I agree with you all. This is saying that the introduction of the 50 k note will “complete” the series, meaning that all of the other notes remain legal tender. This has nothing to do with the plan to reduce the note count itself, which will still occur.
This is proven by the statement that the introduction of the larger notes will not be inflationary. In other words, they will exchange two 25k notes for each 50k note introduced, thus not affecting the overall money supply. Otherwise there would be inflation, which they specifically deny.
Enorrste: Mike is generally correct. However, his discussion doesn’t take into account the fact that the CBI plan is two-fold: first to reduce the paper count from 4 billion notes to 1 billion notes: and second to reduce the total money supply from 40 trillion dinars to 40 billion dinars.
The introduction of the larger 50k and 100k notes in itself only deals with the first objective, reducing the paper count. However, this alone would not reduce the paper from 4 billion pieces to 1 billion. At most it might reduce them from 4 billion to 2 billion, and probably not even that much since there are also the 1000, 5,000, and 10000 dinar notes incirculation.
Therefore, in addition to the even exchange (two 25k notes for one 50k note, for instance), the CBI will also be reducing the circulation even farther by removing 25k notes directly from the market.
This will reduce the total value of the money supply from 40 trillion dinars to 40 billion dinars over time. In the process of reducing the value of the money supply the value of an individual dinar rises.
It is this rise that will increase demand for dinars as opposed to dollars. The savy Iraqi will see that, over time, he gets “more bang for his dinar” than he does for his buck. It is through this second method that the CBI will raise the value of the dinar.
The introduction of the 50k note in and of itself has no affect on the value of the dinar, as Mike rightly points out. It is only the second action, a further reduction in paper and value of the total money supply, that will raise the value of the dinar and through that process reduce the demand for dollars. As the demand for dollars is reduced the reserves of Iraq are made more secure, which will also help support the risiing value of the dinar.
Enorrste: bye the sea – There are not 39 trillion notes. There are only 4 billion notes, according to the CBI, and they want to reduce that to 1 billion notes. There is a value of the money supply of 39 trillion dinars.
As the value per dinar rises to $1 and probably more, the note count falls which causes the rise in the value. At the end, the note count is 1 billion notes worth $40 billion, just as the 4 billion notes are now worth $40 billion. Thus there is enough money to go around ($1000 worth per person, and if you eliminate the children it is much higher).
Enorrste: Mike – you are correct: the introduction of the larger 50k notes won’t change the money supply value. Only burning more of the 25000 dinar notes than they exchange for the 50k notes will lower the value of the money supply. They will have to destroy, say, 3 of the 25k notes for every 50k note that gets issued. This will reduce the money supply.
Below are News Titles & Links Referenced in Discussion:
Central Bank: the issuance of 50 thousand dinars category will not be accompanied by the withdrawal of any other category of trading November 25, 2015 Alsumaria News / Baghdad, LINK
Central Bank: the issuance of 50 thousand dinars will not be accompanied by the withdrawal of any class of trading
CBI responds on Notes about the issuing 50 000 dinars currencyWednesday, 25 November 2015 Shafaq News / LINK
Drag to any category of cash in exchange for the new currency 2015/11/25 BAGHDAD / Obelisk: LINK
Central Bank: the issuance of 50 thousand dinars will not be accompanied by the withdrawal of any other category
Project will lead to reducing the rate of the national currency in circulation from four billion to one billion notes.
Here’s the definition of money supply:
In economics, the money supply or money stock, is the total amount of monetary assets available in an economy at a specific time. There are several ways to define “money,” but standard measures usually include currency in circulation and demand deposits (depositors’ easily accessed assets on the books of financial institutions).
Money supply data are recorded and published, usually by the government or the central bank of the country. Public and private sector analysts have long monitored changes in money supply because of its effects on the price level, inflation, the exchange rate and the business cycle.
That relation between money and prices is historically associated with the quantity theory of money. There is strong empirical evidence of a direct relation between money-supply growth and long-term price inflation, at least for rapid increases in the amount of money in the economy.
For example, a country such as Zimbabwe which saw extremely rapid increases in its money supply also saw extremely rapid increases in prices (hyperinflation). This is one reason for the reliance on monetary policy as a means of controlling inflation.
The nature of this causal chain is the subject of contention. Some heterodox economists argue that the money supply is endogenous (determined by the workings of the economy, not by the central bank) and that the sources of inflation must be found in the distributional structure of the economy.
In addition, those economists seeing the central bank’s control over the money supply as feeble say that there are two weak links between the growth of the money supply and the inflation rate. First, in the aftermath of a recession, when many resources are underutilized, an increase in the money supply can cause a sustained increase in real production instead of inflation.
Second, if the velocity of money (i.e., the ratio between nominal GDP and money supply) changes, an increase in the money supply could have either no effect, an exaggerated effect, or an unpredictable effect on the growth of nominal GDP.