While nominally under the supervision of the US Treasury Department, it’s actually the Fed which caused the USD notes that are now circulating globally to be printed and distributed; and it’s the Fed governing board consulting with the US Treasury Department that decided the rate of exchange which the Fed will pay to redeem or honor those same notes or digital accounts.
The USD is a prized currency to hold for most of the Middle East cash societies in the region, including Iraq, because it can easily trade for goods and services across borders and is lighter and easier to transport than bullion or livestock.
The entire available supply of USD cash notes inside the CBI and inside all other state owned and privately owned Iraqi bank vaults right now originally came from the Fed printing presses and as far as the Fed is concerned, the rate is still 1:1166 when being exchanged for IQD cash notes or for electronic dinars.
Right now in 2014, the CBI regularly has daily US$250 Million (plus) auctions of petro-dollars @ 1:1166 just to meet the current demand from up to 20 Iraqi banks and financial institutions participating in each auction.
That 1:1166 USD to IQD rate is really important because any currency rate influence on the petro-dollar will ultimately influence the price of a barrel of oil for all multinational corporations and/or countries that expect to suck Iraqi light sweet crude out of Mother Earth.
The idea of the USD as the petro-dollar started when the US based Economic Hitmen approached the Saudi Royals back in the 1970’s with a deal they couldn’t refuse.
The USD as the petro-dollar is still true today ~ with the international price of a barrel of oil still expressed in USD’s (not IQD).
A notable portion of the USD cash notes still circulating in and around Iraq now was part of L. Paul Bremer’s initial US$21 Billion contribution to the Iraqi reconstruction effort and was off loaded from a fleet of C130’s in 4’ X 4’ X 4’ shrink wrapped cubes of $100 notes ~ on forklift pallets.
In order to resupply the CBI with more USD cash in a hurry, a similar delivery technique would have to be implemented and that would definitely require Fed/Treasury Department approval and permission and lots and lots of security on the Iraqi end of the flight/s.
Even if overnight Iraq was suddenly turned into a bustling 21st century country with the infrastructure to attract both business and tourists (ATM’s, electronic banking, fair and regulated currency exchange outlets), the CBI would still needs lots of USD notes to supply those enterprises in the event of an overnight RV.
With Warka and its 120 Branch/350 ATM footprint temporarily suspended, an overnight RV of the current Bremer notes would be very difficult to pull off. Iraqi citizens in rural areas that have only a very few physical banks stocked with ready USD cash around them would probably be the biggest losers ~ those in cities closest to banks with lots of USD on hand, the biggest winners. All have access to plenty of guns and ammo.
At the time those original crispy new USD notes were first delivered the official exchange rate was close to 1:2000, but it moved up fairly quickly to around 1:1500; and now a decade later, it’s steady at 1:1166 and the Fed regularly honors that rate of exchange.
1166 from 2000 is a respectable increase in the value of the IQD against the USD ~ it’s a 71.5% ROI of USD’s and that’s a margin that has been made in a highly speculative currencies market.
An IQD 71.5% increase in value against the globally used petro-dollar might already be considered a substantial revalue in some circles of currency players.
Absolute fortunes in oil and other commodity futures are already based on this 1:1166 rate of exchange between the IQD and the USD ~ long term international contracts between countries and Multinational Corporations have been signed, sealed and attested to with this current rate of exchange factored in to the price of every barrel of oil coming out of Iraq; albeit with regular and ordinary currency fluctuations understood to be part of the cost of doing business.
According to Iraqi law all legal debts and taxes must be paid in IQD and in the majority of cases among the Iraqi citizenry that means in cash.
If overnight the value of a single IQD jumped from being worth US$0.0008576 to being worth anywhere from US$0.10 all the way up to a predicted US$3.71, wouldn’t at least all the historically and traditionally trade savvy Iraqi clan leaders, politicians and others of that ilk want to trade in every single IQD they could get their hands on for all the USD they could possibly acquire? Wouldn’t you, if you lived in Iraq?
At least temporarily ~ and just for the potential once in a lifetime 11,420% to 423,709% profit margin ~ before converting back to other, steadier currencies (and not necessarily the IQD)?
