Dinar Speculator Chat:: Peg the Iraqi Dinar To Oil?
Charlie well what i'm sharing tonight, i remember hearing way back in "the day"
Charlie we had long discussion about pegging to oil
tudor yes we did
Charlie so we talked about pegging to oil years ago
Charlie and recently here
Charlie i did numbers back then, looking at the M currencies -- the analysis was way off, but when i started analyzing last week i started noticing some correlations -- iraq is a cash driven economy
Charlie one had to hope that this would change and money markets develop and capital flows into the country -- today we still see a heavy oil dependent economy
tudor very much so
Charlie oil account for half of iraq gdp
Charlie the correlation i found was quite stunning as i looked at currency circulation
Charlie particularly the exchange rate as it relates to currency to gdp ratios
Charlie i didn't expect to see the numbers fall complete in line with the values as far back as 1981
Charlie so when iraq hit a big snag with oil prices
tudor that had to hurt their bottom line
Charlie i further understood the pressure of the rising dollar against the dinar though it is effective pegged to it
Charlie as i go back to an article from a long time ago, it very much predicted this problem
Charlie from the article
Charlie iven instability in the region and the absence of credible institutions, the Iraqi dinar requires an anchor of considerable credibility.
Charlie Given instability in the region and the absence of credible institutions, the Iraqi dinar requires an anchor of considerable credibility.
Charlie Some have proposed a rigid peg to the dollar, as through a currency board. But this idea has significant drawbacks.
Charlie That it would mean giving up the ability to set monetary policy independently is not such a big cost, as few governments have been able to use such discretionary policy well anyway. But there are other serious disadvantages.
Charlie One big drawback of a fixed exchange rate is that it means giving up the automatic depreciation that a floating currency would experience at times when the world market for the country's exports were weak.
Charlie does that sound familiar?
tudor yes it does
Charlie In the case of Iraq, the most important export is of course oil. Large fluctuations in the world price of oil have wrought havoc on the economies of other big oil-producing debtor nations such as Indonesia and Venezuela, often entailing a serious currency crisis before a change in the terms of trade is accommodated.
Charlie A second big drawback of fixing the dinar to the dollar would be the introduction of gratuitous volatility when the dollar fluctuates against other leading currencies.
Charlie does that sound familiar?
Charlie Argentina's currency board collapsed two years ago, not just because the straitjacket was so rigid but also because the rigid link was to a currency, the dollar, that had appreciated strongly against the euro and other trading partner currencies during the second half of the 1990s.
Charlie article is not current so time references are off by a decade
Charlie That meant Argentine exports suffered a huge loss in competitiveness at a time when world market conditions were already weak.
Charlie Finally, imposing the dollar on Iraq could also feed widespread fears of US imperialism. The politics would get even trickier if, as in Argentina, the arrangement hit a crisis - for example, as a consequence of an increase in US interest rates.
Charlie isn't that the conversation today
Charlie An alternative would be to peg the dinar to the euro. But this idea has big drawbacks as well. The euro has been appreciating against the dollar and might continue to do so as a result of ever-widening US trade deficits.
tudor it sure is Charlie
Charlie A peg to the euro would thus risk a future loss of competitiveness against non-euro trading partners. The problem is that, as Iraq's trade returns to normal, its trading partners will be so dispersed geographically that a peg to either currency alone - the dollar or the euro - would introduce unwanted volatility with respect to the other.
Charlie Like other countries with geographically diverse trading partners, Iraq may thus be headed for a basket peg, with equal weight given to the dollar and euro.
Charlie But a basket peg does not solve the problem that, in the event of large future declines in the world price of oil, the currency of an oil exporter must be able to depreciate in order to accommodate the adverse shift in the terms of trade and help stabilise export earnings.
Charlie oh really, never heard of that before ()
Charlie Here is where sense kicked in: Fortunately a proposal designed for small commodity-exporters, which I have called "peg the export price", addresses precisely this issue.
Charlie The proposal is for a country to peg its currency to the export commodity. It could be implemented as follows.
Charlie The central bank would set the daily price of dinars in terms of dollars in direct proportion to the daily price of a barrel of oil in terms of dollars.
Charlie The result would be to stabilise the price of oil in domestic terms.
tudor oh wow, never thought of it that way
Charlie This approach combines the best features of both fixed and floating exchange rates. Like fixed exchange rates, it constitutes a transparent nominal anchor and also helps promote integration into world markets.
And yet, at the same time, it retains a crucial advantage claimed by floating exchange rates: automatic accommodation of fluctuations in world markets for the export commodity. In short, it offers the best of both worlds.
Charlie To fix the dinar simply to oil alone may be too radical a proposal. While it would facilitate the recovery and expansion of the oil sector, it might at the same time discourage production of other internationally tradeable goods by shifting the entire burden of price uncertainty on to them.
tudor that actually makes a lot of sense Charlie
Charlie Simply add oil to the basket of currencies to which the dinar is pegged. For simplicity, give equal weight to all three units. Or, what is almost equivalent, define the value of the dinar as one-third of a dollar plus one-third of a euro, plus one-hundredth of a barrel of oil.
tudor that sounds brilliant
Charlie The more I read about oil, the more I hear lower price.
Charlie This is certainly in present terms because long term, oil will be priced higher than many of us can imagine.
