It's Official...Runaway inflation in the L$

Let us assume a world filled with only two types of people: Sellers and Buyers. Sellers are very very cheap wish to pay nothing for access to Second Life. Buyers will buy everything available on LindenX.

A Seller has a choice of premium accounts which, for a year, cost $119.4, $90 or $72.

At $119.4 a monthly Seller would need to sell at an exchange rate of L$210/$1 or better.
At $90 a quarterly Seller would need to sell at an exchange rate of L$278/$1 or better.
At $72 a yearly Seller would need to sell at an exchange rate of L$334/$1 or better.

If any Seller does better than that exchange rate they are making money by doing nothing. They never even have to download the Second Life client to do it. I think we can say that those are the three points around which the Linden could naturally stabilize.


In order to order to get a more realistic view of the world we need to work on correcting some assumptions that were made.

First off, the cheapness of Sellers; it is safe to assume that people are pretty cheap, but they may not be that cheap. Being as there are plenty of people that pay monthly fees to play MMORPGs chances are people are willing to pay something, so the natural exchange rate goes up. (As in, more Lindens for a dollar.) This might be because they are willing to sell for a non-optimal or because they do not sell all of their Lindens, I do not think it matters.

Now the capacity of Buyers; for as long as there has been an exchange there have always been a surplus of offers to sell. Clearly they are not willing to buy everything available at any price so again the exchange rate at which the Linden will naturally stabilize will tend to be still a little higher.

In any case, at L$280/$1 we are hardly seeing runaway inflation. We may very well just be seeing the move of a number of accounts from being monthly to quarterly or even yearly.

Oh, I am also, quite clear, totally ignoring tier and what Buyers do with their Lindens. I have hand waved it away by combining the two and assuming that people who pay for more are doing so by selling Lindens given to them by Buyers at just slightly below whatever rate the market happens to be at. Which I guess would lower the value of the Linden and might explain why demand never ends up greater than supply. So very bad hand waving.

Sellers that get more Lindens than they would require to pay for tier will allow drive down the value. Even faster really.

I would claim the problem is that Linden Labs really has very few and very small sinks for the money but have no idea what a better and/or large sink might be. Which I assume has something to do with my having little idea how real currency avoids the same problems. I suspect they do not, it is just that it takes such a long time that we typically do not notice it.

What you have to understand about your L$250 "barometer" though is that L$ isn't worth that. It just isn't, I'm sorry. This is an illusion.

The problem is that LL takes contrary views between what they say L$ bought from them is worth (L$361) and what they say L$ bought from residents is worth (L$250). They then "tinker" to try to prop the L$ up to this fictional and contrary price on the exchange, which it simply isn't worth. From where I'm viewing this, for there to be any long-term stability, LL must do one of the following:

1. Increase account fees to $104.00 per year and scale the other billing increments accordingly.
2. Decrease the premium stipend to L$346 and the basic stipend to L$35.

Either of these will result in the L$ being worth the same from LL as what they INSIST it's worth from other residents on the exchange. Option 3 is to simply stop taking contrary positions on the value of L$, stop tinkering to try to give L$ bought from residents a price that's that's 31% above its value, reset this "baramoter" to L$361 and let the exchange stabalize in the neighborhood of L$361 (and it will).

Repeating a theory (Ricky's theory that the price of the L$ is determined by the cost of a premium account and the stipend you are entitled to as a premium account holder) again and again and again does not make it more (or less) true.

The formula is not wrong but is in no way a model that describes the inner workings of the market. For example, it does not take into account that there is something like supply and demand (and many psychological factors) at work, too.

When I can buy a resource A at a price X at one specific source, that does not necessarily mean that said resource will be sold (exchanged) and resold for exactly this price in every other deal. This is rarely the case. When the supply of this resource is limited and the demand is higher than can be satisfied with the supply, the price in the market will rise (above X). And if demand is less than the supply demand would fall even below X.

Every deal is influenced by assumptions on the future, too. If I am assuming that the price of a resource iI currently own will rise I am less inclined to sell it at current prices. If I fear that prices will fall, I will try to sell it even below current market price.

So it all boils down to the question, if the supply of L$ through stipends is enough to meet the demand - or more - or less. I don't feel qualified to answer that question. And I wonder who (outside of LL) is qualified to decide this, because the necessary data is not available to mere residents.

Just repeating that the "natural" rate for the L$ is (Sum of stipend payments/Price for premium account with yearly payment) is simple - more simple than the workings of the market, IMHO.

When the price meets the value, and in-world prices correct, the premium fee alone will no longer buy you enough L$ to compensate creators for their work. The demand will then increase. Or, we will learn that residents don't value the work of other residents enough to pay for it.

Shaun, I used to think the same thing you're describing here, but apparently I had vastly underestimated a BIG L$-sink: people who quit SL. Also, the big growth rate of SL's population further inflates the market value of L$

I think supply is outpacing demand so much simply because the price isn't right. When it gets there, it'll stabalize assuming people have become unwilling to accept the devaluation of their work and adjust prices by then.



