Stabilization Of L$

OK, I'm going to open the can of worms and find there's all kinds of different worms, but...

I propose as a concept, that GOM or LL or whoever primarily sells L$ take upon themselves to stabalize the US$ trade value of the L$. Set it at, say, $4.00 per 1000 and KEEP it there.

WHY? Because although the value of the L$ may decrease... the monthly US$ charge for land does not.

Land rentals and merchant booth rentals are designed around L$ conversion value. For example, if someone opens a sim and rents out merchant space to pay the $195.oo a month sim fees... s/he is are relying on the fact that if they rent X amount of space for X amount of L$, they will be able to convert those L$ to US$ to pay for land fees.

But if the L$ is so unstable that it drops 15-20% in value (as it has done recently) then that leaves folks paying for things out of their own pockets as their conversion values greatly decrease. If a person can't pay sim fees or land fees because the L$ destabalizes... that's no good for anyone.

I see no reason to not stabalize the L$. Linden Lab doesn't charge more or less for land as the L$ fluxuates. So SET the L$... leave it there, and use other methods to control the economy.

Having it fluxuate as it does is to me, someone's idea of playing a "money game" where a game should not be played. I don't come to SL to have it emulate the insanity of real life... I come here to get AWAY from that insanity.

It sounds like what you're suggesting is for *us* to lose $US out of *our* pockets so those renting out merchant space in their sims don't have to worry about the plummeting value of the L$. Thanks, but no thanks. We've done our bit for king and country -- now it's time for the market to do what it will. You're free to try to prop the L$ up at $4 if you want, though.

Anyone at all can fill open orders on GOM. Therefore, *anyone* is free to try to stabilize the market at $4.00/block. We just run the market, we don't try to influence it.

Right now, it would require someone to spend around $17,000 USD *right now* to force the market up to $4.00. And what happens tomorrow, when it becomes apparent that you're trying to out-muscle the market? I'll tell you what. You end up buying more currency at $3.99. And more. And more. Until you run out of money, and the market finds its own equilibrium again. The market will do what it wants to do, and by trying to artificially force it to do something else, you're just going to end up paying in a big way.

Is there anyone here interested in spending that kind of money to try to push the exchange rate up? I'm surely not. And I doubt anyone else is. Not if they're smart.

If there were some compelling reason to want to spend L$ in SL, then people would be buying currency, and the exchange rate would rise. Simple as that. It's called market forces, and it works.

Anybody who thinks the exchange rate should be rigidly fixed at a certain value is welcome to try to make it so. We could sure use the commissions on $17,000 worth of sales.

All i see is that line graph on GOM going down....and down....and down.

People are buying and buying.......and still down and down.

Does this mean that in a few months $L will be worth pennies?

(i once turned over to the bloomberg channel by accident, lol)

This is why the price keeps falling.

Some people, mostly traders, will offer to buy L$ at (say) $3.45 others will put L$ for sale at $3.50

A user comes along with 3 million to sell (as happened yesterday) and fills all the buy orders down to $3.35

Small users come along wanting to sell 4 or 5 thousand, see the big gap, see the large amount still for sale at $3.50 and think "I don't want to wait 24 hours to sell, but I want more than $3.35" So they place their L$ for sale at $3.49, or $3.48 in the hope of selling quicker.

Instant price drop.


How can this be stopped? The only real way is to convince more people to place buy orders to soak up the regular large "cash outs". Simply injecting US$ and filling the sells to raise the price does not increase market confidence and opens up the gap between buy and sell. A large "spread" between buy and sells is an open opportunity for random "quick sell" orders which again lower the price...


It's all about market confidence.


Please remember, there is NO ONE PERSON at GOM that sets the rate. The rate is set by YOU, the market...

well Im new to the whole selling L$ but I 'was' shocked to see it at its all time low that I know of.

I held onto my L$ for the while.

But what about the fact that LL is selling L$ now?

Surely THAT effects the overall economy?

I know they sell small amounts as apposed to 3 million or even 10K...I 'think' the most you can buy is 5K.

