Solid explanation of how the RV may go down

[DinarChiTown]

Brought this over from another site. Makes sense to me.

Shabibi's address to the US Chamber of Commerce and the RV

While all this has been going on I have been watching from the side lines all the debate over the Shabibi videos. I watched Frank change his rate. I saw all the supposed gurus in the know scramble to come up with explanations as to why their rates are wrong, what the hold ups are, And how everything will unfold. I also watched a new generation of lopster monsters attack the forums. I have wanted to address these things but I have been lacking the time to do so. I will address them now.

As many of my readers know I am not a rate and date guy. I don’t put rates out there for one simple reason. I have no hard evidence. This does not mean I don’t have a belief about what I think the rate will be. I have shared my belief with close friends. I have shared the revalue process in an article called “The Truth About The Iraqi Dinar part 5.” My belief on this scenario has changed a little bit since this article was written. I am about to reveal my opinion on the rate. While I believe in a little different process my belief about the rate has not changed. Before I talk about the process that I believe will unfold soon we need to look at the videos containing Shabibis speech. For those who don’t know, Dr. Sinan Al-Shabibi is the head guy at the Central Bank of Iraq. (CBI) As the governor of CBI Shabibi has the sole power of setting the rate. This power was given to him by the Iraqi constitution. So now let us watch the videos and see his plans to raise the value of this currency.

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Now let us address some points that Mr. Shabibi raised.

Video 1

In the first Video Dr. Shabibi gave an overview of Iraq’s condition before 2003. He went on to point out that Iraq had high inflation, A huge external debt, and a weak currency. Because of sanctions Iraq had low oil output and high unemployment. Iraq also had damage to it's infrastructure. He went on to say that policies to respond to sanctions were not adequate.

He also said that in 2003 it was important to obtain stability politically and in economics. Without this they could not move forward. Iraq needed to stabilize the exchange rate to lower inflation. The CBI concentrated on the stability of the exchange rate. (fixed rate) This set up stable parameters.

Side note: Dr.shabibi seems to believe that a fixed exchange rate helped stabilize Iraq and controlled Inflation. He went on to say “Today we paved the groundwork for government to act. No more worry about exchange rate and inflation. This will attract investors”

Video 2

Dr. Shabbi said that the economic side, the political side, and the security side should all work hand in hand to provide stability. He briefly talked about currency wars and nations printing too much currency and increasing the money supply. He talked about having the reserves to counter that approach. He said, nobody is responsible for rate stability. They were using currency auctions to stabilize the exchange rate. He also said that the global increase in food prices will affect the exchange rate. He said that the government will help the private sector.

Video 3

This was the question and answer part of his presentation. It was also the most telling. The first question was: Will there be a revalue of the Iraqi Currency to foreign and domestic investors? How long before this happens to the Iraqi currency?

Dr. Shabbi said that it depends on controlling inflation and maintaining price stability. Other factors are trade, imports and exports. Inflation will be a deciding factor in adjusting the exchange rate. He said they are going to revisit the exchange rate.

Another question was: It has been said in the news media that Iraq will cut 3 zeros and it plans to redenominate it’s currency. Is there any truth to this? Shabibi responded by saying there is a lot of talk from people writing articles saying the value of the dinar will depreciate. This is not the case. This is just a way to ease counting. They have a plan and conditions are different now. Shabibi said “Removing the three zeros will go hand in hand with adjusting the exchange rate. We have been studying when and we will implement this soon.” He went on to say that they will need the help of the security forces. They need to become less busy with violence.

Video 4

This is the last part of the question and answer section. The question was: What affect did the drop in policy rate have on lending? (side note the policy rate is what we would call the interest rate here in America which is set by the Federal Reserve)

Dr. Shabbi said when inflation is high they raise the policy rate. The policy rates the banks use to lend are different then the CBI’s rate. What judges the banks rates are the markets. The policy rate set by the CBI is a guideline for banks to follow. Banks don’t always follow the CBI rate due to things like risk. Banks like to play it safe by putting money in the CBI and participating in currency auctions. Problems with uncertainty in loans and problems with the banks will be resolved soon.

My Analysis,

It is evident to me that any Revalue scenario will use a fixed rate of exchange not a floating rate. Shabibi credits a fixed rate with providing stability with inflation and stability in the economy. It is highly unlikely he will abandon this when Iraq needs stability the most. That is when they implement their plan to remove the zeros and raise the value of the dinar.

Dr.Shabibi has said that raising the exchange rate of the dinar goes hand in hand with controlling inflation and maintaining price stability. He also said that redenomination will go hand in hand with raising the exchange rate. Typically there are two ways inflation can be controlled.

First: raising interest rates. When interest rates are raised consumer spending drops. This decreases demand and increases supply. This works to bring down prices in all markets.

