Sanctions Against Iran Spurs Burgeoning Use of Gold as Money in the Middle East

US sanctions against Iraq has been promoting the use of gold as medium of exchange in the Middle East, particularly the Iran-Turkey-Dubai corridor.

From Reuters:

Couriers carrying millions of dollars worth of gold bullion in their luggage have been flying from Istanbul to Dubai, where the gold is shipped on to Iran, according to industry sources with knowledge of the business.

The sums involved are enormous. Official Turkish trade data suggests nearly $2 billion worth of gold was sent to Dubai on behalf of Iranian buyers in August. The shipments help Tehran manage its finances in the face of Western financial sanctions.

The sanctions, imposed over Iran's disputed nuclear program, have largely frozen it out of the global banking system, making it hard for it to conduct international money transfers. By using physical gold, Iran can continue to move its wealth across borders.

"Every currency in the world has an identity, but gold means value without identity. The value is absolute wherever you go," said a trader in Dubai with knowledge of the gold trade between Turkey and Iran.

The identity of the ultimate destination of the gold in Iran is not known. But the scale of the operation through Dubai and its sudden growth suggest the Iranian government plays a role.

The Dubai trader and other sources familiar with the business spoke to Reuters on condition of anonymity, because of the political and commercial sensitivity of the matter.

Iran sells oil and gas to Turkey, with payments made to state Iranian institutions. U.S. and European banking sanctions ban payments in U.S. dollars or euros so Iran gets paid in Turkish lira. Lira are of limited value for buying goods on international markets but ideal for a gold buying spree in Turkey.

ROUTING VIA DUBAI

In March this year, as the banking sanctions began to bite, Tehran sharply increased its purchases of gold bullion from Turkey, according to the Turkish government's trade data.

Direct gold exports to Iran from Turkey, long a major consumer and stockpiler of gold, hit $1.8 billion in July - equivalent to over a fifth of Turkey's entire trade deficit in that month.

In August, however, a sudden plunge in Turkey's direct gold exports to Iran coincided with a leap in its sales of the precious metal to the UAE.

Turkey exported a total $2.3 billion worth of gold in August, of which $2.1 billion was gold bullion. Just over $1.9 billion, about 36 metric tons, was sent to the UAE, latest available data from Turkey's Statistics Office shows. In July Turkey exported only $7 million of gold to the UAE.

At the same time Turkey's direct gold exports to Iran, which had been fluctuating between $1.2 billion and about $1.8 billion each month since April, slumped to just $180 million in August.

The Dubai-based trader said that from August, direct shipments to Iran were largely replaced by indirect ones through Dubai, apparently because Tehran wanted to avoid publicity.

Perhaps US imperialist policies will backfire in the context of the degeneration of the US dollar as the world’s foreign currency reserve.

More US States Seek New Gold and Silver Currencies

From the CNN,

A growing number of states are seeking shiny new currencies made of silver and gold.

Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.

"In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System ... the State's governmental finances and private economy will be thrown into chaos," said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.

Unlike individual communities, which are allowed to create their own currency -- as long as it is easily distinguishable from U.S. dollars -- the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make "gold and silver Coin a Tender in Payment of Debts."

The world does not operate on a vacuum. People act based on purported ends, or that people responds to incentives shaped by perpetually changing conditions—impelled by the environments, the markets, political policies or social relationships or on a blend of these [certainly not based on mathematical variables and equations].

If national governments continue to relentlessly debauch their currencies, then people will seek refuge in alternative currencies that would preserve their hard earned savings.

The function of money can be seen even in the prison environment where in absence of conventional money, exchanges takes place through spontaneously designated commodity medium by the inhabitants (not authorities).

Returning coins to circulation have even reached mainstream US politics as 2 senators have introduced a bill that would replace dollar bills with coins.

And this aligns with the actions of 13 US states above, who seems to realize of the growing fat tail risks of inflationism.

Swelling grassroots recognition of such risks seems to prompt for noteworthy changes on the fringes of the mainstream political spectrum.