However I am guessing from what little exp I gained from buying & selling L$ on ebay 8 mths ago that the majority of people buying L$ are fairly new to SL and also only buy 1-5K...the odd exception of 10K now & again ( in my exp)

So Mr "short of L$' nips over to a store doesnt have the amount of L$ required for 'said' item..POP UP...buy L$ have product...nice little impulse purchase there as lets be honest the mojority of things purchased in SL is impulse or 'as & when' they see something...so if they dont have the L$ they either a) dont go shopping or b) walk away and forget where they even saw the item...(obviously there are exceptions...those few that will 1) know how to buy L$ from 3rd party websites and B) will stand there in world and WAIT for the L$ to go through paypal and be delivered.)

BUt lets assume the majority of ppl buy on impulse...or at least arent THAT organised to save a LM and go back to that store when their stipend comes.

So...I figure overall sales in SL have increased and dramatically due to LL selling of L$ now.

Which on the surface looks GREAT!

But less people buying it from 3rd parties now, 3rd parties getting desperate as they cant shift it so lower their prices...

Not to mention the genral more money turning hands in world now we have the convenience factor..and we all know how deflation and inflation works yes?

People arent spending money value goes up.
People are spending money value goes down.

Any currency will tend to become more valuable whenever demand for it is greater than the available supply and Vice versa
If there are too many people trying to sell it...too much floating about its value drops.

It makes perfect sense 'now' to me that LL selling L$ would have an effect of the L$ value.

They play a risky game however and need to be careful for the points mentioned by the original post. Creative input may decline and stop if there is little financial gain over the overheads LL charges us as merchants & land renters.

The only way to overcome this is to increase the value of goods sold.

After all if our customers are buying L$ cheaper or getting more L$ for their dollar then it's only fair the sellers of SL goods increase the prices as we get less Dollar for the L$

Thats my '2 penny worth' for what its worth

I dont claim to be a financial guru but just follow the simple equasion of RL economy and exchange rate falls & rises and reasons for.

Where are LL selling L$?

LindenLab are NOT selling L$, they are making their own copy of GOM.

It is still SL users selling, but through the LL site, and so the same rules of supply/demand apply.

But you do accept its easier for residents to buy it...therefor increase sales generally?

Therefor the increased sales will have an effect on the value of the L$?

No?

Forgive my ignorance on the sales of L$ I didnt know I we could sell our L$ to LL direct now...ignorance on my part

as i say the whole 'making L$ and selling it' is all new to me but there MUST be a reason for the dramatic decrease in L$ value in such a short period of time and in coincidence to the new supply from LL direct and in world ( no? lol )

*feeling more & more stupid*

At the moment, we have more L$ that people want to sell than there are buyers for it. As long as that situation exists, the value of the L$ will continue to drop. Slower growth in the supply of L$ or faster growth in the number of active SL accounts than is currently happing will change that, but that is not happening.

If LL does make it a little easier for more people to buy and sell L$, there is no guarantee that the same glut of L$ that exists now won't still exist. In fact, if the market that exists through the current channel also exists in the new LL market, the rate of the drop in the value of the L$ will actually accelerate.

lilly -- As said, LL is acting as a market for $L already in circulation, not selling directly. What this will do, theoretically, is increase the demand for L$ sold by users.

The price is dropping because there aren't enough people wanting to buy linden currency as fast as linden dollars go up for sale. If demand outstripped supply, then those people wanting to sell in a hurry wouldn't need to discount so heavily -- they could just sell at or near the current price.

This is all about LL trying to increase demand for existing L$.


Wayfarer -- it's one thing to speculate on a currency market, and quite another to try to control it. I think Ricky's post stated the problem well.

No one has any obligation to ensure content creators a monthly income. Yes, it *IS* in LL's interest to have a stable economic, because if the environment gets too volatile, LL will never see the kind of sophisticated content and commerce they are hoping for. It is hard to run a business if your costs fluctuate so rapidly (although in this case typically it's the exchange rate and your ability to pay your costs that fluctuates).