I’ll bet that trend would catch on fast and even those Iraqi folks who don’t normally pay attention to such things would get into the currency trading business ~ especially when it’s cash in the hand and not electronic.
I doubt if too many Iraqi citizens would hold on to their IQD waiting for it to grow any stronger than $3.71 for one dinar.
Before anyone could calculate the consequences of such an overnight move in the value of the world’s most used currency (the USD), Iraqi citizens will have traded as many IQD notes as possible for as many USD notes as possible and/or until the currently available supply of USD notes stored at the CBI and all the other Iraqi banks was depleted or deliberately withheld.
For certain there would be a run on all open Iraqi banks for all available physical USD notes.
Since the CBI would probably be the only central bank in the world buying physical IQD notes with its own stock of physical petro-dollars (especially right at the beginning of such an overnight event), the demand for the CBI’s stored petro-dollars; including those pallet loads inside the other major Iraqi banks vaults, would be huge and fast.
The CBI’s already well publicized plan to de-dollarize Iraq would certainly have to be put on a more or less permanent hold and the CBI Board of Directors will have caused that indeterminate delay themselves just by initiating the RV of these existing high denomination Bremer notes.
That will be a huge loss of face for the CBI Board of Directors and more importantly, a substantial loss of credibility for the CBI, itself.
What other central bank in the Middle East, or for that matter anywhere else in the world, would/could trust the CBI if the CBI Board of Directors just all of a sudden and literally overnight without any prior warning or further effort to insure that these currently circulating high denomination IQD notes would be accepted internationally and would be tradable outside of Iraq, initiated a substantial upward revalue of their own fiat IQD currency against the Fed’s own fiat USD ~ which is the World’s own fiat Petro-dollar?
After circulating in Iraq for 11 years, these Bremer era high denomination IQD notes are still not accepted as payment for anything outside of Iraq.
If these banknotes haven’t been accepted as international currency by now ~ especially after getting through all the steps necessary to have Chapter VII sanctions lifted ~ why would they be accepted after a CBI initiated RV (inside Iraq) against the USD?
There’s absolutely no demand for IQD notes outside of Iraq ~ other than by dealers selling to speculators. Does the CBI intend to force these high denomination notes on the rest of the world as being acceptable international currency?
Since Iraq is the current (by default) economic and otherwise leading country of the 22 strong Arab League of Nations, can the GOI or the CBI really afford any more of a credibility challenge?
It’s notable that both Libya and Egypt were the previous Arab League of Nations leaders until they both became too disruptive and Iraq was forced to assume the mantle. That was a few years ago.
Now, it seems that it is Iraq’s turn for a handover of leadership since the annual Arab League summit meetings might have to be held someplace other than Baghdad until everybody learns to get along a little better.
The trouble is (with Libya and Egypt out of it) which country other than Iraq can assume to lead the 22 other countries and be credible internationally?
In such a cash society as Iraq, after that initial RV rush to exchange existing high denomination IQD notes for USD notes, which Iraqi citizen could realistically be expected to then willingly exchange his newly acquired USD notes back to IQD notes? Would you, if it was a one-time take it or leave it RV with no further rise in value expected for a long time?
What other incentive would an Iraqi citizen have to hold IQD notes; except maybe to satisfy Iraqi legal debts or to pay Iraqi taxes?
According to Iraqi law, it’s illegal to take physical IQD notes out of Iraq and both foreigners and Iraqi citizens on their way out of Iraq are regularly searched as possible smugglers at airport security.
Who would willingly exchange newly acquired cross border and globally tradable petro-dollars for fiat IQD notes that are only exchangeable inside Iraq through the CBI and its subsidiary banks and financial institutions?
ISIS might if they thought there was a financial hint that an IQD overnight RV of the existing high denomination Bremer notes was truly eminent, but so far they’ve only robbed Iraqi banks of their USD cash, not their IQD cash.
Such an overnight change in value by the CBI would almost certainly cause a critical USD cash shortage inside its very own vaults; as the CBI tried to hold on to its own minimum requirement of USD notes (as a reserve currency) and at the same time tried to keep up with the demand from the other major Iraqi state owned and private banks ~ all of whom have their own currency reserve minimums to maintain ~ including Sunni owned Warka Bank.