Second: Raising the exchange rate. When the exchange rate is raised against foreign currency imports become cheaper. This is something Iraq desperately needs to do to help rebuild infrastructure. Most of the materials needed for this will be imported. When Imports compete with goods manufactured in country it brings down prices. This should not affect Iraq’s chief export which is oil. This is because oil is bought and sold using US dollars. Raising the exchange rate is a great plan when the imports are too expensive. This is something China is even considering.

http://en.21cbh.com/...tion-Forex.html

Whenever you use the word redenomination the lopsters come out from hiding. They typically say see we told you so! Here comes the lop! Their main argument and point seems to stem from Iraq having some 24 trillion dinar in circulation in Iraq. They say there is no way Iraq can revalue their currency for even $1.00 because that would put the equivalent of 24 trillion in US dollars in circulation and that would destroy their economy. The problem is they are right. If there was a one-time revalue of a dollar that would put way to much currency in circulation.

Now let’s reverse that. If Iraq were to lop the way they claim one old 25,000 dinar note is equal to one new 25 dinar. that would only bring an amount equal to 24 billion in US dollar value. This would be the entire Iraqi dinar money supply. This would not work. Consider that Iraq’s budget for 2011 is equal to 82.6 billion US dollars. A lop of the currency would not even meet a third of the budget let alone provide extra currency for the people of Iraq to use. So obviously both scenarios are wrong!

Let’s revisit the main points Dr. Shabibi made in these videos

1. A fixed exchange rate brought stability to Inflation and the currency. Translation= during the RV process the rate will remain fixed to provide stability.

2. Currency Auctions are used to stabilize the exchange rate and the global increase in food prices will have a direct effect on the exchange rate. Translation= Currency auctions will continue to play a role in the RV. The exchange rate will increase to combat higher food prices because a higher exchange rate directly affects the cost of importing food.

3. In video 3 Dr. Shabibi said that a revalue would depend on controlling inflation and maintaining price stability. Translation= A revalue will lower imports and will be used to control inflation.

4. Shabibi said a redenomination and removing the zeros would just be a way to make counting easier. Translation= He downplayed a lot of what was written on the redenomination. His definition of Redenominating is one and the same with removing the currency with 3 zeros.

Side note: If a lop were to play out Iraq would need to replace all the currency in circulation. You simply cannot take an old 250 dinar note and now say that it is worth more than this old 10,000 dinar note. So in the event of a lop Iraq would need to replace all currency. Shabibi constantly makes reference to removing the zeros while implying that they are keeping the lower denominations in circulation.

5. Removing the Zeros will go hand in hand with adjusting the exchange rate. Translation= as we pull the notes with three zeros out of circulation we will raise the exchange rates.

6. We will be implementing this soon. Translation= no translation required

7. Problems with uncertainty in loans and problems with the banks will be resolved soon. Translation RV baby!!!!!

You may not agree with the way I have read between the lines, but before you object let me present my RV scenario with the rates. Notice I said rates and not rate.

Before I talk about the rates I want to make one thing clear. First and foremost this is strictly my opinion and this does not mean that what I am about to tell you will come to pass. I do not know anyone on the inside. I don’t have any connections or inside information. I have no secret information or intel. This is completely guess work on my part and it is not to be taken as fact because I really don’t know for sure.

I believe things will play out mainly like the scenario I wrote about in the article. The Truth About The Iraqi Dinar part 5. The main difference now is I believe the rate will be fixed. It will not float. This is how I believe events will happen.

There will not be one-time revalue event. Lopsters provide too much proof for this. The exchange rate will adjust and begin to move up in a controlled way. If it floats the CBI has no control. When it gets to a certain point maybe a penny to ten cents lower denominations will be put into circulation. When this happens the notes with 3 zeros will be removed from circulation.

The rate will continue to go up and more notes will be removed from circulation and the CBI will contract the currency supply. Now Iraq is making money off the float and off the spread. There is a controlled exchange rate in the currency markets and the auctions. For example, The dinar the CBI purchased for 1 penny is now being sold for 10 cents. At the same time they decrease the supply of the currency through the auctions and the markets. The exchange rate will continue to go up as Dr. Shabibi monitors Inflation and releases more lower denominations. All the while CBI is making money, financing the revalue, and reducing currency supply through the auctions and the currency markets.

As the rate increases Iraq continues to make money off a controlled float. For example, It may be that they raise the rate over time to 50 cents. This means all the currency they purchased below this amount can now be redistributed for a profit. This will also be a way for Iraq to contract the money supply because they will not need to issue as much to break even and they will not take a loss when doing so.

