RD 101

As dinarians discuss Iraq's pending redenomination, the subject of a lop often surfaces only to be met with derision from uninformed or unscrupulous people who refuse to acknowledge that the possibility exists.  I thought it would be good to clear up some misconceptions and clarify exactly what people who know what they're talking about are saying when they refer to a lop.

First of  all, let's define a redenomination (RD).

From Wikipedia:

Redenomination is the process of changing the face value of banknotes or coins used in circulating currency.  When redenomination occurs, financial data that spans the change must be correctly accounted for.  In times of inflation, the same number of monetary units have continually decreasing purchasing power. In other words, prices of products and services must be expressed in higher numbers. If these numbers become excessively large, they can impede daily transactions because of the risk and inconvenience of carrying stacks of bills, or the strain on systems, e.g. automatic teller machines (ATMs), or because human psychology does not handle large numbers well. The authorities may alleviate this problem by redenomination: a new unit replaces the old unit with a fixed number of old units being converted to 1 new unit. If inflation is the reason for redenomination, this ratio is much larger than 1, usually a positive integral power of 10 like 100, 1000 or 1 million, and the procedure can be referred to as "cutting zeroes".

"Cutting zeroes" sounds a lot like "removing zeros" or "deleting the zeros" which has been mentioned many times in statements coming from Iraq.  The slang for removing zeros is "lop", as in lopping or chopping off zeros.  A redenomination can be done without a simple removal of zeros, as was the case with Brazil when they did a 2750 to 1 redeonomination in 1994, but usually they are done with a simple removal of zeros to avoid confusion.  The basic idea is that the currency is replaced with new currency that has a higher value and usually a proportionally lower money supply.

In Iraq's case a lop of three zeros would reduce their money supply from about 25 trillion dinar down to about 25 billion (depending on whose numbers you go by) and raise the value of their currency from $.00086 to $.86.  The money supply's value would remain unchanged at approximately $21.5 billion (25 trillion times $.00086 = 25 billion times $.86).  As they dedollarize theoretically their monetary base of $21.5 billion would expand to compensate for the loss of US dollars. 

Usually a redenomination occurs because of the effects of inflation, but not always.  Sometimes they occur because of political change, like when Iraq's currency changed from the old Saddam dinar to the current dinar, or when European nations converted to the euro.  Sometimes they happen to address the effects of war, as was the case with Kuwait when it redenominated in 1991 because Saddam stole so much of their money and the printing plates for their currency.

Below is a list (from Wikipedia) of nations that have redenominated through the years.

