Kuwait did not RV. That's a myth.
In Fall of 1990, Iraq invades and replaces the Kuwaiti dinar with the Iraqi dinar as the official currency. The Kuwaiti government was essentially in exile. However, because of the way currencies were managed in the early 1990’s the official rate for the KWD never changed.
The UN condemned the invasion and no one of any consequence recognized the right of Iraq to replace the government and currency of Kuwait.
There are many anecdotes floating around that you could have bought the KWD for a fraction of its original value on the black-market for a few weeks during that period but I don’t know of anyone brave enough to come forward and admit (and prove) that they did it.
In Winter of 1991, the U.S. led invasion and liberation of Kuwait was chaotic to say the least for money supply in Kuwait. People claim to have been able to buy KWD on the black market during this period but the official exchange rate was still the same.
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The old Kuwaiti government was restored following the withdrawal of Iraqi troops. Unlike Iraq, the same government, currency, central bank, money, and civil system was in place before and immediately after the Iraqi invasion.
In September of 1991, the KWD was redenominated with new bills in 1991. Sometimes redenominations are done at a ratio but this one was 1:1 straight across. Theoretically it is possible for some investors who had bought KWD on the black market during the occupation to have made a big return but there are no known institutional investors who have admitted engaging in that activity.
The KWD has been pegged to a basket of currencies (dominated by the dollar) or the dollar itself since 1975. Since the mid-1980s when the dollar was released to float more freely the KWD has had an exchange rate that has ranged between $2.78 and $3.10.
This includes the period of the Iraqi invasion and the U.S. invasion of Iraq in the early 2000s. The bottom line is that if you had 1,000KWD worth $3,000 before the invasion you still had 1,000 new KWD after 1991 that was still worth about $3,000 assuming you were able to exchange your hard currency. No one profited from the invasion.
There are rumors and stories about profits being made by people who were buying KWD for a few weeks on the black market in the fall and winter of 1990, but where is the proof?
There is none. In any case, these stories don’t help the hopes for the Iraqi RV because the same money and government existed before and after a 6 month war in Kuwait, which is why it is even theoretically possible to have made some profits.
The only thing the Iraqi dinar has in common with the pre-1990 IQD is the name. Everything else has been changed. The government, central bank, and quantity of money supply has been changed since the invasion.
Bottom line, Kuwait never revalued their currency. The central bank did not change the rate. Saddam outlawed the Kuwaiti dinar and it fell in value. He told people to trade in their Kuwaiti dinar for Iraqi dinar before Oct. 6, 1990.
When the U.S. stepped in, the value did again rise. This was not due to the bank changing the rate but rather the black market, similar to what Saddam did with the dinar in the late 80s. The Kuwait Central Bank never adjusted the rate below 3 dollars.
They were occupied by Iraq and business was halted. Seven months later when Kuwait was back on their feet, they redenominated with the previous exchange rate. Actually, this was neither a RI or RD, by the true definition. This was a unique circumstance due to the invasion. Their currency was not adjusted due to sanctions like Iraq.
None of this means Iraq can't or won't revalue the IQD. It just show that Kuwait is probably not a good comparison and that it was a very different set of circumstances, both economically and politically.
SWFloridaGuy Continues In Response To Previous Post:"Previous Countries RV"
No problem guys. Keep in mind, I'm not trying to be negative and I think that there's great hope for this investment. I'm just interested in the true facts, as I'm sure we all are. Like many, I entered this investment under many false pretenses but I've found the truth to show equal promise (unless you believe in ridiculous $42 rates and things of that nature).
Keep in mind Iraq's future and economic outlook is far brighter than Kuwait's. The latest report to U.S. Congress forecasts Iraq's GDP growth 3x that of the next strongest MENA economy and efforts to diversify their economic base (IMF's 2012 World Economic Outlook Report 14.7% for 2013). The global economic crisis is stimulating investment and presents vast opportunities and a gateway to revive the world’s economies.
I have no doubt that Iraq's currency will once again boast a high value. However, I have my doubts about the IQD being recognized as a hard currency in the near future due to questions of long-term political instability that may affect their purchasing power, fiscal outlook and in turn - CBI policy that discredits them as a reliable store of value.
No need for concern though for us or our investment though.
The IQD (similar to the KWD mentioned above) will remain bound to the economy of their country even though the value will be high. Some currencies have far less value but are considered a hard-currency because of stability (e.g., Japanese yen).
Whether we see a float (Kaperoni/Enorrste theory) or a historical large currency appreciation of 100,000% to get us to 1 to 1, I do think Iraq will accomplish returning their currency to its previous levels by increasing the value of the paper currency in a quantitative sense.
