Open Market Operations aka "Currency Auctions"

[HopefulTxn]

Given the statements regarding the contractionary part, it does not seem to be referring to the daily currency auctions, but rather the semi-monthly CBI T-Bill auctions.

"A central bank can use open market operations to reduce the monetary base. The central bank would typically sell bonds in exchange for hard currency. When the central bank collects this hard currency payment, it removes that amount of currency from the economy, thus contracting the monetary base."

Here is the link for the CBI T-Bill auctions - http://www.cbi.iq/index.php?pid=CbiAuctions

If it is referring to the T-Bills, then the quantity removed per year would be significantly less than originally thought because those auctions are for 100 billion dinar. Twice per month would equate to 2.4 trillion dinars annually, not 24 trillion dinar as stated above.

[randalln]

20 you now know what sonny1 and his professors friends have known for a long time now. As I have stated on numerous occasions, the CBI has been removing 000 notes from circulation for some time. Now all you have to do is try and convince the lopsters of this. I gave up a long time ago. I tried posting that the CBI was buying dinar but it seems every time I did I was told I was wrong and I refuse to argue on a forum. You have said it in a way I couldn't. Great job my friend. Let's see which lopster speaks up first.

I will help you spec

THE CBI IS BUYING DINAR AND SELLING DOLLARS......................................

AND HAS BEEN FOR 5 YEARS..................................................2006

Edited August 8, 2011 by randalln

[20MillionDinar]

Given the statements regarding the contractionary part, it does not seem to be referring to the daily currency auctions, but rather the semi-monthly CBI T-Bill auctions.

"A central bank can use open market operations to reduce the monetary base. The central bank would typically sell bonds in exchange for hard currency. When the central bank collects this hard currency payment, it removes that amount of currency from the economy, thus contracting the monetary base."

Here is the link for the CBI T-Bill auctions - http://www.cbi.iq/in...pid=CbiAuctions

If it is referring to the T-Bills, then the quantity removed per year would be significantly less than originally thought because those auctions are for 100 billion dinar. Twice per month would equate to 2.4 trillion dinars annually, not 24 trillion dinar as stated above.

The following is in regards to the U.S. Fed. Can't find too much in regards to the CBI's OMO details:

Open Market Operations

The other major tool available to the Fed is open market operations (OMO), which involves the Fed buying or selling Treasury bonds in the open market. This practice is akin to directly manipulating interest rates in that OMO can increase or decrease the total supply of money and also affect interest rates. Again, the logic of this process is rather simple.

If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. Therefore, OMO has a direct effect on money supply. OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase.

So, OMO has the same effect of lowering rates/increasing money supply or raising rates/decreasing money supply as direct manipulation of interest rates. The real difference, however, is that OMO is more of a fine-tuning tool because the size of the U.S. Treasury bond market is utterly vast and OMO can apply to bonds of all maturities to affect money supply.

Read more: http://www.investope...p#ixzz1UP3CRiMc

When there is an increased demand for base money, action is taken in order to maintain the short term interest rate (that is, to increase the supply of base money). The central bank goes to the open market to buy a financial asset such as government bonds, foreign currency or gold. To pay for this, bank reserves in the form of new base money (for example newly printed cash) is transferred to the sellers bank, and the sellers account is credited. Thus, the total amount of base money in the economy has increased. Conversely, if the central bank sells these assets in the open market, the amount of base money that the buyer's bank holds decreases, effectively destroying base money.

HopefulTxn - Notice how this states: The central bank goes to the open market to buy a financial asset such as government bonds, foreign currency, or gold? Conversely, if the central bank sells these assets (government bonds, foreign currency, or gold) in the open market, the amount of base money that the buyer's bank holds decreases, effectively destroying base money.

I think it would be safe to say they can and do sell government bonds, foreign currency, or gold. It is also probably safe to say that they sell more USD since that is what accounts for 95% of their GDP through sales of oil. Unless you can prove otherwise that is what I am basing my information off of.

[watercop]

Tnanks for this thread. This is the kind of threads I look for.

[estewart]

WHOA! This has been like getting a peek behind the curtain.

[binko]

I saw those daily currency auctions there and considered that they were actually selling dinar for USD. !!!! ie the other way around.

I mean hey, where do all these dinarbanker and the likes get their masses of spanking new bills?

So I see it as highly expansionary! And to the reverse end!

They quote the auctions in USD and I assume USD equivalent because they are raking in USD from brokers who get it from you and me.

Prove if you can that they are buying back dinar........coz I say its the other way around.

Just saying IMO..........wish it weren't so but.......realism is where I am at.

20 you now know what sonny1 and his professors friends have known for a long time now. As I have stated on numerous occasions, the CBI has been removing 000 notes from circulation for some time. Now all you have to do is try and convince the lopsters of this. I gave up a long time ago. I tried posting that the CBI was buying dinar but it seems every time I did I was told I was wrong and I refuse to argue on a forum. You have said it in a way I couldn't. Great job my friend. Let's see which lopster speaks up first.

I sure hope you are right!

Isn't there anyway to find someone who really knows whether dinar or $$ are being sold at the auctions?

Also, I heard that the US forces are being paid in dinar not USD these days......so they must be getting lots of 000s out to the market , not removing them. This is not consistent. Can you explain this? Thanks.

[20MillionDinar]

I saw those daily currency auctions there and considered that they were actually selling dinar for USD. !!!! ie the other way around.

I mean hey, where do all these dinarbanker and the likes get their masses of spanking new bills?

So I see it as highly expansionary! And to the reverse end!

They quote the auctions in USD and I assume USD equivalent because they are raking in USD from brokers who get it from you and me.

Prove if you can that they are buying back dinar........coz I say its the other way around.

Just saying IMO..........wish it weren't so but.......realism is where I am at.

I sure hope you are right!

Isn't there anyway to find someone who really knows whether dinar or $ are being sold at the auctions?

Also, I heard that the US forces are being paid in dinar not USD these days......so they must be getting lots of 000s out to the market , not removing them. This is not consistent. Can you explain this? Thanks.

I will try and find your proof! Just give me some time.

[GI_Jane]

Thank you so much. I've been having a hard time understanding all of the "technicalities" involved in the money. You have helped a simpleton understand what's happening behind the scenes. Now, I feel much more informed. Kudo's to you sir.

