Brad Setser

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Cross border flows, with a bit of macroeconomics

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Just because one dollar currently buys something like a million and half Turkish lira …

by Brad Setser
November 30, 2004

That does not necessarily mean the Turkish lira is cheap. Right now, given Turkey’s almost US scale current account deficit (close to 5% of GDP), the lira probably is a bit overvalued. Turkey is going to exchange a million old lira for one new lira in January. That will make working on Turkey a bit easier — no more lira quadrillions — but lopping a bunch of zeros off both the currency and off local prices is not going to make any one rich (apart from a few scam artists), nor will it change the lira’s external value.

The same is true in Iraq: One dollar currently buys 1460 Iraqi dinar, but that does not necessarily mean the dinar is cheap.

This article is not going to make me popular in some quarters. It seems that there are some folks selling dinar to the US retail market, though there not as many who are also willing to buy. The sales pitch for dinar often goes like “if each dinar were only worth one cent” … you would make a killing.

That, alas, is not going to happen. End the war, and Iraq’s economy should be bigger than the $20 or $25 billion it is now. So the dinar might (and emphasis should be placed on the might) do something like double in value if (a big if) all goes well in Iraq over some time frame. It also might fall if things go poorly.

But Iraq is going to remain a relatively poor country for some time. The dinar is not going to go up by a factor of ten, let alone the factor of fifteen needed for one dinar to buy one cent. That would be like the euro appreciating so that one euro bought ten dollars, or the yen appreciating so that ten yen bought one dollar. Like Martin Wolf, I think the dollar has further to fall, but even I think that kind of change is just not going to happen.

Make no mistake, the big brokers selling dinar are making a profit no matter what. The central bank was selling dinar this morning for 1460, so a million dinar cost about $685 in Baghdad. A broker is offering a million dinar for $790 over the internet. Getting the dinar out of Iraq probably takes a bit of effort — the broker is offering a real service — but that is still a nice markup …

Buying dinar is one way of diversifying out of the US dollar, but anyone considering making an interest free loan to the Iraqi government (that’s what buying dinars as an investment implies) ought to understand the risks. The dinar is not exactly a candidate to be the world’s next reserve currency.1) If you are buying dinars, you are betting on real appreciation through nominal appreciation of the currency — that is to say betting that the way the purchasing power of Iraqis will increase is through a rise in the dinar’s value. If the currency appreciates in nominal terms from 1460 dinars to the dollar to say 1000 dinars to the dollar, an Iraqi that makes say 10,000 dinar a day would be able to purchase $10 rather than @$7 of the world’s goods.

2) You lose if the nominal exchange rate goes down, obviously, for whatever reason — civil war, lower oil prices, etc. You also lose — or at least don’t win — if Iraq’s dinar stays stable in nominal terms but the currency appreciates in real terms because of inflation in Iraq. In that case, our Iraqi’s salary would go up to 15,000 dinar a day rather than 10,000 dinar, but the exchange rate would stay around 1,500 dinar per dollar. The Iraqi could then buy $10 of the world’s goods even though the exchange rate stays constant. Iraqi citizens are richer, those holding its currency abroad are not. This is not an entirely unrealistic scenario.

3) Iraq’s government has fairly strong incentives to keep the currency stable — it is one of the few signs of political and economic stability the government can point to. It also has some incentive to resist letting the Iraqi dinar rise in real terms. A stronger currency makes imports cheaper and any Iraqi production (to the extent there is Iraqi production) relatively more expensive. Not exactly the best way to solve Iraq’s unemployment problem. The Iraqi government, one presumes, does not want Iraqi wheat production, for example, to be uncompetitive with imported wheat.

4) Oil alone does not make betting on Iraq’s currency a slam dunk, to paraphrase George Tenet. With production @ 2.5 mbd (November seems to have been a bit lower) and with oil at $50, Iraq is getting a fairly solid revenue stream — nearly $2 billion a month — from its oil right now. Even if the security situation stabilizes and, over time, Iraq can bring more oil production on line, it may do so in a less robust world economy with lower oil prices. So Iraq may make less money from selling a larger amount of oil than it does now …


  • Posted by Jeff Fisher

    Money is the most saleable commodity.
    It is that simple.
    If a money becomes less saleable, it becomes less valuable. The Dinar will never be money outside of Iraq. The dollar is becoming less saleable, hopefully you do not have too many in your cash balance. All legal tender is basically slave money. We can be free if we reject the State’s money. The market will choose a better money than the Dinar or the Dollar. Gold and Silver prices are telling us something. Are you listening?

