The oil based economies of the Gulf region have to have a managed float because oil by its very nature has a volatile price structure. As we've seen over the past four years a barrel of oil has sold for over $120/bl and below $40/bl. Since these economies are so dependant on oil, a free floating currency would be very unstable and it would make it virtually impossible to conduct business. Thus, the managed float.
Let's take a look at some of the other oil based economies of that region. We'll start with Qatar. Their reserves took a dip in late 2011 but they've grown pretty consistently since then.
Now according to the gurus, if their foreign currency reserves grew and they're backing their currency with their reserves, the value should have grown too, right? Wrong.
Their exchange rate has remained very stable, with the value around $.275. Now, how could that be? Doesn't make sense, does it? Well, yes it does. You see, the growth is seen in the money supply, not the value. The chart below shows that the money supply declined at the same time the reserves declined in late 2011, and then it started growing again as the reserves increased. (I'm using M0, M1, and M2 figures in these examples because these were the charts provided by Trading Economics.)
Now let's look at Saudi Arabia. Notice the consistent growth in the money supply and reserves, while the exchange rate remained stable.
Now let's look at Oman.
As you can see, they all saw a growth in the foreign currency reserves but maintained stability with the exchange rate by increasing the money supply. That's what a dirty float (or managed float) does. It prevents the currency's value from being subjected to the volatility that it would experience with a true float. Are all of these currency's values being "held down"? Well yes, I suppose they are in a way. They're being stabilized so that these countries can conduct business. Are they going to quit holding the value down and revalue their currencies to the point that anybody in possession of their currencies will become rich? Fat chance. They're going to keep managing these exchange rates and keep them right about where they are. Why? Because they need a stable exchange rate to plan, to budget, and to attract investment into their countries. Raising the value would do more harm than good.
A quick check of the financial report at the CBI website shows that Iraq's M1 has grown from 37 trillion in 2009 to about 70 trillion today. The M2 has gone from 45 trillion to about 80 trillion. The foreign currency reserves have similarly grown from around $40 billion to almost $80 billion. And the IQD's rate has been remarkably stable going from 1170:1 to 1166:1. We can see from these figures that Iraq is essentially following the same approach in maintaining exchange rate stability.
Often when gurus talk about the dinar floating they seem to think of it like a tennis ball floating from the bottom of a swimming pool to the surface, where the value would grow exponentially. That's the wrong visual in my opinion. A better way to think of it is a tennis ball floating on the surface of that pool, bobbing up and down but remaining relatively stable. You can see from the charts above that some fluctuation is involved with those currencies, but over the years they maintain stability. And even if Iraq does eventually move to a more flexible exchange rate scenario, you're still talking about a much more stable arrangement than any of these gurus are talking about. It would probably be no more than 10% a year. Currencies don't float up 100,000%, or 10,000%, or even 1000% a year.
This is how the dirty float works, and with these oil based economies it's a must. That's why the CBI has kept increasing the money supply as their foreign currency reserves grow, rather than raising the value. And it's why these douchebags who are telling everybody that Iraq is going to RV or float to ten cents, a dollar, $3.44 or whatever are either lying or terribly misinformed. Iraq is on a managed float and will remain that way as long as their GDP is 90% oil revenues which in my opinion will be for many years to come.