does a slowly rising rate actually work?

[engineer1138]

Frist to just let you know where I am coming from I think an RD is certain and we will only make money based on whatever small sized RV goes along with that to make the rate 1.00 per dinar or 1.50 per dinar etc instead of the 0.86 dollars per dinar that a 1000 to 1 RD alone would produce. But that has been debated to death so I would like to ask something I have not seen discussed. Adam has stated many times that if they start with the rate he estimates (.10 dollars per dinar, i.e. ten cents) then the CBI could "methodically" raise that rate and actually make money. The problem with any rate over a penny is the huge liability (in many aspects) that the CBI would face, so this claim that they can with a huge spread actually make money is (as I read it anyway) a counter to that problem. I have three big issues with this claim

1) I am not aware of any central bank that has ever had a spared as large as suggested in this scenario (i.e. 20 or 30%). I have not seen any argument here that this could in fact be done.

2) This scenario assumes that buying and selling would continue through out this methodical increase but, that seems very unlikely to me.. For a market driven thing (say a stock) even if it is slowly marching upwards it could come back down at any time. So at any time there are those that think it has hit the top and want to sell and those that think it will continue and want to buy. But a pegged currency is not market driven but set by the central bank (the CBI in this case). I think we can all agree that they are not going to pull the rate down substantially so the question is only has it reached the top, or will it continue up in the near future. To convince folks to sell the time between increases would have to get much much greater. So if it starts at 10 cents and a month later goes to 20, who is going to not hold on for the next month for it to hit 30? So they might have to wait 6 months before going to 30, then a year before 40 etc. At this rate it might take decades to get to the $2 level, if we assume that the long term goal. But this methodical stair step up is always talked about is only a year or two. I just don't see any way that can happen.

3) But he biggest issue of all is that even if you assume that yes a 30% spread is possible, and yes they can step it up every month or so and still have buyers and sellers, it STILL does not work. When Adam talks about this he only talks about one point in the process, but to see if it really deals with the giant liability you have to look at the entire sequence. I made a simple spreadsheet to look at this issue (but spread sheets are not allowed to be attached, so drop me a line if you'd like me to send it to you).

The spreadsheet just uses 1T dianrs outstanding, since the model is the same no matter what this number is (as its all percentages). I think the CBI numbers are close enough and that m0, m1, and m2 are likely close to 4T, 25T, adn 62T, but it doesn't matter for this issue. So using 1T just makes it easy.

Sorry that the cols and headers don't line up very well, but the cols are

total outstanding dinars at each step

exchange rate at each step

CBi's profit (loss) at each step in dollars

the accumulating profit (loss) in dollars

the total liability (accumulated profit - outstanding dinars * buy exchange rate)

First assume that the buy and sell the same amount, 10%. This means that the total number of dinars outstanding does not change, which I do not think is the goal. Here they end up with a liability of 770 billion dollars (per trillion of dinars initially outstanding). That's better than just starting out at 2 dollars, but its still a gigantic problem.

   spread  30%
   sell    10%
   buy 10%
   outstanding dinars  exchange rate   CBI profit (loss)   accumulating profit (loss)  libability (accumulating profit - outstanding dinrs)
                                                         in dollars              in dollars                         in dollars
   1,000,000,000,000   0.1     3,000,000,000   3,000,000,000   (67,000,000,000)
   1,000,000,000,000   0.2     6,000,000,000   9,000,000,000   (131,000,000,000)
   1,000,000,000,000   0.3     9,000,000,000   18,000,000,000  (192,000,000,000)
   1,000,000,000,000   0.4     12,000,000,000  30,000,000,000  (250,000,000,000)
   1,000,000,000,000   0.5     15,000,000,000  45,000,000,000  (305,000,000,000)
   1,000,000,000,000   0.6     18,000,000,000  63,000,000,000  (357,000,000,000)
   1,000,000,000,000   0.7     21,000,000,000  84,000,000,000  (406,000,000,000)
   1,000,000,000,000   0.8     24,000,000,000  108,000,000,000     (452,000,000,000)
   1,000,000,000,000   0.9     27,000,000,000  135,000,000,000     (495,000,000,000)
   1,000,000,000,000   1.0     30,000,000,000  165,000,000,000     (535,000,000,000)
   1,000,000,000,000   1.1     33,000,000,000  198,000,000,000     (572,000,000,000)
   1,000,000,000,000   1.2     36,000,000,000  234,000,000,000     (606,000,000,000)
   1,000,000,000,000   1.3     39,000,000,000  273,000,000,000     (637,000,000,000)
   1,000,000,000,000   1.4     42,000,000,000  315,000,000,000     (665,000,000,000)
   1,000,000,000,000   1.5     45,000,000,000  360,000,000,000     (690,000,000,000)
   1,000,000,000,000   1.6     48,000,000,000  408,000,000,000     (712,000,000,000)
   1,000,000,000,000   1.7     51,000,000,000  459,000,000,000     (731,000,000,000)
   1,000,000,000,000   1.8     54,000,000,000  513,000,000,000     (747,000,000,000)
   1,000,000,000,000   1.9     57,000,000,000  570,000,000,000     (760,000,000,000)
   1,000,000,000,000   2.0     60,000,000,000  630,000,000,000     (770,000,000,000)