In an unstable environment, sophisticated business people will hedge. You know, similar to how the airlines try to protect themselves against fluctuating fuel costs by hedging with financial instruments and oil futures?

Of course, someone would need to create an options market so people could make puts and calls. (and then make sure that people weren't trading excessively on margin or there'd be a bundle of trouble).

The quantity of L$ in the economy has nothing to do with the value of the L$. LL's ploy to reduce the stypend bonus will have little or no stablizing effect (it might force more people to buy L$'s from the exchanges). The trouble is what people are using the exchanges for. The SL exchanges have become a way for people to pay for their teir, a way to turn a profit. The trouble is there isn't enough demand for L$ to ballance the greed, plain and simple. If commercal buissnesses were removed from the exchanges things would balance out (this will never happen).

The trouble is L$ are stockpiling, the number in active circulation are dropping per user (shown in the drop in median balance). The L$ are ending up in the exchanges and no ammount of pressure is going to make people buy them. Everyone wants a free lunch and nobody want to pay for it.

20% of the L$ is in the exchanges, 3% of the $L are in the poorest 50% accounts.
Those dumping L$ through GOM aren't reinvesting in SL products, it's a major problem. The majority of GOM transactions are done to facilitate transactions that would be better done in US$, very few are done to buy SL products or services that won't result in a L$ being sold in an exchange. If SL corporations were interested in stabilizing the L$ they would they would stop using it inplace of US$ and start charging a fee for having to exchange it. What SL needs is a paypal type service that primarily deals in US$ but can handle L$ conversions to US$ (and then it liquidates the L$ on an exchange, or runs it's own).

Well, GOM (the company) really has no control of this.
They don't really sell $L, they just provide a place for
residents to sell... and residents set their own prices.

You'd have to convince several hundred people to force
their price at $4.00, but I think you know that won't
work, because if Joe Seller wants to sell his $L faster
the he'll put his price at $3.90 (below EVERYONE else),
and, of course, any (smart) person wanting to buy is
going to buy the lower priced $L.

If GOM tried to FORCE $4.00 sales, then Joe Seller
would sell on ebay for $3.90, or make his own site
like GOM, but without that restriction.





Well, even though it's up to the entire population
to set our own prices (and no one can strictly CONTROL
what another person sells $L for), several people at
LL have indeed indicated they would like to stabilize
the economy at $4.00 / 1000, so you are (somewhat)
in luck.... because LL has the ability to create and
destroy $L at will... this means they can flood the market
or bleed it dry.... and so can adjust the amount of
available $L to fit (generally) whatever exchange rate
they want. I say "generally", because it should be fairly
easy to get in the ball park, but there will ALWAYS be
minor fluxuations do to the nature of people. Just as the
U.S. Feds are always doing things to adjust the US
economy to help keep it stable.

So.. patience... let's see what their new
VP of Finance does.

Gabrielle

You CAN'T sell direct to LL.

The is NO new supply, either direct from LL or inworld.

There are good reasons for stabilising the exchange rate, and for stabilising prices. I have posted on these.

The first cannot sanely be done by anyone intervening in the market by buying and selling. People will speculate against them. Not even LL can afford it. In the end genuine market forces would beat them.

Only two things can do it, one short term and quick acting. One long term. The second should be used to back up the first.

The short term solution is confidence. All it needs is a widely distributed, emphatic, and determined statement by LL that they have the power to control, by manipulating the money supply, and that they will immediately start to do so, aimed at a declared target, within a declared timescale. All desperate sellers who are not too time-strapped will withdraw and wait. New buyers will buy fast to grab some of the climb to the new level. Whichever way round, the price will pop to the declared level fast, if LL are believed. It's their job to make sure they are.

The longterm one is the money supply (ie that in active circulation). LL have total power over this, not day-to-day because of the "active circulation" bit. But on about a 10/30-day timescale (time for their sink/source changes to work through). This needs to be got right in two senses. From the confidence viewpoint, if people really think it will work, it hardly even needs to do so. From the "long term pressure" viewpoint, and drifting of inworld prices, it is a real factor, needing to be regularly controlled.. Seen to be working correctly, this would suppress/limit possible speculation against them.

