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North Korea�s New Currency Collapses
by Joshua Stanton

http://newledger.com/2010/01/22357/

I expected this, but I didn�t expect it to be so sudden, or so dramatic:

The Seoul-based Open Radio for North Korea (ORNK), citing unidentified sources along the Sino-North Korean border, said that merchants were exchanging one yuan for 1,000 new North Korean won as of late last month, plummeting from the 50 won traded for every yuan on Dec. 3, right after Pyongyang introduced the new currency. [Yonhap]

If my math is right, that�s 1,000 percent in less than a month.

Under the move, the communist country knocked two zeros off its currency without warning on Nov. 30 in the first such value adjustment since 1959.

Yet already, the new won is worth half of what the old won was worth:

Before the currency reform took place, 1 yuan was worth around 588 old won, which is equivalent to 5.88 new won.

Open Radio for North Korea is run by a South Korean acquaintance of mine who goes by the name Young Howard. Howard, a former leftist, dissident, political prisoner, and thoroughly enigmatic figure, has assembled a network of North Korean informers who feed him news about events inside North Korea, which he then broadcasts into the North and to the foreign press. Open Radio is now commonly cited by some of the world�s foremost news sources. It cites two reasons for the new currency�s collapse: rumors (that is, a loss of confidence in the regime�s erratic monetary policy), and a new ban on holding or using foreign currency.

The North Korean People�s Safety Agency has declared a �complete prohibition of foreign currency usage.� The decree was issued on December 26th and went into effect on Monday 28th. A source inside North Hamkyung Province reported, �A People�s Safety Agency declaration on banning the use of U.S. dollars, Yuan and the Euro was publicized on the 26th. The declaration was posted in public places and in every workplace starting this morning.�

The title of the declaration is, �On punishing severely those who use foreign currencies within our Republic.� Surprisingly, the targets of the declaration are said to include foreigners visiting North Korea.

A source from Yangkang Province also reported, �From December 28, no foreign currencies can be used. The foreign currencies the declaration meant were dollars, Yuan and the euro.� According to the source, this new regulation was a Cabinet decision, and the People�s Safety Agency is responsible for its implementation. The declaration stipulates, �Not for any reason may individuals or organizations possess any foreign currency, with the exception of banks.� [Daily NK]

The directive from North Korea�s Ministry of People�s Security seen at one of Pyongyang�s commercial markets said that from January 1, residents will not be allowed to directly pay with dollars, euros or other foreign currencies for food, goods and other retail items, Xinhua news agency reported. �Foreigners with foreign currency will also have to exchange it for North Korea�s own currency to use it,� the report added, citing the announcement. [Reuters, Chris Buckley and Jon Herskovitz]

There will be almost no exceptions to this new rule except North Korean banks holding foreign currency after international transactions. For everyone else, we can assume that examples will be duly set:

�The relevant authorities will adopt measures to establish strict order for the circulation of the national currency,� the directive said, according to Xinhua. [....] It also warned that businesses breaking the new restrictions would be shut down and their property confiscated, and illicit foreign exchange deals would be �harshly dealt with.� [Reuters]

The North Hamkyung Province source also cautioned, �Upon the release of this declaration, there will inevitably be someone sent to a prison camp or sentenced to an extreme penalty as a model case. These days, if you are unlucky, you may become the model case for bringing in Yuan or dollars.� [Daily NK]

North Koreans� holdings in foreign currency are very different from their savings in North Korean currency in two ways: first, the regime can print all the dollars we�re willing to let it get away with printing, but it still lacks the unilateral power to cancel dollars, which will always have intrinsic value on the black market. People � especially people with the means to pay extortion money and buy their way out of a prison camp � are still going to hoard them, especially after the regime has given them so much reason to distrust the North Korean currency. The new currency�s value is already plunging, even as the regime struggles to re-set wages and prices.

