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Economist Explains How The Plan To Have An IQD RV of $1 IQD = $1 USD Really Works!

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We were introduced to the IQD investment in 2005 by a retired State Dept economist who had worked on the original plan to install a new monetary system for Iraq post 2003 invasion. He indicated then the plan was for the IQD to achieve financial parity with the USD over a 7-10 year period from the introduction of the new system. At that time the USD would be completely discontinued and be replaced by the IQD for in-country use and international exchange. The variable in the timetable would be the political environment.

I talked to him recently for an update and he indicated the original time table was proceeding on a fast track due to the financial management skills exhibited by the CBI in (1) controlling the rate of inflation, (2) controlling the value of the IQD in a declining economic environment and (3) Implementing a digital banking system both internally and externally, but the variable was still the political environment. Like most economist he doesn't talk in absolutes (i.e. rate/date) but in probabilities. His knowledge base is pretty current since he is still part of a subsection of the original group that Iraq, State Department and IMF financial people bounce things off of.

One of the other things we did discuss, was the large number of IQD reported as being in circulation (current estimates are at 25 Trillion). He indicated this was mostly made up of (1) in country physical currency, (2) the foreign currency reserves of the central banks around the world which are electronic and (3) privately held physical currency which exists because the CBI was allowing physical IQD to be sold out of country, particularly in the US, to generate cash flow. The oil revenues are still under the control of the UN supervised DFI, and Iraq only gets roughly 30% of the fair market value of the oil they are selling. The CBI makes up the difference in auction receipts, T-bills etc.

He commented that Shabbi, the head of the CBI was a pretty good marketing guy. He knew he couldn't get anymore cash flow out of the controlled revenue system the IMF/UN had him under so he opened a currency sales window and tapped the wallets of the worlds speculators. Works pretty good since he's built his foreign currency reserves to over $50 billion USD.

Also the removal of big bills (the ones with 3 zeros on them) was discussed and he said that was always part of the plan. The process was to be put in place as soon as Iraq had implemented a modern (non-cash based) digital financial system (i.e. bank branches, credit/debit cards, ATM's, direct wire transfers etc.) The removal of the large bills in-country would be the reverse of the process that was used to remove the pre-2003 currency with Saddams picture on it. The example was a 25,000 IQD=$25USD/pre-rv note would be brought into the bank and exchanged for a 25 IQD note=$25 USD post/rv. The 25,000 IQD note would then be destroyed removing it from the currency in circulation. I told him a lot of people would call that a LOP and he laughed, saying they are partially right, because 25,000 IQD was being lopped from the money in circulation account, but the only reason for this process was to improve money handling ability at all organization levels, and reduce the actual physical currency in use in all areas of the Iraq economy.

Interestingly enough he said this activity could happen in-country without an approved RV rate being released to the International financial system. I asked how much physical IQD did he estimate was in circulation in-country and he said probably less than had been originally exchanged in 2003 which was about $4.5 billion USD worth at an exchange rate of 2000 IQD = $1 USD, because there has been a continuous process of not replacing the larger bills as they wore out. In fact this has resulted in currency shortages in some areas.

The next obvious question was how would the removal of the large bills with the three zeros work outside of Iraq, because of the number of speculators holding IQD. He indicated, the amount of IQD held by speculators was relatively minor (less than 10%) compared to the IQD held as foreign currency reserve by the CBI of a number of major countries (US, China, England & France were the largest) with major financial interest in Iraq. He didn't have an exact estimate of speculator holdings but ventured an educated guess of 750,000 individuals worldwide with the majority in the US. Estimated value of their holdings $1.5 Trillion - $1.7 trillion IQD.

He outlined the planned process of how currency exchange would take plan after the IQD was released as an international tradeable currency. He prefaced his answer by asking if I remembered my economics 101 and what the real purpose of currency is? Yes teacher I replied, it's a medium of exchange that facilitates the orderly distribution of goods and services among individuals, companies, country's etc. The often used example, is it allows an automobile dealer to exchange a new mustang GT for the cash down payment + bank financing check of a proud new owner, and each has received equal market value at the moment of exchange. This an important concept because currency value is flexible and is really defined by its underlying economic indicators. As an example the value of the USD varies daily and is based mostly on the indicators that reflect the performance of the US economy.