  • Posted by anne

    What is interesting is that no matter the dire concerns of economists, with which I agree, we have finished 2 years of a world bull market in stocks. Investors simply are not worried about a near crisis.

    National Index Returns
    12/31/03 – 11/30/04

    Australia 26.5
    Canada 20.5
    Denmark 26.8
    France 14.5
    Germany 10.7
    Hong Kong 22.1
    Ireland 34.0
    Japan 10.3
    Norway 53.4
    Sweden 34.8
    Switzerland 10.6
    UK 15.8

  • Posted by anne

    Vanguard Returns
    12/31/03 to 11/30/04

    S&P is up 7.1%
    Value Index is 11.4
    Growth Index is 3.4

    Mid Cap Index is 15.5%

    Small Cap Index is 15.7%
    Small Value is 19.9

    Europe Index is 16.0
    Pacific Index is 13.6

    Energy is 38.6
    REIT Index is 24.7
    Health Care is 4.1

    Long Term Corporate Bond Fund is 7.4
    High Yield Corporate Bond Fund is 6.1

  • Posted by brad

    anne — low short-term and long-term US dollar int. rates do wonders for all asset prices. and 2004 was a VERY good year for the global economy, strongest world growth in something like 20 yrs. Unfortunately, the 04 boom seems (at least to me) to be built on shaky foundations.

  • Posted by anne

    Agreed, Brad.

  • Posted by anne

    Several days ago, Stephen Roach spoke privately in Boston to a group of investment managers. Though Roach has been sanguine in public about debt and the decline of the dollar, in private he was extremely pessimistic. I am annoyed about the different messages, but even for Roach the pessimism was severe.

  • Posted by brad

    You almost don’t even have to read through the lines of Roach’s public statements to figure out that Roach is very worried. He puts out a story showing how it all might work out, but it is pretty clear he thinks the chances that it will all work out are slim. He clearly takes lots of heat for being as bearish as he is — he did a nice report on his speech to a group of bullish equity investors a couple of weeks ago.

    So I am inclined to cut him some slack — and not just b/c Morgan Stanley does us all a favor by putting its analysis out on the internet. But maybe I am just used to people being darker in private than in public …

  • Posted by anne

    Agreed again. I must no longer grumble, and I am appreciative of the Morgan Stanley discussions. Thanks 🙂

  • Posted by bob

    Sure… It’s a gamble, there is a rather large amount of risk involved in the Iraqi Dinar. But, for a small amount of money, If it does pay off… it could possibly pay off HUGE! So, each individual needs to see for themselves if they can afford to gamble their US$ for dinar versus NOT taking this once-in-a-lifetime chance. The Odds may be against those of us who think it’s a reasonable chance, but I willing to lose a little money just to say that I’m an Iraqi millionaire. I mean… how cool is THAT!?!?!?!

  • Posted by brad

    bob — glad you realize it is a gamble, and enjoy being a dinar millionaire. Some people think they have made huge gains by betting on the euro over the past few years. It is up 40% or so in dollar terms. That kind of huge gain certainly is possible. But like I said in my post, it is hard for me to see the dinar doing more than doubling (giving iraq a $ GDP of 40-50 billion) even in a good scenario, at least over the next few years. The really huge gains some talk of imply a valuation of Iraq’s economy that strikes me an unrealistic. Bottom line: I would think of it as a gamble, but one more more like wagering one to win two than wagering one to win ten.

  • Posted by Chaka

    This looks interesting given the fact you stated the value of the Iraq Dinar could increase “inside” Iraq. I mean if I had my money in a bank there, it wouldn’t matter and I would not be stuck with a bunch of worthless paper!

  • Posted by zen

    I believe the answer lies deeper than you all may think.Presumably Iraq is going through changes.The people have chosen a rooted democracy.This is their first test.They need to know inspite of everything dont quit.However because they have chosen a new govt and a new currency. They are now being bullied by other third world countries.The Rolling stones should put on a concert in Baghdad and show them bullies off. They are from N.Y.and england.Time is on their side.Yes it is.Let the world return and join hands with the Iraqi people and blind the real enemy with solidarity and faith and Brotherhood. Make the devil choke on the tears created by the deeper love of humanity.

  • Posted by Paul

    Some of this talk is nonsense and quite candidly speaking inflated. As a conservative Canadian investor I will place my money into dinars simply because I have been to Iraq and the people I met are generous, hardworking, decent , and kind. This country is on the rise. Oil or not they will succeed in many different economic directions, be it garments, auto, produce, glass, etc. They are geared for economic success. Oil is only a fraction of it.

