>>>Money is just a medium of exchange. If the number and value of exchanges goes up the money supply has to grow in order to provide enough "medium of exchange" to transact.<<<
This is a common fallacy, but completely wrong.
If the scale of transactional balances rises, more exchange units must be made available. Let's assume that isn't done. Let the number of units, dollar bills, remain constant. At the margin someone won't be able to get that dollar because it will be involved in the next transaction at the margin. So the someone transaction can't occur because units of exchange medium are not physically available.
The scarcity value of money comes from its demand to be held as a store of future purchasing power, and has next to nothing to do with the number and value of transactions.
The term, "scarcity value", is oxymoron. One can say, X is scarce, so its price has risen, but that doesn't mean its value has risen.
How can value be assigned to future purchasing power? Value is assigned to something created in the past.
Every dollar of the money supply is always owned by a single someone every nanosecond, while transactions are instantaneous and do not reflect a net demand on, or a consumption of, the money supply.
This is an assertion of equilibrium, but value comes from disequilibrium, the desire to get the marginal dollar instantaneously being owned by someone else.
If you want to buy something that costs a million dollars and you only have $100 in cash, it's not simply the lack of money that prevents your transaction, but rather the lack of other assets that can be converted into money, sequentially, if necessary.
If you really want that expensive item, you will have to stretch the instantaneous value of all units of money, but that doesn't say anything about the static instantaneous fair representation of economic scale in exchange units. |
