On Wednesday, October 29, 2003, at 11:38 AM, Robert B.Z. wrote:
"Your point is well taken, but you made one small mistake there, JP. 1mdc does NOT expand the money supply in any way. -- Patrick"
In a way it actually does. Much in the same way a bank deposit or holding
a <plug type="sales"> balance in a CF$ customer account </plug> does.
No, it does not behave at all like a bank deposit. Bank deposits are held for the purpose of fractional reserve lending, and that is what causes an increase in the amount of currency in circulation. 1mdc reserves are held in a completely idle status, and are not loaned out or used in circulation in any way whatsoever.
You see, when you 'deposit' your e-gold into the 1MDC account, and your
1MDC account is credited, your e-gold is still there as well. When you
then use your 1MDC account to pay for a purchase to another 1MDC account
you are using FastGrams, rather than e-gold. While your FastGrams change
hands, the e-gold doesn't.
Hence, theoretically if all e-gold was depositted with 1MDC, then the money supply would double.
No it wouldn't, not in any meaningful way. Sure, anyone can easily add the number of 1mdc grams to the number of e-gold grams held in the 1mdc reserve, but then you are just counting the same asset twice.
The e-gold grams held in the 1mdc reserve are, quite simply, not in circulation anymore. They are completely idle assets, good only for one purpose: to redeem 1mdc grams. Upon redemption, the 1mdc grams cease to exist and the e-gold grams are once again released from their cage and allowed to circulate as money again.
Although in this particular case there is the 1MDC caveat that the e-gold
shall never leave the 1MDC e-gold account, and hence halve [sic: half] of the doubled
money supply would not circulate.
The half that doesn't circulate does not function as part of the money supply.
Another analogy might help. If you give me a gold coin for safe keeping and in exchange I give you a gold certificate redeemable for that coin, there is no change in the money supply. The gold coin sits in the vault collecting dust and does not serve any active function as circulating money. In short, the gold coin does not go out "chasing" goods. Only the gold certificate does that. If someone redeems the gold certificate for the coin, then I must either destroy the certificate or permanently lock it away somewhere, only to reuse it if someone bails in another coin.
-- Patrick
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