In your scenario, Slapshot, the money supply would need to increase if it is to mirror the wealth of the island. OK, theoretically B could embark on building huts, then houses and even bamboo skyscrapers while A turned the sand into silicon, making computers and solar panels to power their economy, with just $200, but it isn't very practical. In that scenario, the more they built, the less each item would be worth, though each dollar buys more. The trouble comes when B realizes the new solar computer will be worth LESS next year if he hangs on to the money he made selling his last hut to A. That is the problem with deflation, and the good thing about a little inflation... it prompts us to spend our money and keep the island humming.

By the way... the FED on the island created more money by lending to B. He obviously spent it on labour or materials sold by A (the only other person on the island!) who put it in his account (all done by cheque or... debit?) and voila! Money created! By the way, someone else stated that that is not money creation, but it is. There is very little paper or coin money compared to the total money supply.

Question for our gold standard buffs. In this little economy, how would a gold standard affect it? If the beaches were littered with gold or devoid of it, would it change their wealth, assuming they can't sell off the island?

Fianlly, much of those trillions of dollars lost never went anywhere. They never really were there. In Jan., people paid over $4 for KXL and others sold (smart!) and last week, some sold at .55 and some bought there (hopefully smart). My account is valued at the last trade, and if for some reason it trades at $4 next week (overly optimistic) it is back. Nothing lost nothing gained, particualirly if I don't sell at $4.

By the way, does anyone want all this on off topic???