But they want to reduce the number of dinars, so lets assume that 15% come in and 10% go back out at each step. We still end up with 584 Billion dollars in liability (per trillion of dinars initially outstanding), but since the number of dinars as gone down, its better than above.

   spread  30%
   sell    10%
   buy 15%
   outstanding dinars  exchange rate   CBI profit (loss)   accumulating profit (loss)  libability (accumulating profit - outstanding dinrs)
                                                         in dollars             in dollars                          in dollars
   1,000,000,000,000   0.1     (500,000,000)   (500,000,000)   (70,500,000,000)
   950,000,000,000     0.2     (950,000,000)   (1,450,000,000) (134,450,000,000)
   902,500,000,000     0.3     (1,353,750,000) (2,803,750,000) (192,328,750,000) 
   857,375,000,000     0.4     (1,714,750,000) (4,518,500,000) (244,583,500,000)
   814,506,250,000     0.5     (2,036,265,625) (6,554,765,625) (291,631,953,125)
   773,780,937,500     0.6     (2,321,342,813) (8,876,108,438) (333,864,102,188)
   735,091,890,625     0.7     (2,572,821,617) (11,448,930,055)    (371,643,956,461)
   698,337,296,094     0.8     (2,793,349,184) (14,242,279,239)    (405,311,165,052)
   663,420,431,289     0.9     (2,985,391,941) (17,227,671,180)    (435,182,542,892)
   630,249,409,725     1.0     (3,151,247,049) (20,378,918,228)    (461,553,505,036)
   598,736,939,238     1.1     (3,293,053,166) (23,671,971,394)    (484,699,414,608)
   568,800,092,276     1.2     (3,412,800,554) (27,084,771,948)    (504,876,849,460)
   540,360,087,663     1.3     (3,512,340,570) (30,597,112,518)    (522,324,792,291)
   513,342,083,280     1.4     (3,593,394,583) (34,190,507,101)    (537,265,748,715)
   487,674,979,116     1.5     (3,657,562,343) (37,848,069,444)    (549,906,797,515)
   463,291,230,160     1.6     (3,706,329,841) (41,554,399,285)    (560,440,577,064)
   440,126,668,652     1.7     (3,741,076,684) (45,295,475,969)    (569,046,211,665)
   418,120,335,219     1.8     (3,763,083,017) (49,058,558,986)    (575,890,181,362)
   397,214,318,458     1.9     (3,773,536,025) (52,832,095,011)    (581,127,138,561)
   377,353,602,535     2.0     (3,773,536,025) (56,605,631,037)    (584,900,674,586)

The only way to make this work is to have the number of dinars sold be much greater then the number coming in, so the end up with a vastly greater number of dinars outstanding, but that is just the opposite of what they want to do.

So can anyone offer support of any of these assertions being correct?

[Darin]

One thing to consider.....

When X amount of people cash in for exchange, the CBI has to fork over X amount of foreign currency to match that.

Now, when the next wave of people come in to buy in, they can spend the same amount of X that was cashed out and the reserves don't get hit hard.

You have 1,000,000 IQD.

For sake of the argument, you paid $1,000 for the 1,000,000

It R/Vs at $0.01

You cash out 100,000

You receive $1,000 in return for exchange.

Someone buys in at $1,000 and receives 100,000.

