A Few Questions for John Jagerson

Addressing guru BS is like playing "Whack-a-Mole".  You knock one lie down and another one pops up.  You whack it and another one pops up.  You start after it and the first one pops up again.  It never ends.  It's also like eradicating a mutating virus.  It starts off as "The RV" and then it mutates into "The Global Currency Reset (GCR)", and then it becomes "Private Exchanges with Non-disclosure Agreements (NDA)".  Most of the time I can respond adequately, but there have been times when I either felt unsure of how to respond or unqualified to offer a valid response.  When that happens I turn to my online buddy and currency/investment expert John Jagerson for help.



John Jagerson

When I first heard about the dinar investment I thought it might be a scam, so I looked around on the internet for information.  Among other things I found a couple of videos by John explaining why it's a scam.  Unfortunately I didn't completely grasp what he was saying at the time and got drawn in by the hype and ended up buying millions of dinar "just in case".  Well of course nothing happened and I eventually did my own research and came to the conclusion that everything John said was right.  After I started the blog John started reading it some and left a comment following a post that I wrote.  That led to an interview and a follow-up interview a couple of years ago.  Well over the past two years a few other things have crept into the guru talking points that I felt needed to be addressed, so I asked John if we could do another little Q&A session and he agreed.  (As one might expect from somebody who works in this field, John uses terminology that most of us aren't familiar with, so I've taken the liberty of providing links and editor notes for clarity.)  The results are below.

*****************************************************************

Sam: With a pegged currency like the IQD, are the foreign currency reserves backing the cash outside of banks, the M1, or the M2?

John: FX reserves aren’t really backing either. A pegged currency just means that the central bank stands ready to buy or sell their own currency and the benchmark currency to maintain a target rate in the currency market. M1 and M2 are measures of money supply but they aren’t the exchange rate. It is possible that expansions in money supply could lower the exchange rate, which the central bank might want to do by buying bonds or lowering reserve requirements if they needed to lower the value of the domestic currency versus the benchmark. Or they could contract the money supply by increasing reserve requirements, or raise rates by selling bonds in order to raise the value of their currency. However, its really important to remember that a peg isn’t just something you set and then forget about. You can’t have a peg if you don’t manage the peg. Its not an automatic thing. A peg can be broken so they have to be pretty active about their management. The central bank basically has to stand ready to honor that pegged exchange rate for financial institutions. They can’t do that if they aren’t managing their money supply very carefully.

Sam:  Okay, the CBI website lists the cash outside of banks at about 35 trillion, the M1 says 72 trillion, and the M2 says 85 trillion.  So when you say "their own currency" is there any way of determining which figure they would go by?

John: Those are just progressively more comprehensive measures of money supply. So when they set an exchange rate it doesn’t have anything to do with the different measures of money supply. Any of these kinds of supply could be manipulated to maintain the peg. M2 is the most comprehensive measure of money supply because M1 and M0 are included in M2.

Sam: How reliable are the figures on the CBI website or any other central bank's website?

John: I believe no one knows for sure outside the CBI but I don’t think it is unreasonable to assume that there are at least some material, unintentional errors. Most central banks are subject to very little audit oversight so it is possible that the numbers aren’t accurate. Auditors aren’t fraud detectives so its also reasonable to assume that if they were faking something that the auditors may not catch it. In developed economies, it would be very difficult to fake the numbers in a big way because it would show up in the market. For example, this is what happened in the 1970’s in the U.S. when they hid the war spending and it ended the gold standard. The market ‘knew’ what was really going on. However, in the case of the CBI, I doubt the “market” would know if there were problems right away. It would probably come out eventually but it may take a while to really be discovered. I would not be surprised to find out that the numbers are inaccurate but are they intentionally inaccurate? I have no idea.

Sam: So if those figures are inaccurate, how much could they be off percentage-wise before the market would notice?

John:  Honestly, I have no idea. The Iraqi government is pretty opaque. I can’t imagine it’s an order of magnitude but if I had to guess I suppose their numbers could be off +- 30% in different measures. Despite their publications, I seriously doubt they have accurate measures of inflation, which is usually the first ‘market indicator’ to react to fake numbers. So without an accurate measure of price inflation, it is really hard to say how far off they are. There isn’t a robust international market for IQD so that isn’t much help either.