There are several ways I believe Iraq could accomplish this, some are better solutions than others. Under a fixed exchange rate, fluctuations in the value of a currency to which the IQD is pegged could produce volatility.
We see these effects when the USD appreciates and other currencies linked to the USD in turn show appreciation also. Iraq does not want unnecessary monetary volatility.
There are a few solutions to this which I have mentioned before but will reiterate to demonstrate the different profitable scenarios. They could include oil in a basket of currencies to which the dinar is to be pegged in order to facilitate the recovery and expansion of the oil sector.
Define the value of the dinar as paired with a basket of currencies + 1/100 (just an example) of a barrel of oil. An oil producer like Iraq could thrive with this scenario, even if there were big swings in international exchange rates or global oil prices in the future. For this to work though, they would need to stabilize the price of oil in terms of purchasing power.
Another solution is Iraq could peg the currency to the export commodity (PEP) as I've mentioned in the past. The CBI could set the daily price of IQD in direct proportion to the daily price of a barrel of oil (or a more broad-based commodities peg) in terms of USD. That would stabilize the price of oil in domestic terms.
That's the best of both worlds (fixed & floating) and would also help promote integration into world markets. I cannot prove that Iraq will revalue their currency but I do postulate that theory and believe there is a great basis for it.
The powerful countries, organizations, corporations and foreign Central Banks that have all invested so heavily into Iraq's reconstruction and helped to foster monetary cooperation will also reap the benefits.
This is why I believe they have assisted in the development, extended project loans and offered technical assistance with communications and Iraq's banking sector. The global monetary system is broken and although the IQD is not the world's savior by any means, I do believe Iraq presents a unique opportunity and may serve the role of a fulcrum in its recovery. These are just my opinions, which may or may not be correct.
Sorry this thread is so long but it's a hard topic to sum up.
That is a very good observation. That's exactly what most are, "rumors and stories." We have to remember that a 100,000% revaluation is Many come from bogus prosperity package memos, which is why most gurus confirm eachother's intel so quickly.
These memos are responsible for the countless UST lockdown scenarios, ridiculous rates, in-country RVs etc. They also claim the RV has been done (just not announced publicly) for over a year. Yeah uh huh. I have friends who have been involved in PPs for decades and whether or not you believe in them, if you receive the memos (as do I) then you'd have to agree that their intel is garbage and the main source of the hype.
They've simply latched onto the IQD to gain credibility. I think we have a great opportunity with this investment and it will prove itself with time. I just think we need to separate fact from fiction.
It's no secret that the IQD's current rate was imposed due in part to UN sanctions and is grossly undervalued but that doesn't mean we should down-play the significance of what we believe they are trying to accomplish and the challenges Iraq has faced to get there.
To put things in perspective; for Iraq to revalue to even a fraction of what we expect (on par with USD/100,000% appreciation) would make this currency reform project a singularity and considered an extremely ambitious economic phenomenon even by Heterodox economists who take "power" and the global elite more into consideration.
Many continue to speculate but no one knows for sure how the CBI could revalue their currency 100,000% and sustain that growth as well. The NID (new Iraqi dinar) has never been on par with the USD, only the old Swiss dinar (named after printing plates) held those levels and has long since been demonetized. In order for the NID to RV to even 1 cent they’d have to remove 90% of the IQD from their M2. Half of their M2 is digital, how do they remove that from circulation?
If they removed all the paper dinar in the world from existence without spending their reserves, there’s still 35 trillion digital dinar. They’d only be able to RV to 0.0016 or so. Iraq has $62 billion in currency with $100 billion in GDP.
So, they are at about 62% of GDP. The US has a $14 Trillion GDP and a M2 of about 10 trillion dollars. Iraq has a M2 of 72 trillion and a GDP of $100 billion. Countries who have floating exchange rates usually have a money supply somewhere in the range of 50-200% of their GDP. A 1 to1 rate on the IQD would give them $72 trillion in currency with a $100 billion GDP. Their money supply would then be 720x their GDP.
Compared to other countries that max out at 2x it's quite a stretch.
However, while GDP is a factor but has little to do with the actual value of currency exchange. GDP is basically used as a reference point for the health of national and global economies.
When GDP is growing, workers and businesses are generally better off than when it is not. The main thing we can learn from GDP numbers (if they are accurate), is the size of the economy and how an economy is performing.
Supply and demand and determines the value. There are many factors that make this situation in Iraq very unique and I don't think it's a case where we can strictly look at the numbers. What is happening here is unprecidented and I believe, with time, history will show that we made a very wise decision to get involved.