food for thought by vincenix on IIF.....
This is an important concept because the value of a particular currency may be defined by the value of what the currency can be exchanged for, instead of the usual underlying economic indicators.
The complete discussion was rather lengthy so here's the executive summary of how the exchange should work with iqd owned by a us speculator:
(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 account, bank y forwards the iqd currency to the federal reserve and bank y's account is credited at the bank private exchange rate. 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 the banks know investors will shop around. There is a possibility that there might even be a three rate structure (i.e. Treasury rate - bank private rate - bank public rate) imposed, but he had no input on that subject.
(3) the federal reserve adds the value of the exchanged iqd to their foreign currency reserve accounts and destroys the actual physical currency under agreement with the cbi, which serves to reduce the total iqd physical currency in circulation. This build up of the foreign currency reserve accounts serves to strengthen the usd in the marketplace, because heretofore the us has never held significant foreign currency reserves, because there wasn't any country whose currency was perceived as being equal to or stronger than the usd. The iqd with it's commodity (oil+others) base, potential for agriculture growth and aggressive private development growth, has the capability to become the most valuable currency in the world in the 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 their local economy and set up a conservative investment portfolio which adds capital to the investment markets. They also pay their estimated taxes which increases the cash flow to the us treasury.
(5) the federal reserve under a controlled redemption plan supervised by the imf, will use it's foreign currency reserve iqd account to buy oil for the national strategic reserve, dod reserves, other country reserves as part of international support agreements or resell it to private oil companies etc.
This gives the federal reserve a powerful market force capability to control the supply/price of imported oil which has far-reaching economic and national security implications.
The economics of this scenario look like this, using the exchange of a 10,000 iqd note with a two-tier 2% bank exchange spread as an example:
(1) mr. & mrs. X get $9,800 credited to their non-interest bearing checking account.
(2) bank y gets a $10,000 credit to its federal reserve account, and by adding the $200 profit to their capital account, allows them to increase their lending cap by $2,000 under the 10% fractional banking model.
(3) the treasury gets $3,500 in estimated taxes in the quarter after the exchange, because mr. & mrs. X are now in the "rich" category and get to enjoy the 35% tax bracket. This lowers the net cost of the iqd exchange to the us financial system to $6,500 usd (i.e. $10,000 out - $3,500 in).
(4) the fed's designated agent, at some point, orders $10,000 worth of oil from iraq. Payment will consist of a 10,000 transfer from the fed's foreign currency reserve iqd account to the iraq oil payment account at the cbi. Even though the world spot price of oil is defined in terms of usd, the actual transaction may take place in any internationally recognized currency agreed to by the parties. For example, iran only accepts yen from japan for their oil orders, because they don't want usd in their foreign currency reserves.
(5) the $10,000 order is filled with 200 barrels of oil based on the spot price on the date of the sale (for this example we used a $50 usd spot price). What does it cost iraq to produce the oil to fill this order? 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 the partner in the field the oil came from. Out of the remaining $1.00 the other oil field partners have to pay the iraq government a profit tax of $.35 usd (35%). The net cost to iraq to produce a barrel of oil used in this scenario is $.65 usd. (i.e. $1.50 - .50 - .35)
(6) the transaction is completed with the federal reserve exchanging foreign reserve credits which are equal to 10,000 iqd (which had a net acquisition cost of $6,500 usd) for 200 barrels of oil (which has a net cost to produce of $130 usd.
Simply put, it cost iraq $130 usd from their foreign currency reserve accounts to redeem the value of 10,000 iqd, which goes into their operating accounts. 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 iqd = 1 usd, with the variable being the political element (i.e. Un sanctions, goi actions, imf actions, world bank actions etc.)
now let's really stir the pot by:
(a) 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.
(b) then change the current fractional iqd reserve requirements of 100% to 15%. That just raised the 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.
(c) also execute the plan iraq announced to increase oil production from 2+ million barrels/day to 10 million barrels/day with the resulting revenues flowing directly to the iraq treasury.
(d) 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 really 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.