Charlie The crash in oil can unleash quite a bit of reform in Iraq's monetary policy.
Charlie While they once had a rainy day fund at the Fed, it's pretty much gone.
Charlie Dipping into currency reserves is not a long term solution to pay off it's bills.
tudor no it is not
Charlie With hard times, there will be hard solutions to hard problems.
tudor thats like hitting our savings account and hoping they raise the interest rate to compensate
Charlie Iraq has established itself to be a dependable supplier of oil to the global market
Charlie It has steadily increased production, even in the midst of continual unexpected, and expected challenges.
Charlie It has yet to develop stronger business sectors, primarily due to the corruption that has plagued them since who knows when.
Charlie But the current problem might be the spark to reconsider the dinar's position to the dollar, irregardless of dinar stability.
Charlie If we were to draw a line in the sand that represents today
Charlie and go two years down the road
Charlie I strongly believe we are going to be looking at a very different world.
tudor things are changing around us at a faster pace
Charlie Iraq's choices in 2003 won't be the choices in has in 2017
Charlie I expect the Iraqis to explore its options based on the shifting sands of economic climate and it's need to protect it's currency in the short term
Charlie Selling TBills in dollars is a bandaid.
Charlie As is the use of its reserves
Charlie What next, sell off the gold?
tudor dont think they will do that
Charlie If the price of oil remains low, some estimates I saw today said $14!
tudor that doesnt sound feasable
Charlie I don't think so either but the talk is down more than up.
Charlie In the short term the pinch can cause massive economic problems for Ira
Charlie Iraq causing it to fall into... bad word
Charlie Do you really think they want to take that course?
Charlie The answer to their problems will be found in oil as much as the problems that currently arise from it
Charlie They will do the short term stuff first
Charlie Redo some contracts to keep the IOCs happy
Charlie I don't get into that kind of territory.
Charlie I don't know if Iraq has good or bad deals.
Charlie The fact that contracts can be changed shows there is plenty of wiggle room
Charlie and maybe more.
Charlie But at the end of this, Iraq will have to make long term decisions to preserve itself and prosper from it's obvious abundance in the world's greatest energy source.
Charlie When one sees the state of countries like Venezuela and Iraq, one has to shake one's head.
Charlie So when I look at the currency circulating in Iraq
Charlie I look at GDP
Charlie I look at it's relationship to the US.
Charlie I see 1200 to 1 easily
Charlie I also see 600 to 1
Charlie I see it in GDP growth
Charlie But in the short term, it's going to take a hit
Charlie In 2017 I see oil prices much higher.
Charlie I would not be surprised to see it at 150
Charlie I can't go into long details on why my long term perspective on oil prices are so high.
Charlie We are at peak cheap oil.
preacher man it sounds like we should have invested in oil instead of Dinar LOL
Charlie The current economic and geopolitical reset has led to a major drop in oil.
Charlie It's not staying there.
Charlie Oil is a volatile investment that you can lose
Charlie Certainly would have if you were in it last year, but we won't see a rise in oil until all the economic and geopolitical chessboarding is done
Charlie Oil is Iraq's GDP, or at least the part that can easily cause a great rise
Charlie The currency ratios in Iraq are way off the mark
Charlie 72% of their money is in print form
Charlie or somewhere near that
Charlie There is massive room for economic growth of the electronic kind which means massive growth of GDP
Charlie This is where currency value will change
Charlie I'm speaking from a macro level.
Charlie One is not driven by the other, more so a reflection.
Charlie The thing is Iraq is still very much spring loaded in terms of economic growth potential.
Charlie The world conditions will force Iraq to politically grow up very quickly.
Charlie There is a bit of calm before the storm right now.
b1955 Then there will be one heck of a storm.
Charlie Just a couple months we were hearing of Russia's certain demise.
Charlie The ruble is falling, the ruble is falling.
Charlie yes b it will be a heck of a storm
Charlie Then I read this http://money.cnn.com/2015/03/30/inve....html?iid=Lead
Charlie Russia should have been no economic match for the US
Charlie The US in years past could have squashed Russia's economy
Charlie The geopolitical world has changed. Very much changed.
Charlie Our economic power is showing signs of being a paper tiger.
Charlie And that probably has to do with all the economic paper coming out of the Fed that has weakend us considerably.
Charlie Geopolitically, we have pushed Russia into the hands of China.
Charlie And some of our allies are even following.
Charlie So the next 24 months will bring about change, and maybe a massive storm.
Charlie Iraq has to position itself properly.
Charlie It it does, the dinar will be a very happy place.
Charlie If not, I don't want to know.
Charlie Thanks so much for your time.
Charlie Be blessed and bless others!
guardian thanks Charlie!
guardian i need to buy more lol
ksdunlap Thank you very much Charlie .. be very Blessed yourself
guardian goodnite (})
b1955 Charlie how do you think Iran being involved in Iraq will affect thinks?
ksdunlap goodnight & have a wonderful evening Charlie .. we appreciate you
b1955 I missed him
Roadrunner Thank-you Charlie!! Very Nice chat!!
Charlie hi b, I think that's a good topic for another chat
Charlie so much to discuss there
Charlie things we see and don't see
b1955 Charlie have a good night and thanks for the chat (})