How The Dinar Works
I spent a little over two years invested in the Iraqi dinar. When I first got into the dinar I knew nothing about how currency works. I knew nothing about finance or investing outside my 401k. The financial terms seem boring and confusing. I felt a sense of urgency to buy because soon I would miss my opportunity and I would miss out completely. I am willing to bet that I fit the profile of most first time dinar buyers.
Over the course of the two years that I was invested, I did intense study and research on the dinar and currency in general. In addition to following this investment for two years I did intense economic studies. Once you learn how currency works and once you understand the basics then you can determine for yourself when the RV will take place. You won’t need to rely on gurus any more for advice. You will understand exactly what is going on and when to cash in.
The main problem here are the things being said to cause people to buy dinar on impulse without doing research. These outright lies are told and repeated without verification. They have been the same lies repeated to first time buyers for many years now. Some of these things I already debunked in older posts but let’s revisit a few statements or myths for the purpose of where this article is going.
1. The dinar will be used to sell oil.
2. The dinar will be used to rebuild Iraq
Actually these two statements go together and one follows the other. The truth is Saddam switched from selling Iraqi oil in dollars to euros. Then right after that America made invasion plans. Once America was in Iraq a new constitution was written that included a separate central bank. They immediately switched back to selling oil using the dollar. In previous articles I wrote about the petro-dollar. These articles go into details about the petro-dollar and why Iraq will not sell oil in dinar.
Iraq oil and the Petro-Dollar
The dinar is not and will not be a means to sell oil in Iraq. Anyone who says otherwise is lying to you!
Oil is sold in dollars. Dollars are used to rebuild Iraq. Iraq is also seeking private investors as well. Iraq’s reconstruction efforts is ongoing and it is in dollars not dinar. It is an international effort.
Funds held by the United Nations Development Group are disbursed through United Nations agencies such as the World Health Organization, UNICEF and the UN Development Program. These UN agencies directly contract with equipment suppliers and construction companies. Disbursement of funds by the UN began in June 2004. Funds held by the World Bank are disbursed directly to Iraqi government agencies including the Municipality of Baghdad and national ministries. Granting of funds to Iraqi agencies began in December 2004
This Wiki article goes on to point out
Funds from the US-operated IRRF are largely disbursed through contracts to private firms. Several US companies have been particularly prominent in receiving Iraq reconstruction funds. Bechtel of San Francisco, USA has been awarded over $2.4 billion for infrastructure rehabilitation through USAID contracts.
I can tell you that is not 2.4 billion in dinar. These are international companies that won’t accept a local currency for their services. Rebuilding is an international effort requiring an international currency.
Dinar sales have become a big industry. Lies are told to increase and hype the sales. Another lie is that the rate is imposed by the IMF.
Since Iraq has few exports other than oil which is sold in dollars there is little demand for Dinars and they remain in “exotic” status. However the new currency has sparked a multi-million dollar industry in selling dinars to speculators. These so called “money service” companies will sell Dinar to speculators at an inflated price and push the idea that the dinars will “RV” or be revalued to greatly increase the exchange rate against the dollar. The Dinar is currently pegged to the dollar at a rate of 1166/1164 (sell/buy) dinars per dollar as can be seen on the Central Bank Of Iraq’s home page. The exchange rate reportedly available on the streets of Iraq is around 1200 dinars per US dollar.
There is considerable confusion (perhaps intentional on the part of Dinar sellers) around the role of the International Monetary Fund in Iraq. The IMF as part of the rebuilding of Iraq is monitoring their finances and for this purpose uses a single rate (not a sell/buy) of 1170 dinars per dollar. This “program rate” is used for calculations in the IMF monitoring program and is not a rate imposed on Iraq by the IMF.
Iraqi Dinar Sales Men
Another lie told to sell dinar is that Kuwait revalued its currency. This never happened! If you want details with proof read this article I wrote a while back
Kuwait never revalued!
[size=47]How the Dinar Works
To better understand how the dinar works we need to spend a little time at the central Bank of Iraq’s website.
According to the CBI, Iraq’s banking law became compliant with international standards.The Banking Law was issued September 19, 2003. The law brings Iraq’s legal framework for banking in line with international standards, and seeks to promote confidence in the banking system by establishing a safe, sound, competitive and accessible banking system.
Another common lie about the Iraqi dinar is that the currency is backed by oil. We are about to see this is not the case. So what is the dinar backed by?
Fiat money is money that derives its value from government law or regulation. Typically it is declared legal tender and has no real intrinsic value. From 1944 to 1971, the Bretton Woods agreement fixed the value of 35 US. Dollars to one troy ounce of gold. Other currencies were also pegged to the U.S. dollar at fixed rates. The U.S. promised to redeem dollars in gold to other central banks. So the dollar was backed by gold. Trade imbalances were corrected by gold reserve exchanges or by loans from the International Monetary Fund. This Bretton Woods system collapsed in August 1971 when the United States government ended the convertibility of the US dollar for gold.
Today the dinar rate is pegged to the dollar. A pegged, or fixed system, is one in which the exchange rate is set and artificially maintained by the government. The rate will be pegged to the US dollar. Iraq has to work to keep their pegged rate stable. This is because if people realize that their currency isn’t worth as much as the pegged rate indicates. They could very well rush to exchange their money for other, more stable currencies.
As a result The CBI must hold large reserves of foreign currency (in this case the US dollar) to mitigate changes in supply and demand. Iraq holds the dollar as a reserve against the dinar. This is why the currency supply grows in Iraq in proportion to how much US dollars they have in reserve. As their reserves grow the amount of dinar they have in circulation also grows. That is how pegged currencies work!
Currently as of this writing there is 31 trillion dinar outside of banks in circulation. So here is the question. How much reserve would they need to revalue their currency? If the dinar were to revalue to just one US dollar how much US reserve would they need to keep their pegged rate? By international banking law they established they would need to keep their reserve even in the event of a Revalue.
So they cannot just say the dinar is worth x amount. They need the reserve to back whatever value they place on it. Now if that is indeed the case, (and it is) then they would need to drastically reduce the money supply in order to raise the value even to 1 cent. The amount of dinar in circulation is in direct relation to the value of that dinar. The value and amount of dinar they have in circulation is in direct relation to the amount of foreign reserve they have on hand.
To find the amount of dinar outside banks go to the CBI website. Found Here Click on financial indicators and download the excel document and open it. Scroll down to line 79. It says money outside of banks. That number is in billions so that means that the numbers found in millions, thousands and hundreds are omitted and everything is rounded to the nearest billion.
So since 2003 the amount of dinar has been growing at a steady rate. As people over here buy dinar that money eventually winds up in Iraq. I have read estimates of 4 trillion dinar outside of Iraq and in the US. If that is true that means Iraq has made 4 billion US dollars off the export of their currency! People get mad because of congress giving Iraq 89 billion to help rebuild Iraq. I often wonder if these same people know that American citizens have also freely given Iraq billions as well. They did this when they purchased the dinar!
Thanks to Marcus and: http://www.dinardaily.net