Post From KTFA by Memphis » April 8th, 2014,
Currency Reserves vs. Currency Peg
One day the world will wake up and learn that the Iraqi dinar has been given a new value. Immediately and without question the world will, on that day, act as if it is true.
Business will quickly be conducted at this new value simply because we have been told that the dinar is worth "X".
Such is the world of fiat money as it plays out daily with no one stopping to ask questions. This then leads us to how the controlling agency (in this case the CBI) defines (or measures) this valuation for their money and this we call the peg (or the backing basket).
The other side of this discussion is the justification for the valuation and this is proportionate to the reserves, the stuff, that they can actually claim as support. Once blessed by the IMF, the new value is justified and the dinar is again an international currency with "value".
Some believe the dinar will be fully asset backed or fully gold backed by CBI reserves. Such stories sound good but are very likely impossible and totally against the realities of the world. Will the dinar be supported at a higher level of reserve than all other fiat money?
Maybe, but Norway might ask for a recount. You see it's not just a question of the level of reserve but rather the RATIO of how much of the money supply has been put into circulation measured against this reserve.
This discussion today will speak to these often misapplied and/or misunderstood terms and attempt to then give some insight as to why the dinar may or may not be a good fiat currency to hold post RV.
A central bank's reserves (in broad terms) is pretty straightforward for most folks. Way back when, in a land far far away, the level of reserve was equal to the total currency value in circulation, a true 1:1 ratio.
As time went by, bankers (driven purely by greed) began to make loans on a level greater than their ability to repay and as long as all monies on deposit were not called for a once?
No one was the wiser and the world kept on spinning. With the passage of time this system always corrupts and the true value of any nations money becomes less and less as it's gatekeepers, the bankers, maintain lower and lower levels of reserve RELATIVE TO the money supply in circulation. It's a cycle guys....
Today's level of capital reserves held by most central banks is (in true terms) only a fraction of a % to their liabilities and in some cases it could be argued (but not easily proven) that they are actually insolvent and being sustained (propped up) by using extraordinary measures that are too numerous to get into here.
Ultimately tho, insolvency means default, and this means everybody loses. Such would define the completion of the cycle as from that day forward things begin to restore.
Getting slightly off point here, the proper application of the word insolvent in these discussions should be directed at the respective gov't as it is they who can be defined clearly in such terms. Just weeks ago the FED had to capitalize over $50B to cover the sudden sales of over $100B in treasury debt all within one week! Was Russia making a statement?
Most people I follow would say "yes" but my point here is that the FED's ability to cover this shortage tells us that they are not yet insolvent, the music keeps playing, and by extension, the US Gov't does not appear in default and so....the world keeps on spinning.
There is much evidence that our gov't has been in default since Oct2013 and yet the music keeps on playing. The house of cards has been built higher than was ever intended as men have attempted to thwart this cycle for several years now.
Forgetting any strong gusts, I believe we now lack only a gentle breeze to make this evident as the entire world is quietly and frantically preparing for this event. I have spoken for many weeks to the IMF 2010 code of reforms and still L@@K to this as a watershed event for America.
The topic of a currency's "peg" or "backing basket" is a totally different matter and has no direct relationship to that of reserves. Any given central bank might hold various financial instruments in their reserve that bear little to no resemblance to their peg. I would describe the peg (interchangeable with the term backing basket) as the measure by which the currency will be valued. The way in which we define it.
We say that as of today the dinar is worth "X", because we say so and going forward it will adjust (float) up or down based on our basket of variables”
For sake of discussion let's assume the following simplified example for Iraq's new peg to value (to measure going forward) their currency:
This would then be the set of variables that determine the dinars value using an algorithm known to very few people that would then assign a multiplier to each asset class and then the currency would rise and fall daily in pricing based on the market forces. Even tho these particulars are not known to us in great detail, certain things can be predicted.
For example, if all currency's in this peg were to lose value and gold remain in a tight range then we could expect the dinar to also be reduced in value by some proportion.
If however the currency's were relatively flat with no major swings and gold's valuation were to increase by some large measure then the dinar would be priced higher and the more "weight" given to gold in this peg? (the greater it's multiplier)
The closer this relationship would be such that it would more closely mirror gold's movement. Hopefully that makes sense. Let's now look at how we might profit from this in the days ahead...
HOW TO APPLY THIS
If you believe that the USD is to remain "king" and that it's reign as the world's reserve currency is not in decline then you will likely be "all in" and exchange your IQD swiftly into USD. If this is you, it is also likely that you get your news from the TV. :thug:
The point here is that there is no big upside for you to hold any foreign currency and so you should hold all assets in USD denominated forms. If your confidence is still in the USD despite all the volumes of evidence to the contrary, then you likely have no concerns about capital controls, bank haircuts and other such terms that FOX, CNN, etc have never heard of.
IF however, you are a student of cycles and recognize that there is a time stamp on such things then it follows that we simply L@@K for evidences that the cycle is about to complete. If time permitted we could easily fill many hundreds of pages with such evidence that YES, the USD is going to cease being coveted around the world. This event is not a future one guys but present tense. Please get that.
Some predictions even call for a strong movement away from the "petro dollar" before years end! To give one example, Jim Willie is adamant that China is to make it's yuan fully convertible in June 2014 and that is not a news headline that we want to see coming anytime soon. If anyone out there is still asleep on these matters? Your wake up call is coming.
As these dollars cease to be held in reserve and cease to be used for global trade then they must L@@K for a new home. It will be the US Gov't that must open it's arms wide to receive and that does not spell for a USD that is strong, stable and secure but rather it speaks to such things as decline and devaluation.
To close on a positive note, if the USD is likely in decline and if the dinar is likely to be stable with a possible upside during such turbulent times then it might be worth considering as a portion of your family's own "reserves". Blessings, Memphis