Friday Night SWFG post emailed to Recaps

5-10-13 SWFloridaGuy: The four leading central bankers from the U.S., U.K., France and Germany navigated in and out of WWI and financed recoveries and German reparations.

These central bankers went off and on the gold and new dollar standards by manipulating their exchange and interest rates.

We’ve all heard the rumor that the Bush administration initial plan for paying for the Iraq war was potentially by collecting taxes from the revaluation of the dinar.

Now, whether or not this is a remotely plausible scenario, it’s hard to discount that, if applied, it would certainly raise revenue and supplement the closing of tax loopholes.

Having said that, I’m far from convinced that the statement implying the Iraq war will pay for itself directly relates to the RV of the IQD. Due to my skeptical nature, this theory has me far from convinced although I do recognize the advantages this would incur.

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The IMF’s panel discussion in Tokyo is advising less developed economies (such as Iraq) to let their currencies appreciate, delivering a strongly worded counterargument to their own critiques of the Fed.

In some emerging markets, policy makers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth. China is a prime example.

However, the situation faced by Iraq, considering their goals to go international, de-dollarize, join the WTO with full accession and refrain from intervening in foreign-exchange markets, thereby allowing the currency to rise.

The more Iraq moves toward becoming less dependent on exports and more driven by domestic factors the policy makers could use GOI spending and tax policies to support their economy which is in dire need of diversification.

This approach would support emerging economies and supplement the recovery of advanced economies. Christine Lagarde made the comment at a conference in late 2012, I believe, where she recognized Iraq’s potential to benefit the global economy during these turbulent times.

A common misconception is differentiating between real and nominal currency revaluation. The nominal exchange rate can appreciate while relative price levels in an emerging market relative to the US remained unchanged.

If you wish to speculate on the long-term real exchange rate your best bet is to compare the rate observed in the currency markets against the purchasing power parity (PPP).

This is the implicit exchange rate at which the amount of money needed to purchase the same goods and services in two countries is the same.

If we wish to determine how quickly an emerging market’s (such as Iraq) currency can appreciate we must consider the state of their economic progress and political stability.

It is inevitable that emerging market currencies are likely to see a gradual appreciation, possibly algorithmic in nature, considering the global financial crisis.

This is all purely conjecture and wishful thinking on my part and I would recommend doing your own research and sharing your own thoughts with us all so we can collectively come to a better understanding and alleviate the misconceptions that plague this community and perpetuate the hype that gives a truly great opportunity such a bad reputation.

In closing, I would like to note that the preceding discussion is drawn from world-renowned macroeconomic experts and global financial advisers. The general consensus among these leading experts was published as follows:

“We think that both economic theory as well as empirical data confirm our expectations that emerging market currencies will appreciate in the coming years, both in real but also in nominal terms!”

References:

1. Penn World Table Version 6.1

2. Center for International Comparisons of Production, Income and Prices at the University of
Pennsylvania

3. Alan Heston, Robert Summers and Bettina Aten, July 2012, Penn World Table Version 7.1,
Center for International Comparisons of Production, Income and Prices at the University of
Pennsylvania

4. Bela Balassa, “The purchasing power parity doctrine: A reappraisal”. Journal of Political Economy 72584-96

5. Kenneth Rogoff, The Purchasing Power Parity Puzzle”, J. Economic Literature, 34

6. Paul A. Samuelson, “Theoretical notes on trade problems”, Review of Economics
and Statistics 46 (May): 145-54