The second and more important difference is who holds foreign currency in North Korea � aside from foreigners, of course: the elite. Now, having seen the seething discontent the Great Confiscation provoked among the proles, the regime is still willing to confiscate the savings of inner and outer party members, too. That is a real risk, because these are the people who carry the guns. Apparently, at least one person in the South Korean government agrees with me:

�It is difficult to estimate the threat to us that will arise in the aftermath of the currency reform and from the regime instabilities as leader Kim Jong-Il goes ahead with a hereditary power handover,� the minister said in a New Year message to the South�s 655,000-member military. [....]

�North Korea is continuing to expand its armaments despite a lack of food and serious economic challenges,� minister Kim said, calling on the military to stay alert to the potential threat. [AFP, Park Chan Kyong]

When North Korea first announced its Great Confiscation in late November, some analysts said the regime did it to control hyperinflation. If so, it�s going about it in unusual ways. It is now buying up every bag of rice it can find across the Chinese border � to the point where it�s getting hard for Chinese shoppers in the border regions to find any. If the regime (as opposed to food smugglers) is in fact behind this shopping spree, it�s a welcome development � it�s a rare case of the North Korean regime apparently spending foreign exchange money on food instead of goodies like centrifuges, Italian yachts, and Omega Watches. For the regime to shift its priorities in such an unprecedented way � even as the palace economy�s income from weapons sales is being pinched � suggests just how dangerous the men in the palaces think the situation on the streets must be.

The regime has also been handing out stacks of the new currency while continuing to crack down on markets. This means more cash that�s less trusted than ever is chasing less food than ever, which fuels hyperinflation and disincentives farmers and food smugglers from selling food to markets where people can buy it.

(Interestingly, Open Radio is claiming that possible successor Kim Jong Eun is being set up as the fall guy architect of this Great Confiscation.)

But with the new currency now in free fall, the regime must either release its death-grip on the economy � probably for good � or find some way to meet the caloric needs of the people in-kind. The state�s wages are already becoming worthless as quickly as planning committees, who weren�t forewarned of the currency redenomination, try re-set them. Unless the regime finds some way to undo the damage it has done, the likely result is more panic and discontent, and this time, it won�t just affect the proles in the countryside. Historically, however, the regime has gradually relaxed its enforcement of diktats that the majority of people violate of necessity. It may well be that a year from now, the yuan will be North Korea�s de facto currency for large transactions:

The reason for this measure is that there is no confidence in the North Korean currency, so the public preference is for foreign currency holdings, which the authorities cannot regulate easily. Nevertheless, it is unlikely that people will willingly pay their own foreign currency to the state, irrespective of this requirement, while it is likely to end up stoking inflation. The source explained, �For the time being it will be difficult to use foreign currency, but after a while, it may be possible to use it again. Since faith in our money has already dropped, no matter how hard the authorities regulate it, demand for foreign currency will increase.�

For each year since 1994, North Korea�s economy has been slipping progressively out of the regime�s control. So far, the regime has managed to hold onto its control through a combination of arbitrary terror and mutual isolation. Each year, a few more straws are added to the camel�s burden. I believe that popular disgust with the regime is both deep and wide, to a much greater extent than it was in the past, even if that disgust is still unfocused. The big unknown is how many more straws the camel�s back can hold. What we know is that the straws are falling like rain.

[bassexpander]

And now we have snow... anybody know if North Korea got dumped-on too?

[djsmnc]

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[jvalmer]

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[mc_jc]

This brings up an excellent discussion-
You know, during the Cold War, many Eastern Bloc countries issued foreign exchange certificates that could be exchanged for hard currency (E.I., $US). In Cuba today, the Cuban tourist industry is kept alive by the exclusive use of the $US at many of their hotels and resorts.

I would not be surprised if North Koreans used $US on the black market.
Especially given their making of "supernotes"- high denomination fake American banknotes that are difficult to tell the difference between the real ones and these.

[andrewchon]

I wonder: after the Great Leader and Dear Lear, what will the successor be called?

I wonder: whether NK can 'sell' their World Cup spot.
Bahrain is next in line if NK is unable to go.

I once had a job sorting foreign currency donated by tourists at an airport.
(This one had many Chinese tourists coming in)
Strangely more often that not, there were more US$2 notes than US$1 notes.