[randalln]

I saw those daily currency auctions there and considered that they were actually selling dinar for USD. !!!! ie the other way around.

I mean hey, where do all these dinarbanker and the likes get their masses of spanking new bills?

So I see it as highly expansionary! And to the reverse end!

They quote the auctions in USD and I assume USD equivalent because they are raking in USD from brokers who get it from you and me.

Prove if you can that they are buying back dinar........coz I say its the other way around.

Just saying IMO..........wish it weren't so but.......realism is where I am at.

I sure hope you are right!

Isn't there anyway to find someone who really knows whether dinar or $ are being sold at the auctions?

Also, I heard that the US forces are being paid in dinar not USD these days......so they must be getting lots of 000s out to the market , not removing them. This is not consistent. Can you explain this? Thanks.

they are selling dollars Its the central bank this( $ )means DOLLAR why would the central bank of a country sell their own notes?central banks sell DEBT. not notes

Iraq has no debt it is already payed they have a surplus on there books because no one has there notes in there central banks YET(a note is DEBT )

YOU have there debt on your books because you hold there promissory note(and thats as simple as it gets)

And they are buying dinar from their banks (in country) thats what central banks do..............

[sandyf]

I saw those daily currency auctions there and considered that they were actually selling dinar for USD. !!!! ie the other way around.

I mean hey, where do all these dinarbanker and the likes get their masses of spanking new bills?

So I see it as highly expansionary! And to the reverse end!

They quote the auctions in USD and I assume USD equivalent because they are raking in USD from brokers who get it from you and me.

Prove if you can that they are buying back dinar........coz I say its the other way around.

Just saying IMO..........wish it weren't so but.......realism is where I am at.

I sure hope you are right!

Isn't there anyway to find someone who really knows whether dinar or $$ are being sold at the auctions?

Also, I heard that the US forces are being paid in dinar not USD these days......so they must be getting lots of 000s out to the market , not removing them. This is not consistent. Can you explain this? Thanks.

If you look at the Arabic version of the CBI website you will see that they sell the dollars at 1183. That is an exchange rate of 1170 plus 13 dinars per dollar commission.

It cannot be much clearer than that, unless you have already closed your mind on the subject.

[speculatorsRIDE]

I saw those daily currency auctions there and considered that they were actually selling dinar for USD. !!!! ie the other way around.

I mean hey, where do all these dinarbanker and the likes get their masses of spanking new bills?

So I see it as highly expansionary! And to the reverse end!

They quote the auctions in USD and I assume USD equivalent because they are raking in USD from brokers who get it from you and me.

Prove if you can that they are buying back dinar........coz I say its the other way around.

Just saying IMO..........wish it weren't so but.......realism is where I am at.

I sure hope you are right!

Isn't there anyway to find someone who really knows whether dinar or $$ are being sold at the auctions?

Also, I heard that the US forces are being paid in dinar not USD these days......so they must be getting lots of 000s out to the market , not removing them. This is not consistent. Can you explain this? Thanks.

Not sure where you heard that our forces were being paid in IQD but I can assure you this is not true. The United States Government pays our military in US Dollars. Always have and always will.

[20MillionDinar]

I saw those daily currency auctions there and considered that they were actually selling dinar for USD. !!!! ie the other way around.

I mean hey, where do all these dinarbanker and the likes get their masses of spanking new bills?

So I see it as highly expansionary! And to the reverse end!

They quote the auctions in USD and I assume USD equivalent because they are raking in USD from brokers who get it from you and me.

Prove if you can that they are buying back dinar........coz I say its the other way around.

Just saying IMO..........wish it weren't so but.......realism is where I am at.

I sure hope you are right!

Isn't there anyway to find someone who really knows whether dinar or $ are being sold at the auctions?

Also, I heard that the US forces are being paid in dinar not USD these days......so they must be getting lots of 000s out to the market , not removing them. This is not consistent. Can you explain this? Thanks.

Binko - I found your proof! Now I don't want anybody on this site to ever question whether or not the CBI buys or sells IQD or USD... LOL

Middle East Economic Survey

VOL. XLVIII

No 18

2-May-2005

The Foreign Exchange Auction In Iraq

By Simon Gray

Simon Gray is Adviser, Markets and Financial Infrastructure, Centre for Central Banking Studies (CCBS), Bank of England. During his secondment to the Coalition Provisional Authority (CPA) in Baghdad, he was Senior Advisor to the Central Bank of Iraq. He wrote this article for MEES.

The Central Bank of Iraq (CBI) introduced a foreign exchange auction on 4 October 2003, just under a fortnight before the start of the currency exchange (which replaced the old banknotes, and ran from 15 October to 15 January 2004). The timing was to a large extent dictated by that of the currency exchange, but the underlying need reflects Iraq’s position as a major oil-exporting country.

Background

The government’s revenue is predominantly in US dollars, from oil sales. To this extent, Iraq’s position is similar to that of many countries in the region. And in common with many countries in the region, its expenditure is largely in domestic currency, in this case Iraqi dinar. The Ministry of Finance therefore needs to sell dollars for dinar.

Typically, a Ministry of Finance with foreign currency revenues will sell surplus foreign exchange (it will use some for the purchase of imports for government projects etc; and may keep some in a separate oil stabilization fund) to the central bank; and the central bank will on-sell dollars to the market, via the banking system. Under a fixed exchange rate regime – and many oil-exporting countries in the region operate such a policy – it is clear at what rate the Ministry should sell to the central bank. The central bank can then on-sell, at the same rate, whenever banks request dollars. Prior to the war, Iraq operated a fixed exchange rate regime (albeit with a hopelessly non-market exchange rate), supported by exchange controls. But post war, the central bank was not in a position to operate a fixed exchange rate regime, and in any case did not want to lock into the exchange rate prevailing at the time.1

From the end of the war though summer 2003, the exchange rate was purely market-determined – the market in question being a street market for physical cash in three main locations in Baghdad. But the Ministry and central bank did not need to make use of this market, as official expenditure at that time was mostly in US dollar bills.2 From October, things had to change. Once the currency exchange was under way (from 15 October), it was clearly important – if only from a political point of view – for the government to make disbursements in the new Iraqi dinar, rather than predominantly in dollars as had been the case since May. This meant that the Ministry needed a reference rate at which it could sell dollars to the central bank; and the central bank needed a mechanism for on-selling dollars to the market. Without a mechanism to rechannel dollars to the economy, there would have been two consequences:

A shortage of dollars could hit the dinar exchange rate, leading potentially to a very sharp depreciation;

A dollar shortage would also cut off import supply, pushing up prices sharply. (Large amounts of dollar expenditure by the CPA and MoF had, predictably, fed through to a huge increase in imports, as previously suppressed demand could now be satisfied.)