Perhaps we will reach a tipping point where the periphery transforms into the popular. And this should apply not only to the US but importantly to the world.

The Tenuous Correlation of Remittances and the Philippine Peso

``Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen." Ludwig von Mises, Human Action The Place of Economics in Learning

Recently an amusing article in a local business broadsheet predicted that the Peso will likely fall to Php 52 against the US dollar at the end of the year. The article anchored its prediction from the analysis of a prominent economist, whose assessment was rooted on “remittances”.

Simplistic Analysis Equals Misdiagnosis

I say it is “amusing” because journalistic reporting projects the operational nature of the marketplace as seemingly so simplistic. The Peso’s path is deterministically portrayed as one dimensional. It assumes that “remittances” which only account for 11% of our GDP as the most powerful driver (survivorship bias-focusing on the popular or winners at the expense of the rest) and further assumes that its “pair”, the US dollar, is a fixed or non-dynamic state (selective perception bias).

Importantly, as Nassim Taleb of the Black Swan fame wrote in Fooled by Randomness, ``The problem with information is not that it is diverting and generally useless, but that it is toxic”. (bold highlight mine)

And as the public gets flimflammed over the perceived linearity of the causal relationship, they develop false impressions or notions that “simplistic” markets can ultimately be tamed or mastered by the state. And this applies to everything else. Think rice, meat, LPG and etc….

And this is why local media never fail to impress upon the public of the significance of government control over prices, which almost always don’t work.

What is Popular Isn’t Necessarily Economically Viable

The fact that prices, through money, exists is a manifestation of scarcity. And money functions as the medium of exchange meant to bridge on such deficiencies.

For example, if you have pizzas and I have beers, then we can make a trade. How many pizzas in exchange for beers will be determined by our relative values, i.e. how much a pizza is worth to me and how much a beer is worth to you. And where our relative values meet, these allow us then to conduct such exchange. You have (x quantity) beers and I have (y quantity) of pizza. Thus, we are both satisfied.

That’s because pizzas and beers are scarce goods. And exchanges of scarce goods or service are the natural state of the markets. Hence, satisfaction is derived by voluntary exchange. Alternatively this means, in a world of abundance, ipso facto, we don’t need money (markets or prices at all).

And where the allocations of scarce resources are implemented by the state, in order to attain efficiency requires the comprehensive and foolproof understanding of (marginal utility) the values or priorities of each individual within its constituency (e.g. the number of pizzas or beers you and I would have for a day, month or year) and the perfect assessment of the balance of supply and demand.

In short, this essentially requires omniscience- a trait only attributable to God.

Going back to our example; if the government ascertains a fixed rate of exchange for pizzas against beers and vice versa, which goes against the perceived pleasure or benefits of the producers, then the tendency is to produce less (quantity) and or inferior (quality) products. The end result is product shortages, black markets, higher prices and dissatisfied consumers.

Yet, the purported government predominance over the marketplace signifies nothing less than a GRAND DELUSION constantly peddled and perpetuated by politicians, so called economic “experts” and mainstream media used to gain mileage for tacit political or financial agenda.

Rationalization Meant For Political Agenda

Going back to the Peso, we’ve long been a skeptic over the Peso-remittance connections, as we wrote years ago in Philippine Peso And Remittances: The Unsecured Knot or What Media Didn’t Tell About the Peso, where experts have incessantly broached the causal relationship of the advancing Peso with remittance trends.

And as we earlier noted, while economic experts boisterously bruit about the multiplier impact of remittance growth to Philippine consumption, none of these experts or even the local authorities have given an estimate of the presumed multiplier or how much of local consumption has been captured by remittances.

Yet, this is the reason why populist “Keynesian” experts continue to blazon on a “depreciating Peso” as a virtue, which means printing of more money, bigger government, more redistributive policies from the productive and competent sectors to the non productive incompetent sectors and a rent seeking and dependency culture which ultimately leads to higher prices and more (not less) poverty. Nonetheless, if currency depreciation is a virtuous act then Zimbabwe should be the world’s richest country today.

