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Today, I received this PM from Etemenanki. With his permission, I am publishing both it, and my response, so that we can all learn something (including me, I always learn something from the comments in my articles).

He writes:
As the sitting minister of finance, I was wondering if you could answer a few questions for me.
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Firstly, I have only a basic understand of the fundamentals of finance, and much of those are based solely as a private citizen, and are rooted in the real world. My question is what are the principle reasons for the issuing of currency, and what is the outcome intended to be? If you could explain the basic concepts as to why this action leads to the outcome that would also be appreciated.
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Secondly, what is the method used to mature bonds issued by the government that are purchased by private citizens? Gold is given to the Canadian government at a rate that seems to average approximately 32-33 CAD, and is returned at a rate of 40 CAD. What is done with this gold that allows a return of approx 7 CAD growth?
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Thankyou and I appreciate your time and effort in answering these questions.



What are the principle reasons for issuing currency?

Currency is the proverbial “grease” of the machinery of trade. The CAD “greases” the machinery of trade which is the eCanadian marketplace. You cannot do business on the eCanadian marketplace without eCanadian currency or CAD. Currency is required by ecitizens to purchase manufactured goods and its required by businesses to purchase raw materials and labour and its required by the government to deliver services (military, work programs, infrastructure).

Here is the key point: the amount of grease required is proportionate to the size of the machinery.

Consider that an inventory of currency is required to keep the economy moving; as an ecitizen I need CAD for the food and guns I will buy tomorrow, as a business owner, I need CAD on hand to meet payroll tomorrow and to buy materials for the food I will produce. The larger the volume of economic trade going on tomorrow, the more cash on hand I need today. The larger the number of citizens buying goods and companies gathering/manufacturing/constructing, the more cash on hand needed. Resultantly, when trade is big, the amount of cash required is big.

There is another dynamic.

The pool of “trade” and the pool of “currency” are independent of each other. The trade pool can expand and shrink. The eCanada trade pool is expanding right now due to the high demand for diamonds and gifts. The currency pool is largely static with some losses due to citizens who die and some growth spurts when currency is issued. Suffice to say that currency is not issued in the exact same proportion as trade grows. IMO, this is why there has been a lot of upward pressure on the CAD as of late. People in general are conducting more trade than they were the previous day and the supply of cash is not keeping up. When this happens, the purchasing power of the CAD grows (real prices in terms of gold stay the same but the nominal price in CAD drops).



What is the intended outcome of issuing currency?

The primary outcome intended with the issue of eCanadian currency is to pay bills. It has been the tradition in eCanada to print money to fund budget expenditures that cannot be paid via tax revenues. When treasury gets low, a motion is moved to inject currency and cash flows from there.

This policy has not devalued the CAD so it remains in force. It is possible that our economy could stabilize and that we reach an equilibrium amount of currency and the system will be in balance and not require an injection of CAD.

One outcome that has never materialized that I have expected for months, and this is predicated on my experiences in RL, is that the value of the CAD will drop with all this printing. My hypothesis for why this does not happen is that ecitizens get more efficient every day in their various skills (manufacturing, gathering, constructing) and provide more "division of labour" for their wage, which counteracts the deflation I expect. Also, the various medals (worker, congress, hero) are windfalls into the economy which create demand for the local currency. Afterall, gold is nice but you can't spend it in the marketplace.



What is the method for determining a rate of return on bonds?

Bonds in eCanada derive from the Bond Act. The Bond Act permits the Prime Minister to issue an executive order to sell bonds. The executive order must contain certain details, one of which is the redemption price per gold. The recent bond issues have stuck to the $40 price however this is completely at the discretion of the PM at the time the order is issued.

Obviously, if there is no return provided by the bond, there will be little interest in purchasing them.



Gold is given to the Canadian government at a rate that seems to average approximately 32-33 CAD, and is returned at a rate of $40 CAD. What is done with this gold that allows a return of approx $7 CAD growth?

Issuing money is a game mechanic. Each nation can print its nation’s currency at a cost of 0.005 Au per unit. So at its very core, the epaper that each CAD is printed on is worth 0.005 Au, anything above that is attributable to the development and execution of a monetary policy (ie. a function of the inventory of CAD available to facilitate trade AND the relationship of that inventory of CAD with the volume of trade that goes on).

This game mechanic is the same for every country, that is to say the cost to print money is the same for every nation. The fact that the relative values of the various currencies differ with respect to the gold standard speaks to how much grease is in their respective economies, or in some cases, how little machine is left.

Let’s consider the latest bond issue. The government collected 1,500 Au and promised to pay everyone $40 CAD for each gold, a total commitment of $60,000 CAD. To print $60,000 CAD it will cost the government 300 Au which is WAY below what would be required to purchase this much on the open market. As MoF, I donated 300 Au of the 1,500 Au raised in the bond issue to Treasury and the government passed a motion to issue $60,000 CAD. This $60,000 CAD was used to settle the bonds. So, at the end of the day, the government raised 1,200 Au (1,500 - 300) for free...

...unless you count the dilution of the nation’s currency a cost.

The Government of eCanada has a unique right to print money at a cost far below what it would cost to acquire it on the open market, this unique perspective of money isn't easy to grasp since the entire enation is used to negotiating from the other side of the table.



Additional Commentary

Recently, the CAD has been trying to climb. It was decided to settle the bonds early (by about 10 days) to increase the supply of CAD in the marketplace and add grease to the machine. In addition, Congress has recently moved another motion to issue money which will help stabilize the CAD.



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