Associating the introduction of the ‘new’ currency with sharp depreciation, cutting of the supply of consumer goods, and a hike in prices for those goods still available would have been disastrous.

An Auction As The Solution

The solution was to introduce a foreign exchange auction. This was kick-started by the CBI selling a small amount of its foreign exchange reserves to the market. Thereafter, the auction rate could be used for MoF dollar sales to the CBI (so that it would be a genuine market rate, rather than something based on a straw poll of street exchanges); and the market could bid for dollars in the auction to meet the level of demand. If demand was excessive, the rate would adjust.

We were aware that, once the new currency was available, the MoF would be selling several hundred million dollars a month to the CBI, and that auctions could easily exceed $10mn a time as the domestic demand generated by government expenditure (payment of salaries, pensions etc) fed though to import demand (since many consumer goods had to be imported), and thus demand for foreign currency. It was important to prepare the market for the auction system, and ideally to have a mechanism up and running, before the amounts became large. This meant starting in early October at the latest.

The full details of the auction need not be covered here. Importantly, several meetings were held with the commercial banks and the non-bank licensed foreign exchange dealers to discuss the mechanics and the purpose of the auction. Three dry runs of the auction were held, to give participants a better feel and ensure the mechanics worked. The first dry run was very messy; but by the end everyone understood not only how to complete bidding forms correctly, but how to participate in the price formation process and learn from the previous auctions.

All the banks and foreign exchange dealers also understood how the CBI would participate. It would look at the volume and price of bids from the market before deciding on its own participation, so that it could choose the cut-off rate. Clearly, no central bank can have full freedom in this: trying to keep the dinar too strong could lead to an unsustainable drain on limited reserves, while trying to hold back appreciation could have an inflationary impact. But at the margin, and for a time, the CBI could influence the rate. Since the market is allowed to participate in the auction in either direction (buying or selling dollars), it is possible that the central bank will not need to participate at all. But in practice there will nearly always be a large net demand for foreign currency by the market

.

Banks and licensed foreign exchange dealers were allowed to submit bids directly to the central bank; but the dealers had to accompany their bids by a confirmation from their bank that funds were available to honor the bid, if successful. Settlement is book-entry only, across accounts at the central bank. Most bids are made in the 15-30 minutes before the cut-off time for the auction; and results are published 30 minutes after the close of bidding. Details can be found on the CBI website (). Settlement is same-day. The short time-scale – only possible with book-entry settlement – helps to keep the auction and the rest of the market in line with each other.

The Auction, Exchange Rate Policy And Inflation

The first auction was held on 4 October 2003, and received a single bid, for $20,000. There was some debate about whether to accept it, since it was arguably below the market rate. But the CBI decided it was important to give a positive signal to the banks, to encourage participation in the future, and the bid was accepted. Within a couple of weeks, the bid rate at the auction and the street price – CBI staff went out three times a day to check prices at a range of locations (preferring those where prices were displayed, rather than given in response to a request) – had merged; and volumes were soon close to $10mn3. The majority of Iraqi banks participate regularly.

The CBI has said regularly in the auction result announcements that its aim is to achieve broad exchange rate stability, in order to support domestic price stability. There is no exchange rate target or band. The CBI has been able to meet demand, and there is not enough economic information for the market to take a strong view on what an ‘appropriate’ level of the exchange rate might be, certainly not to push for change in the rate.

But while the ‘right level’ was not clear, the CBI could be confident that excessive volatility was harmful. After the massive shocks to the economy and to society more widely in the previous months, it was important as far as possible to engender an atmosphere of stability – particularly in the early days of the currency exchange, when many Iraqis would see their income switching from dollar cash to new dinars. In any case, in view of the upward stickiness of some prices, it was likely that exchange rate volatility would tend to increase the level of inflation.

Especially in the early days, it was not clear what a ‘normal’ level of day to day volatility might be, since there was no ‘normal’ period to compare with. The chart above shows the daily returns on holdings of new Iraqi dinar, and clearly indicates much more volatility in the early days of the auction, and of the currency exchange, than more recently. Two particular spikes in the chart – in early December and mid January – can be linked to the announcement of Saddam’s capture (when it was not clear what the long term impact would/should be), and the end of the currency exchange, when the trend appreciation of the dinar (arguably starting with Saddam’s capture) led to ‘irrational exuberance’.

In the former case, the CBI made no attempt to stand against the trend, but did help to smooth it by the level and rate of its participation in the auctions. By contrast, the very sharp appreciation of the dinar in early January seemed unwarranted and almost certainly unsustainable; and it was clearly upsetting the market4. On this occasion – on 15 January 2004 – the CBI bought a small amount of dollars at the auction, and indicated that the recent appreciation of the dinar ‘was not supported by any recent political or economic announcements’. In other words, the CBI again avoided taking a stance on the appropriate level of the exchange rate, but merely noted that nothing had changed recently which would justify the very sharp movements in preceding days. Similar action in January 2005, just ahead of the national elections, was also undertaken in response to an increase in volatility, but otherwise the market has been remarkably quiet.

Reducing exchange rate volatility, and then supporting a remarkably stable nominal exchange rate since the beginning of 2004, has proved to be a very powerful tool in meeting the CBI’s objective of low domestic inflation (formalized in the new CBI law, dated 6 March 2004). In Iraq, as in many commodity-exporting open economies, there is a rapid pass-through from the exchange rate to domestic inflation. The correlation is bound to be unstable, as it will be affected by expectations, changes in the level of demand (eg reflecting changes in the security situation), changes in the direct costs of importing goods in an unsafe environment, and periodic supply disruptions. But prima facie, there is strong evidence that a stable exchange rate has helped to support price stability.

In fact, there were differing exchange rates depending on the denomination of note used (with a difference of 25-30%); and the rate was very unstable. The ID10,000 note was not widely accepted at face value, in part because of (legitimate) counterfeit concerns; and the smaller-denomination ID250 notes (worth around $0.12 at the time) could not be printed fast enough. Within a year of the first auction daily turnover was regularly over $25mn. In the words of a senior official at Rafidain on the evening of 14 January: "The market is going crazy. People are offering 1,000 for the dollar. What are you doing about it?"

