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The Law of Unintended Consequences-- If I Had Only Invested My Money in Iraqi Dinars
By Dr. Nimrod Raphaeli
03/17/2008

The concept of unintended consequences is one of the building blocks of economics. Adam Smith’s “invisible hand,” the most significant metaphor in social science, is an example of positive unintended consequence. Smith maintained that each individual, seeking only his own gain, is led by the invisible hand to promote an end which was no part of his intention, that end being the public interest. “It is not from the benevolence of the butcher, or the baker, that we expect our dinner,” Smith wrote, “but from regard to their own self-interest.”

The invasion of Iraq five years ago has had many unintended consequences, some positive, some negative. On the positive side, Iraq was able to lay down the foundation, albeit shaky and often uncertain, for democracy and the freedom of the media. It has also started to dismantle, quite vigorously, many of the state instruments of control over the national economy. Of course, the invasion also brought about the dismantling of the Saddam regime and the ultimate demise of the dictator, but these positive outcomes were the cardinal purposes of the invasion, not unintended consequences.

Among the negative unintended consequences, most devastating is the pervasive violence, both domestic and imported, much of it with sectarian overtones. More than two million Iraqis have chosen a life of exile over a life leading to the abyss. Indeed, for many Iraqis, the situation today is far more uncertain and stressful than it was under the Saddam regime. Iraq, which was perhaps one of the most secular countries in the Arab world, has become increasingly under the religious edicts of armed militias that have introduced new standards of religiosity akin to those applied by the theocratic regime of the Iranian Mullahs. Women’s rights have been trampled on and those who dare walk outside the walls of their homes without the veil risk their lives.

Perhaps the most dangerous unintended consequence is that major parts of the country, those particularly rich in oil, have fallen under the hegemony of Iran and its well-financed and well-armed militias.

In a different realm, there is yet another unintended consequence: the fate of the two respective currencies, or legal tenders, of the invaders and the invaded.

Five years ago, when the invasion was under way, the U.S. dollar--the currency of the invader--was the preferred reserve currency of the world. It reigned supreme in the international financial markets. A Euro was not worth a single Greenback. And a dollar would fetch 2,200 Iraqi dinars--the currency of the invaded country--though such a transaction could have taken place only in the black market since trading in foreign currencies under the Saddam regime could bring years of imprisonment, if not a death sentence, to the perpetrators.

Five years later the financial markets have turned on their heads. The erstwhile strong dollar has not merely lost much of its virility; rather it is hobbling on crutches as if it were hit by a truck. Countries whose currencies are pegged to the dollar, and particularly the Gulf oil producing countries, daily wrestle with a Hamlet-like dilemma: to peg or not to peg.

Now, lo and behold, it is the Iraqi dinar, which is freely traded in a market-oriented economy, and which is appreciating twice as rapidly as the dollar is depreciating. To stem the tide, the Central Bank of Iraq has recently set a ceiling on the exchange rate of 1,220 dinars to the dollar. In our calculation, the Iraqi dinar has appreciated by about 80 percent since the invasion while the dollar has depreciated by more than 40 percent against the world’s major currencies, primarily the Euro.

Today one can sigh in misery with the wisdom born of hindsight, If I had only invested my money in the Iraqi dinar!

We are left to wonder what might happen to the dollar if the U.S. were invaded by the European Union. We promise to be more alert to the possibilities.

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