New unit	Exchange rate (new:old)	Old unit	Year	Country	Cause	Note
!a	-9e99	!a	!a	!a	!a	!a
~z	9e99	~z	~z	~z	~z	~z
Chinese "silver" yuan	5e8 ! 500 000 000	"gold" yuan	1949	China (Republic of China)	inflation
Yugoslav novi dinar	1.3e7 ! 13 000 000	1994 dinara	1994	Yugoslavia	inflation	Anchor currency: German mark
Chinese "gold" yuan	3e6 ! 3 000 000	(old) yuan	1948	China (Republic of China)	inflation
Peruvian nuevo sol	1e6 ! 1 000 000	Peruvian inti	1991	Peru	hyperinflation	"nuevo" is an official designation and is still in use
Yugoslav 1993 dinar	1e6 ! 1 000 000	1992 dinara	1993	Yugoslavia	inflation	no official designation
Turkish new lira	1e6 ! 1 000 000	Turkish lira	2005	Turkey	inflation	"new" is an official designation and has been dropped in 2009
Hryvnia	1e5 ! 100 000	Karbovanets (third)	1996	Ukraine	inflation
New Taiwan dollar	4e4 ! 40 000	Taiwan dollars	1949	Taiwan (Republic of China)	inflation	"new" is an official designation and is still used in official documents
Second Renminbi yuan	1e4 ! 10 000	First Renminbi yuan	1955	China (Peoples Republic of China)	inflation
Peso argentino	1e4 ! 10 000	Peso ley	1983	Argentina	inflation
Peso (convertible)	1e4 ! 10 000	Austral	1992	Argentina	inflation
Polish złoty	1e4 ! 10 000	Polish złoty	1995	Poland	inflation
Leu	1e4 ! 10 000	Romanian Leu	2005	Romania	inflation
New Ghanaian cedi	1e4 ! 10 000	Cedi	2007	Ghana	inflation
Azerbaijani new manat	5000 ! 5 000	(old) manat	2006	Azerbaijan	inflation
Turkmenistani new manat	5000 ! 5 000	(old) manat	2009	Turkmenistan	inflation
Real	2750 ! 2 750	Cruzeiro real	1994	Brazil	inflation	Anchor currency: United States dollar
Cruzeiro (antigo)	1000 ! 1 000	Real (old)	1942	Brazil	inflation
Cruzeiro (novo)	1000 ! 1 000	Cruzeiro (antigo)	1967	Brazil	inflation
Austral	1000 ! 1 000	Peso argentino	1985	Argentina	inflation
Peruvian inti	1000 ! 1 000	Peruvian sol	1985	Peru	inflation
Cruzado	1000 ! 1 000	Cruzeiro (novo)	1986	Brazil	inflation
Cruzado Novo	1000 ! 1 000	Cruzado	1989	Brazil	inflation
Cruzeiro real	1000 ! 1 000	Cruzeiro (third)	1993	Brazil	inflation
New Shekel	1000 ! 1 000	Shekel	1986	Israel	inflation
Russian Rouble	1000 ! 1 000	Rouble	1998	Russia	inflation
Bulgarian New Lev	1000 ! 1 000	Bulgarian Lev	1999	Bulgaria	inflation	Anchor currency: German mark
Belarussian Rouble	1000 ! 1 000	Rouble	2000	Belarus	inflation
New Mozambican metical	1000 ! 1 000	(old) meticais	2006	Mozambique	inflation
Bolivar Fuerte	1000 ! 1 000	(old) Bolivar	2008	Venezuela	inflation
Euro	239.640	Slovenian tolar	2006	Slovenia	monetary union	Eurozone
French Franc	100	Franc	1960	France	inflation	originally called New Franc
Peso ley	100	Peso moneda nacional	1970	Argentina	inflation
Euro	40.3399	Belgian or Luxembourgian francs	2002	Belgium Luxembourg	monetary union	Eurozone
Euro	30.1260	Slovak koruna	2009	Slovakia	monetary union	Eurozone
Peso moneda nacional	25	Peso moneda corriente	1881	Argentina	inflation
Euro	1.95583	Deutsche Mark	2002	Germany	monetary union	Eurozone
Cruzeiro (third)	1	Cruzado Novo	1990	Brazil	renaming
Karbovanets (third)	1	Soviet ruble	1992	Ukraine
Euro	0.787564	Irish pound	2002	Ireland	monetary union	Eurozone
Euro	0.585274	Cypriot pound	2008	Cyprus	monetary union	Eurozone
Austro-Hungarian krone	0.5	gulden/forint	1892	Austria-Hungary	monetary union	Moving from silver to gold standard
Euro	0.429300	Maltese lira	2008	Malta	monetary union	Eurozone
Peso moneda corriente	0 ! ?	Real	1826	Argentina
Second Zimbabwean dollar	1000 ! 1 000	(first) dollar	2006	Zimbabwe	inflation
Zimbabwe Third Dollar	1e10 ! 10 000 000 000	Zimbabwe Second Dollar	2008	Zimbabwe	Hyperinflation
Zimbabwe Fourth Dollar	1e12 ! 1 000 000 000 000	Zimbabwe Third Dollar	2009	Zimbabwe	Hyperinflation

There are several misconceptions about a lop.  Some people think that a lop means the country's currency becomes worthless and people who hold it will lose everything.  Not true.  Redenominations are done with a time frame for turning in the old currency for the new.  The trick for dinarians would be to find a place thousands of miles away from Iraq to handle that conversion or redeem the IQD for USD.  Some think lops are only done during hyperinflation, when in fact they are often done after hyperinflation has abated; sometimes years later.  Others think that a lop is an admission of failure for the economic policy.  Not at all.  In fact, redenominations are usually done after the country has experienced some success in combating inflation and the currency's value has stabilized.  Another misconception about a lop is that the country that redenominates (in this case - Iraq) would be screwing other nations out of something.  Wrong.  Other nations who hold cash of the currency being replaced would be allowed to convert to the new currency just like everybody else.  If they hold electronic currency the conversion is done via software.  The only way they would be screwed is if there was some secret plan to revalue it to create a windfall for the countries who own it.  In the case of Iraq there is no evidence that any such agreement exists.  Yet another misconception popularized by Breitling is that a lop doesn't affect all denominations.  As was stated in the definition above: "When redenomination occurs, financial data that spans the change must be correctly accounted for."  That means all denominations, all electronic currency, all prices based on the currency's value .... EVERYTHING!  You can't escape the effects of a lop by buying lower denoms or electronic currency any more than you can escape the effects of a nuclear bomb by hiding under your desk.  The change is all-encompassing.

Sometimes you'll hear people who don't believe that Iraq will lop say something like "why are you so negative?"  It's not a matter of being positive or negative.  It's simply a matter of understanding history.  Countries that go through a period of hyperinflation caused by war, sanctions, unrest ... etc. tend to redenominate by removing zeros from their currency after things stabilize somewhat.  Others will act like this whole lop theory is crazy and these "lopsters" are just making it up.  Not at all.  If anything is being made up it's this idea of Iraq revaluing their currency to 1000 or more times its current value.  I have listed above dozens of times when a country has lopped.  I have yet to see anybody present one example of a nation doing what Iraq is supposedly about to do.  If they RV at $.86 or more it would be a phenomenon of economics.  It would be completely unprecedented and would defy the conventional wisdom of the financial world.

Let's take a look at what Shabibi said earlier this year when he visited DC. 

