Copycat currencies

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June 25th, 2016 at 7:54:11 AM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 1068
Posts: 12569
Let's start with a real copycat currency, that of the Bahamas for a population of 377,374 where roughly 6 million Americans visit every year. The Bahamian government issues a Bahamian dollar set at parity with the USA dollar. The currency is backed by conservative US investments dollar for dollar. The earnings on the investments help pay for the production, distribution and destruction of the Bahamian notes. US currency is perfectly legal in the Bahamas.

Roughly $970 per person of banknotes is circulated with the distribution shown in the following table. The 50 cent banknote and the $3 banknote are in small numbers, almost as novelties. The incredibly large number of $1 banknotes in circulation (60 per person) are probably indicative of tourists taking them home as keepsakes.

Slightly surprising is the large percentage of the currency circulating in the $50 and $100 denomination. You would think that it would more closely mirror the USA and Canada distribution with massive numbers of $20 banknotes. It is possible that the US $20 bills circulate in large numbers throughout the Bahamas.


Denomination Value $/Person Notes Notes/Person
$0.50 $676,676 $1.79 1,353,352 3.6
$1 $22,702,973 $60.16 22,702,973 60.2
$3 $1,943,823 $5.15 647,941 1.7
$5 $11,036,815 $29.25 2,207,363 5.8
$10 $15,997,260 $42.39 1,599,726 4.2
$20 $57,299,060 $151.84 2,864,953 7.6
$50 $108,690,150 $288.02 2,173,803 5.8
$100 $147,495,000 $390.85 1,474,950 3.9
Total $365,921,592 $970 35,025,061 92.8


How would a scenario like this apply to Greece with a population of over 10 million if they should leave the Eurozone?

Prior to the changeover from drachmas to Euros at (340.75 Δρχ to the Euro) there were six denominations of banknotes. The bottom three would be covered by coins today. The largest denomination was only 30 Euros which shows you that the Greece had a much smaller economy than Germany and only needed small bills.
100 Δρχ ~ 0.29 €
200 Δρχ ~ 0.59 €
500 Δρχ ~ 1.47 €
1,000 Δρχ ~ 2.93 €
5,000 Δρχ ~ 14.67 €
10,000 Δρχ ~ 29.35 €

Resurrecting the old drachma doesn't make much sense. Maybe Greece could copy the Bahamian model? As the currency must be backed by securities, perhaps Greece could get away with much less currency, and make up the difference with electronic payments and with Euro banknotes circulating side by side.

Suppose the new drachma is set at parity with the Euro. Euros will also be legal tender in Greece. But the new drachma only copies the smaller European denominations. Hypothetically 40 banknotes per person, with ten €5 notes, ten €10 notes, and twenty €20 notes or €550 per person would take car of routine currency needs of most citizens, and would require backing of ~€6 billion in securities.

Tourists would still be free to spend €50 and €100 banknotes in Greece, but they may receive their change in the new drachmas. They would scramble to spend their Greek money before going home.

Do you think that scenario will work, or would Greek economy collapse worse than it is now?
June 25th, 2016 at 9:19:06 AM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 135
Posts: 18136
I don't think it would work because Greece has too large a balance of payments problem. The Bahamas lives off American tourists, and other tourists to a lesser extent. Greece has tourists but not near the same level. Greece also has an immigration problem, large percent of people working for government, and very early retirement. IOW, lots of folks sucking up the resources of the minority producing wealth.

Greece is really stuck, like a person with high credit card debt and few work skills. They really need to get out of the Euro and just keep inflating their currency if they can.
The President is a fink.
June 25th, 2016 at 12:36:00 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 1068
Posts: 12569
My proposal is very tenuous as Greece only has $7.535 billion (=6.78 billion EUR) in foreign reserves as of March 2016. That is a mere €642 per person. That's not much to back up a currency that is set at parity with the Euro. Using the Bahamas as an example they are circulating $970 per person in their dollars which are at parity with the US dollar..

Quote: AZDuffman
Greece is really stuck, like a person with high credit card debt and few work skills. They really need to get out of the Euro and just keep inflating their currency if they can.


But who would accept conversion of long term debt (homes and cars) to "neo-drachmas", knowing full well that the currency is only being created so that it can be devalued. It was like after the devaluation of the Mexican peso in 1994. You could only get a mortgage if it was for 30% down and if it didn't last for more than 7 years.

I'm not exactly sure how the it would work to "get out of the euro" completely without massive riots bordering on civil war.

===================
Just repeating my comparison between cash in Sweden and cash in the USA, you can see that if Sweden reduces their middle denomination cash supply to something much less than $584 then they can more easily peg their currency to another currency if it begins to fluctuate too widely. Since nearly all transactions will be done via phone, you can easily get the readout in Swedish crowns or in the peg currency. There foreign exchange rate is high enough that they probably already have enough Euros, dollars, or Norwegian Crowns to back up their currency.

