I'm An Economist And...

Note: This was posted in another thread by mistake.

Hello there,

I'm an economist and actually the economy is not on "self destruct mode." We do have a rather large inflation rate here in SL. This is due to the adding to the money supply each week through stipends and other adds. Simply, adds outweigh the sinks. This in combination with a devaluation of Land in SL (After SL started giving out lots of new land as well as adding First Land), has added to devaluation. In economic terms, this could be considered "hyper inflation." although we are not quite at that level yet. Hyperinflation happens when a government decides to try and fund, a war, for example, by printing more money. As they print more money and add it to the money supply, the value of that money drops and thus prices go up.

One of the main drawbacks of an economy on a hyperinflationary route is that of "menu prices." This is the cost of changing prices. Actually, it comes directly from the fact that when inflation is high, restaurants must change their menu prices often, which costs money, to print the new menus, etc.

The devaluation of the currency also adds uncertainty. It is more difficult to borrow money, because that money keeps losing value. This slows the economy more and lowered tax revenue and the cycle continues. This would normally lead to a crash in the value of the currency.

Here in SL, we constantly add to our money and land supplies, thus driving down the value of the two, depending on population growth. Many people on here post things such as, "Why do people keep selling Lindens for cheaper!! You’re driving down the value!!" Well, the answer is, because the $L is overvalued. We have to remember, that this is a virtual currency, backed by nothing else than the word of Linden Labs that the currency is a medium for exchange. Our value of even 350L/$1 is higher than many real world nations.

Now, LL could cut all adds to game, but this would diminish the "fun" aspect of the world. Thus they would lose subscribers, the value of the Linden would fall even faster, and Linden Labs would lose revenue which in the worst case scenario could threaten the shut down of SL which would make the currency plummet to nothing due to no further backing or need.

I have played many MMORPG games, and the simple fact is, ALL to date continually add to their money supply in the form of "hunting" or "gathering." In Ultima Online, for example; when I first started playing, I could sell 100,000 gold on ebay for about $55. Today, due to the MASSIVE increase in the money supply, you would need to sell several million gold to get $55 USD. The UO economy has not collapsed, but things have gotten more expensive via gold, but still about the same via USD.

Some people have also asked Linden Labs to "freeze" the value of the Linden and get rid of the exchange. This also would not work. By trying to artificially keep a currency at a given level, you create "black markets." In SL, the black markets would be in the form of people selling Linden Dollars on EBay, for example or simply via papal if they find someone in game. You can't artificially hold down (or up) the value of a currency (or anything for that matter.) without unbalancing the economy in question and throwing things, in the words of Plato "off balance."

Also, as long as Linden Labs does not make stipends, etc. LARGER to offset the devaluation, the high rate of inflation will slow over the next year, as the % adds each week will be less and less each time as the money supply grows. And let’s not forget they cut dwell as well. Let’s also not forget that inflation is measured by taking a "basket of goods" and analyzing the increase in prices from one period of time to the next. Many people, whom talk about inflation in SL, are actually referring to currency valuation, not inflation. Inflation grows a bit slower than currency devaluation, due to the Keynesian Theory of "sticky prices." Meaning that prices to not go up everyday, although we may have some inflation day to day. In real life, for example, the cost of a newspaper does not go up everyday although we do have a small amount of inflation each and everyday.

To sum things up:
1. In a MMORPG they have to keep the game fun, or they lose customers and the loss of players, makes the value of the game's currency fall even faster than it does with hyper inflation. By cutting stipends, in SL for example, the above would happen, maybe not to an all out crash or shutdown of the game, but they would def lose players, thus decrease population, thus decrease the demand for L thus decrease value because we would still have the same amount of L in circulation.

2. The economy will not collapse. Land owners will have to charge a bit more for rent, which will be offset (partially) by the added land supplies. Shop owners will have to charge a bit more, which will get passed on to customers. Customers will pay more in Linden. When it comes down to the bottom line of how we measure our Linden Dollars (in USD) we will still be paying the same amount of money.

3. A negative side of a hyperinflationary economy is the fact that people want to "spend" the money as soon as they get it in order to maintain the value. In post World War 2 Germany, for example, workers would get paid at lunch and allowed one hour to spend their money, because by the time they got off at night, the value of their pay would have dropped almost 50%. Here in SL, this would be reflected in the form of content creators and shop vendors selling their Linden often to try and maximize profit and avoid inflation. This decreases the demand for L$ and increases the amount of L for sale at any given time, which further devalues the $L, and the cycle continues.