Starting at about 3:30 in:

Question:

I've heard a report in the last couple of days That Iraq is about to cut three zeros off the currency ...they call that re-denomination that may be the same question that you just received (at the end of the preceding video somebody asked Shabibi if Iraq was going to revalue their currency) but I wonder if you had any information about that.

Shabibi:

Well, I mean .... I don't know whether if it is the same question, I think this cutting of three zeros... shouldn't be exaggerated ... that is a problem...the question is ... just re-denomination and .... people writing a lot of articles in the news papers... criticizing the Central Bank…., that is going to devalue the Iraqi dinar... that is going to depreciate ... all kinds of talks. This is a question, just actually, to facilitated payment... ease of counting and all this things.... when you see a lot of figures, you see trillions and huge figures.... if you want to be precise and you see twelve figures or fifteen figures or digits ... So I think we have a plan on that.

If you remember ... there was not a government decree to add this zeros. It happened because of the course of development of the economy at the beginning of the eighties.... Inflation was very high ... Inflation was rampant and therefore... small denoms start not to be use ...so government started to add the three zeros.... and of course conditions are different now .

Inflation is under control, exchange rate is manage by the Central Bank.... when you have the zeros you could not manage ... not because of fault of the government or the Central Bank (only) ... which I think there was but because there were a lot of exogenous (external) factors.

I'm not saying that we are champions now... there were a lot external factors which affected and a lot of people did not know what to do, so they started to add three zeros and all this things.

So now the situation is completely different from that time, you had a high inflation, you have now a low inflation, you had actually something which is a stable macroeconomics situation . At that time the situation was not stable . So the only way to combat all of this things at the time was to increase the denomination and put three zeros.

I think… to bring back the Iraqi dinar were the three zeros are remove .... of course, this will have to go hand in hand with the monitoring of the exchange rate and all this things, and we'll see ...

I think now, it is probably .... we are studying ...not studying, we have decided actually on that, when to implement that. Removal this three zeros is very soon, but of course this requires not only the Central Bank activity it requires a lot of propaganda, a lot of advertising campaign and all of this things, and you have to go probably a campaign... to educated a lot of people on this things…. and I think it needs a lot of help from the government, from many people from the government, specially the security forces, and we hope the security forces becomes less busy with the violence issue so that they can give more time for us.

So here Shabibi talks about how the zeros came about because of inflation when people quit using the lower denominations, and now that they feel that they have inflation under control they have decided to remove three zeros.  This is a typical lop scenario.  Dr. Shabibi mentions that it will take time to educate the Iraqi people to make for a smoother transition to the new currency and exchange rate.  His use of the word "propaganda" has been taken out of context by some to mean that Iraq has a campaign to mislead us into thinking that they're going to lop instead of RV.  (Obviously English isn't his first language so it's understandable if he uses a wrong word or pronunciation on occasion.)  The context clearly shows that he's referring to an advertising campaign to educate Iraqis, which is standard procedure when a country redenominates.  It has nothing to do with investors.

Hopefully now you're starting to see why many people have referred to the dinar investment as a scam.  It's because these pumpers have taken all of this information about a simple redenomination and misinterpreted it to make inexperienced and unsophisticated currency investors think that they could turn $1000 into $1,000,000 or more.  Then some of them have started to make up intel to support these misinterpretations.

Of course the lop scenario isn't popular with people who make money selling dinar, or by selling advertising on their dinar forums, or by selling other things while they're telling people about this incredible "blessing" we're about to receive.  Nobody is going to get rich from a simple redenomination.  And it's not popular with people who want to believe that they're going to become millionaires by investing a thousand dollars in a hard currency, something that is seen in the investment world as a gamble more than an investment.  The average dinarian would either lose money or just break even.

Like it or not, history tells us that this is the most likely outcome.  Yeah, maybe there's a secret plan at work here.  Maybe Bush, Cheney, and the international bankers had this all set up before we ever invaded Iraq.  Maybe Iraq is fudging the numbers to throw us all off.  Maybe the new lower denoms were printed back in 2003 and have been sitting in storage waiting to be introduced when Iraq revalues the dinar.  Maybe some ingenious innovation of currency valuation has been recently developed.  Maybe there's an impending overhaul of the world's financial system with the Iraqi dinar being used to bail us all out.  Then again, maybe not.

For more research:

http://www.spokesman.com/stories/2004/dec/31/turkey-will-lop-six-zeros-from-its-currency-at/
http://edition.cnn.com/2002/WORLD/asiapcf/central/10/06/afghan.currency/
http://www.reuters.com/article/2011/04/02/businesspro-us-iran-currency-redenomiati-idUSTRE73112P20110402
http://accountant.informe.com/blog/2008/04/26/venezuela-redenominates-currency-dividing-by-1000-from-jan-1-2008/
http://en.mercopress.com/2008/01/02/venezuela-launches-new-currency-to-stem-inflation
http://online.wsj.com/article/SB125975276400572645.html
http://mg.co.za/article/2008-07-30-zim-to-lop-10-zeros-off-currency
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1347407
http://www.cenbank.org/redenomination/newpolicy.asp

(My thanks to dinar_queen at www.investorsiraq.com for much of this research.)