I think the current rapid exchange rate movement very damaging.
A huge dramatic believable announcement of intent by LL could halt/reverse it instantly.

Why don't they do it ?

The ratings bonus thing is puny and unbelievable, and discussion of its money supply implications is muddied in peoples minds by the "fairness between residents" issue. Emotionally its better to increase sinks than reduce sources. Need some creativity here, fast. Or the willingness to bite a pretty nasty bullet.

I admit I know very little about economics, but what I believe
is that the value of anything is directly related to the supply
verses demand at any given time, so could you explain what
you mean? As far as I see it, if the demand remains the
same and the quantity goes 50% more or less, it seems like
that would change the value a lot !?

Gabrielle

Maybe LL should offer each currency exchange site a "financial message of the day" for prominent display to all those residents contemplating trades.

Suggestion for today:

LL considers last night's rate far too low. We shall be actively manipulating the money supply with the intention of returning it to the xxx level within the next yyy days. An anouncement of the precise steps to achieve this will be made in forum on zzzzzz"

PS I too think it possible that we are waiting for the new VP Finance and the new economics consultant to get into the saddle, and get things more firmly under control.

On the question of whether the ratings bonus cut will do much, or should have done if properly promoted/understood.

Philip said:
"Taken together, these two changes reduce the amount of new currency flowing into the Second Life economy by approximately L$6.8 Million per month. This is a signifigant change, corresponding to a reduction in overall monthly economic incentives by roughly 19%"

Now you see, this statement has a weakness. It doesn't tell us what we want to know.
What on earth are "overall monthly economic incentives" ? And any way, we want to know the % it is of the money supply, not of some vague thing which we don't know the significance of to the economy.

I know its laziness, I know we could dig it out. But I looked at this statement of Philip's - I thought "Ah-ha, this looks hopeful". Then I saw the words " monthly economic incentives" and thought "what the hell does that tell us - is it just a way of spinning the numbers by mixing in an unknown factor ?", and lost interest.

And more importantly, since I don't know how significant this change is, the statement didn't increase my level of confidence. I dumped a chunk more L$ onto the exchange, before things got worse. Thank heavens, because they did.

The precise wording of announcements for absolute clarity and conviction is critical.

A good significant change that is clearly understood can have instant effect. Not understood, it will take weeks to work its way through.

For it to work quickly, I have to believe it will work. More, I have to believe that enough of you others will understand it, and believe so too.

The Linden Dollar has actually _fallen in value_ 12.5-percent (from an average of US$4:L$1K to US$3.5:L$1K) when pegged against the US$.

Landlords themselves frequently make a fundamental mistake by failing to calculate the proper annual cost per prim, which (based on a _current_ market rate of US$3.5:L$1K) is:

(((US$9.95 * 12-months) / 117-prims) / US$3.5) * L$1K = $292 (rounding up)
[Please note the above formula is slightly simplified in that it doesn't include the actual cost of the land ammortized over the course of a 12-month period (I know, I know... a CPA is out there gnashing their teeth that I broached the subject of ammortizing real estate but it's _virtual_ real estate)]

The mistake is made when the landlord simply combines his premium (possibly discounted) and his total tier (also possibly discounted) then divides the sum by his total available prims. A landlord charging less than L$5.60 per prim per week (at _current_ market rates) is eventually going to get into trouble as:
A) they're also assuming they'll maintain 100-percent occupancy over the course of a 12-month period (highly unlikely; in the Real World if you can maintain a commercial occupancy rate of 81-percent you're doing fantabulous). And
B) operating within an ever-decreasing margin.

Nutshell version: Bob wants to be a landlord, but Bob is bad in math. Bob fails to crunch his numbers correctly and improperly prices his service (land rental) based on current market rates. As time goes by Bob loses more and more money until Bob loses his parcel or island, and maybe even his shirt, and his tenants all wind up out on the street.

