Stabalizing the Economy - Economics 101

I've seen alot of posting about the linden economic instability lately and I've been watching the value skyrocket. Having a business of my own, this was starting to concern me because every time it rises, I have to readjust how I support my sim and how much it will cost me to maintain my current overhead.

These are just some random thoughts on the subject:

1. The basic laws of supply and demand still apply to a certain extent here in SL and it is a proven fact that when you have too much supply, the demand goes down and the value of the dollar ( or in this case the Linden) drops.

2. The US mint has a governing system that prevents the creation of too much new money. The dollar is basically a promisary note of ownership of gold. If we don't have the gold, they can't create new money or the value of the dollar will crash. So whats governing the Linden value? Nothing. There is no commodity that the linden dollar is based on so therefor the Lindens must impliment some means to prevent too much new money from entering the system. Raising the cost of blackhole money sinks like upload textures cost and classified ads would be one way to "burn" excess lindens.

3. But the primary problem with the economy is not the Lindens.. its the Business owners like you and I. When the value of the linden drops and Merchants do not raise their prices accordingly. Without this balance in business practices, the Linden will surely hit the 500:1 ratio everyone is afraid of. Putting small business owners out of business and Large business owners reconsidering if this is really worth the effort. Basically this would be nothing more than a virtual stock market crash.

So how do we fix this?

Take a look at the economic stats that the Lindens now let us see on the website. In the month of April, roughly 59 million Lindens were created and flooded the system. How much went out? Only about 18 million left the system or was "burned". Now take a look at this month, its even worse. New money created has already hit about 59 million and we still have another week to go, so we could potentially hit around 65 to 70 million in new money generation for this month alone. How much has been burned so far? Only about 17 million has been removed from the system.

If the Lindens do not take a look at their own economic figures and remove the obvious new Linden creation areas, the value will never stabalize. Basically what needs to happen is if they want to keep the stipend around, the money sinks are going to have to be substantially larger. Content creation fee and new land auctions as well as land listing fee's will have to be raised to match if not exceed what is coming into the system in order for it to just balance out and stabalize the value of the Linden. The problem with this is there are new accounts being created every day which raises the stipend amount and jacks up the creation of new money.. and these people may not be coming in buying land. They could simply be alts coming in to serve some personal purpose as far as groups or organizations go.

The stipend has to go. Thats the bottom line. Or at least be put on a fluctuating scale so it matches the amount of lindens being taken out of the system or being "Burned."

If the Lindens don't take drastic steps to stabalize this economy, all their dreams of turning this into a virtual economic structure that businesses can function in will go out the window and people will only look at it as a failure and proof that the virtual business place will never work.

Some suggestions:

Get rid of the stipend completely and only give new premium accounts start up money on a one time basis. Basic accounts should not get a stipend at all, this will also stimulate the creation of premium accounts which will help the Lindens (as in the company) thrive.

The dwell bonus is NOT the problem. Honestly I think the stipend should be converted to a land ownership bonus. Not a Dwell bonus but an actual bonus given to those people who shelled out Lindens and actually own land on a premium account. This will stimulate new land purchases and linden buy requests BEFORE new money is put into the system, not after like the stipend does currently.

And one final suggestion which i'm sure wont be too popular i'm sure; create a virtual commodity with a finite limit amount. Basically an imaginary gold. Lock that amount in and adjust the amount of lindens flooding the system so that it never bypasses that locked amount. That will force a natural stabalization of the economy and also force us to investigate other options for helping new people coming into the system. In the US there are homeless people everywhere. The only thing stopping the US government from creating a bazillion dollars and handing them out to everyone so we are all happy and holding fists full of money is the fact that the money would be worthless if they did that. We need to start thinking like the real world if we want this virtual economy to behave like the real world economy. Only then will any of us stand a chance in actually seeing some benefit to our hard work.

Thats my 2 cents, which is roughly worth less than nothing on the Lindex exchange and THAT aint right!

Rissa

No.

It's not.



Oh, yes they can.

http://en.wikipedia.org/wiki/Fiat_money

The Federal Reserve controls the currency pool by adjusting interest rates and selling bonds rather than fixing money to the value of gold.

What En said. We haven't been on a gold/silver standard for a long time now.

True. Now we have Bentleys, spinnaz, iced out gear, Sean Jean pants, and gold teef.

so you want to end stipends and create a fixed rate?

Starbucks, too.

Fiat Money has already been mentioned; there is also credit creation by banks.



The L$ is falling because most SL users don't buy L$ to spend on content. (If they buy L$ at all, they do so to buy land.)

If users don't buy L$ to spend on content then raising the cost of content will only lower sales.

The reason why people don't buy L$ to spend on content is probably not to do with the quality or price of the content, but more the social perception of virtual content and the overall limitations on what any form of SL content allows.

The distribution of wealth of SL is very skewed, simply because there are so many basic accounts who live on their stipend. You can argue that it's right that they be frozen out of the economy, because they don't contribute US$; but as long as they exist, someone will be making money by selling to them and cashing out.