The exchange rate between 100SEK and other currencies drift close to "easily remembered exchange rates" at different times. A swedish crown is similar to a dime (currently worth US 12 cents)
2016 May: .9981~ 1 NOK (Norwegian Crown was traditionally stronger than Swedish Crown, but now suffers from oil prices)
2013 Jul: 10.05~ 1 GBP
2010 Feb: 9.96~ 1 EUR
2001 Mar: 10.03 ~ 1 USD

But the "easily remembered exchange rates" only mean a lot if you are working in cash. For a long time along the Mexican border, the unofficial exchange rate for price conversion from pesos to dollars was 10:1. You could pay in either currency as many Mexicans hoard dollars as defense against future peso devaluation.

SMALL DENOMINATIONS (changemakers)
USA $137 per person for $1, $5, and $10 banknotes
Sweden $131 per person for 1kr coin, 20kr, 50 kr, 100 kr banknotes

MAINSTAYS OF CASH DOMESTIC
USA $780 per person for $20 and $50 banknotes
Sweden $584 per person in 200kr and 500kr banknotes

High Value Denominations: It's All About the Benjamins
USA $3361 per person, much of which circulates overseas in $100 bills
Sweden $26.50 per person in Sweden in 1000kr ~$123 banknotes (~ one note for every 5 people)


Sweden's Foreign exchange reserves is over $6000 per person, which is several times as much as their currency per person. They have plenty of foreign reserves but to ensure that the rising trend in inflation continues, the Executive Board has is purchasing securities that will total SEK 245 billion at the end of 2016. That is 2650 Euros per capita in securities. At some point they may decide to peg the currency instead of buying more securities.
June 26th, 2016 at 4:28:18 AM permalink
Fleastiff
Member since: Oct 27, 2012
Threads: 62
Posts: 7831
What is this economic analysis of a currency. A currency stands or falls on trust based on the public's perception, not on what is or is not in Fort Knox.

Greece will have rioting but not during siesta. Turkey will have shooting but as the poor man of Europe and the poorer man of Asia its currency will always collapse.
June 26th, 2016 at 8:30:27 AM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 1068
Posts: 12569
Quote: Fleastiff
What is this economic analysis of a currency. A currency stands or falls on trust based on the public's perception, not on what is or is not in Fort Knox.


I think that is largely true of a major currency, but minor currencies are often pegged. For instance Denmark has pegged their Krone (DKK) at 7.46038-kr +/- 2.25% just as they pegged the Krone to the German Mark.


In the Middle East many countries have their currency pegged to the US Dollar

Oman Rial OMR 0.3845 USD 1986
Jordan Dinar JOD 0.709 USD 1995
Lebanon Pound LBP 1507.5 USD 1997
UAE Dirham AED 3.6725 USD 1997
Bahrain Dinar BHD 0.376 USD 2001
Qatar Riyal QAR 3.64 USD 2001
Saudi Riyal SAR 3.75 USD 2003


Three other countries with pegs to the USD
Panama PAB 1 USD 1904
Hong Kong HKD 7.75-7.85 USD 1998
Venezuela Bolivar VEB 6.3 USD 2013

I think that it would be natural to expect neo-drachmas to circulate at a peg to the Euro. The old inviolate rate was 340 drachmas to the Euro, but the new one may be one to one or 100 to one.

Sweden and Greece are similar size. Sweden does not use a hard peg, and the currency is subject to currency investors, but Sweden is buying a fortune in bonds to try to keep inflation at the desired level and the exchange rate with the Euro at roughly the same rate.

With a little over 600 Euros in foreign reserves, Greece certainly could not afford to replace the 50 Euro notes. They can barely afford to replace the 20 Euro note, but replacing only the 5 and 10 would be ludicrous.

I was using the Bahamas cash in circulation as an example to compare with Greece.

Bahamas cash per person for different denominations
$5 $29
$10 $42
$20 $152
$50 $288
$100 $391

USA cash per person for different denominations
$5 : $43
$10 : $59
$20 : $532
$50 : $248
$100 : $3361
But the big question is would getting out of the Eurozone with a pegged currency do much good? It wouldn't give you the ability to float the currency. But how do you replace a good currency with a bd one? Argentina pegged their peso at 1:1 with the dollar in 1999, but there was still large numbers of real dollars circulating in Argentina. Eventually the peg failed.
June 26th, 2016 at 11:55:34 AM permalink
Fleastiff
Member since: Oct 27, 2012
Threads: 62
Posts: 7831
I guess there are TWO currency FLOWS.

One Flow is open and results from bank trader's buying and selling on physical and electronic exchanges unimpeded by any central bank or central government controls.
The other Flow is known as smuggling: be it of gold or wheelbarrows.

If smuggling is involved there is a weak currency and gold and wheelbarrows flow INTO the country to be gobbled up by people desperately getting rid of the garbage currency and trying to buy something of REAL value with it, such as gold or wheelbarrows. Then the merchants and peasants try to get the gold or wheelbarrows out of the country and into a jurisdiction where they can sell the gold or wheelbarrows at a profit.

The problem with the gold or wheelbarrows takes place at the weak currency's border control stations.

