> >Hardly. It might tend to decrease the amount of money in
> >circulation and cause deflation. But that, per se, is
> >irrelevant to the health of the economy or to the level
> >of demand. It would only change the price levels at which
> >trade takes place.
>
> Even this is not quite correct. Increasing or decreasing the
> supply of "money" in circulation only causes deflation in an
> economy where the money supply is manipulated without any true
> value backing. With a currency like e-gold that is backed by
> an asset that's value is set externally from the currency, the
> price levels at which things trade is in no way related to the
> money supply.
You are partially correct.
The "price" of gold is set by supply and demand like everything
else. Changes in either the supply or the demand for gold will
cause changes in the price of gold (in terms of other goods) which
would be inflation/deflation even under a gold standard.
Now gold has industrial as well as monetary uses so there are
those two components to its demand. If the industrial demand
were dominant then it would largely set the value of gold and
so gold's value would largely be, as you say, "set externally".
However, with the possible exception of the 20th century, I don't
think there has ever been a time in recorded history when the
industrial uses of gold have predominated so this is generally
not the case. And if e-gold caught on the historical norm would
be restored.
Strictly speaking e-gold is a medium of exchange but not a
currency. The term currency usually means a debt instrument.
Currency, circulating debt instruments, even if denominated in
gold serve as money and compete with gold in supplying the demand
for money. So the redemption of currency would increase the demand
for gold and cause deflation.
On the other hand, redemption of 100% backed "warehouse receipts"
would largely just change the composition of the money supply (from
"paper" to gold) and not its quantity. So this would, more or less
as you concluded but for slightly different reasons, not change the
price levels.
> Note that the amount of e-gold in supply constantly changes (it
> seems to have grown in the last year!) but the price levels at
> which I trade is totally unrelated and unaffected by that. The
> price level at which I trade is governed by the gold price.
This is because e-gold supplies a negligible part of the exchange
medium of the world and uses a negligible part of the gold on
the world's markets. If e-gold took off it would constitute a
major new demand for gold as gold was remonetized. This would
cause deflation (a rise in the gold price).
> If e-gold were in short supply,
Then the value of e-gold would increase: supply and demand.
> it would probably adversely affect the gold economy, because people
> would use alternative forms of payment, but the currency value (price
> levels) would be unaffected.
This would mean higher price levels in terms of e-gold. But this
would, not by itself, cause people to use alternative forms of
payment since more expensive e-gold would serve just as well at
a higher price level.
However, if e-gold was in "short supply" *because* GS&R was not
allowing bailment (as is now the case) then the prices of gold
and e-gold would diverge. As a result it would probably be more
economical to use something other than e-gold, perhaps gold in
another form, for an exchange medium. This might "adversely effect"
the use of e-gold but not the economy, or even the gold economy,
in general.
> PS deflation and inflation are terms that are related to fiat
> currencies only, and don't apply in an economy with asset backed
> currency.
Not only is this untrue in theory it is false to historical
fact. During the California gold rush when there was a gold
standard in this country so much new gold was produced that
it caused inflation.
CCS
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