More Information:

http://www.bankofeng.../pdf/lshb05.pdf (Banking in Low Income Countries by Simon T. Gray)

http://pubs.aeaweb.o...895330042162395

http://www.nps.edu/A...ooneyJul04.html

http://www.bos.frb.o...04/ppdp0401.pdf

Read more: http://dinarvets.com/forums/index.php?/topic/78815-cbi-currency-auctions/#ixzz1UPp0hDDr

[20MillionDinar]

Sorry - Repost

Edited August 8, 2011 by 20MillionDinar

[binko]

Binko - I found your proof! Now I don't want anybody on this site to ever question whether or not the CBI buys or sells IQD or USD... LOL

Middle East Economic Survey

VOL. XLVIII

No 18

2-May-2005

The Foreign Exchange Auction In Iraq

By Simon Gray

Simon Gray is Adviser, Markets and Financial Infrastructure, Centre for Central Banking Studies (CCBS), Bank of England. During his secondment to the Coalition Provisional Authority (CPA) in Baghdad, he was Senior Advisor to the Central Bank of Iraq. He wrote this article for MEES.

The Central Bank of Iraq (CBI) introduced a foreign exchange auction on 4 October 2003, just under a fortnight before the start of the currency exchange (which replaced the old banknotes, and ran from 15 October to 15 January 2004). The timing was to a large extent dictated by that of the currency exchange, but the underlying need reflects Iraq’s position as a major oil-exporting country.

Background

The government’s revenue is predominantly in US dollars, from oil sales. To this extent, Iraq’s position is similar to that of many countries in the region. And in common with many countries in the region, its expenditure is largely in domestic currency, in this case Iraqi dinar. The Ministry of Finance therefore needs to sell dollars for dinar.

Typically, a Ministry of Finance with foreign currency revenues will sell surplus foreign exchange (it will use some for the purchase of imports for government projects etc; and may keep some in a separate oil stabilization fund) to the central bank; and the central bank will on-sell dollars to the market, via the banking system. Under a fixed exchange rate regime – and many oil-exporting countries in the region operate such a policy – it is clear at what rate the Ministry should sell to the central bank. The central bank can then on-sell, at the same rate, whenever banks request dollars. Prior to the war, Iraq operated a fixed exchange rate regime (albeit with a hopelessly non-market exchange rate), supported by exchange controls. But post war, the central bank was not in a position to operate a fixed exchange rate regime, and in any case did not want to lock into the exchange rate prevailing at the time.1

From the end of the war though summer 2003, the exchange rate was purely market-determined – the market in question being a street market for physical cash in three main locations in Baghdad. But the Ministry and central bank did not need to make use of this market, as official expenditure at that time was mostly in US dollar bills.2 From October, things had to change. Once the currency exchange was under way (from 15 October), it was clearly important – if only from a political point of view – for the government to make disbursements in the new Iraqi dinar, rather than predominantly in dollars as had been the case since May. This meant that the Ministry needed a reference rate at which it could sell dollars to the central bank; and the central bank needed a mechanism for on-selling dollars to the market. Without a mechanism to rechannel dollars to the economy, there would have been two consequences:

A shortage of dollars could hit the dinar exchange rate, leading potentially to a very sharp depreciation;

A dollar shortage would also cut off import supply, pushing up prices sharply. (Large amounts of dollar expenditure by the CPA and MoF had, predictably, fed through to a huge increase in imports, as previously suppressed demand could now be satisfied.)

Associating the introduction of the ‘new’ currency with sharp depreciation, cutting of the supply of consumer goods, and a hike in prices for those goods still available would have been disastrous.

An Auction As The Solution

The solution was to introduce a foreign exchange auction. This was kick-started by the CBI selling a small amount of its foreign exchange reserves to the market. Thereafter, the auction rate could be used for MoF dollar sales to the CBI (so that it would be a genuine market rate, rather than something based on a straw poll of street exchanges); and the market could bid for dollars in the auction to meet the level of demand. If demand was excessive, the rate would adjust.

We were aware that, once the new currency was available, the MoF would be selling several hundred million dollars a month to the CBI, and that auctions could easily exceed $10mn a time as the domestic demand generated by government expenditure (payment of salaries, pensions etc) fed though to import demand (since many consumer goods had to be imported), and thus demand for foreign currency. It was important to prepare the market for the auction system, and ideally to have a mechanism up and running, before the amounts became large. This meant starting in early October at the latest.

The full details of the auction need not be covered here. Importantly, several meetings were held with the commercial banks and the non-bank licensed foreign exchange dealers to discuss the mechanics and the purpose of the auction. Three dry runs of the auction were held, to give participants a better feel and ensure the mechanics worked. The first dry run was very messy; but by the end everyone understood not only how to complete bidding forms correctly, but how to participate in the price formation process and learn from the previous auctions.

All the banks and foreign exchange dealers also understood how the CBI would participate. It would look at the volume and price of bids from the market before deciding on its own participation, so that it could choose the cut-off rate. Clearly, no central bank can have full freedom in this: trying to keep the dinar too strong could lead to an unsustainable drain on limited reserves, while trying to hold back appreciation could have an inflationary impact. But at the margin, and for a time, the CBI could influence the rate. Since the market is allowed to participate in the auction in either direction (buying or selling dollars), it is possible that the central bank will not need to participate at all. But in practice there will nearly always be a large net demand for foreign currency by the market

.

Banks and licensed foreign exchange dealers were allowed to submit bids directly to the central bank; but the dealers had to accompany their bids by a confirmation from their bank that funds were available to honor the bid, if successful. Settlement is book-entry only, across accounts at the central bank. Most bids are made in the 15-30 minutes before the cut-off time for the auction; and results are published 30 minutes after the close of bidding. Details can be found on the CBI website (). Settlement is same-day. The short time-scale – only possible with book-entry settlement – helps to keep the auction and the rest of the market in line with each other.

The Auction, Exchange Rate Policy And Inflation

The first auction was held on 4 October 2003, and received a single bid, for $20,000. There was some debate about whether to accept it, since it was arguably below the market rate. But the CBI decided it was important to give a positive signal to the banks, to encourage participation in the future, and the bid was accepted. Within a couple of weeks, the bid rate at the auction and the street price – CBI staff went out three times a day to check prices at a range of locations (preferring those where prices were displayed, rather than given in response to a request) – had merged; and volumes were soon close to $10mn3. The majority of Iraqi banks participate regularly.