  • Posted by toemaas

    Iraq’s currency is not traded internationaly. It only has worth within it’s borders, therefore it’s value (outside) is arbitrary. Once World trade resumes for Iraq, deals will be hashed out, assessments will be made and thier currency re-evaluated.

  • Posted by Anonymous

    Its all fair to mock saying the currency will never go up by a factor of ten, but is that not what the dinar of Kuwait did after the gulf war and no one is now mocking the millionaires who made their riches from tiny investments in it at that time.

  • Posted by Steve

    I wonder how many of the people who are pro-iraqi dinar investment are really working for

  • Posted by Ed

    Iraq is the poster child for the Democratic world. Nothing in history compares with this in terms of showing the rest of the world what can happen when a suppressed society is given freedom & free trade. The Iraqi dinar will prosper, along with Iraq & its people. The USA & England will make sure of it. Iraq will be the next mideast superpower. Not only because of their vast natural resources and hardworking people, but it is prophesized in the christian bible! I will continue to invest in Iraq and its citizens!

  • Posted by Guest
  • Posted by Phil

    The head of a Harvard ‘think tank’ on the global economy stated in a report that he believes the Iraqi Dinar will be pegged to a basket of known values – 1/3 of US dollar + 1/3 of Euro + 1/100 of the price of a barrel of oil. Could that put the Dinar valuation in excess of .68/1USD? Remember; Iraq has possibly the largest oil reserves in the world (pending the results of future exploration), huge natural gas reserves (10th in the world), all the fresh water in the Middle East, a vastly reduced national debt, an educated and industrious population and the support of virtually every democracy in the world. Iraq will become the ‘jewel in the crown’ of the Middle East; a shining example to neighboring countries of what a ‘free people’ can accomplish. Sure it could come ‘limping’ into the world currecy market, but personally, I see it boldly and proudly proclaiming ‘IRAQ – NOW OPEN FOR BUSINESS – FIRST COME; FIRST SERVE’.

  • Posted by Anonymous

    The moment the US troops withdraw, civil war is going to erupt as Iraq is molded out of three groups of people whose small but well armed minorities of fanatics want different things.
    Shias in the south would rather go to their Shia brothers in Iran.
    Kurds in the North can finally correct a historical injustice and achieve a milestone of creating a first modern Kurdish state (probably the true best investment bet when that happens.)
    And Sunnis? We’ll they would rather that everything was like it use to be. But it never will be.
    There are no such people as Iraqis; there are Shias, Kurds and Sunnis.
    Yes, there will be war. And then, three new nation states will be born. Iraqi dinnar will cease to exists and so will the investments of those who chose to bet on Iraq.
    Iraq is best compared to state once known as Yugoslavia. And we all know what happened there.

  • Posted by Anonymous

    i wish i come upon your blog soonur. i bought dinars and now stuk with them i put them on ebay and loose big money just to try sell them. thar is no profitt in dinars now i loose money big time don not by dinars you will loose yur money. dinar seller tell me i make big money if i by dinars . he make big money and i loose big money. don not by dinars you loose yur money also. dinar seler make money from me he laff at me when i want to sel my dinars to him

  • Posted by Anonymous

    i wish i come to yur blog soonur. i bought dinars and now stuk with them i put them on ebay and loose big money just to try sell them. thar is no profitt in dinars now i loose money big time don not by dinars you will loose yur money. dinar seller tell me i make big money if i by dinars . he make big money and i loose big money. don not by dinars you loose yur money also. dinar seler make money from me he laff at me when i want to sel my dinars to him

  • Posted by Guest

    It makes more sense to me that instead of a 25,000 dinar note being worth $1 per dinar, that a revalued 25,000 dinar note being 25 dinar would be worth something like .68 cents per dinar. Then, possibly, the dinar could go to $3-$5 or even more!

  • Posted by Eddie

    I knew the risk is my 41800 ID worth to USD 0.00, but in my case, we go via MLM and make binary business, with that, we can recover the cost (of what ever amount you have paid to get the Dinars) and yet at the same time you can wait for yr entire life to get the promised from Dinars, if it never happen, you lose NOTHINg because you already cover the cost and if (a big if) the Dinars promises does actually happend, YOU ARE RICHER !! a lot (or you kids in the event you’re too old by then)can fly to Iraq for vacation and get your exchange in USD and get back to your hometown the following week !and of course it is juat a dream..and some dream does come true !