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Strategies & Market Trends : Heinz Blasnik- Views You Can Use -- Ignore unavailable to you. Want to Upgrade?

To: GraceZ who wrote (2437)	6/11/2003 7:21:38 PM
From: GraceZ	Read Replies (2) \| Respond to of 4905

Further comment on the fixed quantity of money thesis. Assume a microeconomic economy where there is one buyer, an intermediary, and a seller. The intermediary functions to hold money and product, a storekeeper. The only money is currency. The seller goes to the storekeeper and exchanges product for currency in some fixed relation, x quantity of product for y units of currency. The buyer goes to the storekeeper and exchanges currency for product, x for y. This exchange recurs repeatedly and everything is equilibrium. The storekeeper has on hand or creates enough currency to satisfy the next transaction, and since the buyer provides enough currency for the quantity demanded, no new transactional units of currency are needed. Now let's say that the seller creates more product than previously, but still wants to sell all the product to the storekeeper. The storekeeper can't accommodate the transaction because he doesn't have enough currency on hand. Therefore, the storekeeper declines the transaction. Let's say the buyer becomes aware that the seller has more to sell than usual and the buyer would like to buy that extra. If the storekeeper can't accommodate the transaction due to lack of transaction medium, the buyer will go to the seller and barter. That isn't efficient. Better that a storekeeper handles the transaction with the various unspoken complications that can arise wrt any transaction. The storekeeper is aware of this possibility so if a seller has more product to sell and the amount of fair representation of product in the form of units of transactional exchange is less than needed to fairly represent the increased quantity of product offered, the storekeeper will create new units of transactional exchange and give them to the seller. After the purchase a buyer might show and might not buy all the product available. What isn't bought sits as inventory, so the storekeeper has inventory of product and debt to the seller for exchange units created secured by product. If all is purchased, then the storekeeper can return all the new units to the seller. In this idealized model transactional efficiency isn't facilitated unless further units of exchange are synthetically created. This model contains the essence of credit. No one can argue about whether such synthetic creation is trustworthy, because the efficiency gained is worth more than the quantity of money at risk. The point here is that what defines value is what generates action. Those economic quantities which are deemed value but don't cause economic action, actually have no value. Thus art is worthless, and equivalently, priceless. True for air and water too. The argument of economic quantity value always lies at the margin: what generates marginal economic action. This is what was behind my comments about "stretching" the marginal dollar. Human desire causes effort to bring about a result which can be modelled by stretching the marginal held dollar. Thus even if there was only so many units of currency in circulation and none ever were created beyond this total(assuming no physical deterioration) the representational value of money would fluctuate due to this factor of human desire. When this factor is widely held, for example, the wealth effect, the representational value of money can be extremely distorted and cause all sorts of economic dislocations.