1-19-2012 Guru Kaperoni chat log
“What is the CBI up to?”
kaperoni: Today’s chat is a “What is the CBI up to?” chat.
kaperoni: I wanted to take a shot at this rate change. I am not an economist, but I do have tactical skills as a researcher and think there are some interesting assessments that can be seen with this rate change. Though somewhat speculative, only time will tell if I am right.
kaperoni: The Central Bank raise the price of the Iraqi dinar against the dollar by 3.4% - 19-01-2012
kaperoni: We all know the CBI adjusted the rate of the dinar yesterday. Some .34% (3.4%) as stated in the article title. This is the first time in 3 years that the CBI has done such a thing, and Shabibi has maintained in the marketplace an 1170 to $1 rate. Thought this seems nominal, it may have significant meaning in the Plan. Let’s take a look at a few quotes from this article….
kaperoni: “the Bank worked to raise the prices of the Iraqi dinar against the dollar during the sessions for the sale and purchase of foreign exchange by four dinars and by .34% to up to 1166 dinars to the dollar,”
kaperoni: To the citizen, this is meaningless. We're talking about 4 cents on a $100 purchase at this exchange rate. So, IMO, there is little or no effect in the marketplace. And especially when we know from the previous chat the extensive efforts to “dollarize” the economy in recent weeks. This next quote seems to imply we may be close to the RV…
Click "Read More" on the right to get the full scoop : )
kaperoni: Let’s look at this statement. Saleh states.. The nominal (very low) price of the dinar is NOT commensurate (adequate or agreeable) with the purchasing power to him or the real price of the exchange rate of the dinar against the dollar.” My question then is why make this meaningless change? Let’s look at this next quote…
kaperoni: “Saleh pointed out that “the dollar exchange rate in the Iraqi markets that recently experienced a slight increase will be affected by the decision of the Central Bank of Iraq,” adding that “the Iraqi dinar will be attractive in the Iraqi market.”
kaperoni: How can that be?
kaperoni: 1. Iraq is dollarizing (we know that from the numerous articles in the past weeks pertaining to the auctions.
kaperoni: 2. The dinar currently in circulation is worn out, burned, torn, taped as stated by several recent articles.
kaperoni: 3. What is in circulation appears to be the smaller notes such as 50, 250, 500, and a few 1,000 dinar notes.
kaperoni: 4. This “adjustment” has no effect on overall prices at this exchange rate.
kaperoni: So what can the .34% change really be a about?
kaperoni: Let’s assume this was a pre RV adjustment. To align pricing prior to the RV to reflect the purchasing power at the new rate.
kaperoni: Example… We have seen numerious articles state a 50 dinar note will equal about $43 USD. Or .86
kaperoni: In order to achieve that exchange rate, the dinar must appreciate from the 1170 locked rate. Though so slight, it’s meaning is substantial on large transactions.
kaperoni: Some have stated that the CBI might raise it further? Or there would be a gradual appreciation. Well that would be contradictory to the stated rate of 50 dinars = $43. Therefore, we can assume that this move is the only move prior to the RV.
kaperoni: Going with the exchange rate that is stated, let’s see some numbers…
kaperoni: Previous rate….
kaperoni: 1170 to $1 post RV to 1.17 would equate to 1 million dinar = $855,000 USD
kaperoni: New adjusted rate…
kaperoni: 1166 to $1 post RV to 1.16 would equate to 1 million dinar = $862,000
kaperoni: That’s an increase of $7,000 USD
kaperoni: Let’s go back to something that Assistant Dean and Professor Fadel stated…when referring to the “delete 3 zeros” process…
kaperoni: “Must also coincide to re-work the CBE board of prices to determine the general level of prices and the real level of wages in order to eliminate the structural distortions in the national economy makes the process of removing zeros are mechanisms to reduce the rate of inflation and make it in the lowest levels”
kaperoni: This is telling as we see him mention that the CBE (CBI) has to “determine general level of prices and real level of wages in order to elimiate structural distortions” IMO, that is what the CBI is doing here prior to the RV happening.
kaperoni: Here is another quote from Dr. Fadel…
kaperoni: “The phenomenon of rising prices in the world is caused mainly by the decline in currency values and thus lower the purchasing value. And your conception that the best remedy for these reflections on the psychology of the Iraqi individual and the market is in the drafting of a new Iraqi currency prices are back with the logical relationship between the cost of the real item and the selling price based on the market.”
kaperoni: Again, IMO, this is the CBI only adjusting pricing. So when they “delete the 3 zeros”, this new rate conforms as stated..to the “real item and selling price based on the market”
kaperoni: IMO, this .34% move is an attempt to remove the “structural distortions” prior to the RV. And appears to be right in line with the Plan as documented by Dr. Fadel.