One must be reminded that misdiagnosis extrapolates to false prescriptions.

On the other hand, the same school of thought disingenuously lambastes or assails on corruption as the principal and proximate cause of our miseries. Yet none of them have the audacity to decry the association between how CORRUPTION is correlated to BIG government. And this concerns NOT just the bureaucratic nightmare but also government spending and general economic intervention.

The silence is deafening. Naturally, an enlightened and empowered public could strip away their authority or means of control over the populace. Hence, self interest calls for looking at superficial measures as diversion than dealing with harsh cold reality.

What Peso-Remittance Relevance? Where?

It is hard NOT to associate the markets with political correctness as markets always function as the political scapegoat for government failures. Nonetheless it is ironic how these self-righteous all knowing pretentious experts claim to have the right solutions to deal exactly with our economic plight when they can’t even predict markets accurately in both short or long term basis.

Remember, markets function as signals to allocate the basic economic forces of demand and supply. This means that if they can’t read markets correctly, what additional qualifications have they to know the degree of distinctive individual values required to allocate resource efficiently? Mathematical models based on classroom conditions?

So under the remittances driven Peso concept, the reasoning or logic goes- growing remittances equals a stronger Peso. Inversely, negative remittances equal to a weaker Peso.

Here are the facts: The Peso in 2008 fell 15% even as remittance growth accounted for 15% for the first 11 months according to the IHT (estimated by World Bank to account for 18% growth for 2008). Growing remittances against a falling Peso, so how valid is this concept?

Figure 1: World Bank: Remittance Outlook, First Quarter Report

More Proof of inconsistencies?

Despite the present deterioration in macro economic conditions, World Bank estimates growth trends of remittances will decelerate and NOT grow negative see figure 1 (left window-gray line). However, the growth clip of East Asia and Pacific remittance trends have been on a decline since 2006. Yet when looking at Philippine economic growth composition (right window) where the services industry has allegedly been the primary beneficiary of remittances, services growth continue to surge in 2007 amidst a declining rate of growth in remittances. The services industry only began to moderate in the last 2 quarters of 2008. A case of lagged effect perhaps?

So, if the Peso should reflect the relative health of its economy with its comparable pair, then I am lost in ascertaining the said “steamy” correlations between remittance growth and the service industry.

Figure 2: Danske Bank: Emerging Market Currencies Monthly Performance

In addition, since remittance trends could grind to a halt or even go negative, why does it seem that the Peso is consolidating if not appreciating (see figure 2) than declining? Has the currency markets been “discounting” the remittance factor?

Of course one may argue that it is still 10 months away from the day of reckoning.

But with some credit indicators materially manifesting easing conditions, some markets have begun to reflect these conditions. Again as shown above Asian currencies appear to be outperforming the other emerging market counterparts. Again further signs of brewing divergences.

Could it be that this isn’t mainly about remittances, or to include about trade account, but one from the diminishing impact of forcible selling in the developed world? Or could this possibly imply that the “spillage effect”, from nearly concerted inflationary policies abroad, may have began regain some traction in pockets of the economy? Or perhaps a combination of both?

If I would apply Winston Churchill’s ``Out of intense complexities, intense simplicities emerge" or adopt Occam Razor’s principle, ``one should not increase, beyond what is necessary, the number of entities required to explain anything” then I would have to say that the state of relative capital (accumulation or consumption) conditions will determine the fate of the currency.

This includes remittances, net trade and portfolio/investment flows- all of which constitutes the Balance of Payment (BoP), combined with forward contracts, derivatives, evolving economic and fiscal policies, the economy’s capital and production structure, national government and central bank balance sheets- all of which likewise contributes to the health of the domestic currency at varying degrees, dependent on the flux of the political economy.

In today financial crisis prompted global recession, the burden could possibly to shift to the extent of the degree of deployment of government resources to “fix” or “cushion” the economy. This means that relative accessibility of liquidity flows and inflationary policies could weigh more on currency values than the traditional metrics.

