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Given that the total balance is zero, either the time-average of the money flow into each node is zero, or some nodes will have a net average loss of money. This is unsustainable and eventually these nodes will go bankrupt. Since nodes abhor negative money balances, these balances will be compensated by issuing IOUs instead of paying outright. This means that the total money mass grows in proportion to the unsigned sum of the nodes' net money flows. This is inflation.

The more volatile transaction prices and volumes are, the larger will this unsigned sum of net money flows be, and the more credit will be created to prevent parts of the network from dying (going bankrupt). This means that inflation is correlated with market volatility.

So, the freer the market the larger the inflation of the money mass. Price and volume control, be it through market power or regulation, reduces volatility and the pressure to create credit and inflation.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:35:37 AM EST
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