of the plan happen when one of the key model componets is not right? Inflation must be delt with, and now, to reach whatever that number is. This is why we see low volumes of cash auctions in Iraq in the last week. Im not sure how long this will go on to reach the goal but one thing is for sure. The CBI is once again shoring up its money again, an attempt to hoard currency off the street. The last thing that government wants or needs is to create independant millionaires in a socialist economy. Many articles of late suggest large notes have been already hard to come by. One thing I'm ABSOLUTELY sure of, there is "NOT" 27 trillion dinar in current circulation. There are many articles saying there is but the real question is, do you believe all what you read. We are lied to daily to keep speculation at bay. DV.... Helllo, are you listening loppers! What percentage of that report is in digital dinar? What percectage of that is in smaller notes that make 27 trillion? Were only talking about all three zero notes! 1.00 rate to start the forex out, that was, and is the model. no less, all which is based on $70 pbd oil output which is running @ $112 all hinging on inflationary numbers. you decide!

Read more: http://dinarvets.com/forums/index.php?/topic/64549-logical-rate/#ixzz1L8Yn7vPB

[Sawmill]

I agree... While this whole dinar investment seems to virtually defy logic, it would seem to me that any number less than $1.00 might not take the usd out of their country. I am betting on the fact that they want USD out, IQD in. If that is the plan, then I am hoping for $1.00 to $1.19. Happy with .25, but if we are dreaming, then why not dream big!!! It goes without saying, we will settle for what we get, but in the back of my mind, being careful not to drink the "Koolaid", I cannot help but think, "what if it really goes big without a lopp". Truth is, there are major players out there making it big in forex trading. We just have to be lucky enough to bet on the winning side just once. As the old country song goes, all a man needs is one good well.... Go RV!

[DinarSeeker]

I agree... While this whole dinar investment seems to virtually defy logic, it would seem to me that any number less than $1.00 might not take the usd out of their country. I am betting on the fact that they want USD out, IQD in. If that is the plan, then I am hoping for $1.00 to $1.19. Happy with .25, but if we are dreaming, then why not dream big!!! It goes without saying, we will settle for what we get, but in the back of my mind, being careful not to drink the "Koolaid", I cannot help but think, "what if it really goes big without a lopp". Truth is, there are major players out there making it big in forex trading. We just have to be lucky enough to bet on the winning side just once. As the old country song goes, all a man needs is one good well.... Go RV!

Well said! You made a great point in the first post....... "they want the USD out, and IQD in" A very logical statement

[marcuscurtis]

The definition of dollarization is wrong.

Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency. The term is not only applied to usage of the United States dollar, but generally to the use of any foreign currency as the national currency.

Official dollarization has gained prominence as several countries have considered and implemented it as official policy. The major advantage of dollarization is promoting fiscal discipline and thus greater financial stability and lower inflation.

The biggest economies to have officially dollarized as of June 2002 are Panama (since 1904), Ecuador (since 2000), and El Salvador (since 2001). As of August 2005[update], the United States dollar, the euro, the New Zealand dollar, the Swiss franc, the Indian rupee, and the Australian dollar were the only currencies used by other countries for official dollarization. In addition, the Turkish lira, the Israeli shekel, and the Russian ruble are used by internationally unrecognized but de facto independent states.

http://en.wikipedia.org/wiki/Dollarization

“Under official dollarization the local currency is completely replaced by the dollar” Wrong! Not in every case the euro is used as a dual currency too.

There is nothing to prevent a country from unilaterally moving to an official dollarized currency, although the Fed has recommended that it be consulted in advance. At the very least, the Fed would need advance notification of the extra notes that it would have to make available. Wrong! We all know the feds don’t have enough dollars to go around (notice the sarcasm)

The Fed has stated that under no conditions would it act as a lender of last resort to foreign banks, nor would its monetary policy be contrary to the best interests of the US. So far, US officials have taken a neutral position, neither encouraging nor discouraging dollarization. However there are many issues, pro and con, for the US and a dollarizing country that deserve careful consideration.

Tell this to some of the recipients of QE2. The feds don’t oppose use of the dollar because it creates demand for our worthless fiat currency.

Dollarization in Iraq has taken place because Iraq sells it’s oil using US currency. Oil revenue is used to help pay the Iraqi governments annual budget. The dinar was deflated due to war and sanctions. When the new Dinar was introduced an exchange rate of 4,000 to one dinar was in place. The 1170 to one dollar is actually a raised rate from the introduction rate. One reason Inflation was kept in check is due to the dinar being a fixed rate. Not a floating rate. (watch the videos with shabibi) Maliki is no more a thorn than any other Iraqi politician. According to Shabibi the auctions acted to stabilize the currency (watch the videos)

If your absolutely sure there is not 27 trillion in circulation then how much is there in circulation? Here is a bit a trivia for you. Before we invaded Iraq, Saddam switch from selling oil in dollars to euros. This would still be considered dollarization. Once we were in Iraq we switched oil sales back to dollars. How much is in circulation in Iraq? If there is 24 trillion in Iraq and the rate adjust to $1.00 that makes 24 trillion in Iraq’s money supply. How would they control inflation then? Even if there is only 10 trillion how would they control inflation.

I am not a lopster. I have a working scenario of how the value of this currency will increase, and what will happen when it RV's. It just seems to me that deep down you still have a lot of unanswered questions.