Here is the difference

The first guy paid the equivelant of $100 to receive that 100,000 (from his 1,000,000 holdings)

The second guy had to pay $1,000 for the 100,000.

Foreign cash reserves become a wash, as $1,000 went out & $1,000 came in.

This does not really reduce circulation, but, a higher exchange rate could allow for a larger spread... Right now, the spread is 13 dinar on the dollar. Basically $0.01118 (1.11%)

The CBI could increase the spread, and use that as a figure to help withdraw from circulation.

For the sake of the argument, lets crank the spread to 5%

Okay, so, 100,000 came in & 100,000 came out via exchange.

The 100,000 IQD was valued at $1,000, but the CBI paid $950 to retrieve those notes (5% spread)

Now the next guy comes in and wants 100,000 IQD. Well he pays $1,050 to exchange for IQD.

So, they cycled $1,000 and broke even (wash) with the exception of making $100 profit due to the fees of exchange (spread)

2 transactions, $50 from each.

Now, where would that money be applied to?

Potentially added to foreign cash reserves to help pay for future exchanges, or, maybe they pull $100 worth of currency from the market. (10,000 IQD)

After they pull "X" amount from the market, a desired target amount determined by the CBI... They increase the exchange rate & repeat.

The stepping process may take time... But, it can be done.

Now, if a lot of foreign investments & demand come in, they may raise the value against demand even if they can't back it. See, if a really high demand exists for the IQD they wouldn't necessarily need 100% of foreign liquidity to back it. Does the U.S. have 100% foreign liquidity to back every dollar in existance? No..

Other factors may include bank holding IQD as reserve currencies, banks holding for providing the service of exchange in foreign countries, speculative holders, etc.

Overall however, the flaw in IQD in a rising value is that if they were to R/V to lets say $0.01... People may continue to buy which to a point may exceed what gets cashed in.

I.e., they R/V to $0.01

X amount of people cash in IQD at a value of $5 Billion (500 billion IQD) however, new speculative buyers buy up roughly 1 trillion IQD at a value of $10 billion.

Just thing(s) to consider.

[Dinar Buddy]

THE CBI WILL NOT BE CASHING ANY CURRENCY. THE UST WILL BE HANDLING ALL US TRANSACTIONS. WE HAVE PLENTY OF MONEY...

[truthful1]

Thats why a low rv is a great possibility. the cbi will make money on the next increase and then the next. All it takes is one law to allow the cbi to function many different ways. there are more possibilities than what is plain to the eye.

[engineer1138]

One thing to consider.....

When X amount of people cash in for exchange, the CBI has to fork over X amount of foreign currency to match that.

Now, when the next wave of people come in to buy in, they can spend the same amount of X that was cashed out and the reserves don't get hit hard.

You have 1,000,000 IQD.

For sake of the argument, you paid $1,000 for the 1,000,000

It R/Vs at $0.01

You cash out 100,000

You receive $1,000 in return for exchange.

Someone buys in at $1,000 and receives 100,000.

Here is the difference

The first guy paid the equivelant of $100 to receive that 100,000 (from his 1,000,000 holdings)

The second guy had to pay $1,000 for the 100,000.

Foreign cash reserves become a wash, as $1,000 went out & $1,000 came in.

This does not really reduce circulation, but, a higher exchange rate could allow for a larger spread... Right now, the spread is 13 dinar on the dollar. Basically $0.01118 (1.11%)

The CBI could increase the spread, and use that as a figure to help withdraw from circulation.

For the sake of the argument, lets crank the spread to 5%

Okay, so, 100,000 came in & 100,000 came out via exchange.

The 100,000 IQD was valued at $1,000, but the CBI paid $950 to retrieve those notes (5% spread)

Now the next guy comes in and wants 100,000 IQD. Well he pays $1,050 to exchange for IQD.

So, they cycled $1,000 and broke even (wash) with the exception of making $100 profit due to the fees of exchange (spread)

2 transactions, $50 from each.

Now, where would that money be applied to?

Potentially added to foreign cash reserves to help pay for future exchanges, or, maybe they pull $100 worth of currency from the market. (10,000 IQD)

After they pull "X" amount from the market, a desired target amount determined by the CBI... They increase the exchange rate & repeat.

The stepping process may take time... But, it can be done.