Sam: Some of the gurus are saying that the money supply figures on the CBI website include US dollars, and that if you remove dollars from circulation inside of Iraq those money supply figures will come down.  Any truth to that?  Do any central banks include US dollars or any other foreign currency in circulation in their currency's money supply figures?

John: No, foreign currency is not counted in money supply unless you are using the foreign currency as your domestic currency. If foreign currency is being included in money supply it would be broken out separately. I can’t think of an example of this but I suppose a country could do it. However, combining them would be useless because it would make the rest of the information meaningless.

Sam:  So those figures of 35 trillion, 72 trillion, and 85 trillion are all in dinar?

John: Yes, they are all dinar. M0, M1, M2 and so forth are simply measures of hard currency, demand deposits, timed deposits and money market funds that are all denominated in IQD. So M0 is mostly just hard currency. Then M1 adds together hard currency, checks and certain deposits. M2 includes all of M1 (which includes M0) and also accounts for money market funds and other kinds of timed deposits. The U.S. money supply is measured the same way. M0 in the US is a mere fraction of M2 (which includes M0, and M1) and is currently over $11Trillion USD.

Sam:  Money supply has been defined as "the aggregate amount of monetary assets available in a country at a specific time".  Some gurus take the word "assets" and try to make it appear that Iraq's assets are included in the money supply, and that means that the money supply figures aren't necessarily liabilities that require backing by the reserves.  I'm going to admit that what accounting I took in college was mostly over my head, and I'm guessing that most of my readers were no better.  Without getting too technical, could you explain assets and liabilites in money supply, and how these concepts relate to the dinar and the CBI's figures?

John: Currency issued by the central bank is considered a liability of the bank in the same sense that your deposit at your local bank is also considered a liability to that bank. This is confusing because it’s a little different than how you normally think about debt or liabilities. Think about it like this… the money belongs to you but it is issued and backed by the central bank/government. So its your asset but the bank has a responsibility for it, so it must be their liability. It can’t be an asset to both entities. The assets of the central bank are real assets. They could include securities, bonds, property, gold, foreign exchange reserves, etc. The assets of the bank would also include loans made to other financial institutions.

Sam: So the 35, 72, and 85 trillion are liabilities to the CBI?

John:  Yes, those are liabilities to the CBI. If you pull their financial statements, you will see all the components of M2 (which includes M0 and M1) in the liabilities section of the balance sheet. Its going to vary a little because they are categorized differently but the numbers should be pretty close.

Sam:  Some of the gurus insist that Iraq is reducing the money supply because there have been articles about a reduction in the note count.  Is the number of notes in circulation relevant to money supply totals?

John:  Yes it is. In developed economies the hard, physical currency is a very small fraction of the money supply so it wouldn't really matter that much. However, in the case of Iraq, hard currency is a major percentage of the money supply. So the question would be are they reducing the lower denominations because they just aren't in demand? They have been doing that in the U.S. for a while now as well and it is pretty normal as you determine what kinds of notes are used most frequently. I actually don't know what kind of notes they CBI is reducing or if that is even true but printing more or less of a certain note that is used in the economy will change over time as prices change. Its normal to do that in any economy. In any case, according to the CBI, the hard currency amounts aren't shrinking so I am not sure where they are getting their information.

Sam: One of the gurus talks about Iraq creating demand for their currency by using it for trade with other countries.  Is the frequency of use relevant to the value of a pegged currency?

John:  Yes it is. The more the dinar is used for trade the more demand for the IQD will rise. This is relevant because a pegged currency strategy will require the Iraqis to then subsequently sell dinar to keep its value low. They are in fact doing this very thing right now and it is all normal. Its exactly what you would expect from any net exporter who isn't suffering from massive inflation. If you have to buy oil for Iraq, you have to do it in dinar. So demand for dinar grows, which would push its value up. The Iraqi's do what every other net exporter with a pegged currency does and they then sell dinar to keep its value from rising due to demand.

Sam: The same guru says that Iraq is holding the value down for now so that they can build their infrastructure cheaply, the implication being (as I understand it anyway) that as they approach the completion of their infrastructure they'll begin to raise the value.  Is there any validity to this theory?

