Sunday, September 25, 2011

More RV Analysis

From Iraqi Dinar News Blog

I am not what you might consider an "old timer" in this investment. In fact, I have owned my Dinar for less than a year. I made my first purchase in November of 2009 because a friend suggested I do so, quickly. Normally I do not JUMP into anything but I was convinced that he might be right; so I made my purchase.

I think, in the effort of full disclosure, I should at least throw my "qualifications" out there, for speaking on the Dinar, before you read any further.

I am not a currency trader nor am I an investment adviser. I was however, a registered representative (stock broker - Series 7 - fully licensed by the Fed and the State of Texas) for 6 1/2 years. I was an ACTIVE broker (managing client accounts, making stock recommendations, executing buy and sell orders, and researching prospective opportunities for my clients) for the first 4 of those years. To put it in simpler terms, I was a "Bud Fox" (Like in the movie Wall Street). No, I never got to sleep with Daryl Hannah (a chick - for those that don't know) but then, nobody's perfect.

As you can see, I am NOT a currency specialist; nor do I play one on tv. But what I do posses, is the mind of someone who understands markets and securities. I am not making the claim of being a financial guru or that I am even qualified (in the most astute sense of the word) to tell you guys what to do with your money. Cash, whether it be the USD, the IQD, the EURO, or the Peso are considered "securities." And as such, their values fluctuate on the most basic of financial principles; "supply and demand." For those of you that would like to read up on how a central bank controls the value of their respective nation's money supply, I would suggest you google the purpose of a central bank.

So without further delay, let's just dive right into this......

We have all been told that 25 Trillion Iraqi Dinar were printed.  Of that amount, we have no way of knowing how much of that currency the Central Bank of Iraq still holds in it's liability column.  Or, how much of that cash is in the hands of the global public.

As of 2010, the population of Iraq is approximately 31,234,000.  So we have a nation of people who's population totals a little over 31 million, who's central bank originally had 25 trillion of their dollars (dinars) printed for circulation.

Now let's compare that to a country like, oh I don't know......The United States. Probably a good place to start since their money is pegged to our dollar.

As of 2010, the population of the United States is approximately 305,689,000

And as shown below, we currently have 1,132,337 Trillion dollars (real currency) in circulation.  Of course the Fed (Federal Reserve) is on the hook for much more than hard currency but that's another discussion altogether. 

12. Collateral Held against Federal Reserve Notes: Federal Reserve Agents' Accounts
Millions of dollars

Wednesday Aug 4, 2010

Federal Reserve notes outstanding: 1,132,337

So let's compare:

Iraqi population of 31.2 million
US population of 305.6 million

Iraqi currency 25 trillion with no proof that ALL of it is NOT in circulation 

Let's think about this for a minute.........we have 305.6 million Americans that are fighting for their share of 1.13 trillion worth of cash. LET ME STATE THAT I UNDERSTAND THE BASICS OF FRACTIONAL RESERVE BANKING so I know that "wealth" is not represented in the currency supply OR the amount of money an entity may have in the bank. So for illustrative purposes let's focus on the marketability of the currency alone. We have a supply for a market and a demand for the equity on that security. Not only are American's vying for the dollar, but other nations are as well. (SUPPLY AND DEMAND)

Contrast this with Iraq:

We have a nation of 31.2 million Iraqis that are fighting for their share of 25 trillion worth of cash.  We have a supply for a market and a demand for the equity on that security. At this point, the only REAL demand for that equity is created by the 31.2 million Iraqis. Other than travelers and speculators (like us) there isn't much demand internationally. Thus, the whole point of bringing the IQD to the international markets.

Now I ask you this.....

Does it make sense that a currency, without much marketability, would maintain it's current level of supply, and hit the international market at a 3 to 1 ratio to one of the most valuable currencies on the market?

Wouldn't it make more sense to reduce the currency supply before bringing the currency to the international market?

Look, I know that this line of thinking, or reason, is frowned upon by those who are hoping to become millionaires overnight. And the last thing that I want to do is trash people's dreams of this giant windfall that WE ARE ALL hoping for. (I own IQD as well) 

But is it possible that there is a "plan" in place that ISN'T exactly what WE are all hoping for??