The CBI has said regularly in the auction result announcements that its aim is to achieve broad exchange rate stability, in order to support domestic price stability. There is no exchange rate target or band. The CBI has been able to meet demand, and there is not enough economic information for the market to take a strong view on what an ‘appropriate’ level of the exchange rate might be, certainly not to push for change in the rate.

But while the ‘right level’ was not clear, the CBI could be confident that excessive volatility was harmful. After the massive shocks to the economy and to society more widely in the previous months, it was important as far as possible to engender an atmosphere of stability – particularly in the early days of the currency exchange, when many Iraqis would see their income switching from dollar cash to new dinars. In any case, in view of the upward stickiness of some prices, it was likely that exchange rate volatility would tend to increase the level of inflation.

Especially in the early days, it was not clear what a ‘normal’ level of day to day volatility might be, since there was no ‘normal’ period to compare with. The chart above shows the daily returns on holdings of new Iraqi dinar, and clearly indicates much more volatility in the early days of the auction, and of the currency exchange, than more recently. Two particular spikes in the chart – in early December and mid January – can be linked to the announcement of Saddam’s capture (when it was not clear what the long term impact would/should be), and the end of the currency exchange, when the trend appreciation of the dinar (arguably starting with Saddam’s capture) led to ‘irrational exuberance’.

In the former case, the CBI made no attempt to stand against the trend, but did help to smooth it by the level and rate of its participation in the auctions. By contrast, the very sharp appreciation of the dinar in early January seemed unwarranted and almost certainly unsustainable; and it was clearly upsetting the market4. On this occasion – on 15 January 2004 – the CBI bought a small amount of dollars at the auction, and indicated that the recent appreciation of the dinar ‘was not supported by any recent political or economic announcements’. In other words, the CBI again avoided taking a stance on the appropriate level of the exchange rate, but merely noted that nothing had changed recently which would justify the very sharp movements in preceding days. Similar action in January 2005, just ahead of the national elections, was also undertaken in response to an increase in volatility, but otherwise the market has been remarkably quiet.

Reducing exchange rate volatility, and then supporting a remarkably stable nominal exchange rate since the beginning of 2004, has proved to be a very powerful tool in meeting the CBI’s objective of low domestic inflation (formalized in the new CBI law, dated 6 March 2004). In Iraq, as in many commodity-exporting open economies, there is a rapid pass-through from the exchange rate to domestic inflation. The correlation is bound to be unstable, as it will be affected by expectations, changes in the level of demand (eg reflecting changes in the security situation), changes in the direct costs of importing goods in an unsafe environment, and periodic supply disruptions. But prima facie, there is strong evidence that a stable exchange rate has helped to support price stability.

In fact, there were differing exchange rates depending on the denomination of note used (with a difference of 25-30%); and the rate was very unstable. The ID10,000 note was not widely accepted at face value, in part because of (legitimate) counterfeit concerns; and the smaller-denomination ID250 notes (worth around $0.12 at the time) could not be printed fast enough. Within a year of the first auction daily turnover was regularly over $25mn. In the words of a senior official at Rafidain on the evening of 14 January: "The market is going crazy. People are offering 1,000 for the dollar. What are you doing about it?"

More Information:

http://www.bankofeng.../pdf/lshb05.pdf (Banking in Low Income Countries by Simon T. Gray)

http://pubs.aeaweb.o...895330042162395

http://www.nps.edu/A...ooneyJul04.html

http://www.bos.frb.o...04/ppdp0401.pdf

Read more: http://dinarvets.com/forums/index.php?/topic/78815-cbi-currency-auctions/#ixzz1UPp0hDDr

20M Many thanks for that! Mucho appreciato. And to the several others who responded to my post - thanks also.

[dinarck]

Right ,right,

The dumb-a$$ cant even see that it says $ not dinar

We brought Billions of dollars over there so that the country would not shut down wail we where there .............

Now they are selling them back( in cash) for credit in Digital currency

And the bills are being destroyed on the spot (at least most of the bills hehe! )by us.

Was hoping you could clarify on your remarks about the dinar being destroyed on the spot. So they are giving billions of USD for thier own currency so they can destroy it? What about the 29 trillion electronic? Are they going to destroy that too? So they are going to destroy 50 trillion dinar so they can RV? Lets think about whats really going on here. If 20Million is correct which it seems he is then we need to discuss further how this all will work.

[20MillionDinar]

Was hoping you could clarify on your remarks about the dinar being destroyed on the spot. So they are giving billions of USD for thier own currency so they can destroy it? What about the 29 trillion electronic? Are they going to destroy that too? So they are going to destroy 50 trillion dinar so they can RV? Lets think about whats really going on here. If 20Million is correct which it seems he is then we need to discuss further how this all will work.

Hey Dinarck, I was doing some more digging around trying to find out exactly how the FED or the CBI (in our case) can destroy their money base. This is what I have found so far.

In the United States, as of 2006 the Fed sets an interest rate target for the Fed funds (overnight bank reserves) market. When the actual Fed funds rate is higher than the target, the New York Reserve Bank will usually increase the money supply via a repo (effectively borrowing from the dealers' perspective; lending for the Reserve Bank). When the actual Fed funds rate is less than the target, the Bank will usually decrease the money supply via a reverse repo (effectively lending from the dealers' perspective; borrowing for the Reserve Bank).

In the U.S., the Federal Reserve (Fed) most commonly uses overnight repurchase agreements (repos) to temporarily create money, or reverse repos to temporarily destroy money, which offset temporary changes in the level of bank reserves.^[3] The Fed also makes outright purchases and sales of securities through the System Open Market Account (SOMA) with its manager over the Trading Desk at the New York Reserve Bank. The trade of securities in the SOMA changes the balance of bank reserves, which also affects short term interest rates. The SOMA manager is responsible for trades that result in a short term interest rate near the target rate set by the Federal Open Market Committee (FOMC), or create money by the outright purchase of securities.^[4] Very rarely will it permanently destroy money by the outright sale of securities.^{[citation needed]} These trades are made with a group of about 22 (currently 18 as an immediate aftermath of 08/09 credit crisis) banks or bond dealers who are called primary dealers.