John: This guru has it exactly backwards. If the dinar were expensive they could import what they need for infrastructure more cheaply. Internal costs aren't likely to be affected in the short run by market fluctuations of the dinar so it doesn't help them there either. In fact, they have to walk a tightrope right now. If inflation rises too quickly, not only will imports become much more expensive but internal costs will skyrocket. The IMF has issued very strong warnings to the Iraqi government this year that deficit spending is getting out of control and could become a big problem. The big savings in infrastructure would come from an expensive dinar that can buy international goods and services cheap.

Sam:  Just a hypothetical scenario here .... if somehow the CBI were to remove three zeros from the dinar without redenominating (in other words a revaluation from $.00086 to $.86 per dinar) what would that do to their economy?

John: If you hold everything else equal (unlikely in this situation) then the average price level would just go up by 1000 fold. So what used to cost 100 dinar would cost 100,000 dinar.  In Theory-Land there would be no effect on the economy. The currency’s notional value may have been increased a thousand fold but your purchasing power (in notional terms) just dropped a thousand fold. It would just wash itself out. However, in reality I would imagine this would be incredibly disruptive and would hurt confidence. If countries could do this, why don’t they? It actually reminds me of when Saddam set the value of the old Saddam dinars at an artificial rate. It didn’t affect anything in the real world or inside Iraq, it just made revenue collection and book-keeping impossible.

Sam: Some are now talking about the dinar going to a free float and appreciating on the open market to $1 or more.  Could you give us your take on that possibility?

John: Will the Iraqi government float the dinar? Maybe, but most big oil exporters don’t. It causes a lot of problems as the Russians can attest. (NOTE: Russia is a big oil exporter, and their currency the ruble has depreciated considerably in recent years.)  I suppose they could, but it seems unlikely. Will the dinar appreciate to $1 in a free float? Not a chance. That would be a complete disaster for the Iraqi economy. There is a reason no economy wants their currency to appreciate too fast. These reasons are even more important for commodity exporters.  Its important to note that there is no such thing as a floating currency that isn’t manipulated by the central bank to a certain extent. So if you float your currency, that just means you aren’t targeting a specific rate and the central bank doesn’t stand ready to exchange at that rate. However, it does not mean that the central bank (as we have seen over the last several years) won’t intervene to drive the value of their currency down in the market.

Sam:  "But Iraq's commodity is oil.  Isn't their oil sold for USD?"

John:  Yeah, I should clarify that. Oil is sold for dollars by OPEC nations. Those dollars are called petrodollars and is at least part of the reason the USD is the world's reserve currency. However, the cost of oil production, infrastructure investment, and government spending still has to be covered in IQD. The production costs for Iraq are incredibly low but volume is still going to be very high, which would lead to an appreciation in the IQD alone. However, in addition to production costs, those petrodollars are going to have to be spent (like they are elsewhere in OPEC) on infrastructure spending, social programs/government spending, and other investments. Very little of it is likely to wind up in a surplus after imports are accounted for. So the problem remains a big issue.

If those petrodollars are converted to IQD then the IQD would still appreciate in value. For example, lets say that oil's price per barrel is $100. Now lets assume that Iraq needs 100,000IQD to pay for production costs, investment and government spending. So that would mean that $85.76 of that $100 is converted to IQD and the rest is surplus that can be spent or invested outside the country. Now assume that demand for the IQD drives its exchange rate to 800IQD to the dollar. They still need 100,000IQD to pay for intrinsic and extrinsic costs but now that $100 per barrel is only worth 80,000IQD. They would essentially be selling the oil at a loss when converted to IQD.  Unlike Canada or the UK, Iraq will sell its oil in dollars (petrodollars) but eventually part (or most) of that payment has to be converted to IQD. The end effect is the same... a rising IQD puts Iraq in a losing situation. They may not lose marketshare (as I suggested) but they will lose profitability.  Now, also keep in mind that this situation is unique to the oil trade. OPEC countries are and should be working to diversify their industrial production. I know Iraq wants to do the same. Although it may take a long time, a more diversified export trade will need a stable (mostly non-appreciating) currency.

Sam:  So in your opinion, what would happen if the dinar were placed on a free-float?  Would it go up, down, or would the CBI attempt to manipulate it and keep it relatively stable?