I think you're right. The constant influx of new residents lately is the only thing slowing this decline down. It's not enough though.

But shouldn't we help it get there though. Hence, the "tinkering."

You've even suggested what, in your opinion, needs to be accomplished to stabilize the economy here...



...and LL may well have to arrive at this conclusion before the economy does, in fact, stabilize. But it does behoove them to sort of feel, or tinker, their way there.

They way I see it, it's like trying to balance a scale. When trying to balance a scale, we dont just simply plunk everything down on one side of the scale or else we risk over-tipping the scale. We instead give a little, and take a little from each side of the scale, until eventually we reach a balance.

The aim should be to stabilize and maintain a barometer for the linden, which currently and historically has been $L250/$1.00.

We're in agreement here.



You lost me here though. The problem is it needs to continue moving the OPPOSITE way that you'd like it to in order for it to reach an equilibrium. History has shown time and time again that LL trying to prop the exchange rate up to this fake arbitrary price results in 2 things:

1. a quick climb to this price
2. reality setting in again and causing a slow slide back towards where the price wants to be.

Then they tinker again, trying to get it back to the fake price they're trying to maintain. Why can we not finally learn from history instead of repeating it over and over and over again, with the L$ price continuing to bob up and down wildly like this? Why can LL not simply either charge more for the L$ they sell directly, OR admit that L$ just isn't worth L$250 per dollar on the exchange and let the rate slide to where it wants to be? I understand that in the short term, people who are holding a lot of L$ will be upset that this illusion which the populace has been hypnotized by for so long is shattered. I'm one of them afterall. In the long term though, if LL is going to sell L$ directly, it will be a GOOD THING for a stable economy for LL to allow consistant pricing between the L$ they sell and the L$ that residents sell.

There is no shame in admitting that a dollar is worth L$316 rather than L$250, it's the price they've set themselves! The way I see it, if LL is going to sell L$ themselves, AND have a credible economy, this inconsistancy should be dealt with as soon as possible.

100% in agreement. Historical movements indicate that the L$ does not want to live at L$250/US$, and trying to muscle it up to that point with halfhearted tweaks simply perpetuate the economic instability.

Yup.

Would someone please enlighten me as to what LL does to "prop up" or manipulate the exchange rate? I'm unaware of them doing anything aside from injecting new L$ into the game.

Please don't get me wrong, Shaun, but the way you and Ricky perpetually present assumptions as facts makes me wonder, what is the purpose behind this PR ...

Nobody outside the walls of Linden Lab has the information necessary to calculate the "price" at which premium account holders get their stipends. If they are on a monthly plan, they get 201 L$ for 1 US$, at the quarterly plan they get 288 L$ for one US$ and at the yearly plan they pay 1 US$ for 361 L$. And nobody knows how many premium account holders are on a monthly, quarterly or yearly plan.

Yet you two are constantly stating this price of 361 L$ per US$ as if it were a kind of holy grail and completely obvious that this is the price at which all residents get their Lindens and the price where the L$ will inevitably settle. Funny.

The fact that the same amount of L$ which enters the SL economy through premium accounts enters the Second Life economy at a cost of 0 (Zero) with the basic accounts is ignored.

The fact that there is no market in RL, where the price of a resource is determined solely by the cost of that resource is ignored.

This costant denial of obvious facts makes me wonder, if there is an agenda behind the public announcement of the "natural" (!) target for the exchange rate ...

Setting the upload fees, minimum classified fees, places advertisement fee, rating cost, manipulating the stipends (suppression of bonus ratings, referal bonus, etc).

Quitting isn't necessary. The _amount_ of $L in SL doesn't affect the value of the $L; it's how much is in active circulation. idle $L on people who don't often come on means more money in the game, but doesn't contribute to inflation. I might try posting my own idea about how to combat inflation, which I really don't see as much of a problem anyway.

I think that it's important to do away with these wide-spread euphemisms like, "injecting new L$ into the game." Residents would be well served to rethink these gentle wordings and deal in terms which represent this more directly as what it is, "selling internally printed L$ in direct competition with the residents, all the while INSISTING that they want those residents to be able to monetize their efforts". We should all be so lucky as to have an L$ printing press, which could churn out L$ for US to sell all day long too!

That said, LL does in fact do a lot of thigs to (attempt to) "prop up" or manipulate the exchange rate to a higher value than their own "fresh off the printing press rate". Every time they notice it sliding too close to its real value, they do one of these things. Some of them include cutting stipends, removing bonus L$ payments for things like hosting events, introducing some sink like classified ads, etc. This is usually accompnied by a proclimation that they've taken this bold new step to restore currency pricing to it's "value" of L$250 per dollar. This is what I've referred to above as "tinkering".

What's fascinating is how consistant the results of this tinkering are. What happens next is that the masses accept LL's proclimation that the L$ is now worth L$250 per dollar again, and start selling it for that in pretty short order. Unfortunately, it isn't worth that much, because the LL printing press is operating in full force 24/7/365 printing up new L$ to sell directly to residents for L$316 per dollar.