If the goal is to "stabilize" the L$ by having it rise in value against the US$ then money has to be taken out of circulation thus decreasing the money supply (which, though new currency is injected into the game via weekly stipends, stipend bonuses, and Dwell payments) is actually finite at any given time. Money that is spent on things like First Land (L$512), rating points (L$25), uploading textures (L$10), etc., literally removes money from the game. In other words, it makes more sense to encourage new players to buy First Land than to ask _one_ 3rd party currency exchange to adopt a non-fluid benchmark against a rather fluid currency. SAVING money also reduces the amount of currency in circulation and raises the US$ value of L$. The elimination of Stipend Bonuses will also reduce the amount of money being injected into the economy (by 60-percent; in fact, if we include the earlier Bonus change around February it's a 75-percent reduction) thus increasing the value of the L$ to the US$.

So, in the case of a number of landlords their status as an endangered species is self-inflicted. Plus, if 9,417 basic accounts upgraded to premium _and_ purchased First Land it would have the same net effect of your goal of "stabilizing" the economy (equivalent to the US$17K that Ricky Zamboni previously mentioned), though it wouldn't reduce the number of landlords on the endangered species list, but would add more.

And even with an elimination of Stipend Bonuses there will still be plenty of L$ sloshing around plus about L$258,406,000 injected into the economy over the course of a year after the change takes effect (based on the current size of the population and percentage of premium and basic accounts; and yes, if you've previously crunched this number on your own the total finite size of the SL economy is shrinking dramatically).

Huh? So they upgrade to premium, get L$500 in their first stipend which they spend on first land. Net effect, zero.

Next week they get another L$500 stipend but they already bought their first land, so all this extra stipend (L$450 x 9417) is NEW money added to the system...
Rinse and repeat each week...

In the end - reguardless of the actual exchange rate -

The Value of the Linden Dollar is based on what content providers are willing to provide Quality content for VS. The willingness of Consumers to buy that content.

If they want the content more then they need their RL money they will buy L$ and thus Content providers who are sucessful enough to sell L$ make RL money.

The effect of a rapidly dropping Linden $ is that it makes it difficult for Content providers to get a resaonble (to them) return on their hard work.

By having Linden Labs guarantee the currency at any particular value - could prove prohibitively expensive to them, and theres still no guarantee that consumers will feel that the Lindens are worth what they are being sold for.

I think an Active SLOWLY declining Linden $ ,would be Preferable to a Stagnant No Change Linden $.

So how do you plan for only Slow inflation? Reduce increases in the Money Supply while encouraging growth of the consumer base.

So LL -

Reduces Total Stipend payouts - Offers Basic Accounts for free

Seems to me Linden Labs Knows what they are doing.

just curious, but what kind of landlords have a charge per prim per week???



But LL is also now getting almost $10US monthly in exchange for this new money.

That is LindenLab money, nothing to do with SecondLife economy...

I took it to read that LL is pumping about L$34 MILLION
of new $L in the economy each month (stipens,dwell,etc)
and this change would be a 19% (L$6.8 million) reduction
in that amount.

I could be mistaken, but that does seem like a significant
amount. Do we have any figures that indicate how much
is being taken out from sinks each month?

Gabrielle

Yes and no, couldn't it be kind of like adding gold to fort knox? The U.S. can only print paper currency (worthless on it's own) equal to the ammount of Gold they have...(I think...maybe I didn't pay enough attention in soc. studies though)

LL can print new $L based on us adding our gold (premium fees) to the bank.

Am I way off on this???

It seems quite obvious that LL needs to be handing out
$L the same way we have government assistance programs.
Those dollars are gained through taxes (sinks), and no
"new" money is created. The economy itself will only be
stable once the amount of $L being created and destroyed
is near equal.

The rate of exchange between $L and $US is a
seperate matter from the actual stabilization.
We could have a stable economy where
L$10 = US$1 or where L$1000 = US$1
(assuming we consider the $US stable.. heehee)

Gabrielle