Summary: Linden Labs has to find the "equilibrium" of how much stipends and adds to give out and how much land to offer in order to keep the game fun, while at the same time not introducing too much new currency into the money supply to try and keep the level of inflation steady and not overly high to help avoid the dumping of Linden on the exchange which further drives down Linden value creating a valuation-paradox.

Now, I typed this in a hurry, because I'm about to go to the gym, so I'm sure this is not very clear. I can answer any comments or questions on this subject. I hope this helps a bit.

Regards,
Teufel

PS. One thing they could do to slow inflation and currency devaluation would be to eliminate the stipends given out to free accounts. This would not hurt Linden Lab's bottom line much, thus securing our world's future a bit more, thus increasing confidence. You could give free accounts a stipend for 30 days to try things out, then they can stay in world, but not get a stipend unless upgrading to a full account. This would depend on how much of the add is from free account stipends. If the add is mega low, the loss of population may not be worth the decrease in currency value by such a small percent. Cheers!

I made it larger for the sight impaired.

Excellent Post, Teufel.

I'm still not convinced that keeping the stipends is in the long-term best interest of the SL economy. I do understand, however, your point that if LL intends to keep SL as more of a gaming/socializing platform, then removing stipends may cause problems.

I have wondered about something for awhile with the SL economy. Perhaps you can take a stab at answering these questions. You made a brief reference to it in your post:



1. Since land in SL is theoretically infinite in supply (more can always be added), doesn't that create a devaluing pressure on the economy over time?

2. Since most residents simply teleport directly to where they wish to go, thereby bypassing everything in between, does not that do away with the real estate mantra location, location, location?

3. Although it is desirable for your parcel to have a "good view", since land is constantly created, there is always the chance that more good views will be created.

Considering these three issues, it seems to me that the viability of the real estate industry in SL comes into question. It is only a matter of time before residents figure these issues out.

Since land is not finite in supply and since location does not matter in the long run, where do you see the real estate market heading? What affect will that have on the economy over time?

Good post. Teufel.

Schwanson, that repost is really annoying.

You cannot successfully use logic in this forum. It is unacceptable. Beyond that small problem though, great post!

You make a lot of excellent points, which the regulars will be here in a minute to counter with "No, we must end stipends!" and "I paid for my stipend, and need to tell you this on the off chance that you're subliminally suggesting a change to it!" Thank you for being a ray of sunshine in a dark, dark place though.

No, we must end stipends! I paid for my stipend, and need to tell you this on the off chance that you're subliminally suggesting a change to it!

I am pretty new so I might be wrong about this, but I know at least with my land that I bought i got in on the edge of a habital land, so that i atleast had a large green field on one side of my parcel. This does alow for the real-estate mantra to still exist because if people are concerned about their views, which I am, they wil pay more for a place with a better view. Also people might pay more for a place with better neighbors, just an idea though.

Glad to see more folks coming to my side of the fence and
realizing that Linden Labs and their Money Printing Stipend
Machine is killing the economy...

There is still an army of Socialists out there who feel the
Stipend Machine is a God Sent. But our numbers are growing
and we will win this battle to end stipends once and for all..

I guess you missed a lot of his post he said ending stipends would be a bad thing LOL

maybe you should try reading in stead of cutting and pasting the same old stuff LOL

Any maybe you should open your mind and trying using it.
Instead of letting others tell you ending stipends will be bad and
accepting that as the gospel.

Go research "Money Supply Inflation" and see what the future holds.

Good, Vashuda Linden was too.

No economy can.

No, there is no inflation yet, but yess will come because of devaluaiton.

Teufel, you sure you are an economist? There is no inflation yet, it is L$ losing value<- devaluation. But no increase on the prices yet.Well, anyway, lets continue.

No this is the last thing real life people think believe me. I lived at Argentina at hyper inflation and at Turkey with over 60% annually inflation. And changing the menu prices is the last think people think.

At last you come to a point, yes this is the problem: "the devaluation of the currency".

Right

What a wrong statement. "Well the answer is because the $L is overvalued". Only market can decide this and if they end stipends today and L$ value goes upto 200/usd, then will you say: "yes L$' s actual value was 200/usd". This is so wrong Teufel, sry. If market is selling L$ at 320/usd and you try to sell at 250/usd to a guy, this means overvalued. If a currency loses value 20% at a short time interval, this means low value. If a currency gains value like 20% at a short time interval, this means overvalued. But you cant say: "oh this country's currency has 1/usd. it is really overvalued so it is normal to decrease to 2/usd". This is the worst statement an economist could do. Market decides the value of a currency. All economists know that this has no meaning : "Our value of even 350L/$1 is higher than many real world nations."