None of these suggests, however, that we are in denial of the incremental deepening of correlations between the price value of the Peso relative to remittances, and correspondingly, the latter’s intensifying role to the nation’s economic pie overtime.

Where we depart from the mainstream is the apparent patent overplaying of the causality of the said trends relative to the value of the Peso.

Nonetheless, such dramatization by the spinmeisters, as pointed earlier, has been vested with political-financial dimensions. Why? Because of the salability of the concept, which could translate to future votes, justification for bigger government spending on programs aimed to “benefit” the 11% of the GDP sector (against the 89%) or a wider audience for commercial gains.

The irony is that people always claim that they are after the truth, but the sordid reality is that instead of using economic common sense, they NOT only buy into rubbish information but the toxicity of politically slanted “expert” opinion as their version of facts, reality or truth.

Julius Caesar was right, ``People readily believe what they want to believe".

Niall Ferguson: Ascent of Money

Great educational stuff on "money" and today's crisis by Niall Ferguson

The Origin of Money and Today's Mackarel and Animal Farm Currencies

Contrary to common perception money originated not from governments but from free markets,

According to Murray N. Rothbard in What Has Government Done to Our Money?, `` Now just as in nature there is a great variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more widely demanded than others, some are more divisible into smaller units without loss of value, some more durable over long periods of time, some more transportable over large distances. All of these advantages make for greater marketability. It is clear that in every society, the most marketable goods will be gradually selected as the media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media--in almost all exchanges--and these are called money.”

What ideal place to demonstrate this than in the ultimate government controlled living place-Prison Facilities!

In the US, a Californian prison where the US dollar has been banned to circulate within its premises, inmates have elected by implicit virtue of the above dynamics as their alternative currency of choice-cans of Mackarels!

Wall Street Journal

This interesting article from Wall Street Journal (emphasis mine),

``When Larry Levine helped prepare divorce papers for a client a few years ago, he got paid in mackerel. Once the case ended, he says, "I had a stack of macks."

``Mr. Levine and his client were prisoners in California's Lompoc Federal Correctional Complex. Like other federal inmates around the country, they found a can of mackerel -- the "mack" in prison lingo -- was the standard currency.

``"It's the coin of the realm," says Mark Bailey, who paid Mr. Levine in fish. Mr. Bailey was serving a two-year tax-fraud sentence in connection with a chain of strip clubs he owned. Mr. Levine was serving a nine-year term for drug dealing. Mr. Levine says he used his macks to get his beard trimmed, his clothes pressed and his shoes shined by other prisoners. "A haircut is two macks," he says, as an expected tip for inmates who work in the prison barber shop.

``There's been a mackerel economy in federal prisons since about 2004, former inmates and some prison consultants say. That's when federal prisons prohibited smoking and, by default, the cigarette pack, which was the earlier gold standard.

``Prisoners need a proxy for the dollar because they're not allowed to possess cash. Money they get from prison jobs (which pay a maximum of 40 cents an hour, according to the Federal Bureau of Prisons) or family members goes into commissary accounts that let them buy things such as food and toiletries. After the smokes disappeared, inmates turned to other items on the commissary menu to use as currency.”

Oh well, this is definitely a lot better than for society to utterly eschew government’s mandated legal tender similar to that in Zimbabwe where its 531 BILLION PERCENT hyperinflation (Voanews.com) rate has virtually ravaged or evaporated the purchasing power of its currency, enough for the people to reject it and find an alternative...

Courtesy of Zimbabwean

From “The Zimbabwean” Thomas Ncube, 58, who also lives in Dongamuzi, told IRIN he had exchanged all his goats and had nothing left to barter with. "The people who are selling maize are refusing cash, saying the Zimbabwean dollar loses value fast and they only exchange the grain with livestock, and most villagers have become poor from exchanging their livestock for grain." (highlight mine).

Welcome to the Barter economy!

Lesson: When governments take away or devalue money, people will always find an alternative.