The Illusion of Zeros & the Game of Economy

[Rayzur]

I don't have the link as this is all I got, .... however there is a source reference to cross check:

Printed From: Iraq Business Directory

Category: Business & Economy

Forum Name: Iraqi Dinar

Printed Date: 15/September/2011 at 3:54pm

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The Iraqi Dinar between the illusion of zeros and the game of economy

A lot have been said lately on the phenomenon of amending Iraqi Dinar. The word “Amendment” implies several aspects including improvement first. When this procedure was first stated by one of senior officials directly concerned with this subject, it was merely a general statement.

Later, this suggestion turned out to be the removal of three zeros from right side of the figure; thus ( 5.000.000) five million I.D. will be ( 5.000 ) five thousand I.D. many saw great good in this procedure but it is necessary to explain it scientifically.

The value of the currency affects many aspects which are linked to the National Economy like its strength and how much resource it has. It also, reflects the firmness of association when range and size of deficit to GDP represent how much that deficit is taking from size of GDP of a country; in other words, this ratio represent the size of the ( corrosion ) taking place in the GDP because of this shortfalls in the balances. Hence the economic imbalance which affects the structure of economy resulting this contradictory combination that finally leads to economic problems reflected on the economic process in this country affecting all joints of life and it is revealed even move the ordinary individual because it is directly attached to his average level of living.

Thus the existence of the deficit in the balance requires to filled by the state, and then there is the increasing demand for the foreign exchange to fill that deficit, that demand grows whenever the deficit does, and the size of the financial obligations of a certain country grows too, especially when these obligations means the increase in its foreign debts.

The high demand for the foreign exchange leads to the rise of the prices of the foreign currency which is subjected to the mechanism of the supply and demand and the requirements of the international or local market. This will lead to the devaluation of the local currency of that country and will be reflected on the living situation. In other words, the ratio of inflation in the economy which is obvious to the observer is actually in the increasing zeros added to the currency. This shows clearly in the Iraqi economy and the economies of such countries like Turkey, Italy, Iran, Israel and others.

Another important point is that the currency is issued and its value is determined according to a law issued by the state through the mechanisms and the institutes in charge of the financial policy in that state. So it is certainly not a viewpoint of a certain person nor just on opinion of this matter.

To recall some experience, Turkey, which has suffered from severe inflation after accepting the World Bank and the International Monetary Fund concerning the economic reform programs? , which led to progress in economic performance, but the price of this performance was paid by the middle class in society. This economical progress did not prevent the existence of a high inflation ratio that seemed to be obvious to the ordinary none-specialized observant to economy, like when you learn that the price of a loaf of bread is one million Turkish liras. It was then, the value of the currency was improved by removing zeros, and the price of the loaf became one thousand Turkish liras. But this was not done by re-constructing the Currency Law, nor by its Gold and Cash re-evaluation. It was by an internal procedure aiming at absorbing the fear, despair and frustration caused by the high ratio of inflation and so, the zeros were removed without a real change in the true value of the currency which represent the true value of the individual income; meaning, the amount of goods and services an individual could get. Thus, the removal of the zeros was no more than a ( monetary illusion ). So it is not a fundamental but rather a formal change that affects the mentality of those who deals with the currency more it affects the size of the economic transactions.

A reporter of one of the Arabic newspapers asked me about the impact of this decision, if applied in Iraq? My answer was that it would not exceed the ( monetary illusion ) and there would not be any real changed in the true value of the currency nor any re-evaluation to it, because such actions would require a re-construction of the whole Iraqi economy and the re-arrangement of the Iraqi economic papers affecting its bound with the Paris Club and its obligation to the conditions of the World Bank and the International Monetary Fund. This will not happen ; what will happen is an attempt to absorb the anxiety and frustration on the Iraqi currency dealer. We can not change the value of the Iraqi currency into a better state of value and pricing as long as there are still unpaid external debts and until we find the best way to deal with these debts.

Some dealers in the currency markets in the neighboring countries feared from the Iraqi Government taking such actions. This fear would have been normal during the reign of the fallen regime because of the unavailable freedom for the circulation of foreign exchange, the existence of the central market and the dictatorial philosophy then. But now, the freedom to deal with and circulate foreign exchange is available in Iraq because of the economical openness and the circulation of currency became free in and outside Iraq; but it is also subjected to the factor of supply and demand. There is also, the political stability which greatly affects directing the rates of the supply and demand and its management in and outside Iraq.

Any observer can sense this more clearly in the money markets in neighboring countries.

Finally, we have a long way to go on the way of the economic reform and reconstruction in order to improve the price of the Iraqi Dinar and its raise its value or as some would like to call it ( when the Iraqi Dinar gets its health back ). This is not impossible and tomorrow is not too far.

Blessings~~

[vvalley]

Good article Rayzur, thanks!

[drox]

Great find thank you! It is not necessarily good news for us but it proves the Okies of the world as the frauds they are. This is just one person's opinion on this and nothing more though. The author of the article sees this as a very basic and fundamental principle of economics but doesn't see it for the opportunity it presents. It is unique and the Dinar is undervalued especially compared to the PPP of other nations. He doesn't realize that the current value is an arbitrary number that has long aided the CBI (to their purposeful advantage) to reduce inflation and build reserves. Although it has been hurtful to the Iraqi economy in the short run, it will be a big benefit in the longer run in my opinion.