The problem with the OPEN flow bank trader takes place when a currency is PEGGED by a weak country's Central Bank and the traders note that the weak country's Central Bank may lose its nerve or its ability to maintain a peg.

So once again it all comes down to a BELIEF system. One either believes the peasant who knows how to get the gold and wheelbarrows across the mountain in the night or one believes that the Central Bank has balls and full vaults. Sort of like a poker game where you can see the central bankers tells and low stack.
June 26th, 2016 at 6:38:58 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 1068
Posts: 12569
Quote: Fleastiff
So once again it all comes down to a BELIEF system.


Money and value have always been about BELIEF. Even when money was defined as gold and silver or cowrie shells it has always been about a shared belief in value of things that are rare. That is a fundamental fact if you are talking about national currencies or bitcoins.

Different measures of money supply. Not all of them are widely used and the exact classifications depend on the country.

M0 normally include coins and notes in circulation and other money equivalents.

M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions).

M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds.

M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity.

The exact definitions of the measures depend on the country. M4 includes M3 plus other deposits. The term broad money is used to describe M2, M3 or M4, depending on the local practice.


This is a table of the value of currency per person using exchange rates (not purchasing power parity) of countries in the BIS.
Currency USD-2014
Switzerland $8,655.39
Japan $6,429.42
Hong Kong SAR $6,272.93
Singapore $4,762.28
United States $4,218.24
Euro area $3,734.85
Australia $2,459.01
Canada $1,839.18
United Kingdom $1,587.94
Saudi Arabia $1,567.67
Korea $1,349.97
Sweden $1,108.76
Russia $1,084.92
Mexico $606.98
Turkey $480.77
Brazil $410.59
South Africa $217.48
India $180.46


Mexico has dropped dramatically since the end of 2014 because the exchange rate has dropped badly. Sweden has dropped a lot because so much cash has been taken out of circulation.

People in these countries obviously believe in the value of this currency, as it is all fiat money.
June 27th, 2016 at 11:43:20 AM permalink
Ayecarumba
Member since: Oct 24, 2012
Threads: 89
Posts: 1744
Quote: Pacomartin
Money and value have always been about BELIEF. Even when money was defined as gold and silver or cowrie shells it has always been about a shared belief in value of things that are rare. That is a fundamental fact if you are talking about national currencies or bitcoins.

Different measures of money supply. Not all of them are widely used and the exact classifications depend on the country.

M0 normally include coins and notes in circulation and other money equivalents.

M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions).

M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds.

M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity.

The exact definitions of the measures depend on the country. M4 includes M3 plus other deposits. The term broad money is used to describe M2, M3 or M4, depending on the local practice.


This is a table of the value of currency per person using exchange rates (not purchasing power parity) of countries in the BIS.
Currency USD-2014
Switzerland $8,655.39
Japan $6,429.42
Hong Kong SAR $6,272.93
Singapore $4,762.28
United States $4,218.24
Euro area $3,734.85
Australia $2,459.01
Canada $1,839.18
United Kingdom $1,587.94
Saudi Arabia $1,567.67
Korea $1,349.97
Sweden $1,108.76
Russia $1,084.92
Mexico $606.98
Turkey $480.77
Brazil $410.59
South Africa $217.48
India $180.46


Mexico has dropped dramatically since the end of 2014 because the exchange rate has dropped badly. Sweden has dropped a lot because so much cash has been taken out of circulation.

People in these countries obviously believe in the value of this currency, as it is all fiat money.


I am surprised Japan is #2 on the list. I thought their economy has been withering for some time, and folks have a real disdain for banks resulting in a lot of cash sitting in shoe boxes, or buried in backyards for safekeeping. Shouldn't the rise in electronic transactions correlate with a fall in circulated currency, as people use less folding money? Yet the highest per capita circulating currency values belong to countries with a high number of adopters of electronic banking services.
June 27th, 2016 at 12:18:45 PM permalink
Fleastiff
Member since: Oct 27, 2012
Threads: 62
Posts: 7831
Value per person?
What about per Productive Person? (Total Population less children, less prisoners, less retirees, less housewives, less government employees).?
A better measure perhaps?
June 27th, 2016 at 1:02:52 PM permalink
Nareed
Member since: Oct 24, 2012
Threads: 346
Posts: 12545
There's a big problem with using something that is consumed or sued as currency. Namely that as the stuff gets consumed or used, the currency changes in value. Also how much of the stuff can be obtained fluctuates depending on what it is. Take grain, for example. A bad harvest means deflation. A good one inflation.

Precious metals as currency, or as backing for currency, are not the panacea libertarians dream of, either. While their value is more objective, once governments take control of the mint, they can play as many games with gold and silver as they can with paper money. The most glaring example is Rome (what isn't?). By the time Diocletian took the throne, the denarius, the main silver coin, had about 10% silver in it. Inflation was so bad, Diocletian imposed a barter system and price controls for much of the economy. Notably the legions were paid in kind.
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