Three Currencies Set to RV (6/28/12)

Here is an article (see link below) that I read recently.  There is a line at the end that says a 10-15% increase in currencies is huge.  I think that is a simple but profound statement.  Just to put things in perspective, an RV at $3 would be an increase of over 300,000% or about 20,000 times what is considered huge.  Now if somebody were to tell you that they know a guy who is 100 years old you might find that believable, but if they say they know a guy who is 2 million years old (100 x 20,000) you would know they’re either joking or insane because they couldn’t possibly expect you to believe that.  If somebody were to tell you that they know a guy who is 7’6″ tall you might believe them, but if they said that they know a guy who is 150,000 feet tall (7.5 x 20,000) you would dismiss them as a lunatic.  Well, you should be just as dismissive of anybody who makes a similar claim about a pending revaluation to $3 or more for the IQD.

Currencies don’t move like stocks.  Sometimes you’ll see a stock that has plummeted in value climb back up to its former value after the company gets turned around, but that doesn’t happen with currencies.  It would be as devastating to a nation’s economy for a currency’s value to increase 100,000% as it would be for it to decrease that much because of the accompanying deflation and debt liability.  Unfortunately in times of war, sanctions, political unrest, or natural disasters a decrease is unpreventable.  But they can always keep a currency’s value from increasing in a similar manner.

Countries try to maintain some stability in their exchange rates.  One well known dinar commentator whose name sounds like a luxury watch says that the dinar’s current value is artificially low because their money supply has grown but their exchange rate hasn’t changed.  What he has obviously overlooked is the fact that Iraq’s foreign currency reserves that they are using to back the dinar have also grown.  As the reserves increase they adjust their money supply accordingly to prevent the exchange rate from increasing.

Something that dinar “gurus” haven’t really talked about too much is deflation.  Deflation occurs when a currency’s value increases which means that the prices of goods and services decrease.  People are more likely to spend money that is decreasing in value and less likely to spend if it is increasing.  What happens to the economy when people quit spending money?  It grinds to a halt.  If a nation’s money supply decreases it has a tendency to drive up the value of the currency.  It’s Economics 101 … supply & demand.  If there’s less money and equal demand the value increases just as equal demand and more money drives the value down.  The fact is nations don’t like to raise the value of their currencies.  They try to keep them as low as possible like China has been doing in recent years, because a lower currency value makes them more competitive with their exports.  Revaluations are usually only done as a result of political pressure.  Given that reality it seems pretty far fetched that Iraq is seeking to revalue by 100,000% or more.

When we read articles where Shabibi or somebody else with the CBI refers to raising the value of their currency they’re not talking about a revaluation which is a policy driven increase in the value.  They’re talking about a redenomination where the currency is replaced by a new currency with a higher value and less supply.  That results in the people having a currency that is much easier to use, especially for a cash based society like Iraq.  The value of the currency is raised but there is no net gain.  No profits, no losses.  Just a simplification and hopefully a psychological boost to the people who use it.

I’m not saying that Iraq won’t RV.  With the redenomination in doubt I think there’s a good chance that they will.  And given the unique circumstances I think there’s a good chance that any RV could be huge by RV standards, possibly even the largest in history.  But let’s keep things in perspective.  15% is huge.  China’s yuan revaluation (2005-2011) of nearly 30% is historic.  So keep that in mind when you’re contemplating any potential returns on your IQD.  An RV to a penny (a 1000% increase) would be unprecedented.

“Bottom line: Remember that we’re talking currencies here, so a move of 10% to 15% would be huge. But these three will represent the new world order in the currency market over the coming years – and the gains will reflect that.”