Money is created or destroyed by changing the reserve account of the bank with the Fed. The Fed has conducted open market operations in this manner since the 1920s, through the Open Market Desk at the Federal Reserve Bank of New York, under the direction of the Federal Open Market Committee. The open market operation is also a means through which inflation can be controlled because when treasury bills are sold to commercial banks these banks can no longer give out loans to the public for the period and therefore money is being reduced from circulation.

http://en.wikipedia.org/wiki/Open_market_operations

What are your thoughts? Let's try and figure out exactly what they are saying here.

Edited August 8, 2011 by 20MillionDinar

[dinarck]

Hey Dinarck, I was doing some more digging around trying to find out exactly how the FED or the CBI (in our case) can destroy their money base. This is what I have found so far.

In the United States, as of 2006 the Fed sets an interest rate target for the Fed funds (overnight bank reserves) market. When the actual Fed funds rate is higher than the target, the New York Reserve Bank will usually increase the money supply via a repo (effectively borrowing from the dealers' perspective; lending for the Reserve Bank). When the actual Fed funds rate is less than the target, the Bank will usually decrease the money supply via a reverse repo (effectively lending from the dealers' perspective; borrowing for the Reserve Bank).

In the U.S., the Federal Reserve (Fed) most commonly uses overnight repurchase agreements (repos) to temporarily create money, or reverse repos to temporarily destroy money, which offset temporary changes in the level of bank reserves.^[3] The Fed also makes outright purchases and sales of securities through the System Open Market Account (SOMA) with its manager over the Trading Desk at the New York Reserve Bank. The trade of securities in the SOMA changes the balance of bank reserves, which also affects short term interest rates. The SOMA manager is responsible for trades that result in a short term interest rate near the target rate set by the Federal Open Market Committee (FOMC), or create money by the outright purchase of securities.^[4] Very rarely will it permanently destroy money by the outright sale of securities.^{[citation needed]} These trades are made with a group of about 22 (currently 18 as an immediate aftermath of 08/09 credit crisis) banks or bond dealers who are called primary dealers.

Money is created or destroyed by changing the reserve account of the bank with the Fed. The Fed has conducted open market operations in this manner since the 1920s, through the Open Market Desk at the Federal Reserve Bank of New York, under the direction of the Federal Open Market Committee. The open market operation is also a means through which inflation can be controlled because when treasury bills are sold to commercial banks these banks can no longer give out loans to the public for the period and therefore money is being reduced from circulation.

http://en.wikipedia.org/wiki/Open_market_operations

What are your thoughts? Let's try and figure out exactly what they are saying here.

Thanks for that 20Million. Gonna have to ponder that for a minute and hopefully some one can chime in with a better understanding. All I know is the 29 trillion electronic alone would make Iraq the richest country on earth. I dont see how the IMF would allow it.

[20MillionDinar]

Let's go back real quick to Contractionary Monetary Policy.

Contractionary monetary policy is monetary policy that seeks to reduce the size of the money supply. In most nations, monetary policy is controlled by either a central bank or a finance ministry.

We can all agree that this type of monetary policy seeks to reduce the size of the money supply either directly or indirectly. Lets look at a few ways that they do this.

Monetary base

Contractionary policy can be implemented by reducing the size of the monetary base. This directly reduces the total amount of money circulating in the economy.

A central bank can use open market operations to reduce the monetary base. The central bank would typically sell bonds in exchange for hard currency. When the central bank collects this hard currency payment, it removes that amount of currency from the economy, thus contracting the monetary base.

One method that Central Banks use to reduce the Monetary Base is called Open Market Operations. This method DIRECTLY reduces the amount of money circulating in the economy. I don't know exactly what they do with their money, burn it, destroy it, or if they just remove that amount from the economy and hold it in some "off balance" account. It would be nice to have more details as to what they mean by "reduces the total amount of money circulating in the economy." Maybe being in the CBI's reserves it is technically "out of circulation..."

Reserve requirements

The monetary authority exerts regulatory control over banks. Contractionary policy can be implemented by requiring banks to hold a higher proportion of their total assets in reserve. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By requiring a higher proportion of total assets to be held as liquid cash, a central bank or finance ministry reduces the availability of loanable funds. This acts as a reduction in the money supply.

Another contractionary monetary tool is "Reserve Requirements." When Central Banks require the commercial banks (banking institutions in Iraq) to hold a higher proportion of their total assets to be held as liquid cash, the CBI reduces the availability of loanable funds. This acts as an "indirect" reduction in the money supply. Probably falls under the "M2" category if I'm not mistaken.

Discount window lending

Many central banks or finance ministries have the authority to lend funds to financial institutions within their country. By calling in existing loans the central bank can directly reduce the size of the money supply. By advertising that the discount window will be reduced for future lending, the central bank can also indirectly reduce the money supply by reducing risk-taking by financial institutions.

This "indirect" method is pretty simple to understand. The money that is loaned to the financial institutions by the CBI is normally loaned at a discount making it easier and more attractive for banks to take these loans. However, by reducing the "discount window" for future lending obviously reduces the amount of money the CBI is loaning out to the banks which in turn "indirectly" reduces the money supply by reducing risk-taking by financial institutions / banks.

Interest rates

The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates.

Monetary authorities in different nations have differing levels of control of economy-wide interest rates. In the United States, the Federal Reserve can set the federal funds rate by open market operations. This rate has significant effect on other market interest rates, but there is no perfect relationship. In the United States open market operations are a relatively small part of the total volume in the bond market.

In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By raising the interest rate(s) under its control, a monetary authority can contract the money supply, because higher interest rates encourage savings and discourage lending. Both of these effects reduce the size of the money supply.

I think this is pretty straight forward. When the CBI increases the nominal interest rates it makes it more attractive to save and discourages lending. Meaning less money is loaned out by the banks and more money is saved by citizens. **I know most Iraqis do not have bank accounts so we would need to see how they deal with interest rates on loans as well as the average bank account interest rates, etc...

Monetary policy and inflation

Monetary policy can be used to control inflation. Inflation is defined as continuing increases in price levels. Since price level is a monetary variable, monetary policy can affect it. Contractionary monetary policy has the effect of reducing inflation by reducing upward pressure on price levels.