Right.

This is adapting to inflation.

Sure, wouldnt work.


Yes, and this is why we dont have inflation problem yet, the actual definition of inflation is;
money supply growth rate / population growth growth. Can check many federal reserve bank web site or other .gov sites to lookup for similar definitions. Or an econ course book.


Cutting stipends or not. The real solution is money supply / money sinks balance.


Actually this will lower stipends with a natural way Prices will increase and stipends will remain same but will have lower value then you will conflict with yourself



Stipends will have lower value everyday.

The solution :
1-> constant money supply / money sinks rate. <- will pull L$ value up.
2-> put unlimited L$ at 250/usd <- will create a base value for L$.
Please use a simulator to test it. I used, and it works perfect.

I typed in a more hurry, because i am about to go to the RL job, and sorry for my lack of english. Maybe if i had a better english, LL could understand me better. And we wont have any problem atm.

Regard,
Kaz.

Hiya Katz,

Somehow you seem to think I think inflation and devaluation is the same thing. I mentioned in there somewhere the difference between the two. I even talked about sticky prices and how inflation comes later due to it. Maybe I confused you, I was typing fast. One thing, though; inflation HAS already entered the game. I've talked to several in game shop owners and coders who plan to raise prices of their good and some that already have. But yes, inflation comes after a currency is devalued.

Also, I'd LOVE to see the stipends taken out, or at least the ones going to free accounts. I updated my PS to reflect that. The main problem is that this is not a real economy. It is a virtual one run by a company which needs to make money. You have to think this all the way through. By cutting all stipends, the population will shrink, thus the value of the L will lose a bit more ground and at the same time LL will lose revenue which could make people "Weary" about the future of SL, which drives down the demand for L$ which devalues it more.

Cheers!

"Yes, and this is why we don’t have inflation problem yet, the actual definition of inflation is;
money supply growth rate / population growth growth. Can check many federal reserve bank web site or other .gov sites to lookup for similar definitions. Or an econ course book"

Once again, you have to remember that this is a game. The population which you are dividing by includes tens of thousands of dormant free accounts which just sit there. In real world we have people which MUST spend in order to live. In SL there are lots of accounts which people start for one night then never log back on. The population of SL is no where near what is posted on their homepage. Inflation is coming, and actually has already started in game.

Cheers!

Also, I have taught undergrad economics I have lots of those books.

Good to see we think very similar,
now we have 2 main problems:
1-> Making god happy(LL).
2-> Healthy economy.

I dont say "cut stipends" to LL but
1-> just make money source = money sink. <- will force L$ to have more value
2-> And put unlimited L$ at 245/ usd or 250/ usd to sell. <- will force L$ to have a base value and will manage SL's L$ needs in a natural supply-demand way not in an artificial way, and will make money for LL.

After doing this steps i CAN guarantee:

1-> L$ will have a most 250-255 L$/usd value.
2-> L$ will have at least 260-265 L$ / usd value.
3-> Stipends will stay(sometimes lower, sometimes higher.).

"What a wrong statement. "Well the answer is because the $L is overvalued". Only market can decide this and if they end stipends today and L$ value goes upto 200/usd, then will you say: "yes L$' s actual value was 200/usd". This is so wrong Teufel, sry. If market is selling L$ at 320/usd and you try to sell at 250/usd to a guy, this means overvalued. If a currency loses value 20% at a short time interval, this means low value. If a currency gains value like 20% at a short time interval, this means overvalued. But you cant say: "oh this country's currency has 1/usd. it is really overvalued so it is normal to decrease to 2/usd". This is the worst statement an economist could do. Market decides the value of a currency. All economists know that this has no meaning : "Our value of even 350L/$1 is higher than many real world nations."

With the above, I'm not sure what you're saying. Are you saying that I think I can set an exchange rate for L? No, you can't. I said somewhere in my post that if you tried to do that, people would simply sell their L on ebay, etc.

In my opinion, the L is still overvalued. That is an opinion. I don't think it is much overvalued, but as we continue to add to the in game money supply the L will continue to lose value in world as well as out. And yes, the market will determine the value.

Oh well, your English is pretty good.
Cheers!

Yes!

