Reducing the Money Supply

In May of 2010 Iraq announced the removal of 70% of excess liquidity.  This news was welcomed enthusiastically by dinar gurus.  Some reported to their followers that the RV was just around the corner because the money supply in Iraq had been reduced by 70% which would only leave what?  6-9 trillion dinar in circulation?  Do the math, folks.  Six trillion times $.000855 = $5,130,000,000 USD in circulation, down from a presumed money supply of around $25 billion USD.  This article came out a year and a half ago.  So if the gurus were right we have to conclude that for the past eighteen months the Iraqi people have been getting by on roughly a fifth of the money supply they had a couple of years ago with no increase in value.  Does that make sense?  Other gurus claimed that the 70% reduction meant that Iraq had pulled in 70% of the larger denominations.  That makes no sense either, because it would mean that for eighteen months now Iraqis have been trying to conduct their daily transactions with mostly lower denominations which are worth less than half a dollar.  Can you imagine buying a $200 TV set with 400 or more bills?  Isn't it far more likely that the term "excess liquidity" doesn't mean what these armchair economists think it means?

QFINANCE.com defines "excess liquidity" as: Cash in bank exceeding required amount  
cash held by a bank above what is required by the regulatory authorities

A reduction in excess liquidity is simply a matter of moving money from the banking institutions into the private sector to encourage investment in the economic development of the country and combat inflation.  It has NOTHING to do with reducing money supply, folks.   

Time and time again I have talked with people who are actually in Iraq and asked them if they have seen any change in the availability of the higher denominations ... the 1K, 5K, 10K, and 25K, notes?  I always get the same response.  No changes.

I'm no economist.  And I can't speak Arabic.  But I can read English, and "excess liquidity" does not mean what many people in the dinar world are being led to believe.  Once again, inexperienced currency investors are being misled by either ignorant or opportunistic dinar dealers, pumpers, and gurus a.k.a. .... douchebags!

A few weeks ago an article came out saying that Iraq has 4 trillion in circulation and the overnight millionaire crowd cited that as proof that Iraq is reducing their money supply and that their view of this investment is right.  Then last week an article came out saying that Iraq intends to reduce their money supply from 25 trillion dinar to 15 billion dinar and the same people cite this as proof that their view is right.  So which is it?  Have they already reduced it or do they simply intend to reduce it?  You can't have it both ways, guys.

One thing I think we can all agree on is that Iraq can't RV at even $1 let alone $2 or $3 with 25 trillion dinar in circulation.  Speculators alone hold trillions of dinar.  Add that to the trillions being held by the Iraqi people and the CBI and you can see the problem here.  Iraq needs their money supply to get to less than 1 trillion to even think about a $1 RV. 

The fact is Iraq hasn't significantly reduced their money supply at all, but they need to in order to simplify cash transactions and in order to get their people to quit using the USD.  Thus the news articles to that effect.  Now they are saying that they will reduce the money supply down to 15 billion dinar.  How do you suppose they will accomplish that?  The only way that I can see is for them to redenominate as numerous other countries have done after they recovered from periods of hyperinflation as Iraq has.  In other words, issue all new currency and render the former currency invalid.  Speculators would then have to turn in their IQD for a new currency during the allotted time frame.  

If you take 25 trillion and multiply it by the current value of $.00086 you get the current money supply which is roughly $21.5 billion USD.  Then you take the proposed money supply figure of 15 billion and divide that into the $21.5 billion and you get roughly $1.43, provided no further RVs in the equation.  So it appears to me that the only way to accomplish their stated intention of removing three zeros from their currency, de-dollarizing, easing cash transactions, and arriving at a new money supply of 15 billion dinar is for them to issue all new currency at a new rate of $1.43 which would mean that dinar speculators would make a profit of 50-200% prior to subtracting the exchange fees.  Better than a kick in the backside but hardly the overnight millionaire status that many have been promoting.

Is this what they're going to do?  Who knows with the Iraqis?  But if they reduce the money supply to 15 billion dinar as is their stated intention I can assure you nobody will become a millionaire overnight by holding IQD.