_Spacecowboy From BondLadys Corner: - Very Good But Long Read
THE COMING RV IS HIDDEN IN SPAGHETTI SAUCE
I read the posts and replies regarding the use of the USD as the small currency in Iraq. I have talked about this subject quite a bit as I personally believe the introduction of the new low denominations will tell us the RV rate. But recently I have noticed that there is another interesting phenomenon going on.
With trade rates pegged at 1176 D (or so) per USD, each trade for 1 USD forces the Iraqi to lose 26 D value. That loss is due to the fact that there is a 50 D note, but nothing smaller, so Iraqi's can have 1150 D and/or 1200 D but nothing in between.
It is impossible! No one will take the 1150... it is less than the current rate, so they are forced to give 1,200 D for the USD. IT GUARANTEES they will pay more than the standard rate... but right now, it is the only MATHEMATICAL option available to them and they do it over and over again every day!
Obviously, they can purchase large quantities of USD with (much) larger quantities of Dinar, to break even, but they would need to purchase 100 USD for 117,600 Dinar in order to be able to trade the currencies without any loss due to the lack of low denominations.
(But it isn't likely they can do that, because $100 USD is about 5% of their annual earnings!) This requirement inhibits the use of the USD as the low denomination standard.
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_They really do need low denomination notes of dinar as quickly as possible... and that is impossible without some form of currency valuation change (RI/RV/Lop/Drop/Do the Hokey Pokey).
Losing 26 D per trade (on small purchases) is not a big deal, but it adds an artificial inflation rate into daily life that is not accounted for when we talk about inflation in Iraq in standard economic terms. (The cost to do business in dollars is about 2.2% at the worst case, and declines to 0% when 100 USD is purchased or traded)
So to count on the USD as the small denomination will increase the REAL cost of living by up to 2.2% ABOVE inflation!
Furthermore, currently there is ALREADY a black market situation going on in the USD trade. USD are being sold on the street for a price even higher than the rate you and I see! This country needs a working currency quick.
I agree that Dr. S is using the USD as a monetary control, but that is not new info. It started automatically on day one when the rates were set. The USD was introduced (in billions) to the people and provided them a financial instrument during the establishment of their new Dinar.
Dr. S (CBI) does not benefit when Iraqi's choose to trade in USD. For one, the USD had to be purchased (borrowed) at pre-RV values from somewhere else, which means for every USD in hand, Dinar are held by someone other than the CBI or Iraqi citizens.
Secondly, they are COUNTING on the current (in wallet) monetary supply to wear out and be turned in... the same as our banking system does with our bills. This return of worn bills easily allows the CBI to reduce the money supply.
Remember, unlike the USA, Dr. S cannot just go and print new Dinar. The lifespan of a $20 (USD) note is about 2 years. The lifespan of a $10 USD note is about 1.5 yrs, and the lifespan of a $1 USD note is just over 1 year.
So when Dr. S says, he hopes the currency plan is completed in 2 years... it isn't a wish, it is a necessity! In 2 years their currency is going to be so worn and damaged that it will be useless... and by the way, that clock already started ticking on the day the new notes were distributed! They are ALREADY at the point where notes are being taped and stapled together!
There is a way to refresh the dinar notes. The CBI can replace worn ones with new ones already printed, and currently held by the CBI. Unfortunately, that process would very quickly decrease Dr. S's reserves, and besides, if that was the plan, Iraqi's would still need to replace their notes AGAIN in another 2-3 years! But this time there wouldn't be reserves available to trade for, so what then?
Dr. S has already stated that he wants a "scale-able" currency. I have posted about the importance of this word. It means they want to use a currency formula that breaks down in equal units, always divisible by 100.
That means USD. (The Pound breaks down to decimals since 1971, but requires half value coinage to make that happen... the USD is still the world's standard for scale-able decimal notation currency).
Regardless of what he uses in his "basket", he is committed to creating an accounting system that is much easier. Imaging having to write an extra three zeroes next to every number in your account books!
To sum up, YES, the USD is being traded (easily) in Iraq. YES, it allows them a bit more leeway, and the ability to make change in smaller units, and YES, it foreshadows the need for smaller units.
HOWEVER, now we can see that this process is actually COSTLY to the Iraqi citizen! It is confusing to say the least, and it takes monetary and budget control out of the hands of the CBI and puts it into the hands of foreigners holding USD...
BUT EVEN THAT ONLY WORKS AS LONG AS THERE ARE BUYERS THAT STILL WANT DINAR! Because when those people (or NATIONS) with USD to trade do NOT want dinar, then the CBI is in huge trouble!
They HAVE to create a demand for Dinar so they can have/get the USD's required to keep their economy moving!
Most countries create a demand for their currency with goods and services in the international trade arena. Iraq is getting killed here because their investments into growth are limited (no one in IQ has money to invest, and foreigners are not willing to risk it yet)
AND because the one thing they do have to trade... oil... is ALREADY TRADED IN PETRODOLLARS! This transaction doesn't bring USD into the hands of the average Iraqi citizen!
So when news comes out that dinar are being counterfeited, it should come as no surprise. But be aware, the Dinar is supposed to be one of the world's most sophisticated and secure notes ever made!
They went to great lengths to protect themselves. That means any counterfeiting that is happening, is happening with the governments knowledge! OR it means the counterfeit bills are not being circulated widely. (I believe it is a combination of both!)
To see how it works, imagine a very popular religious leader is counterfeiting bills. His lackeys take the fake bills to the people that follow him, (the very popular leaders have tens of thousands of LOYAL followers!) and they get "discounts" and buy new notes (and renewed loyalty!) with USD. Or they trade in worn notes for "new" (at a fee) and walk away happy.
The religious leader in this example doesn't worry about having to get the fake dinar into the community, BECAUSE the community trades the fake dinar among themselves for goods and services... and no one is the wiser!
If I hand you a fake bill and you give me a cab ride, I don't care that it was fake. As long as you can take my fake bill earned by giving me a ride, and go buy smokes, then you don't care either!
Keeping the fake dinar in a small population is necessary, but is actually quite easy because the average Joe Iraqi's really don't trade outside of their religious sect, they don't travel widely, and literally, they only use about $2,000 USD worth of dinar a year, AND THEY RARELY USE THE BANKS!
Basically the religious leader has created his own little currency using fake dinar. This scenario is already happening! Trust me, the CBI is not letting fake currency through the banks or into the foreign market... but it doesn't matter, because it is all happening within the little sects.
Getting this fake money out of the hands of the people will be easy. It will happen in a few short days if they RV. The citizens will be forced to trade it in... the banks will determine that it is fake... Average Joe gets nothing and the CBI takes the fake bills.
This process is going to decimate the religious leaders and political sect leaders and Al Qaeda and Iran and everyone else currently profiting from the USD trade!
Are you starting to see why this is taking so long? THE RELIGIOUS LEADERS DON'T WANT AN RV and THEY CONTROL THE GOVERNMENT!!!
So it isn't "scuff codes (HAHAHA)" keeping this from happening, it is STALLED because the guys in office got there with votes that came from the followers of the religious leaders that backed them. They were ALLOWED to get into office, so they could stall the RV... and that is exactly what they have been doing.
Don't worry about Dinar being counterfeited, we know it is happening. Don't worry about Dinar being held by bad guys... it is being monitored. What we need to worry about is USD being funneled into Iran and into the hands of the terrorist organizations.
The average Joe Iraqi will gladly give his USD (real!) to the guy offering him more dinar (fake)than the bank. It is this process that is funding criminals and this is one reason I am confident that Iraq must RV. I pray it is soon.
God Bless you all.