Get Rich with the RV of the Dinar! (or Not)

I had an illuminating conversation the other day that forcefully reminded me to never underestimate the depths of human stupidity.  This one makes me very angry, because I know a few people buying into it, but the person in question is literally betting the farm on it.  He’s unemployed, and instead of looking for work, he’s convinced that he has the gold ticket and his ship is about to come in.  Meanwhile his family's on food stamps and his kids can’t afford new clothes for school.  And no matter how I try to explain it to him, he just doesn’t understand that he’s chasing a will-o-the-wisp.

There’s a scam circulating that involves the impending “RV” of the Iraqi dinar.  For those of you not in the know (I wasn’t), “RV” stands for “revaluing” the dinar.  The Iraqi dinar currently trades at about 1170 dinar to the US dollar.  Unscrupulous currency brokers have convinced an astonishing number of people that they should invest in the dinar in preparation that the dinar will soon be revalued, making them overnight millionaires.

What does it mean to revalue a currency?  Well, it could mean several things.  One is just the normal floating exchange rate of the currency on the international market.  This exchange rate reflects the demand for the currency internationally, which is influenced by trade and fiscal policy.  If a government prints a bunch of fiat money and dumps it on the international market, the demand goes down and the rate drops.  Buying and selling into and out of a country involves using that country’s currency, and the amount of trade in and out causes the currency demand to fluctuate.  This is normal.  You can speculate in this market, and even make money, but it’s just gambling, and no one is going to get rich from a sudden, predictable move in this way.  In fact, the Iraqi dinar has been remarkably stable for the last four years, indicating that the exchange rate is being artificially supported by outside agents (Can you say U.S. Federal Reserve?).  Should the US reserve remove its exchange rate controls from the dinar, in all likelihood the value of the dinar will drop like a rock, further wrecking the Iraqi economy.  If you have foolishly invested in the dinar, this is definitely NOT what you’re looking for.

Another way the dinar could be revaluated is for the Iraqi government to place severe controls on currency availability.  The idea would be to reduce the number of dinar in circulation, increasing their value.  The government would absorb (and literally burn) excess dinar being held in bank reserves, thus restricting the money supply.  The problem with this scenario is that it would have a very deflationary effect, causing prices to rise in an economy that’s struggling to get back on its feet as it is.  People would hoard their money, waiting for it to be more valuable, stalling an economy that’s barely moving right now as it is.  No, the Iraqi government has a vested interest in promoting spending, not savings.  Again, for the speculator, this process would be slow, and probably not profitable, as the world exchange rate would probably not notice a shortage of dinar in Iraq.  After all, that paper money needs to be supported by real material wealth and productivity, right?

The third way is the one all the speculators are counting on to make them rich overnight.  The hope is that the Iraqi government will lop a few zeros off the end of the currency, making the dinar worth $1.17 on the world market at the stroke of a pen.  So our savvy speculator buys a thousand  dollars worth of dinar – 1,170,000 dinar to be exact.  Then the Iraqi government removes three zeros, and viola! Like magic, our happy speculator’s 1,170,000 dinar is now worth a cool million!

Hold on, Sparky.  Not so fast.  No one is going to stand for that. That money has to be represented by real wealth somehow, and the world currency exchange will just laugh at Iraq and want to cash their dinar in for the real wealth that Iraq insists it’s now worth, causing the dinar to crash back to its original level almost instantly, because Iraq certainly doesn’t have that wealth.

No, there’s an intermediate step that for some strange reason the dupes in this scam aren’t willing to admit to.  Iraq certainly can remove as many zeros as it wants from its currency – many countries have done so in the past.  But the only way it can do that is to print “new” dinar and exchange them for old dinar – at a 1000:1 exchange rate.  That way no new wealth is demanded, and the available dinars in circulation is reduced by a factor of 1000.  The books balance, no one gets rich, and our happy speculator finds that his old dinar are worthless, except to buy new dinar, which can be traded for pretty much what he originally paid, minus a brokerage commission, of course.

Looking through message boards, this scam has been around for at least 5 years, ever since the post-war dinar sort of stabilized, at a much lower level than pre-war.  This is an understandable devaluation, when you consider how much wealth was literally blown up during the war, how much productivity was ruined, and how the Saddam Hussein regime artificially set the exchange rate by controlling international trade through their oil monopoly.

The average person can’t just go into a bank and ask for dinar.  This scam is perpetrated by currency brokers who are sitting on mountains of nearly worthless dinar that they can’t move, because nobody wants them, not even the Iraqi government.  They find a sucker, and convince him about the impending RV, and tell them how their investment will get a thousand-fold boost when it happens (conveniently neglecting to tell them that they will have to exchange their old dinar for new dinar when it happens).  At the very worst they create a market for their dinar, offloading them to a sucker who thinks he's sitting on a gusher about to blow.  If they’re real slick, they can even sell their dinar above market rate, because of the aforementioned difficulty in the average person getting dinar (Because, realistically, who the hell really wants them?).  A quick look through internet message boards shows that the true believers have been anticipating the RV of the dinar to happen “any day now!” for at least the last five years.  Meanwhile the currency broker takes your dollars and starts investing in a real currency market.

Anyone who's had a basic accounting class will tell you, the books must ALWAYS balance!  You can't just invent a thousand times more wealth out of thin air by fiat.

The amazing thing, is that when I tried to explain this to my colleague who was all jacked up about how much money he’s soon going to be worth, he refused to listen to the facts, and waved me off with an airy “You just don’t understand.”  I patiently admitted that I didn’t understand, and invited him to please explain it to me.  He couldn’t, of course.  His most coherent response was “You’ll see!”

Be very careful.  They’re out there, walking among us.  And they vote.