Now, if a lot of foreign investments & demand come in, they may raise the value against demand even if they can't back it. See, if a really high demand exists for the IQD they wouldn't necessarily need 100% of foreign liquidity to back it. Does the U.S. have 100% foreign liquidity to back every dollar in existance? No..

Other factors may include bank holding IQD as reserve currencies, banks holding for providing the service of exchange in foreign countries, speculative holders, etc.

Overall however, the flaw in IQD in a rising value is that if they were to R/V to lets say $0.01... People may continue to buy which to a point may exceed what gets cashed in.

I.e., they R/V to $0.01

X amount of people cash in IQD at a value of $5 Billion (500 billion IQD) however, new speculative buyers buy up roughly 1 trillion IQD at a value of $10 billion.

Just thing(s) to consider.

Sorry but this just does not work. The impact of a slowly increasing value is nearly the same if the do not sell ANY dinars as the value increases. Again you can not evaluate this by looking at a single transaction but must view the total.

spread	30%			
sell	0%			
buy	10%			
outstanding dinars	exchange rate	CBI profit (loss)	accumulating profit (loss)	libability (accumulating profit - outstanding dinrs)
		in dollars	in dollars	in dollars
1,000,000,000,000 	0.1 	(7,000,000,000)	(7,000,000,000)	(77,000,000,000)
900,000,000,000 	0.2 	(12,600,000,000)	(19,600,000,000)	(145,600,000,000)
810,000,000,000 	0.3 	(17,010,000,000)	(36,610,000,000)	(206,710,000,000)
729,000,000,000 	0.4 	(20,412,000,000)	(57,022,000,000)	(261,142,000,000)
656,100,000,000 	0.5 	(22,963,500,000)	(79,985,500,000)	(309,620,500,000)
590,490,000,000 	0.6 	(24,800,580,000)	(104,786,080,000)	(352,791,880,000)
531,441,000,000 	0.7 	(26,040,609,000)	(130,826,689,000)	(391,232,779,000)
478,296,900,000 	0.8 	(26,784,626,400)	(157,611,315,400)	(425,457,579,400)
430,467,210,000 	0.9 	(27,119,434,230)	(184,730,749,630)	(455,925,091,930)
387,420,489,000 	1.0 	(27,119,434,230)	(211,850,183,860)	(483,044,526,160)
348,678,440,100 	1.1 	(26,848,239,888)	(238,698,423,748)	(507,180,822,625)
313,810,596,090 	1.2 	(26,360,090,072)	(265,058,513,819)	(528,659,414,535)
282,429,536,481 	1.3 	(25,701,087,820)	(290,759,601,639)	(547,770,479,837)
254,186,582,833 	1.4 	(24,910,285,118)	(315,669,886,757)	(564,772,737,933)
228,767,924,550 	1.5 	(24,020,632,078)	(339,690,518,834)	(579,896,839,611)
205,891,132,095 	1.6 	(23,059,806,795)	(362,750,325,629)	(593,348,393,575)
185,302,018,885 	1.7 	(22,050,940,247)	(384,801,265,876)	(605,310,668,350)
166,771,816,997 	1.8 	(21,013,248,942)	(405,814,514,818)	(615,947,004,234)
150,094,635,297 	1.9 	(19,962,586,495)	(425,777,101,312)	(625,402,966,257)
135,085,171,767 	2.0 	(18,911,924,047)	(444,689,025,360)	(633,808,265,834)

But of corse a steadily increasing exchange rate has problem number 2 I stated in my OP, once this is clear no one will want to exchange and will just wait for it to stabilize.

THE CBI WILL NOT BE CASHING ANY CURRENCY. THE UST WILL BE HANDLING ALL US TRANSACTIONS. WE HAVE PLENTY OF MONEY...

If you are referring to the claimed scheme where the UST buys oil with dinars at a huge discount, its just a fantasy. Even if such a thing were possible, Iraq is only going to do what is in THEIR best interests and such a plan clearly is not advantageous to them.

Thats why a low rv is a great possibility. the cbi will make money on the next increase and then the next. All it takes is one law to allow the cbi to function many different ways. there are more possibilities than what is plain to the eye.

But as I have shown the do NOT make money by buying and selling. A gradual increase allows them to purchase dinars more cheaply then coming out at a higher rate, but that assumes everyone will ignore that such an increase is happening and want to exchange instead of just waiting for it to reach a higher level, which seems highly unrealistic.