Author Topic: Modelling the coin/note border  (Read 4574 times)

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Offline Figleaf

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Re: Modelling the coin/note border
« Reply #15 on: November 18, 2013, 01:41:57 AM »
Interestingly, since notes are created as a liability against assets or borrowing of the government ( either from market, foreign lenders or the central bank itself ), there is a cost of capital involved for the duration of the notes issued.

On the other hand, coin making is virtually creation of money itself and seignorage is the additional GDP generation.

Sorry, I don't follow you there. The government does not need any reserves towards the domestic cash supply. The only thing it needs is trust. That trust will not depend on Central Bank reserves, but on inflation expectations, which do not carry a cost of capital. This goes for notes as well as coins, but also for semi-liquid forms of money, such as current bank accounts and travellers checks (M1). All of these have seigniorage for the issuer.

Peter

An unidentified coin is a piece of metal. An identified coin is a piece of history.

Offline malj1

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Re: Modelling the coin/note border
« Reply #16 on: November 18, 2013, 01:56:56 AM »
I believe the Australian polymer notes have been very successful. A look through my wallet today finds the oldest note represented is one from 1995 and this is still in very good condition.

So eighteen years so far! below is a scan, the date is the first two digits of the serial # on our notes.
Malcolm
Have a look at  my tokens and my banknotes.

Offline Pabitra

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Re: Modelling the coin/note border
« Reply #17 on: November 18, 2013, 07:54:58 PM »
I believe the Australian polymer notes have been very successful. A look through my wallet today finds the oldest note represented is one from 1995 and this is still in very good condition.

Yes. Australia started polymer notes in 1988.
I had the opportunity of meeting their sales team in 1989.

The polymer notes have not been unqualified success and as per my information, only 23 countries have adopted it.

Please note that there are 218 note/ coin issuing territories in the world today.

Much depends on quality of substrate, quality of ink and printing proces as well as general habits of users in handling of notes as well as general weather and climatic conditions. Not every country is fortunate in having cold weather throughout the year.

Some countries still have the habit of stapling the notes. A polymer note, once cut, simply gets torn from that area.

Offline Pabitra

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Re: Modelling the coin/note border
« Reply #18 on: November 18, 2013, 08:05:39 PM »
Sorry, I don't follow you there. The government does not need any reserves towards the domestic cash supply. The only thing it needs is trust.

No. In most of the countries, the central bank issues notes against deposits in its accounts.
In Hong Kong, the notes are not issued by Central Bank but by three banks like Standard Chartered, Bank of China etc.
In Scotland, Bank of Scotland issues the notes against deposits.

In rest of the world, there is a limit to amount of notes the Central Bank can issue in its country.
In EU, European Central Bank controls this centrally. Otherwise, in rest of the world, the central banks are autonomous and maintain the balance sheet with rigor as is seen in professionally managed companies.
In Some countries, Government borrows from Market as well as from Central Bank. That is the debt which is indicated as sovereign debt. Now you would like to perhaps explain why bonds of Greece give higher yield than bonds of Netherlands. Simply put, Greece is under higher debt. They can not go ahead and print euros. To keep the balance sheet balanced, the need to get loans from Germany and France.
Giving unfettered powers to Central bank to issue notes under direction from the government would undermine the autonomy a central bank enjoys and would lead to Zimbabwe like conditions.

Offline Figleaf

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Re: Modelling the coin/note border
« Reply #19 on: November 18, 2013, 09:01:01 PM »
The exceptions don't prove the rule. Why will Greek bonds have a higher yield than Dutch bonds? Because money and capital market traders have more faith in the Dutch economy than in the Greek economy. More correctly, because money and capital market traders perceive that Greece may default on its debt and they haven't a clue about the Netherlands but they know it's somewhere near Germany, so it can't be all bad.

I think you may be mixing up reserves and reserve requirements. Reserves are a balance sheet balancing item. They are handy for international payments, but there is no relation with the money supply. Reserve requirements are rules for other banks (in special cases, depending on the independence of the currency, there may be a reserve requirement for the central bank also; see below). The Central Bank of India is a special case, because it is a commercial bank, therefore subject to reserve requirements. The Reserve Bank of India is the Central Bank.

In most Central Bank systems I know, the mechanism for issuing banknotes is that the Central Bank holds government bonds for the amount of banknotes issued. The difference between the interest received on the govvies and that payable on banknotes (zero) is not a capital cost, but an income stream. In theory. In practice, the Central Bank is owned by the government, which gets dividends out of profits and the govvies are as good as the government. If you wouldn't cover the notes with govvies, give a government guarantee instead and pay dividend on profits only, the situation would be exactly the same (though that still doesn't mean a capital cost.) That means that in the final analysis, there is a direct link between government finances and the currency. In other words, what counts for money and capital markets is the chance of default of the government.

It is different for domestic individuals. They don't care whether the government honours its bonds because, by and large, they don't hold them. To individuals, the important thing is that the banknotes will not lose too much of their value in the future. When they lose that trust, they will try to get out of national banknotes as quickly as possible, buying stuff or another currency instead, collect debts aggressively and defer credit repayments aggressively (a recipe for violence and lawlessness.) Like a sad handful of countries before, Zimbabwe illustrates this: when there is no light at the end of the hyperinflation tunnel, national banknotes become unacceptable. When a government guarantee is absent, void or impossible, a central bank is not necessary and note-issuing banks must have a reserve requirement.

Peter
An unidentified coin is a piece of metal. An identified coin is a piece of history.

Offline Pabitra

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Re: Modelling the coin/note border
« Reply #20 on: December 05, 2013, 12:19:57 PM »
I fail to understand what made you think that I assume Central Bank of India is the central bank.

I know central bank of India and State Bank of India are commercial Banks.

In India, central bank is Reserve Bank of India.
In Iran, Central Bank of Iran is central Bank.
in Pakistan, central bank is called State Bank of Pakistan.

When I was referring to balance sheet, I had Bank of England in mind. It's annual report is made on commercial accounting basis and it is available on its site.


However, no one commented on the model which has been presented.

Offline Pabitra

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Re: Modelling the coin/note border
« Reply #21 on: January 02, 2014, 12:13:02 PM »
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