If it ever goes below 361:1, immediately traders will be able to undercut LL on selling L$-only Premium memberships. That will push the market back up again, since the traders will be buying L$, and people who switch their Premium will not be having L$ created any more.



Raising content creation fees will hurt new users and smaller businesses. The problem is that content creation fees are inadequate in an economy where content, once created, can be sold indefinately. As the bulk of content that is sold on SL becomes that which already exists, rather than that newly created, the value of this sink drops.



Basic accounts do not recieve stipend if they don't log on.



If people are not interesting in paying US$ for L$ now, removing stipend likely will not make them. It is doubtful that there are many users who aren't earning money, who are getting everything they want from their stipend. Instead, they're taking their stipend and settling for what they can get. If you remove the stipend, they'll settle for freebies instead.



The virtual business place can work, but only if it remembers that for real money you have to compete against real business too.



For L$-earning users, or pure creators, this would be effectively giving them a tier discount of however much they can cash out their L$ bonus for.



This does not work in an economy where new valuable items (ie, content) can be created from nowhere. As long as that's the case money must also be created from nowhere to match it.

Moving to Land and the Economy.

I agree with everything in your post except part of the above. I am a basic account owner, and there is no way I can live on my stippend. It is only there for me to look at and to remind me that what I want to buy is more than I can afford (or was, anyway). As for not contributing $US, %3.5 of $2000US for selling is about $35US that I have contributed to LindenLabs since last tuesday alone (and maxed out my trading alawance in the process ) Freebies may not contribute by paying directly, but they definitely contribute to the economy, as you have pointed out.

Although you have bought L$, I believe that relatively few basic accounts do.

The customer base effectively has a "long tail". If you sell below L$500 you have many more potential customers; if you sell below L$50 you have a huge number (although advertising costs may be a problem to get them to actually notice)

In order for me to buy that $2000USD from basic accounts/people needing $L now, I had to first sell that same $2000USD to basic accounts and people wanting $US now. It wasn't just a single one time buy thing, it was a series of exchanges of approximately $300USD going back and forth between me, sitting here keeping an eye on the market and setting what I hope are reasonable prices, and people who don't want to bother with the market forces or wasting time. Also, vast majority of the buys and sells were for only between $1,000L and $5,000L (with some going as high as $15,000L), which tells me that most of these are just casual players needing to exchange money quickly. Not land barons, huge business owners, or whatever other types get lumped into the "haves" category.

The stipend does NOT have to go. People have to quit UNDERCUTTING eachother.

The reason people are undercutting one another is because with only a certain number of buyers per day (let's say $11,000,000L worth of buyers based on the past two days) people are trying to make sure their $L sell. If people want $11mil, and people who want to sell have a total of, let's say $20mil, the ones selling will keep trying to sell their offer at a better value to try to get at least a small cut of that $11mil market. In the end, $9mil will still go unsold, and the process repeats itself the next day. Why is that so hard to understand?

You see.. cutting stipends does not truly create a supply/demand balance. It creates a false balance. The true balanc eis what seller can afford to sell, and what buyers en masse will pay. When we reach that number, the lindex will stabalize. This is growing pains.

edit: Why is it so hard for some people to understand that the linden is only worth what someone is willing to pay for it?

I simply think that if people were willing to pay $320 for it yesterday, they should be willing to pay $320 for it tomorrow, and only know of a few ways to make that happen.

Some buying it is deifferent from everyone buying it. If it all sold because there was enough demand, then it would alls ell and the price would stabalize. Maybe 500L/1USD is a good value for buyers.

Wow, I go out for the evening and come back to two pages lol. I figured no one would even read my post nevermind comment on it.

For those saying we are not on a gold standard and haven't been in a long time, you are very correct.. I was using the gold standard as a starting point example because most economic structures did start out on some form of commodity. The US actually has quite a few that still very much influence the economy including (but certainly not limited to) grain, soy, some precious metals and textiles. But notice that the US economy did not come to this overnight.. it was a growing process with many mistakes along the way until it became what it is today and its STILL not as stable as some would like to see it (just ask any babyboomer that lost most of their stock portfolio after 9-11, or a damn good chunk of it).

I can understand many of the points made here but still the bottom line is too much new money coming in will lower the value of the linden. Until there is a balance of money coming in and going out, this trend will continue. You can blame stipends or you can say its UFO's causing it, it really doesn't matter where the money is coming from or where its going as long as there is such a radical difference between the in and the out.. the linden is screwed.

I was only stating some basic suggestions.. but I guess I should have stated that the best way to fix this is to start talking about it and everyone make suggestions until something comes up that works. We can all sit around bitching that the linden is losing value.. or we can get off our fat laurels and do something about it. I, for one, am more than willing to do whatever I can to help.. even take pot shots from people who don't like me expressing some of my opinions lol

But at least I got ya all talking hehe

Rissa