Note that inflation can also be affected by fiscal policy. However, contractionary fiscal policy is often politically unpopular, because it involves spending cuts and tax increases. Thus, politicians favor the use of monetary policy to control inflation.

Monetary policy and the real economy

As noted above, the relationship between monetary policy and the real economy is uncertain. It is important to note that contractionary monetary policy should not be confused with economic contraction (the latter being a reduction in economic output in the real economy).

[Darin]

Thanks for that 20Million. Gonna have to ponder that for a minute and hopefully some one can chime in with a better understanding. All I know is the 29 trillion electronic alone would make Iraq the richest country on earth. I dont see how the IMF would allow it.

Pretty sure the U.S. has more dollars out in ciruclation that they're liable for, as it sits above & beyond 29T.

20Million,

Great work... Lots of information to read through and learn.

From my understanding.... Lets break the scenario down:

They started with 6 or so trillion IQD back in 2004.

The average life expectancy of a bill is 1.5 years

They've expanded the money supply from 6T to nearly 60T (in less than 10 years.. More-so 7 to be more accurate)

That's a lot of printing of bills..

And remember, they had to print bills to replace the old as well.

It took many 747 jets to ship in the IQD (21 was it?)

So, do they need to repeat that process every other year?

So, yes, they continue to print, but only out of necessity.

Hence the reasoning we hold "newer bills"

Why do you think it is cost-effective to reform the banks and get peopel to rely on electronic currency.

Savings on costs of continously reprinting bills.

The CBI #s seem fishy to me.. They always have..

Somewhere along the lines, information is "accurate" as well as "inaccurate"

Could they run 2 sets of books?

1 for the public eye?

Another for the important public officials that need to know the real #s?

Who knows... We can speculator, throw out theories, and so forth.

[20MillionDinar]

Thanks for that 20Million. Gonna have to ponder that for a minute and hopefully some one can chime in with a better understanding. All I know is the 29 trillion electronic alone would make Iraq the richest country on earth. I dont see how the IMF would allow it.

You are right.

"Since most money is now in the form of electronic records rather than cash, open market operations are conducted simply by electronically increasing or decreasing ('crediting' or 'debiting') the amount of base money that the bank has in its reserve account at the central bank."

If I am understanding correctly the open market operations (currency auctions) are conducted electronically in Iraq right? All they are really doing is "crediting" or "debiting" the amount that the CBI has in their reserves. It is all on paper...

So what I have actually started to wonder is if the money in the CBI's reserves technically are considered "money NOT in circulation." If this IS the case, then Iraq is in a much better position then we all thought. From what I have been reading and learning, it looks to me like the "reserves" could technically be considered "off balance" or "not in circulation." That is what I am starting to think...

Edited August 8, 2011 by 20MillionDinar

[Hesalwayswithus]

Thanks for that 20Million. Gonna have to ponder that for a minute and hopefully some one can chime in with a better understanding. All I know is the 29 trillion electronic alone would make Iraq the richest country on earth. I dont see how the IMF would allow it.

Well the US (Hillarious Clinton) came out in June saying Iraq will be one of the wealthiest countries in the world. There's also been other articles that's been posted on here before from various sources claiming that Iraq is likely headed to be THE wealthiest country in the nation. I don't exactly wrap my head around this either but it's what people are saying. IMO they might be wealthy after this happens but other countries involved....China, US, and Euro countries are highly invested in Iraq so some of that wealth will finally be spread back out.

[dinarlady]

Thanks for that 20Million. Gonna have to ponder that for a minute and hopefully some one can chime in with a better understanding. All I know is the 29 trillion electronic alone would make Iraq the richest country on earth. I dont see how the IMF would allow it.

first i want to say i respect everyones opinion, 20 incredible job, dinarck the imf will surely allow iraq (u.s east) to be the wealthiest country, think about it, iraq has the third most oil in the world and the 2nd most natural gas in the world. iraq wants to be the next kuwait and iraqs dinar should really be at the $3.00 range (even though we wont see anywhere near that upon rv) if iraq wants there dollar to be $3.00 plus the imf would surely let them. iraq has the oil, natural gas and gold to allow it.

Edited August 8, 2011 by dinarlady

[Darin]

You are right.

"Since most money is now in the form of electronic records rather than cash, open market operations are conducted simply by electronically increasing or decreasing ('crediting' or 'debiting') the amount of base money that the bank has in its reserve account at the central bank."

If I am understanding correctly the open market operations (currency auctions) are conducted electronically in Iraq right? All they are really doing is "crediting" or "debiting" the amount that the CBI has in their reserves. It is all on paper...

So what I have actually started to wonder is if the money in the CBI's reserves technically are considered "money NOT in circulation." If this IS the case, then Iraq is in a much better position then we all thought. From what I have been reading and learning, it looks to me like the "reserves" could technically be considered "off balance" or "not in circulation." That is what I am starting to think...

Would make sense...

When you look at a financial spreadsheet, you notice that an abundance of their entire holdings is in bank reserves.

And the auctions are to maintain a stable exchange rate. (1170)

So if they use the reserves to artificially manipulate the rates, it would be easy to do.

[dinarck]

Let's go back real quick to Contractionary Monetary Policy.

Contractionary monetary policy is monetary policy that seeks to reduce the size of the money supply. In most nations, monetary policy is controlled by either a central bank or a finance ministry.

We can all agree that this type of monetary policy seeks to reduce the size of the money supply either directly or indirectly. Lets look at a few ways that they do this.

Monetary base

Contractionary policy can be implemented by reducing the size of the monetary base. This directly reduces the total amount of money circulating in the economy.

A central bank can use open market operations to reduce the monetary base. The central bank would typically sell bonds in exchange for hard currency. When the central bank collects this hard currency payment, it removes that amount of currency from the economy, thus contracting the monetary base.

One method that Central Banks use to reduce the Monetary Base is called Open Market Operations. This method DIRECTLY reduces the amount of money circulating in the economy. I don't know exactly what they do with their money, burn it, destroy it, or if they just remove that amount from the economy and hold it in some "off balance" account. It would be nice to have more details as to what they mean by "reduces the total amount of money circulating in the economy." Maybe being in the CBI's reserves it is technically "out of circulation..."

Reserve requirements

The monetary authority exerts regulatory control over banks. Contractionary policy can be implemented by requiring banks to hold a higher proportion of their total assets in reserve. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By requiring a higher proportion of total assets to be held as liquid cash, a central bank or finance ministry reduces the availability of loanable funds. This acts as a reduction in the money supply.

