Thread by @peter_khayat

Instead of opting for full Dollarization of economy, the government of #Lebanon is choosing full Lirafication. Lirafication is how Sulta will control us through hunger. I'll explain it in the following thread.

#كلن_يعني_كلن

Full Dollarization: wipe out LBP entirely from the economy and replace it with USD, or real money that cannot be printed. Ecuador in 2000.

Full Lirafication: wipe out USD from the economy and replace with it LBP, or monopoly money that can be infinitely printed. Venezuela.

We first have to agree that the real value of the USD is the one of the (black) market, not any value artificially set by a central bank. Not 1507 LBP/USD, nor 2600 LBP/USD.

We also have to agree that Banque du Liban (BdL) can indefinitely print LBP but can't print a single USD.

For years, the real value of the USD in Lebanese pound was known by two or three persons, who succeeded in making everyone believe it was 1507 LBP/USD. It may have fluctuated between 1300 and 1700, but the central bank would print LBP (financial engineering) to fix the 1507 peg.

As long as dollars were flowing in the country, the BdL's trick was working. Some months ago, we realized that there were not enough dollars in the country, or, to simplify things, that BdL had printed too much LBP. A parallel market started emerging. 1530 LBP/USD, 1600, 2000...

People, losing more and more faith in LBP, have been rushing to acquire USD. As USD becomes more scarce in Lebanon, people would pay more LBP to acquire it. Dollars are needed for ALL imports, like prime matter needed to produce "Made in Lebanon" fertilizers used for agriculture.

Then came the central bank "Lirafication" circular which instructed financial institution to process all USD and foreign currency operations in LBP and at BdL's artificial/below-market rate, let's say 2600 LBP/USD, with market rate reaching levels above 3500 LBP/USD.

Today, people rushed to OMT to receive their last USD (from abroad) in real USD, because each of these real USD is worth 3500+ LBP on the market, much more than the 2600 LBP of the bank. instagram.com/p/B_Ue1zfpIBD/

USD scarcity in the banking/financial system will now surge, as more dollars will leave Lebanon (imports) and (almost) NO legal dollar will come, because the legal dollar is worth less than actual (cash) dollar. People will prefer to smuggle actual Dollars in.

Instead of flowing into the banking/financial/tax system, the Dollar will be smuggled in Lebanon and fuel/be converted at the black market rate. BdL will keep raising its artificial rate which would always be lower than black/market rate.

So, why would BdL need to print money?

Here is an example. One day, let's say in a month, a distressed USD depositor will want to withdraw, let's say 100 USD, from his account. Bank rate reached 4000 LBP/USD, although market rate was 5000.

The bank, happy to receive USD, will contact BdL, which will approve the conversion. So BdL ships 100x4000 = 400,000 LBP cash to the bank, which is handed to the customer.

But BdL, noticing that its LBP stock was running low, decides to print those 400k LBP to refill the stock

One month later, the same USD depositor comes back and asks for 100 USD. Bank rate is set at 5000 LBP/USD to catch up with the market of now 6000 LBP/USD. So BdL now ships 100x5000 = 500,000 LBP of cash, and prints 500,000 LBP (an extra 100,000 LBP from last time) to restock.

With the USD becoming more and more scarce, BdL prints more and more LBP. Salaries, as well as a big part of the economy, are still the same and in LBP, while everything costs more and more, in supermarkets for instance. Supermarket prices explained here:

https://twitter.com/peter_khayat/status/1252294525588066304

At some point, the government will increase salaries in LBP, and this will only boost black market rate. To simplify, think of it as BdL printing more LBP to pay its expenses like salaries. Bottom line, Lirafication = more worthless LBP in the country and way less USD (imports).

You have seen those "food boxes" being distributed to the most vulnerable. Lirafication will cause a surge in the number of those vulnerable, and the government would give more of these boxes. Well you know, each politician to its followers. Venezuela: en.wikipedia.org/wiki/Local_Com…

With Lirafication, the dollar could shoot to infinity liras. The only solution to stop the tragedy is dollarization. It hurts a lot on the short-term, but saves the economy from total collapse, stops inflation, and allows dollars to flow in the country. Here is how it goes.

BdL sets a high LBP/USD rate, let's say 7000 LBP/USD, takes out all LBP banknotes from circulation and changes them for USD at that rate. Same for LBP bank accounts. Practically, no one ever mentions LBP again. All salaries are changed to USD at that rate.

A parenthesis here. Why 7000 LBP/USD?

Lebanon has:

$115b in deposits
$26b real dollars in the country
or 22.6%

1507.5/(22.6%) = 6670.

So let's say 7000 is a good devaluation for dollarization.

It hurts to say that the minimum wage would probably become 100 USD, down from the 450 USD pre-crisis, but at least those are actual 100 USD, not some value in LBP that could one day be worth 10 USD or even less.

Venezuela, which has been suffering from a similar FX crisis, waited too much and missed its dollarization opportunity. The monthly minimum wage in Venezuela is now worth less than 2 USD. TWO DOLLARS A MONTH. Lebanon and Venezuela similarity thread:

https://twitter.com/peter_khayat/status/1220072937069449216

Lebanon should learn from Venezuela's mistake and follow Ecuador's example, which applied dollarization in 2000. Dollarization should be immediate. An article about How Dollarization Saved Ecuador's Economy worldcrunch.com/business-finan…

Bonus: how to deal with the LBP cash you have. If the black market rate is:
1- falling, stable or rising slowly: buy USD.
2- rising fast: buy goods intelligently. Have in mind the USD-price of the product in 2018, and if it is lower than the current USD price at black market, buy