Finally this scenario plays out and the value of the dinar stabilizes somewhere around $1.20. I believe the rate will wind up somewhere between the dollar and the euro. Then once Iraq has a stable place in the World Trade Organization and infrastructure is rebuilt. It could go up from there. This could all take place over a period of a few months. Of course this scenario could play out a number of different ways. One thing is for sure. I don’t see a one-time revalue event. I never did. I see a gradual increase over a very short period of time. Mr. rich can verify that this was my guess at a target rate. I gave credence to the one-time revalue event for two reasons.

1.So many of my friends believed in a one-time revalue event and I thought people knew more than me concerning this investment. I thought they knew something I did not know.

2. I really don’t know how this will play out. Everything is speculation on my part. What do I know?

What has been the hold up?

With certainty the main hold up is security. I think Dr. Shabibi verified that in these 4 videos. I now believe another hold up has been the Iraqi court attempting to circumvent the constitution and hand over the power of the CBI to Maliki. In Shabibi’s last letter of intent to the IMF he addresses this and he says he will continue to fight this. He said “We remain firmly committed to maintaining the independence of the CBI, as well as to ensuring that all of Iraq’s oil exports are in accordance with international agreements and that all oil export revenues accrue to the central government.”

The report also said “The CBI will continue to be independent in the pursuit of its policy objectives. The CBI’s monetary and exchange rate policies will continue to be aimed at keeping inflation in the low single digits and safeguarding international reserves.” It is pretty obvious to me that this was a big concern for Shabibi and the CBI

[zaborniake]

This is Marcus Curtis. Posted.

[lionfish]

This is a pretty good explanation! I guess a lot of people have time on their hands while we are waiting on this to RV!!

Thanks for the find DinarChiTown!

COME ON RV!!

[quadraph0nic]

Give credit to Marcus Curtis the author...

[Tahoe]

[Now let’s reverse that. If Iraq were to lop the way they claim one old 25,000 dinar note is equal to one new 25 dinar. that would only bring an amount equal to 24 billion in US dollar value. This would be the entire Iraqi dinar money supply. This would not work. Consider that Iraq’s budget for 2011 is equal to 82.6 billion US dollars. A lop of the currency would not even meet a third of the budget let alone provide extra currency for the people of Iraq to use. So obviously both scenarios are wrong!

This is the part of the whole RV world that has bothered me. Is there any solid evidence that debunks the theory that Iraq could LOP then RV? If they LOP, then RV at mid $3, they've met their budget. We don't become millionaires, but we basically triple to quadruple our investment.........

[DinarChiTown]

Give credit to Marcus Curtis the author...

You just did...

[wicked93gs]

I have to say this is one scenario I didnt think about and as such it would indeed allow a controlled finance of a full revalue(the biggest issue I had with a RV to begin with)...even up past 1.2 to 3.2(or whatever the end goal might be...I suspect around 3 is the ideal number iraq would be able to satisfy their pride with, regardless if it takes them 20 years to get there, simply because other arab oil producing nations in the area range from 2.5 to 3.5). This would also play right into CBIs hands because with a tortuously slow upward crawl, a lot of speculators would cash out as soon as it hit a minimum rate they felt would satisfy them...for instance if someone had 10mil and they saw an initial rate of .10 they would say...hey thats 1mil USD...more than I ever thought to make, I'm done...and with an initial offering like that a lot of speculators may well think thats it....one other thing, with auctions CBI can well prevent the whales from coming in and buying everything up, they simply just limit the amount of currency offered on a daily basis...these other tax approved banks will buy it and then re-sell it at whatever rate they can legally get away with to the whales(whales who will then probably sell it out of country to each other at increased rates with an eye to speculation themselves...thereby driving up demand...which plays back into CBI hands again because the next day they sell just a little more....ad nauseum...over the period of a couple months they reach their 1:1 rate...or close enough....at which point they slow the process since whichever citizens held on long enough are now millionaires and start driving the demand for imported and domestic goods up, stimulating the economy....then you have the 75% of the population that were working before this and had some kind of savings as millionaires, the 25% unemployed can no longer fill the labor gap so foriegn labor is required...indian contractors for instance will fill the gap nicely....but they have no place to live as of yet...so the housing market will literally explode just like it is in Kuwait, the imported food market will likely follow since you have essentially doubled the population to be able to support this....both markets will of course even more millionaires...sound somewhat logical at least?

[M.D.]

Thanks I enjoy reading Mr. Curtis' opinions

[wgb52]

The challenge with this theory is in the money supply reduction. He states that through auctions the money supply can be reduced. If they buy dollars by selling dinar to foreign countries it increases reserves AND future obligations. If they sell dollars for incountry dinars they lose the needed reserves and taint their own currency. Anybody have any ideas how they can reduce their money supply? T bills are unlikey and increasing of bank reserves would stifle the economy.

[gp49]

I have read this but Marcus Curtis is Always worth reading again and again. He is has an amazing insight.

Thanks for post

[HYDRANT]

THANKS DCT