Another contractionary monetary tool is "Reserve Requirements." When Central Banks require the commercial banks (banking institutions in Iraq) to hold a higher proportion of their total assets to be held as liquid cash, the CBI reduces the availability of loanable funds. This acts as an "indirect" reduction in the money supply. Probably falls under the "M2" category if I'm not mistaken.

Discount window lending

Many central banks or finance ministries have the authority to lend funds to financial institutions within their country. By calling in existing loans the central bank can directly reduce the size of the money supply. By advertising that the discount window will be reduced for future lending, the central bank can also indirectly reduce the money supply by reducing risk-taking by financial institutions.

This "indirect" method is pretty simple to understand. The money that is loaned to the financial institutions by the CBI is normally loaned at a discount making it easier and more attractive for banks to take these loans. However, by reducing the "discount window" for future lending obviously reduces the amount of money the CBI is loaning out to the banks which in turn "indirectly" reduces the money supply by reducing risk-taking by financial institutions / banks.

Interest rates

The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates.

Monetary authorities in different nations have differing levels of control of economy-wide interest rates. In the United States, the Federal Reserve can set the federal funds rate by open market operations. This rate has significant effect on other market interest rates, but there is no perfect relationship. In the United States open market operations are a relatively small part of the total volume in the bond market.

In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By raising the interest rate(s) under its control, a monetary authority can contract the money supply, because higher interest rates encourage savings and discourage lending. Both of these effects reduce the size of the money supply.

I think this is pretty straight forward. When the CBI increases the nominal interest rates it makes it more attractive to save and discourages lending. Meaning less money is loaned out by the banks and more money is saved by citizens. **I know most Iraqis do not have bank accounts so we would need to see how they deal with interest rates on loans as well as the average bank account interest rates, etc...

Monetary policy and inflation

Monetary policy can be used to control inflation. Inflation is defined as continuing increases in price levels. Since price level is a monetary variable, monetary policy can affect it. Contractionary monetary policy has the effect of reducing inflation by reducing upward pressure on price levels.

Note that inflation can also be affected by fiscal policy. However, contractionary fiscal policy is often politically unpopular, because it involves spending cuts and tax increases. Thus, politicians favor the use of monetary policy to control inflation.

Monetary policy and the real economy

As noted above, the relationship between monetary policy and the real economy is uncertain. It is important to note that contractionary monetary policy should not be confused with economic contraction (the latter being a reduction in economic output in the real economy).

This was a good read and explains how money can be "held" out of circulation but what is getting me is the amount in exsistence. Take the 29 trillion electronic for example. Sure some or even alot of that is owned by people so you could consider it in circulation even though it is in banks. What I am trying to get at is how do they make that wealth un-exsist? I could see the 30 trillion outside banks being brought in somehow by auction but then why destroy it? It is money afterall. Also what would Iraqis use for currency? I know I know USD but is there really enough in Iraq to allow a reduction of IQD needed to make a difference? The IQD is in a hyperinflated state. This is why there is way too much of it in circulation. The question remains. How do they deal with it? Kutos to 20Million for starting the discussion.

[20MillionDinar]

Dinarck, I found it!

http://en.wikipedia....tion_(currency)

Circulation (currency)

From Wikipedia, the free encyclopedia With regards to a particular currency, circulation refers to the total value of that currency (whether banknotes, coins, or demand deposits) that is engaged in that currency's economy at a given time.^[1]Circulation can also refer to the metaphorical or literal movement of wealth due to transactions between the holders of a currency. The euro, the official currency of the European Union, is currently the currency with the highest combined value of cash circulation in the world.^[2]

The money supply (according to other articles on Wikipedia) is defined to be the currency in circulation PLUS the money held in demand deposits, of which the latter makes up the greater part of the money supply. Therefore it seems clear that the currency in circulaton should NOT include demand deposits. Also common sense tells us that circulation refers to money that is readily available to spend for consumers/businesses. Demand deposits are not only extremely high in currency value, but a minimum amount (which is very large) must be kept with the central bank at all times, in which case it's not in circulation, and therefore does not have the same liquidity as cash reserves (not in a realistic sense anyway).

The demand deposit can be used by a bank, but its use is generally a last-resort, either in times of financial crisis, or when the central bank decides to increase interest rates by selling the bank bonds, for which purchases the bank uses their cash reserves at the central bank. The central bank then takes that purchase price amount from the banks' demand deposit accounts, which reduces the money available to them. This depletion in demand deposits increases the need for inter-bank lending, and therefore interbank interest rates are increased. This in turn depletes the money in circulation since borrowers will borrow less (due to the higher interest rates). Since the 'money in circulation' as we generally understand it, is kept separate from demand deposits in practice, by the above reasoning, so should it be in theory. I understand that in some places it may be defined as the opposite of what I have said (i.e. to include demand deposits, but I argue that this is not a good definition as it makes it impossible to distinguish demand deposits from banknotes and coins).

Darin, I have looked over the "Financial Indicators" spreadsheet multiple times but I cannot for the life of me figure out what they are saying. What I was wondering is how much exactly is in the CBI's reserves? That would tell us how much out of the entire money supply is actually in circulation. Then we can go from there.

This was a good read and explains how money can be "held" out of circulation but what is getting me is the amount in exsistence. Take the 29 trillion electronic for example. Sure some or even alot of that is owned by people so you could consider it in circulation even though it is in banks. What I am trying to get at is how do they make that wealth un-exsist? I could see the 30 trillion outside banks being brought in somehow by auction but then why destroy it? It is money afterall. Also what would Iraqis use for currency? I know I know USD but is there really enough in Iraq to allow a reduction of IQD needed to make a difference? The IQD is in a hyperinflated state. This is why there is way too much of it in circulation. The question remains. How do they deal with it? Kutos to 20Million for starting the discussion.

Your points are valid.

I would think that a combination of different contractionary policies would be necessary. Then on top of that a transition to E-Payments (financial institutions) would be necessary. Not too sure to be honest...

If the Iraqi citizens did in fact start using bank accounts for the majority of their transactions that same 30 trillion could be acquired by technically 3 trillion using fractional reserve banking. But obviously for that to happen they would need to be using the banks!

Edited August 8, 2011 by 20MillionDinar