Almost certainly, and probably sooner than later, the CBI would have to appeal to the Fed for more cash.
Here’s the part I don’t understand about this whole IQD RV deal:
What’s the Fed’s incentive to now pay anywhere from US$0.10 up to US$3.71 for a single dinar when just yesterday it paid only US$1.00 for 1166 dinars?
For that matter, what’s a Multinational Oil Corporation’s incentive to pay this same new radically increased rate for changing USD to IQD, in order to pay local Iraqi business taxes, and local Iraqi labor force wages or to pay for local Iraqi food and lodging for their own expat personnel residing in country?
Which one of those Multinational Oil Corporations is actually going to put up with an increase of from over 11,000% up to more than 400,000% more in operating expenses than they originally contracted for ~ no matter which currency is used to pay the tab?
Who’s supposed to absorb that cost?
You can bet your bottom dinar that it won’t be the Fed or the Multinationals.
Both the USD and the IQD are fiat currencies so what’s to stop either the Fed or the CBI from just printing up more to satisfy their own separate agendas?
For example, the CBI could just print up more IQD notes to exchange for more USD notes with the intent on vacuuming up every spare petro-dollar in the Mideast into its own vaults and the Fed could simply print up more USD notes to meet that demand.
What inflationary effect would such a radical increase in the total global amount of USD’s have on any country using the petro dollar to buy oil?
Would the CBI knowingly put that much physical USD in circulation inside Iraq and at the same time knowingly destroy its own IQD currency circulation by buying it all up off the streets of Iraq like that?
Would a newly formed GOI allow such a scenario whereby only the quick and the lucky or the well connected Iraqi citizens get to exchange their IQD for USD before the CBI’s ready cash supply ran out; and those Iraqis that didn’t make it to the bank on time get to be armed and furious and looking for a bank to rob?
Once acquired, those currently available USD notes would likely flee the country along with their new owners who would more than likely be emigrating to a more peaceful climate to be rich in.
The result would be a severe cash shortage inside Iraq.
Both the IQD and the USD would be in short supply on the streets.
Not good for a largely cash based society.
Multinational Corporations all have several central banks and currencies to contend with when conducting international business, but the main one that all of them have to contend with is the Fed ~ the issuer of the petro dollar that actually buys the oil which greases the global economy.
Will the Fed or any Multinational Corporation actually put up with such a sudden whimsical increase in the cost of doing business inside Iraq?
IMO, neither the Fed nor any Multinational Corporation is going to willingly take such a hit on their bottom line without a big fight or a very compelling reason.
As we can see from the current news, some of those countries hosting Multinational Oil Corporations which have (literal) stakes in Iraqi soil are quite willing now to re-supply and support an effort to keep Iraq sovereign and capable of exporting that light sweet crude which is like no other supply on the planet.
Weapons hot, status green ~ good to go, over.
Other than that what else is that very compelling reason?
How much would an abrupt increase in the global inflation of the petro dollar via an overnight IQD RV effect an already shaky global economy ~ a global economy which is also highly dependent on oil for its core value, anyway?
As all global economies become more interdependent, the speed of any effects resulting from a change to even one of those economies increases.
A sudden radical and relatively whimsical upward RV in the rate of exchange of the IQD relative to the USD (a currency representing a two thirds portion of all the currencies now in use worldwide) would almost certainly soon have an upward effect at least at all the fuel pumps worldwide, including those inside Iraq ~ thereby increasing the costs of most other commodities and staples worldwide because of increased transportation costs.
Boycotts and sanctions come to mind as a way the Fed/US, and the UN Security Council typically deal with very naughty dictators and other such disobedient or incompetent lackey leaders whose actions detract from the bottom line of the Multinationals.
So, Iraq would probably once again come under worldwide business boycotts (the cost of doing business in Iraq all of a sudden being too high to deal with) and possibly under UN sanctions as well for causing such a radical increase in fuel prices worldwide and/or for the wholesale breaking of the terms of multiple long term international contracts.
