Memphis: anytime I have seen a discussion turn to currency values things always get complicated really quickly.
Why is that? Well easy! It is the language of finance and this language requires study like any other!
Ultimately when we discuss currencies being "pegged" we are speaking of an outside influence attempting to control a sovereign nations money and dictate it's value RATHER THAN the alternative of true free market capitalism wherein we allow free market forces (Adam Smith's invisible hand) determine the value.
The above is important as a starting point because it then allows us to make the discussion clear by using a comparison to gold.
Many have predicted a return to gold backed currency by the UST and/or the FED and/or other nations and yet I have been resolute and clear in voicing my opposition and saying this will never happen.
Anyone ever wondered why I have even bothered to give an opinion? It is certainly not because I seek fame. There has long been entirely too much "bs" in this investment and tho it seems at times that few have gotten the message it doesn't change the fact that it is important for us to understand WHY?
Why is a gold backed currency contrary to the ( unstoppable) financial cycle that controls our world? EVEN IF we did see such a thing attempted? It would not be a solution to anything and would end terribly as it always has.
A fixed money supply means all the rules change! We in America have grown up under an expanding money supply and have forgotten (never known) the realities of such a system.
Ok back on point...
We can compare a currency peg to a gold standard or gold backed currency by recognizing that they are both on the same side of the coin. (last sentence underlined)
They are each simply attempts to control (to quench) the free market value and dictate what some person or gov't believes it should be.
With a currency pegged to gold (a gold backed currency) the money's value is then allowed to fluctuate only as gold fluctuates in price or else the price of gold is fixed and then the currency then has a fixed value.
This then holds true until such time as more of the $ is put into circulation (currency debasement) at which point it becomes "worth less" than the day before.
I need to cut this short because my aim is to help clarify and not further confuse so let's finish by now speaking of a currency "peg".
A peg can take one of two forms. It can be allowed to move within a small range and under this arrangement is called a "floating peg" OR it can be even further controlled such that it never moves and is then called a "fixed peg".
Each type of peg is currently in use in our world with floating being much more commonly employed. One example of a currency being fixed would be the Hong Kong $ (HKD) such that it's value never changes relative to the USD; the ratio between the two, the exchange value, never changes even over the last several months with the ever increasing USD!
Whether right or wrong, I think of the IQD presently as having a fixed exchange value; a fixed peg. It fits the definition in that it's value is not allowed to fluctuate and is everyday the same RELATIVE value regardless of which currency we compare it to.
Now this is not meant to imply that using a term such as artificial exchange or program rate are bad. If a thing is UNDERSTOOD by using a term then by all means use it! The key point here is that Iraq's currency is presently being CONTROLLED against any and all market forces and the built up pressure that is surely created will and must eventually be....released.
Armstrong has written at length on pegs and why they fail...every time. He in fact told a group of investors over a year ago that the Swiss peg to the Euro would fail but few considered his words at the time! Let's finish here with a quote from one of his blogs this past Saturday:
"Bretton Woods collapsed because they fixed the price of gold and not the quantity of dollars. The collapse of Bretton Woods was not a banker’s plot nor was it any different from creating the euro, which was established on a completely unsound foundation.
Putting it nicely...fixed exchange rates are always comical [to me because] such schemes are always the design of a mob of lawyers who are clueless and believe they can control and force the world to do as they command. NO PEG has ever lasted; all will collapse.
PEGS that float within a range last longer than those that are FIXED. At the end of the day, they all go the same way: down."