I already know the counter arguments to this and I know that the BIG thing people like point out is the "low rate of inflation" in Iraq. But what does that REALLY mean?

Well, the definition of "inflation" is: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

So when someone points out that inflation in Iraq is "under control" or "low", what they are saying is that the prices of goods and services are increasing, annually, at a low rate. The problem with this argument is that the ridiculous amount of currency needed to purchase goods and services in Iraq is still WAY out of line when compared to non-third world nations. I mean come on; it takes 40-50 of US currency to take the family out to dinner on a Friday night. In Iraq it takes 40,000 - 50,000 of THEIR currency for the same meal. So the nominal value of their currency, while common place in Iraq, is in no way representative of a currency holding any REAL value. That's why it takes SO MUCH OF IT to purchase goods and services in Iraq.

When people talk about the historical value of the Iraqi Dinar, they like to point out the rate prior to Saddam's reign. And that rate may have been a legitimate valuation of the currency at that time. BUT....what was the country's population and how much currency was available to the market? I can almost promise you that BOTH figures are dramatically normaler than what we are seeing today.

-Author Unknown


From Dinar Vets

Too many dinars
a. An equal value RV to the dollar is a mathematical and economic impossibility.
Too often it is portrayed that if you have1,000,000 dinar, that suddenly you will be able to run down to the bank and cash it in for $1,000,000 US. Not true!!! Absolutely Not True!!! The US would have to devalue our dollar dramatically for this to even be remotely on the horizon.  There are approximately $7 trillion US dollars in circulation.  If the 30 trillion dinar were suddenly worth $30 trillion dollars, there is not only not enough US Dollars, there isn't enough money in the entire world to buy or compensate for the new value of the dinar...Does that make sense?  A country worth a few hundred billion can suddenly wake up one morning and be worth more than the rest of the combined planet.

It would be like having a $300,000 dollar house in a nice neighborhood and listing it for sale at $3 billion. Understand? Your house value is relative to the value of all the other houses in the neighborhood...very simple supply and demand.  

And yes to a certain extent the comparison to Kuwait can be made given that the country can stabilize the government, drastically overhaul the infrastructure, and increase production of oil.  What gets continuously overlooked though in these forums is that Iraq has 25,000 times more dinar in circulation than Kuwait.  Which brings us back to the point I made in the above post....The greatest likelihood is that you will see the dinar depreciate some from current values and then something comparable to the triple zero LOP.  There is much for Iraq and it's allies to gain from implementing these basic economic policies, but for the investor of dinar, for it to happen the way it is portrayed in these forums is totally in another galaxy. The dinar WILL hopefully grow in the same type of proportions as do most economies when they redevelop their nations. Could you double your money 12 years out...sure, but even this will require steady growth at a pace that exceeds the rest of the world. 

***Please note that I am not bashing this forum...I would imagine that Adam's ebook is worth every penny, as is worst case, you will learn more about economics than you currently know...Pardon me - I don't mean that to sound pretentious, but the forum would never grow to it's current size without the hopes and unrealistic dreams of thousands of readers. ( I really wish I would have thought of is indeed a cash is actually marketing genius)

So anyhow...yes the dinar will RV, but NOT on values anywhere close to a penny, nickel, dime, quarter, or dollar....the entire monetary system will be revamped first.

b. The Dinar may make it to 1000:1, but that is about the best you can expect from this dinar.
Anyone who thinks that Iraq can introduce a currency, increase the supply of it to 26 Trillion (over 3 times more than the US dollar, 3 times more than the Euro) and use this currency for almost 5 years now… an then somehow magically increase the value 120,000%… well you know the old sayings.. I’ve got some land in Florida I’d like to sell you… or maybe a bridge in Brooklyn. 
It’s amazing how many people involved in this thing don’t understand simple economics. Econ 101…supply and demand.  The Dollar and the Euro get their value from the the demand that is generated from the size of the economies.  The US has a $13 trillion dollar GDP, The Euro countries have a $12 trillion GDP. That makes for a tremendous demand for those currencies.  Iraq on the other hand has a GDP of about $90 billion… and almost all of that is from oil sales which are in dollars so it does nothing for the dinar.  The Iraqi non oil economy is practically nothing.  There is virtually no demand for dinar except for speculators.  With a money supply 3 times that of the Euro or Dollar.  Iraq would have to have their non oil economy grow to approx 3 times the size of the U.S. or Euro nations (that would be a non oil GDP of about $35 trillion) in order to have the dinar rise to 1:1.  Hopefully you see that is a total farce. 