As a result, there isn't a lot of liquidity at this price level. Only those who really need more L$ than LL is selling 316 of for a dollar are going to accept only 250 of for a dollar. People who have L$ still need to sell L$ though, even though the demand isn't there for that much L$ on the exchange. So of course, realizing that their L$ isn't actually worth that much, residents continue to price lower and lower to get under the currently lowest order and get liquidity. This goes on and on with the L$ getting closer and closer to the value that LL sets for it, L$316 per dollar, until LL finally steps in and "tinkers" again.

The result? An unstable economic rollercoaster where you have NO CLUE if what you bill for today will provide the amount that you thought you were charging for it when it comes time to sell the L$. It's rediculous. Would you live in a place in RL where your rent is $2000 this month, but may be $6000 the next month and then only $1000 the following month?

I don't know how LL can promote SL as a place to start a virtual business in good concience, all the while fostering this type of absurd economic atmosphere. The risks that are acceptable to virtual business people should be "Is there a market for my product?", "Can I reach that market?" and "Can I afford to float my business until it becomes profitable?". Throwing in "Will the dollar I charge for my product still be worth a dollar 2 weeks from now or will it only be worth 50 cents then?" is a bit excessive.

Maybe another solution would be for LL to accept tier payments in the form of L$, at the rate of L$250 per dollar owed, if the exchange rate has been below L$250 any time during your current billing period. Then maybe they would understand firsthand what we as resident business operators go through and would finally take action that will truly stabalize the economy SOMEWHERE rather than these roller coaster "quick fixes" to stabalize it at L$250 for five minutes.

I don't mean to "Linden bash" here, and I don't think that the Lindens are bad people or that LL is a bad company. I understand that they have hired a couple of staff economists who will hopefully tell them the same things that Ricky has told them. I also have great hope that they will listen in a way that they don't always seem to listen to mere residents, and finally fix this.

LL: We the residents, are BUYING this metaverse that you're selling! We believe in it enough to expend considerable time, money and/or effort to build it with you and make it all that it can be! Please make it a stable metaverse in exchange!

Their best rate is 361 per $ (the premium stipend bought annually).

52* 500 / 72 = 361

This is were I get lost as well.

It seems to me like there are still way too many unknowns in the SL economy that do not allow for these types of concrete calculations, predictions and conclusions that Ricky and Shaun come up with.

For the record, I do think that Ricky is on to something. In as much as if the linden is left alone and LL's current monetary policy is left "untinkered" with, or otherwise lackadasically left to go "were it may," then the result may well be what Ricky predicts. However, this prediction can only come true if everything remains constant, as it is now, to the mercy of "whatever happens, happens.

This is exactly why we need to "tinker" with it.

I'm of the opinion that when it comes to an economy, there's no such thing as "muscling" a currency market to a desired number. LL has decided that it would like to, as close as possible, maintain a $L250/$1.00 exchange rate. LL has many economic tools by which to steer the economy toward that objective. As such, LL should utilize these tools, their economic knowledge, and their expertise to accomplish this goal.

That can not, IMHO, be described as "muscling" the SL economy. This is how economies function. LL would be remiss to pursue it any other way.

Part of the problem is... lindens don't wear out, the only big Linden sink in the economy is upload fees and groups... most people don't use classifieds.

Linden Labs needs to have more fees.

How about 2% per transaction money transfer fee ('sales tax'), with the necessary bookkeeping to track fractional Lindens? If you buy something for L$1, it'll cost you L$2 the first time and L$1 the next 49 times (or whatever combination of sales takes your fractional balance back down to L$1). You could do it with rounding up and no fractional bookkeeping, but that would mess up too many small transactions or encourage people scripting transactions into loads of penny transfers if you just made it free below some limit...

How about L$2500 to change your name? That's like paying for a new account, which is the "traditional" solution to the problem of "oh shit, that's a dumb name", except you get to keep your stuff.

If they implemented fractional Linden fees for taxes, they could bring back tiny fees for all kinds of stuff, like teleporting, without making people worry about them.

A ten percent change (at most) over six months isn't anything like the "unstable economic rollercoaster" you're talking about. REAL LIFE markets have far more volatility than that, and people manage.

I anticipate that buy volume will increase at more than the historic rate very soon. We're close to deploying some viewer features that make it much easier to acquire L$ from LindeX.

Cheers,
Lawrence

Now all we need is for currency speculators to stop the "pump and dump" chatter and start funding creators who will offer higher value trade goods and services that will make it more worth while to buy Lindens than to sell them.

Folks talk about "inflation," but when the dollar cost of Lindens is falling, that means that the real cost of items in world (bought using Lindens) is actually falling. Last time I checked, that's called "deflation."

Lawrence,

Thanks for the tip. I'll keep an eye out for it.

IRL prices also change. The only thing I see the price fluxuating on in SL to any noticable extent is land.

What will these be? How will they help? Thanks.