Shabibi cannot pass a re-denomination measure through this GOI without revealing or exercising a revaluation of the Dinar to a certain degree. IN MY OPINION of course. It might not be a huge one that we all hope for but there must be a bump or incentive. 1170 is an illegitimate and unfair rate and the people know it. To reduce the use of the dollar you must incentivize the people with a higher rate of value on the Dinar especially at an opportune time when the dollar is dropping. Making the currency easier to use is also important. They are trying to do that through an RD but you may find that they will have to implement 100k, 50k notes and 1000 and 500 Dinar coins in lieu of a re-denomination. That is what I am hoping for. Not increasing the value of the Dinar but RD'ing is a monetary illusion and will be a huge failure and expense in the people's eyes. In my opinion of course.

Edited September 16, 2011 by drox

[Darin]

A reporter of one of the Arabic newspapers asked me about the impact of this decision, if applied in Iraq? My answer was that it would not exceed the ( monetary illusion ) and there would not be any real changed in the true value of the currency nor any re-evaluation to it, because such actions would require a re-construction of the whole Iraqi economy and the re-arrangement of the Iraqi economic papers affecting its bound with the Paris Club and its obligation to the conditions of the World Bank and the International Monetary Fund. This will not happen ; what will happen is an attempt to absorb the anxiety and frustration on the Iraqi currency dealer. We can not change the value of the Iraqi currency into a better state of value and pricing as long as there are still unpaid external debts and until we find the best way to deal with these debts.

Sounds like this guy is saying... "They will not initiate a monetary illusion..."

I think monetary illusion is a great way to basically explain a lop. The numerical value of the notes we hold are reduced by 1,000. However, the value remains the same because the exchange rate decreases by 1,000.

If I were to say that this is a GURU, he is saying no R/V until all debts are paid.. But, he certainly is no GURU, but likely way more qualified. Interesting enough, the plan that we all cringe to hear "Delete the three zeros" would require extensive paper work amendments with the Paris Club, World Bank, and IMF.

I wonder what he meant by ..."attempt to absorb the anxiety and frustration on the iraqi currency dealer.."??

Interesting article.....

Great find thank you! It is not necessarily good news for us but it proves the Okies of the world as the frauds they are. This is just one person's opinion on this and nothing more though. The author of the article sees this as a very basic and fundamental principle of economics but doesn't see it for the opportunity it presents. It is unique and the Dinar is undervalued especially compared to the PPP of other nations. He doesn't realize that the current value is an arbitrary number that has long aided the CBI (to their purposeful advantage) to reduce inflation and build reserves. Although it has been hurtful to the Iraqi economy in the short run, it will be a big benefit in the longer run in my opinion.

Shabibi cannot pass a re-denomination measure through this GOI without revealing or exercising a revaluation of the Dinar to a certain degree. IN MY OPINION of course. It might not be a huge one that we all hope for but there must be a bump or incentive. 1170 is an illegitimate and unfair rate and the people know it. To reduce the use of the dollar you must incentivize the people with a higher rate of value on the Dinar especially at an opportune time when the dollar is dropping. Making the currency easier to use is also important. They are trying to do that through an RD but you may find that they will have to implement 100k, 50k notes and 1000 and 500 Dinar coins in lieu of a re-denomination. That is what I am hoping for. Not increasing the value of the Dinar but RD'ing is a monetary illusion and will be a huge failure and expense in the people's eyes. In my opinion of course.

I completely agree about what you say with "incentives.."

The citizens need the incentive to use the new lower denominations as everyday commerce while also using their old 000 notes to use them up. If you have up to as many, if not more, 3 currencies (USD, IQD, new IQD) and you are stressed on the outcome of all the currencies, you may just head to the USD for a safehaven route.

I try to think if I was in their shoes, and here is what my concerns would be:

Will the new currency be accepted everywhere?

Will the 000s no longer be accepted at certain places?

Will they lose value, remain stable, or go up?

I would probably jump to USD, for stability and with the understanding it could be accepted nearly anywhere (and if not, likely easy exchanged..)

[zigmeister]

What have we read in the past few months giving an insight as to their efforts to pay their external debt? How far are they from accomplishing that? I thought they had it all pretty much under control.

[Carrello]

DROX,

Have you read QuietLearner's post in Opinions, regarding his September 15th preduction? If not, as a friend of his, you need to see it. IMHO

[zigmeister]

Thus the existence of the deficit in the balance requires to filled by the state, and then there is the increasing demand for the foreign exchange to fill that deficit, that demand grows whenever the deficit does, and the size of the financial obligations of a certain country grows too, especially when these obligations means the increase in its foreign debts.

Read more:

I find this interesting. I think he speaking of the deficit in 2012 budget, as well as foreign debt. Those two things may be what would stop an RV right? Okay if that is the issue I can see the dilemma of Iraq and the volatile CBI vs Maliki drama. Without HCL, Erbil, and debts paid, there can be no RV. In which case Maliki has been dragging his feet on the issues of HCL and Erbil. Chapter 7 probably factors in there as well. But a balanced budget would be helpful.