If Iraq wants a rate of 1:1 or anything close, they will issue a new currency and re-denominate.  In other words, lop 3 zeros from the currency. For every 1000 of this dinar you have, you will get 1 of the new currency. That is if they don’t somehow block money from reentering the country for an exchange.

-Author Unknown

From Dinar Vets (This one was circulated around so much it's hard to know where it originated but I seem to recall it starting at DV)

In our 40+ year career as a Retirement Consultant we have been blessed to meet some very talented professionals. One of them is a retired State Dept. economist who introduced us to the IQD investment in 2005. He had worked on the original plan to install a new monetary system for Iraq after the 2003 invasion.

He had originally indicated that the plan was for the IQD to achieve financial parity with the USD over a 7-10 year period from the introduction of the new system. At that time the USD’s use would be completely discontinued and it would be replaced by the IQD for in-country use and international exchange. The variable factor in the timetable would be the political environment.

I visited with him recently and got an update on several issues:

(1) He indicated the original time table was proceeding on a important fast track[due to the financial management skills exhibited by the CBI and the Finance Ministry in (1) controlling the rate of inflation, (2) controlling the value of the IQD in a declining economic environment and (3) implementing a digital banking system both internally and externally, but the variable was still the political environment.

Like most economist he doesn’t talk in absolutes (i.e. rate/date) but in probabilities. His knowledge base is pretty current since he is still part of a subsection of the original group that Iraq, State Department and IMF financial people bounce things off of.

(2) We raised the issue of the large number of IQD reported as being in circulation (current estimates are at 25 Trillion). He indicated this was mostly made up of
(1) in country physical currency,
(2) the ]foreign ]currency[ reserves of the central banks around the world which are electronic,
(3) currency that had been printed but not released (i.e. normal denomination bills) and (4) privately held physical currency sold to increase the foreign currency reserves.

The export oil revenues are still under the control of the UN supervised DFI, and Iraq only gets roughly 30% of the fair [valuef the oil they are selling, which is to be used only for budgetary expenditures. Since Shabbi, the head of the CBI, knew he couldn’t get anymore cash flow out of the controlled revenue system the IMF/UN had him under, he opened a currency sales window at the daily auctions to tap into the wallets of the worlds speculators. Worked pretty good, since he’s built his foreign currency reserves to over $50 billion USD.

(3) We then moved to the removal of big bills (the ones with the 3 zeros on them) and he said that this activity was always built into the plan. The activity was to begin as soon as Iraq had implemented a modern digital financial system (i.e. bank branches, credit/debit cards, ATM’s, direct wire transfers etc.). The removal of the large bills in-country would be the reverse of the process that was used to remove the pre-2003 currency with Saddams picture on it. The example was a 25,000 IQD=$25USD/pre-rv note would be brought into the bank and exchanged for a 25 IQD note=$25 USD post/rv. The 25,000 IQD note would then be destroyed removing it from the currency in circulation account. I told him a lot of people would call that a LOP and he laughed, saying they are partially right, because 25,000 IQD was being lopped from the currency in circulation account, but the only reason for this process was to improve money handling ability at all organization levels, and reduce the actual physical currency in use in all areas of the Iraq economy.

Interestingly enough, he said this activity could happen in-country without an approved RV rate being released to the International financial system. I asked how much physical IQD did he estimated was in circulation in-country, and he said probably less than had been originally introduced in 2003 which was about $4.5 billion USD worth at an exchange rate of 2000 IQD = $1 USD, because there has been a continuous process of not replacing the larger bills as they wore out. In fact this has resulted in currency shortages in some areas.