The complete discussion rather lengthy so here's the executive summary of how the exchange should work using a US IQD individual owner:

(1) IQD is released internationally with an exchange rate of $1 USD = $1 IQD
(2) IQD is exchanged by Mr. & Mrs. X at Bank Y. Their exchange value is credited to their designated financial accounts, Bank Y forwards the IQD currency to the Federal Reserve Bank and Bank Y's account is credited for their exchange value. Yes, the banks will have a private rate and then they will add their profit spread to come up with their public rate. By law this bank spread could be as high as 8% but it will be a competitive marketplace and they know investors can shop around.
(3) The Federal Reserve Bank adds the value of the exchanged to their IQD foreign currency reserve account and destroys the actual physical currency under agreement with the CBI, which serves to reduce the total IQD physical currency in circulation. This serves to strengthen the USD, because heretofore the US has never held significant foreign currency reserves, because there wasn't any country whose currency we perceived could be equal to or stronger than the USD. The IQD with it's commodity (oil+others) base, potential for agriculture growth and growing private development system, has the capability to become the most valuable currency in the world in 10 years after it's revaluation and approval as an internationally recognized currency. Other countries have lots of oil, but they can't feed themselves, they operate under a monarchy or religious tribunal and they have no private development system in place.
(4) Mr. & Mrs. X tithe to their church, local charity etc. which stimulates activity in that sector. They pay off their debts, making currency available for re-lending by their creditors. They buy a new house and car which stimulates local economy and set up a conservative investment portfolio which adds to the capital markets. They also pay their estimated taxes which increases the cash flow to the US Treasury.
(5) The Federal Reserve Bank under a controlled redemption plan supervised by the IMF can use it's IQD foreign currency reserve account to buy oil for the national strategic reserve, DOD reserves, other country reserves as part of international support agreements or resells it to private oil companies etc. This gives the Fed a powerful capability to use market forces to control the supply/price of imported oil.

The economics of this scenario look like this, using the exchange of 10,000 IQD Note with a 2% bank exchange spread as an example:

(1) Mr. & Mrs. X get $9,800.
(2) The bank they used gets $10,000, adding the $200 profit to their capital account, which under the fractional banking model allows them to increase their lending cap.
(3) The Treasury gets $3,500 in estimated taxes, because Mr. & Mrs. X are now in the "rich" category and get to enjoy the 35% tax bracket. This lowers the true cost of the exchange to the US financial system to $6,500 USD.
(4) The Fed's designated agent, orders 10,000 IQD worth of oil from Iraq. 10,000 IQD is transferred from the foreign currency reserve account to the IRAQ Oil receipt account at the CBI. Even though the spot price of oil is defined in terms of USD, the actual transaction may take place in any currency agreed to by the parties.
(5) The order is filled with 200 barrels of oil based on the spot price on the date of the sale (for this example we use a $50 USD spot price). What is the Iraq net cost of a barrel of oil? Well they have negotiated productions agreements for $1.50 USD/barrel. From that price $.50 USD goes to the national Iraqi oil company who is a partner in the field the oil came from. Out of the remaining $1.00 the remaining oil field partners have to pay the Iraq government a profit tax of $.35 USD (35%). The net cost to Iraq of a barrel of oil used in this scenario is $.65 USD.
(6) The scenario finishes with the US exchanging 10,000 IQD in foreign currency reserve credits (with a true net cost of $6,500 USD) for 200 barrels of oil at $50 USD spot price with the true net cost of the transaction to Iraq being $130 USD (200 x .65). Simply put, it cost Iraq $130 USD to exchange for 10,000 IQD currency. At the same time the US got $10,000 worth of oil for a net cost of $6,500.

That's how it was originally planned for Iraq to RV at $1 USD = $1 IQD, with the variable being the political element (i.e. UN Sanctions, GOI actions, IMF actions, World Bank actions etc.) Now we can really stir the pot by having the DFI ($280+ Billion USD) plus other frozen assets (estimated at $100 billion) turned back to Iraq and added to their foreign currency reserve, bringing it up to $430+ billion USD. Then change the reserve requirements so that IQD does not have to be backed 100% like it is now, but is only backed at 15%. That just raised their total potential money supply value to $2.8 Trillion (430 billion/ 15), while at the same time the total physical IQD in circulation is being reduced by removing the large bills with the 3 zeros. Also execute the plan IRAQ announced to increase oil production from 2+ billion barrels/day to 10 billion barrels/day with the resulting revenues flowing directly to them. To add a little more intrigue have the CBI continue to use it's sales window to market oil futures and forex contracts. They have shown they can generate significant cash flow in the private market, think of their impact in public markets.

