Thursday, December 8, 2011

Phoenix - How Iraq Will Pay for the RV

This was taken from the blog Going Global - East Meets West which is Phoenix' wife Lakehouse's blog.

I would like to explain a couple of things.
First the removal of zeros.
This is NOT a standard LOP!

This is a novel solution to a novel situation.
When they say "remove the 3 zeros" They are talking about the removal of the larger denominations the 25,000 the 10,000, the 5,000, the 1,000.

Now at the exact same time that they introduce the new currency which is nothing more than the lower denominations that they have had printed for years and in storage they will also revalue the Iraqi Dinar to at or just above the dollar.

So I understand why people are having a hard time grasping what is about to happen.

People are trying to use past economic events in other nations as a guide but the problem is what we are about to see happen is unprecedented and without historical reference.

So the doubt and confusion is to be expected.

Now the next topic.

Iraq the RV and the Dinar

Ok I would like to address something that I see brought up all of the time.

And that is the question: "How will Iraq cover the exchange?

How can they pay for this?"

Now what people seem to not understand is that the Iraqi Dinar is the currency of Iraq.

The Iraqi Dinar is not a "claim ticket" or "raffle ticket" that will be redeemed for cash.

The Iraqi Dinar IS CASH. It is CASH MONEY!

The real deal. Just like the Euro...just like the Dollar.

So when the revaluation takes place Iraq is not going to turn into a giant currency exchange!

Nor would any other nation!

People seem to wrongly think that after the RV all of the Iraqi Dinar will be sent back to Iraq and a that Iraqi will be required to exchange their own currency for some other nations currency.

That is total BS and not how the world works!

The Iraqi Dinar will be it's OWN value! Backed by the wealth of Iraq.

Lets say for example that if after the RV you were to walk into an Iraqi bank

with 20 million IQD that post RV was worth $20,000,000 USD you will have 2 choices,.

1. Deposit that IQD into an IQD account with strict withdrawl/conversion restrictions.


2. Leave the bank and go buy something with your IQD in Iraq.

Sure...they may exchange a small amount needed for travel but even that is up to them if they chose to do so.

Iraq nor any other nation is not required or expected to exchange their own legal currency for any other currency and that is solely up to their own discretion.

Yes Iraq has a lot of currency out side of Iraq....big freaking does every other nation on earth.

The United States has over 2/3rd's of all of our currency spread all over the world.

Now lets imagine for a moment that for some reason the United States announced that they were going to RV the USD up to say the Euro rate.

What do you think would happen?

Do you think the US banks would be flooded with USD from all over the world demanding Euros in exchange?

What do you think would happen if you were to walk into a US bank with a suit case full of dollars and demanded they exchange it for Euros?

First off they would give you the same two options mentioned above.

1. Deposit those dollars into the bank in a USD account again with strict withdrawl/conversion restrictions.


2. Leave and go buy something!

There is no law or requirement that any nation do currency exchange and for good would destabilize the markets and would drain that nations foreign reserves.

So all of the talk of "How will Iraqi pay for this" is based upon the lack of understanding of the basic functions and properties of currency itself.

So what backs the IQD? The wealth of Iraq itself plain and simple.

So there is nothing "to pay for" the IQD itself is the wealth.

Hope that helps.


Okay, first Phoenix says that the new lower denoms have already been printed and are being stored somewhere awaiting the RV.  He offers no proof for this claim.  We're just supposed to accept it on his word I suppose.  This prompts a couple of questions from skeptics and/or cynics such as myself.  If they have these LDs in storage, why were they talking about introducing a new 50?  Whether they introduce one or not, the fact that they were even contemplating it suggests that the "LDs are already printed" theory is BS.  Additionally, why are they now discussing including three languages on the new currency?  Why don't they just say "oh well, we've already designed the new currency"?  The fact that they're discussing a new design suggests to me that they in fact have not already printed the new currency.   

Second, Phoenix says that what is going to happen in Iraq is unprecedented and without historical reference.  Well then why is the CBI studying previous redenominations in Turkey, Romania, and Brazil to determine a course of action for the dinar?  Apparently Shabibi didn't consult with Phoenix, because he does see precedence in what other countries have encountered.

And third, Phoenix says that the dinar will be backed by the wealth of Iraq. My response to that is simply .... what wealth? Their GDP? It's lower than that of Bangladesh!?!! (Iraq - $81 billion vs. Bangladesh - $105 billion) Remember Bangladesh?  The poor country next to India that George Harrison did a benefit concert for 40 years ago to feed their poor, starving people?  That's right, a poor country like that has a higher GDP than Iraq.  Iraq's GDP per capita is around $3,000 or about 1/10th that of their neighbors in Kuwait. Sure, Iraq has great potential. But potential wealth and actual wealth are two entirely different things.

Steve Jobs had potential wealth when he was a struggling entrepreneur building personal computers in a garage, but he was flat broke until Mike Markkula came along and provided the much needed venture capital to help Apple Computers become a well funded, thriving enterprise.  What if the young Steve Jobs who was a struggling, piss poor entrepreneur walked into a bank and demanded a few million dollars because he had the potential for great wealth?  How long do you think it would it have been before they showed him the door?  Sure, years later he could raise all of the money he wanted because he had produced something, but until he produced it that wealth was not real and tangible.   In order to create that wealth he had a lot of work to do.  He had to sell his ideas, raise the venture capital, hire quality people to work for him, obtain the facilities for his company, handle the legal paperwork, develop the products, oversee the marketing and distribution .... etc. 

Iraq has the natural resources to become as wealthy or possibly wealthier than their Kuwaiti neighbors, but they have many social and political problems to overcome before that will be the case. And changes like that don't occur overnight. They take decades. And Iraq might have the second largest oil reserves in the world, but at the rate that they're going it will take over 150 years to make all of that oil available, and even if they quadruple their production you're still looking at 2050 at the earliest. Maybe in forty or fifty years Iraq will be able to say that they're one of the wealthiest nations on earth, but that's an absurd statement to make at the moment.

Okay, now for my explanation of how Iraq will pay for the RV.  As our dear friend Breitling says, it's very simple.  They will either lop or RV very low at a rate that they can support.  In my opinion that means a penny tops.     

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