Thanks for clarifying terms.
> currency
> 2 a : something (as coins, treasury notes, and banknotes) that is in
> circulation as a medium of exchange b : paper money in circulation c :
> a common article for bartering
> fiat
> 1 : a command or act of will that creates something without or as if
> without further effort
> 2 : an authoritative determination : DICTATE <a fiat of conscience>
> 3 : an authoritative or arbitrary order : DECREE <government by fiat>
Recourse to the dictionary can sometimes shed a great deal of light.
> The government decrees that it's currency has value. The strength
> of their economy, or military, determines if people believe them.
In the absence of real price controls the government can't just
decree the value of "fiat" in quite that way for anything except
the payment of taxes. The value of fiat money is determined by
the marketplace. Fiat currencies come into existence thru a
historical process in which people become accustomed to using
the currency as a medium of exchange because it is exchangeable
for something of real value (like gold) and then, gradually over
time, the right of exchange is abrogated. It continues to have
a value *as money* because people continue their accustomed habit
of accepting it in trade. People continue to do this only because
other people continue to do it.
This gradual abrogation is not unlike the way GS&R has been
gradually abrogating the original promises it made concerning
the convertibility of e-gold. All that remains is the promise
of delivery of 400oz bars. A promise which has not been tested
for a long time.
> > > If e-gold were in short supply,
> >
> > Then the value of e-gold would increase: supply and demand.
>
> Huh? How can the value of e-gold increase if it is in short
> supply? The only way the value of e-gold can increase is if the
> value of gold increases.
E-gold being in short supply was a hypothetical. I was simply
stating a consequence.
Gold and e-gold are not the same thing. And they do not have
the same value. The difference in the value is the premium. The
value of e-gold can increase differently than the value of gold
and this difference would be expressed as a change in the premium.
> How can the value of e-gold rise or fall dramatically without
> the value of gold doing the same?
The only thing that keeps the value of gold and e-gold together
is the extent to which one can be converted into the other and
the resulting arbitrage market between them. At present the
conversion only goes one way. 1) If GS&R will actually honor
their pledge to deliver gold in exchange for e-gold then if the
value of e-gold drops too far below that of gold it would be
profitable to buy e-gold, convert it into physical and sell the
gold on the commodities markets. This will tend to depress the
price of gold and increase the price of e-gold and bring their
values back together. 2) However, GS&R has already abrogated
their promise to allow bailment of gold. As a result, if the
price of e-gold rises above that of gold (ie its premium
increases), it is no longer possible for arbitrageurs force the
prices back together by buying gold cheap, bailing it in for
e-gold, and selling e-gold dear.
> If the value of e-gold and gold diverged, they can no longer
> claim to be "100% backed by gold". If 1 gram of e-gold does
> not equal 1 gram gold, then what is the point?
I hope the above makes clear why being "100% backed by gold" is
not the same thing as 1 gram of e-gold equaling 1 gram of gold
or the prices not being able to diverge. "Backing" is not enough.
They must be exchangeable. Exchangeable is what "backing" usually
means but GS&R has changed their definition by refusing to
allow bailment.
> What does G&SR not allowing bailment have to do with e-gold being
> in short supply? If they won't allow you to bail a 400 oz. bar, then
> send them the cash value, currently $107600, plus inexchange fee and
> they should purchase the bar for you.
Ah... plus inexchange fee. Since they are now a monopoly supplier
they can set the inexchange fee or the price of e-gold as high
as they want. Another way to put it is that since they control it
exclusively they can restrict the supply of e-gold to force the
price (inexchange fee) up. Without bailment there is no longer
any possiblity of arbitrage trading to force it back down. GS&R is
limited only by the possibility of ruining the market for e-gold
and forcing people towards using other media of exchange if they
make it too expensive. But e-gold is no longer tied directly
to gold because they do not allow bailment. The premium (price
of e-gold related to gold) is not determined by efficient
market forces.
> This helps them assure the purity of their gold. If they always
> receive their bars from a trusted source, then they never have
> to spend additional funds certifying the purity of said gold bars.
This is a red herring. The gold market is old and very
sophisticated. Such problems were dealt with long ago. As
long as the gold never leaves the vaults of the large money
center banks and depositories it does not have to be reassayed
or even moved.
CCS
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