(4) The next obvious question was how would the removal of the large bills with the three zeros work outside of Iraq, because of the number of world speculators holding IQD. He indicated, the amount of IQD held by speculators was relatively minor (less than 10%) compared to the IQD held as foreign currency reserve by the central banks of a number of major countries (US, China, England & France were the largest) with major financial interest in Iraq. He didn’t have an exact estimate of speculator holdings but ventured an educated guess of 750,000 individuals worldwide with the majority in the US. Estimated value of their holdings $1.5 Trillion – $1.7 trillion IQD.

(5) Before discussing the planned process of how currency exchange would take plan after the IQD was released as an international tradeable currency, he asked if I remembered my economics 101 and what the real purpose of currency is? Yes teacher I replied, it’s a medium of exchange that facilitates the orderly distribution of goods and services among individuals, companies, country’s etc. The often used example, is the use of currency allows an automobile dealer to exchange a new mustang GT (composed of many diverse parts each with its own individual market value) for the cash]payment+ bank financing check of a proud new owner, and each has received equal market value at the moment of exchange.

This is an important concept because the value of a particular currency may be defined by the value of what the currency can be exchanged for,

The complete discussion was rather lengthy so here’s the executive summary of how the exchange should work with IQD owned by a US speculator:

(1) IQD is released internationally with an exchange rate of $1 USD = 1 IQD
(2) IQD is exchanged by Mr. & Mrs. X at Bank Y. Their exchange value is credited to their designated financial account, Bank Y forwards the IQD currency to the Federal Reserve and Bank Y’s account is credited at the bank private exchange rate. Yes, the banks will have a private rate and then they will add their profit spread to come up with their public rate. By law this bank spread could be as high as 8%, but it will be a competitive marketplace and the banks know investors will shop around. There is a possibility that there might even be a three rate structure (i.e. Treasury Rate – Bank Private Rate – Bank Public Rate) imposed, but he had no input on that subject.
(3) The Federal Reserve adds the value of the exchanged IQD to their foreign currency reserve accounts and destroys the actual physical currency under agreement with the CBI, which serves to reduce the total IQD physical currency in circulation. This build up of the foreign currency reserve accounts serves to strengthen the USD in the marketplace, because heretofore the US has never held significant foreign currency reserves, because there wasn’t any country whose currency was perceived as being equal to or stronger than the USD. The IQD with it’s commodity (oil+others) base, potential for agriculture growth and aggressive private development growth, has the capability to become the most valuable currency in the world in the 10 years after it’s revaluation and approval as an internationally recognized currency. Other countries have lots of oil, but they can’t feed themselves, they operate under a monarchy or religious tribunal and they have no private development system in place.
(4) Mr. & Mrs. X tithe to their church, local charity etc. which stimulates activity in that sector. They pay off their debts, making currency available for re-lending by their creditors. They buy a new house and car which stimulates their local economy and set up a conservative investment portfolio which adds capital to the investment markets. They also pay their estimated taxes which increases the cash flow to the US Treasury.
(5) The Federal Reserve under a controlled redemption plan supervised by the IMF, will use it’s foreign currency reserve IQD account to buy oil for the national strategic reserve, DOD reserves, other country reserves as part of international support agreements or resell it to private oil companies etc.

This gives the Federal Reserve a powerful market force capability to control the supply/price of imported oil which has far-reaching economic and national security implications.

The economics of this scenario look like this, using the exchange of a 10,000 IQD Note with a two-tier 2% bank exchange spread as an example:

(1) Mr. & Mrs. X get $9,800 credited to their non-interest bearing checking account.
(2) Bank Y gets a $10,000 credit to its Federal Reserve account, and by adding the $200 profit to their capital account, allows them to increase their lending cap by $2,000 under the 10% fractional banking model.
(3) The Treasury gets $3,500 in estimated taxes in the quarter after the exchange, because Mr. & Mrs. X are now in the “rich” category and get to enjoy the 35% tax bracket. This lowers the net cost of the IQD exchange to the US financial system to $6,500 USD (i.e. $10,000 out – $3,500 in).
(4) The Fed’s designated agent, at some point, orders $10,000 worth of oil from Iraq. Payment will consist of a 10,000 transfer from the Fed’s foreign currency reserve IQD account to the IRAQ Oil payment account at the CBI. Even though the world spot price of oil is defined in terms of USD, the actual transaction may take place in any internationally recognized currency agreed to by the parties. For example, Iran only accepts Yen from Japan for their oil orders, because they don’t want USD in their foreign currency reserves.
(5) The $10,000 order is filled with 200 barrels of oil based on the spot price on the date of the sale (for this example we used a $50 USD spot price). What does it cost Iraq to produce the oil to fill this order? Well they have negotiated productions agreements for $1.50 USD/barrel. From that price $.50 USD goes to the national Iraqi oil company who is the partner in the field the oil came from. Out of the remaining $1.00 the other oil field partners have to pay the Iraq government a profit tax of $.35 USD (35%). The net cost to Iraq to produce a barrel of oil used in this scenario is $.65 USD. (i.e. $1.50 – .50 – .35)
(6) The transaction is completed with the Federal Reserve exchanging foreign reserve credits which are equal to 10,000 IQD (which had a net acquisition cost of $6,500 USD) for 200 barrels of oil (which has a net cost to produce of $130 USD.

Simply put, it cost Iraq $130 USD from their foreign currency reserve accounts to redeem the value of 10,000 IQD, which goes into their operating accounts. At the same time the US got $10,000 worth of oil for a net cost of $6,500. That’s how it was originally planned for Iraq to RV at 1 IQD = 1 USD, with the variable being the political element (i.e. UN Sanctions, GOI actions, IMF actions, World Bank actions etc.)

Now let’s really stir the pot by:

a. Having the DFI ($280+ Billion USD) plus other frozen assets (estimated at $100 billion) turned back to Iraq and added to their foreign currency reserve, bringing it up to $430+ billion USD.

b. Then change the current fractional IQD reserve requirements of 100% to 15%. That just raised the total potential money supply value to $2.8 Trillion (430 billion/ 15), while at the same time the total physical IQD in circulation is being reduced by removing the large bills with the 3 zeros.

c. Also execute the plan Iraq announced to increase oil production from 2+ million barrels/day to 10 million barrels/day with the resulting revenues flowing directly to the Iraq treasury.

d. To add a little more intrigue have the CBI continue to use it’s sales window to market oil futures and forex contracts. They have shown they can generate significant cash flow in the private market, think of their impact in public markets.

We leave it to your analytical ability to determine how high of an RV exchange rate IRAQ can really support. There is strong political pressure to set the initial rate at $3.22 USD = 1 IQD, so it can be proclaimed that IRAQ has moved back into the International community of nations and has re-established it’s currency at the internationally traded rate in effect before Saddam invaded Kuwait in 1990.

-Author Unknown

Response by Dustin Hayes at Dinar Vets:

This so-called "report" from a so-called "State Dept Economist" is the most misleading, unintelligible piece of fiction I have seen on any Dinar site. If anybody would like more information about (the first) paragraph (3), we can start another thread.

My favorite part is how $10 turns into $10,000. Let's use the original author's numbers.

-I give Iraq $10, they give me 10,000IQD
-I wait
-I wait
-Woo Hoo the RV hits
-I exchange my 10,000IQD for $10,000 at the bank
-The bank transfers the 10,000IQD to the Federal Reserve
-The Federal Reserve orders $10,000 worth of oil with their 10,000IQD as payment
-Iraq gives them 200 barrels of oil

In the end, Iraq gets $10 for 200 barrels of oil? <<<THAT is the part you start to lose me on.
And they had to spend $130 to produce the oil?

Wouldn't this make more sense?

-A dozen other people an I each give Iraq $10, and they give each of us 10,000IQD
-Iraq takes the $130 and produces 200 barrels of oil
-Iraq sells THEIR oil at market for $10,000
-Iraq keeps THEIR $10,000
-I Exchange my 10,000IQD for $10

Even if you scale the RV down from a Dollar to a dime or to a penny, Iraq is still better off keeping THEIR money than by giving it to you.


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