The more I study macroeconomics, the more I understand the Lopsters argument.
If you solely look at historic large currency appreciations, even a 20% increase, runs the risk of having negative long term effects. A 100,000% increase is not even something regarded as possible by most economists.
The macroeconomic effects of "appreciation shocks" differ between developed and developing countries.
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The differential effects appear particularly pronounced with regard to the external balance that deteriorates more persistently in developing countries.
Export growth takes a stronger hit in developing countries, but is counterbalanced by stronger domestic growth.
However, what the Lopsters fail to recognize is the fact that Iraq is a very unique situation. The value for the IQD is still there. Iraq was devalued due to a war strategy (have yet to see proof from a Lopster that it wasn't) and the U.S. has been in control of the reconstruction from the start.
I believe Iraq will revalue and the real questions are - how high, when and by what mechanism? Several incremental adjustments (to get us to 1 to 1 initially) would be what I prefer. That would ensure that the large notes retain their value.
If they go to 1 to 1 initially or just higher, that would be something the world has never seen and the best case scenario. Eventually, I think Iraq will have the strongest currency in the M.E. but only over time.
The IQD is a pegged currency, not one that is actively traded.
The CBI sets the value, as they did from 1189 to 1166. What I would prefer to see is a move to 1000 (between Sept - January) prior to on par with the USD. Iraq has to have a stable and improving economy and manageable monetary supply in order to improve their purchasing power.
Let's not forget all the debts that have been forgiven in conjunction with corporations, foreign governments, banks and powerful organizations that have all chipped in to aid in Iraq's reconstruction, in order to reap the benefits themselves.
The IQD is a very unique economic situation that has come along during at a very desideratum time in history. Foreign governments, corporations, banks and organizations have invested heavily into Iraq, putting their money where their mouth is. Iraq is a unique situation, therefore the rules do not apply.
However, let's not simplify this. Iraq must choose between capital mobility, monetary policy autonomy, and exchange-rate stability. Nominal appreciation must lead to sustained real appreciation.
The definition of a large exchange rate event comprises a 10% (or larger) appreciation of the nominal effective exchange rate over a two-year window (or less), leading to sustained real effective appreciation.
In the past 52 years there have been 25 episodes of large nominal, real appreciations and revaluations. There were 14 cases of "appreciation shocks" that occurred not as a result of discretionary policy action, but were linked to the appreciation of the anchor currency under pegged exchange rates.
What we believe Iraq will accomplish is a 100,000% increase. That is unprecedented but possible under these circumstances (just my opinion). That's why we are all here. This is a unique situation and we were all lucky enough to recognize that.
No country has ever accomplished what Iraq is about to. I cannot prove that the IQD will revalue, nor do I think it's fair to require such proof of others. Economic policy is influenced by international capital markets and foreign central banks and I certainly don't pretend to know the motives behind those that would influence either.
I can only speculate that this RV is how the GOI will reassert monetary sovereignty, dedollarize and give the citizens confidence in the national currency. Establishing their credibility is also a major factor, not only with their own citizens but also with international capital markets.
If Iraq is truly predestined to become a respected borrower and location for private investment in the eyes of global capital markets, then they would take the necessary preparatory steps (which we believe we have been witnessing) to achieve that.
These foreign central banks that have invested so heavily into the reconstruction of Iraq will prosper and Iraq's debts will be paid. Democratic governments RD in response to hyperinflation. Authoritarian governments RD in the presence of civil conflict. Neither of these conditions describe Iraq.
Their inflation is decreasing, not increasing. Inflation fell to o 5.8%. Iraq’s Ministry of Planning said that inflation in Iraq for the period from June 2011 to June 2012 has been running at 5.8%, which was down from the 6.2% reported in May, and the 6.7% in April.
I believe once the zeros are removed from the IQD, the large notes will retain their value. Locally the currency will be exchanged at branches of the Rafidain and Rasheed banks. Iraq got to where they are today with a lot of help.
The formerly mentioned entities assisted in the reconstruction of Iraq in order to benefit from the CBI once they instituted the framework for a functioning monetary policy that achieves stability. Iraq is a unique situation, something the Lopsters fail to grasp.
However, I recognize that both scenarios are possible and leave it up to you to decide. In closing, my research has led me to believe that this investment is solid. This is just my opinion, which may or may not be correct.