But all that negative global economic impact could only happen if the Fed will actually abide by such a radical increase in the value of the IQD relative to the USD.
Why would the Fed put up with it, though?
I’m stuck trying to think of any compelling reason for either the Fed or any other Multinational to agree to such a whimsical, radical, overnight upward RV of the IQD just because the CBI/GOI/MOF declares it.
How can the CBI/GOI expect to enforce such a rate outside of Iraq if no other central banks governing the currencies of those countries whose home based Multinationals have signed contracts for Iraqi oil will agree to devalue the purchasing power of their own fiat currencies along with the petro-dollar?
Everyday trade transactions inside Iraq would get pretty confusing too because without the introduction of smaller denomination IQD notes, how are Iraqi merchants supposed to make change for the everyday sales of goods and services.
Even at a 10 cent RV, the smallest IQD note of IQD 50 would still be worth US$5; and so change would have to come in the form of USD notes and coins for as long as they lasted and then Iraqi coins if any are still around that have not already been converted to petro-dollars.
How will the GOI control the Iraqi population during the physical cash exchange period?
The Iraqi Prime Minister would likely have to resort to martial law to get it done ~ especially if more USD notes had to be imported to meet the demand.
Otherwise, ISIS and other such outlaws would try to rob the currency transport convoys traveling from the airport to the Iraqi banks.
Does the Iraqi Military or any of the official Iraqi Police Forces have the will to enforce martial law, especially now with several “friendly” militia groups in the field fighting ISIS? Does the Iraqi Military have the will to become the occupiers in their own country?
And then what? Use the Iraqi Military and Iraqi Police Forces to protect all the new Iraqi millionaires who have USD cash on their persons and in their homes; while all the rest of those Iraqi citizens who missed the critical exchange period before the USD cash supply ran out have to stand aside and act nice about it?
When those same new Iraqi millionaires decide to immigrate to a country more suitable to their new and richer lifestyles, will an armed military/police/mercenary force be provided for each new millionaire’s escape convoy as it rolls to the airport?
What would be the rules of engagement for those outbound protective groups?
Shoot any peasant that gets in the way of the now privileged principals all leaving the country on time via their newly purchased private jets and with all of their newly acquired wealth stowed safely on board?
How would an overnight radical IQD upward RV against the USD inside Iraq help any other existing currency in the world gain purchasing power relative to the USD?
I can’t see that it would. In fact, it seems that if the petro-dollar’s purchasing power inside Iraq is weakened, then the other world currencies would also be forced to pay more in their own currencies too, since all are connected to the USD through the common commodity of oil ~ and that’s regardless if the oil in the barrel actually came out of Iraqi soil or not.
If for some really odd reason the Fed actually does go for such a deliberate deflation of its own petro-dollar’s purchasing power inside Iraq; then it would have to print up a bunch of new bills just to meet the demand of all these new Iraqi millionaires.
Any demand for USD’s from potential IQD speculator millionaires elsewhere outside of Iraq would be prioritized while various dinar dealers around the globe flew their stash of IQD to Baghdad. I imagine foreign dealers with bulks of cash would still have to wait until the current demand inside Iraq was satisfied enough to allow the CBI to buy back more physical dinars with more physical USD ~ and probably still at an auction center.
The global market is more or less a closed system and increasingly more sensitive to such changes in currency rates of exchange, so a big influx of new USD’s in cash is likely to cause an excess of notes in circulation which is the very core definition of inflation.
Inflation of the petro-dollar inside Iraq would decrease its purchasing power, which would cause higher prices for oil worldwide, which would cause higher prices for anything that needed to be transported from one point to another worldwide.
Which country or central bank in the world is going to agree to that across the board increase in core economy costs willingly?
How can any other country or central bank’s economy benefit from an overnight IQD RV since both the CBI and every other central bank in the world is tied to and subject to the influences of the Fed through the use of the petro-dollar.
What if the CBI decided to host an overnight, radical, upward IQD RV against the USD and nobody bothered to come to the surprise party?
Sorry about the length of this reply.
Thanks for sharing!
Last edited by b2stepblue on Tue Jan 27, 2015 1:48 am; edited 2 times in total