Thread: Explaination of M2 Theory

Took this from another forum, Ialdoboath's post. This is the simplest explaination I have seen so far and it has helped me to understand Socata's and other's posts about this subject. Any thoughts or differing opinions welcome.

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Every Iraqi bill printed is basically an IOU for an American bill.

At 1249:1 the IOU is a promise to pay 1 USD for every 1249 dinar.

However, the more IOU's you write the more USD you are going to owe.

The amount of dinar made (IOU's) is called the M2.

The greater the M2, the greater the promise made.

The theory goes that Iraq has too many IOU's out there to decide to change the promise from being 1249:1 to 1:1.

The assumption is that the CBI does ot have enough USD to cover the promises made if every IOU (every dinar) suddenly becomes worth 1USD.

Thanks! That M2 explanation is very helpful.

Just out of curiosity, how would that work with USD? The USD is an IOU for what? The word of the U.S. government?

Who Knows How Many Dollars Or Gold Has Been Confiscated By The Bush Puppet Government? I Understand That Saddaam Stashed Mucho Cash And Gold Away For Himself And Family.
I Suspect That As The U.s. Bases Everything On The Gnp, So Will They Base Everything On Their Vast Oil And Gas Reserves. People Smarter Than Me Please Comment. I Opened This Discussion By Asking For A Simple Explanation Of The "m2" On The Other Forum.

The problem with the theory is it does not take into account oil. It's not only enough dollars or gold but also oil. The proven oil alone can pay many times for the dinar in circulation. Whether or not they rv, IMHO, is not dependent on the ability to back the dinar at a higher value. The GoI is not considered the supreme authority by the Iraqi citizens. Until the GoI is given the full faith of the people it will have a hard time going forward. I think there is much more going on between the tribes than we think. They are not good things. It's not the leadership of the government that must be changed but the tribes.

Originally Posted by WhoDey

Thanks! That M2 explanation is very helpful.

Just out of curiosity, how would that work with USD? The USD is an IOU for what? The word of the U.S. government?

Hey WhoDey! And Welcome to the club! I am no expert and I will try and answer in a very simplified manner. I believe others have said that at one time, the USD was backed by gold, but now is really only backed by the fact that most oil producing countries trade oil for dollars. Some countries are now changing that and trading in euros because of the decline in dollar, (which I say is a cop out), which in turn is supposedly causing a greater decline in the dollar.

The above is what I believe the dinar experts have said. It is only my interpretation of their opinion. I could be waaaaaay off. Hopefully someone more in the know will step up and make it more clear.

Originally Posted by RetMil

The problem with the theory is it does not take into account oil. It's not only enough dollars or gold but also oil. The proven oil alone can pay many times for the dinar in circulation. Whether or not they rv, IMHO, is not dependent on the ability to back the dinar at a higher value. The GoI is not considered the supreme authority by the Iraqi citizens. Until the GoI is given the full faith of the people it will have a hard time going forward. I think there is much more going on between the tribes than we think. They are not good things. It's not the leadership of the government that must be changed but the tribes.

WHAT YOU SAY MAKES SENSE TO ME . TRYING TO TRANSFORM A TRIBAL SYSTEM INTO A DEMOCRACY HAS TO BE A DAUNTING PROPOSITION. THEREFORE, ALSO, THE OIL, GAS, AND GOLD MUST MAKE THE M2 THEORY UNRELATABLE AND OF NO CONSEQUENCE TO A HEALTHY RV. (IMHO).

Originally Posted by readytogo

Hey WhoDey! And Welcome to the club! I am no expert and I will try and answer in a very simplified manner. I believe others have said that at one time, the USD was backed by gold, but now is really only backed by the fact that most oil producing countries trade oil for dollars. Some countries are now changing that and trading in euros because of the decline in dollar, (which I say is a cop out), which in turn is supposedly causing a greater decline in the dollar.

The above is what I believe the dinar experts have said. It is only my interpretation of their opinion. I could be waaaaaay off. Hopefully someone more in the know will step up and make it more clear.

Actually, the USD has been artificially propped up by the fact that oil was sold exclusively in USD all these years and it was, therefore, the world's reserve currency. That means that other countries kept reserves of USD to back their currencies. The decline in the dollar is not due to the oil countries changing to Euros et al, they are changing because of the decline in both the value and the confidence held in the USD.

The decline in value and confidence is due to the fact that the government has been spending more than they have for umpteen years and the debt is far beyond the country's ability to pay should people/countries want to cash in - even a moderate percentage of them. They've been magically creating money by printing it, selling T-bills, selling bonds, etc. and they stopped reporting the US M2 to prevent us from knowing the full extent of it.

For years, countries kept on and on buying US Treasuries, etc. (especially China) but now they're feeling uncomfortable with the great reliance they have on it and they are reducing their USD reserves and starting to demand Euros or their own currency for their goods.

Many currencies are "pegged" to the USD and that means they maintain the value of their currency to be worth a set amount of USD. For instance, Belize (well, they may have changed it now) kept their currency at 2:1 - two Belize dollars were worth one USD.

Most of the longer established countries have "floated" their currencies and they trade on the Forex: Euros, British Pounds, USD, Swiss, Canadian, et al. Their price changes all the time as people trade - speculators and banks trade all the time and around a trillion dollars worth is traded every day. There is a chain of forex market sites going around the world so it is open nearly all the time and one can trade various sessions (London, Asian, North American).

I hope this is helpful. Sorry if it was a little disjointed - my tenant called to tell me that the basement was full of sewage while I was in the middle of it.

Originally Posted by readytogo

Hey WhoDey! And Welcome to the club! I am no expert and I will try and answer in a very simplified manner. I believe others have said that at one time, the USD was backed by gold, but now is really only backed by the fact that most oil producing countries trade oil for dollars. Some countries are now changing that and trading in euros because of the decline in dollar, (which I say is a cop out), which in turn is supposedly causing a greater decline in the dollar.

The above is what I believe the dinar experts have said. It is only my interpretation of their opinion. I could be waaaaaay off. Hopefully someone more in the know will step up and make it more clear.

Also, oil producing countries that hate the USA... such as Venezuela, Indonesia and Iran... are changing to other currencies in an attempt to bring the USA economy to its knees.

Thanks Greatstuff and Danny. I just loooooove having smart friends in all the right places!

Thanks for the education! And thanks for the welcome, readytogo.

Amazing what investing in a few dinar has done for my outlook...much more global these days. I never understood econ at all in college, de****e my having a fantastic professor. Now after all these years, it's finally starting to make (a little) sense to me.