The closer we can match sinks and adds, the better. The money supply must be maintained. This is why many countries have their Central Bank totally separate from their Govt. So that the govt. can't manipulate the money supply, only the central bank. Helps stop governments from printing more money to try and take advantage of sticky prices to fund wars, etc. But here LL is the central bank and the govt. and in real life, we don’t have to worry about the world closing up, hehe.

Nite!

Actually you're mistaken on the black market thing. All they ahve to do is make third party trading a bannable ofense. The black marketeer would run the risk therefore of losing ALL in game properties, posessions and land and that would make the risk too high. Asd far as tracking it L$'s remain an in world currency, tehrefore regardless of what kind of payment is used on a third party site, the actual transaction is easily policed via the transaction records on the LL servers, and they can set up a flag for large transfers of L's, tehreby making it impossible to sell say 1 million on a third party site except in blocks of say 50 to 100 L's. If said flags came up all they ahve to do is look to see what was bought for the money in world and if nothing was, or some ridiculously stupid item was, say a skin for 5 mill then they investigate and or ban both parties in the deal.

No , i was trying to say, "overvalued" is a strong word, if a currency is losing its value, you cant simply say: "oh it was overvalued". And i alread said that noone can set a fixed price for a supply-demand market.

Exactly
But the point is LL wont care about these ideas

Any idiot could tell you that it's the sellers setting the value. If no one sold below 250 per USD then no one could buy for less. Simple as that. therefore the obvious conclusion is the falling L is the result of a few ppl trying to create a panic and lie about the causes in an effort to get Linden to get rid of stipends and force ppl to buy thier L's. A huge error as it would actually cost Linden a lot of account holders and shove all thier L's into the system thereby killing the value even faster.

Hey man, I understand what you are trying to say, but the black market always sees its way through. It would take a lot of resources for LL to try and stop me, from selling, let’s say you Linden. I could simply IM you out of game, and have you paypal me $100 then transfer the L to you. Just like in real life former Soviet Union, only with a tech twist. Other games have made this a Bann able offense as well, yet I know TONS of people who sell Plat in EQ for example to each other.

I'm law abiding, but many are not.

PS. I should also mention that an artificially priced currency becomes worthless as the citizens do not see it as worth what it has been artificially pinned to. This brings on other currency. Bartering would increase and a group could start their own currency which would then overshadow the L as it would be market viable. Like in the Former Soviet Union when they tried to make Russians take their currency. A black market appeared overnight and the US dollar was introduced as an underground currency. I have talked with diplomats whom lived there and they have told me stories of how everyone would buy everything "under the table" with US dollars.It would have been cool to see. This is a situation very different that what we have here in SL, obviously. By balancing adds and sinks, inflation would drop dramatically and no full scale lock down of the L would be necessary to accomplish this, if that is what you so desired.

LL could always "decrease" the money supply. Ack!
Prost!

Sir,

If you think there is some big conspiracy where people are purposely losing money to drive down the value of some virtual economy's currency, then damn! I need some of what you are smoking.

The value of the L is going down because there is more and more of it. See, when we get our stipends and other adds, the little guys go out and buys some clothes or a skin, etc. This money then gets placed into a store owner's account. This store owner has to use the money, but there is more than he needs, so he/she puts it on the exchange. As there is more supply than demand for the L, the price goes up. People have to keep selling higher in order to sell their lot. Humans, naturally, always want to get the best deal. So, we will buy at the highest L/$ that we can, the sellers want to sell but when the market is flooded will sell orders, you have to sell higher than the last guy or the same and hope no one else sells at a better deal.

The issue of how the sinks/adds should be handled is the job of fiscal policy, not monetary. Let’s see what Linden does!

As long as adds are more than sinks, the money will continue to be devalued and thus inflation will ensue. It is simple economics, no super geeks trying to crash the SL currency value. hehe.

Prost!

Actually all you need to do is watch e-bay. Not too long back someone was selling several million L's at a ridiculously low price. It does occur and quite frequently that if you play your cards right you can pick up L's for around 500 per USD when these idiots pull this market fixing tactic.

You missed what I am saying. Put flags into the system showing that someone sends someone that many L's. First off, check and see if a reasonable product or land changed hands for that exchange. If not the next step is see if the recipient account is an alt of the sending account. And in the case that nothing appears to have been exchanged as far as something in world of equal value, via a vendor etc ( easily checked since the server already keeps a record of all transactions) then BOTH players get banned and lose all in game asets, land, L's and possessions. Easily enforceable.