We leave it to your analytical ability to determine how high of an RV exchange rate IRAQ can support. There is strong political pressure to set the initial rate at $3.22 USD = 1 IQD, so it can be proclaimed that IRAQ has moved back into the International community of nations and has re-established it's currency at the internationally traded rate in effect before Saddam invaded Kuwait in 1990.

VERY INTERESTING! You have to love it when a plan comes together.



Last edited by Admin on Sun Apr 11, 2010 1:56 am; edited 2 times in total

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2 RV exchange oil repurchase on Wed Mar 31, 2010 12:40 am

testlab


Can you please go over the the cost to the US on the exchange. You mention the cost to the US is 6,500. after the tax but why is there a cost to the US ? Aren't we exchanging Dinars to US $ through an international exchange. Don't get why it would cost the US? When we exchange money does that means the US has to buy oil to cover the costs for Iraq? You state the cost of purchase is 1.50 a barrel for the US yet you describe an example spot spot price of $50 as a reflection of the US purchase? Very interesting but a little confusing. Would appreciate a little more detail for the Brickster.
Thanks
BT

3 RV Exchange Oil Repurchase on Wed Mar 31, 2010 1:15 am

Admin

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Physical dinars held in the US are exchanged at a US Bank and then forwarded directly to the Federal Reserve, which adds the value of the dinar received from the bank to the US Foreign Currency Asset account, and the physical currency is destroyed. The accumulated dinar value in that account will be returned to Iraq over time in return for oil.

In the example the $10,000 paid out by the Federal Reserve actually costs the Federal Reserve $6,500 because it receives $3,500 in tax payments from the owners of the dinar that were exchanged.

The $1.50 is Iraq's gross cost to produce a barrel of oil and they pay it to their production partners.

The spot price of oil on the open market is always described in terms of USD everywhere in the world (the $50 spot price was used for example only), but the actual transaction can take place in any currency the parties to the sale agree on. As an example, Iran doesn't trust the USD, so they make Japan pay for their oil purchases in Yen.

The US is not covering the costs for Iraq, it is making needed purchase of oil from Iraq and it is paying for it in dinar value rather than USD value, as it usually does. This benefits Iraq because it can add the dinar value directly into its economy. If Iraq receives USD for its oil, it has to put it in its Foreign Currency Asset Account.

Hope that helps.

http://mjgroup.com

testlab


Thank You as that defintiely helped But then I have a few more questions which I hope you don't mind helping me with.
How is a typical foreign currency redeemed in the US. I take the foreign currency to a bank and exchange it for US $. Where does the foreign currency go?
Does the US have an agreed price to purchase Iraqi oil or is it the same price for all countries ? One would think that with how we have helped them that we would get a big discount. Will the other countries like China, England etc that have dianrs owned by the government just buy oil with their dinars like the US and not turn it in otherwise?

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bdteach23 wrote:Thank You as that defintiely helped But then I have a few more questions which I hope you don't mind helping me with.
How is a typical foreign currency redeemed in the US. I take the foreign currency to a bank and exchange it for US $. Where does the foreign currency go?
Does the US have an agreed price to purchase Iraqi oil or is it the same price for all countries ? One would think that with how we have helped them that we would get a big discount. Will the other countries like China, England etc that have dianrs owned by the government just buy oil with their dinars like the US and not turn it in otherwise?

Typical foreign currency that is exchanged at a US bank is transferred to the federal reserve and sold back to the country that issued it. It's a straight cash for cash transaction.

Yes, US companies buy Iraqi oil at a deep discount now. Technically the US government does not buy the oil it goes through agents.

The IMF has gotten all the major countries like China, England and France to follow the same plan.

http://mjgroup.com

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Very good information! I e-mailed this to all of my fellow investors when you first posted it last March. What a great help! Thank you!

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Ekfugo wrote:Very good information! I e-mailed this to all of my fellow investors when you first posted it last March. What a great help! Thank you!

Thank you and welcome to the forum. I was just the reporter for this information, but maybe Post RV we can get the gentlemen who provided it to come on the forum for a little historical Q & A, and ask him what his next big foreign currency target is. That's what he does in retirement, advise big banks, trading companies, hedge funds etc. on what he thinks the different foreign currencies will do in the future. He say's it's a very relaxing type of activity, only takes about an hour a day of research, analysis and communicating - all online of course because he likes to travel quite a bit.

http://mjgroup.com

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