John: Well, the dinar does float. These are distinctions that I think dinar pumpers are making out to be something they aren’t. If you can buy and sell it on the market (which thousands of dinar investors can confirm) then it is floating. The question is whether that float is pegged or not. So by definition, a ‘free float’ means you are either not intervening or intervening very little in your currency’s value. You can’t just dictate its value to the international market, you have to work to get it set where it is. 

So what if they allowed the dinar to float freely without intervention? Interesting question and it’s a little complicated. It is really a balance between the current account and fiscal spending. If they don’t intervene then oil exports and their current account surplus could drive the currency higher. However, if the price of oil drops from where it is now and the government’s budget deficit continues to grow then inflation will rise and the currency will drop.

Which of these two factors is more likely to play a dominant role? I don’t know but past history shows that it is far, far more likely for the fiscal side to outweigh the current account surplus. If brent oil prices drop below $100 per barrel, I think they are pretty hosed. However, if brent prices rise (a lot) then I think they could keep the IQD’s value relatively stable in the short run despite their spending.  So the bottom line is that if they stopped intervening in the market I think the IQD would rise a little until the current account surplus evaporated due to a more expensive IQD and then it would get crushed under the weight of deficit spending and low investment. Since no one can predict the future I have to go with history and that shows that a big appreciation in the IQD is extremely unlikely. I think the bolivar is a really good analogy to this situation.  (NOTE: Venezuela is also a big oil exporter like Iraq, and their currency the bolivar has depreciated considerably in recent years.)

Sam:  You're referred to the dinar investment as a scam.  For those who are still on the fence, could you briefly explain why there's no chance of getting rich from a revaluation or a float of the dinar?

John: It is not in the best interest of the Iraqi government or its people to intentionally increase the value of their currency. They don’t want it to drop to nothing either but rising in value is a problem for an oil exporter and they would be expected to fight that trend. Why would you invest in an asset that is controlled by an entity that wants it’s value to either stay flat or slowly depreciate over time? That is the scam. Commodity exporters work very, very hard to make sure they stay competitive in the international market. Part of that means they have to keep their currency from appreciating against their customers’ and competitors’ currencies. Fortunately (or unfortunately depending on your point of view) almost all emerging economies have the opposite problem. Their currencies depreciate over time too quickly until inflation starts to harm the economy and they can’t import things they need.

Sam:  Many people are buying the Vietnamese dong, too.  It's not an oil-based economy, so is there any chance of getting rich from owning VND?

John:  In my late teens I translated (very poorly) for Vietnamese immigrants in Philadelphia for doctors and social workers and such. So let me brush off a little of my tieng Viet and answer this way… múa gay vuan hoang. In other words, they are trying to get blood from a turnip with that investment.

Its possible the VND could appreciate a little but very unlikely. I am not an expert on their economic situation but my understanding is that the manufacturing sector is growing rapidly. If they are able to keep inflation under control (suppressing snickers) then demand for their exports could drive the VND a little higher. However, for the same reasons the Iraqis would not want the dinar to appreciate, the Vietnamese would NOT want this to happen. It puts them at a disadvantage to competitors like Bangladesh, Philippines and Ecuador. The bottom line is that developing countries that hope to run a trade surplus do not want an appreciating currency and they will fight it.

*****************************************************************

I learned a lot from this exchange, and even had a couple of misconceptions of my own brought to light.  This makes three times that he has discussed the dinar investment on my blog. I would like to challenge any of the gurus to bring someone comparable onto their broadcasts. I saw one the other night lamenting over the fact that people don't want to discuss the dinar with him on his show. Gee, I wonder why? 

You can read John's bio here, and watch his videos here.  Thanks to John for taking time out of his busy schedule to answer these questions.  This is a guy who is sought out by Fortune 500 companies for his expertise in these areas.  He's not an anonymous, faceless guru with no credentials or accountability.  He's a man whose livelihood depends on knowing his stuff and getting things right.  You wouldn't want to take medical advice from an anonymous guy on the internet, so why take financial advice from one?  In the five years since John produced those videos debunking the dinar investment scam absolutely nothing has happened to prove him wrong.  Compare his track record with the gurus, folks.  It's a no-brainer.