Linden Lab is Destroying the Economy

Several months ago, when Linden Lab set up LindeX, I and a very few others cautioned them against using the same concept that GOM had been using. Linden Lab (and many other outspoken users) felt the warning was invalid.

We cautioned that if they pursued the method of an unregulated currency exchange, the value of the L$ would drop like a rock. They felt that warning was invalid. We recommended an alternative method, different from the method GOM was using (and already had a very bad track record). Linden Lab felt their intended LindeX concept was just fine.

Yesterday the value of the L$ was L$317/US$1. Today it hit a "high" of L$336/US$1. In the last several months, the value of the L$ has decreased by approximately twenty three percent!

The results on SL users? Well, buyers are having a heyday, since they can buy L$ cheaper than ever before. But they won't be very happy for very long, because at these rates, merchants and landholders are already raising L$ prices to meet their expenses. While we still charge the same PayPal rates (and now encourage our land users to pay via PayPal)... our L$ rates have gone up 25% to compensate for the daily dropping-value market. This will continue as long as the LindeX continues to drop in exchange value.

It is amazing when a company sees a current method failing, but is totally unwilling to change what they're doing. My dad used to say, "If what you're doing isn't working... TRY SOMETHING ELSE!"

Linden Lab obfuscates the issue by pointing out the vast increase of L$ sales SL wide. What they don't mention is that in the last year Second Life has gone from 25,000 members to about 200,000 (an 800% increase)... and from 400 sims to well over a thousand. OF COURSE overall sales are going to be higher. But are they 800% higher than a year ago? How much of that "increase" is directly due to increased land needs? What is the ratio between increased sales and increased population?

LindeX is failing. It messed with the economy from day one and is continuing to do so. LindeX was badly conceived and if it continues without change... the economy will self destruct-- soley due to the way LindeX is put together. There will always be somebody willing to sell for one L$ less in order to make a quick sale.

We warned Linden Lab about this. They denied the sense of the warning. But LindeX is doing exactly what we said it would do. That's the way companies crumble.

Now I expect a whole bunch of counter-arguements here, and probably more than a few troll posts, just like happened when we gave our initial warnings. But I think a 23% drop in the economy pretty much speaks for itself.

No arguments its failing. The argument is the fix.

I think you'll find that the elasticity just isn't there if you raise prices. With the influx of new accounts there is alot more competition as well in every vein.

Bottom line: we raise prices at our own peril.

Well said. Actually, I believe the fix to be fairly simple. But it's a gutsy move that would take someone with cahoneys to initiate. Linden Lab may not agree with my suggestions, but my proposal has one thing over the current LindeX... mine might work. LOL

I fully agree. Which is why this thread is entitled "Destroying the Economy". Wasn't overstating the issue.

Land owners have to charge more L$ for the land because the L$ is worth less... and they have bills to pay. Merchants then have to charge more for merchandise because their land rental fees went up. Since SL merchandise is a luxury, buyers don't have to buy it; they can survive without new gadgets.

Our solution is to strongly encourage all of our land renters to go PayPal. Since the SL value of the US$ has remained stable for some time, it's the only sensible solution until/if Linden Lab ever gets a handle on things.

But until LL makes a change for the better, the economy is on a downhill slide and picking up speed.

I've said before that its the ability to undercut thats killing the market. Funny how you can usually find something to agree on.

What is your fix, out of curiousity?

In sixteen months of operation the fluctuating exchange rate hasn't affected my bottom line at all. When lindens are expensive, fewer buyers mean fewer sales but more income per sale.

When the lindens are cheap, more buyers mean more sales and less income per sale. I've actually made more US dollars when the lindens were inexpensive and more people were buying more products each.

Is Fate Gardens the antithesis or do most inworld business function this way?

I'm going to hold off on my fix for a bit until others have a chance to comment on their proposals. But here is an interesting alternative proposed on a concurrent thread from Dmitri Polonsky:

I still think the actual solution is for SL to alter LindeX in such a way that the only cashing out or buying is done there. Set a fixed rate, charge a markup on buying. Make it a banable ofense to sell Lindens on any third party site except maybe ones they approve of ONLY if trafic goes to high for them to handle themselves. If they set it that you sell them say 300 per USD and buying price is say 275 per USD, they make money, ppl can depend on a stable amount from cashouts..no more problems.

I don't necessarily agree with everything in his proposal... but I do believe it would work better than the current system.

Question is... are you earning more per SL member?

If not, your market is falling. And that is indicative of market crash. I never look at the current status; I look at where things are likely to go.

Well you proved you can rant but why not post your brilliant idea?

Note also that an economy is not solely defined by its currency. Given you think it does I fear for your solution.

Edit:
In the meanwhile you did and that's a silly idea. Setting a fixed price will lead to trading outside of Lindex. Waving a ban won't stop that ever.

Sorry Blakar, I don't respond positively to insulting attitudes. Troll somewhere else.

Too bad. I'd loved to see you defend the system in a meaningful way. I don't consider it viable and while it has been tossed around a million times before nobody has ever given any argumentation to support it would work.

Note that your initial post was insulting towards LL too but it never stopped you from posting it. It's not because you consider it a failing system that you're right per se.

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 the game would be shut down, and thus Linden Dollars would be worth nothing anymore.

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.

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, as well as the level of inflation in order to keep the $L value under control to help avoid the dumping of Linden on the exchange which further drives down value.

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. If SL were a real world economy, they would want to try and prevent the adding of money to their money supply via "printing." But SL is a game which is based on players whom want to have fun and meet people. A total loss of the stipends would have to be offset by another way for players to make money, such as hunting, etc. But then, it would no longer be SL, but rather another hack-n-slash. Without this, you would only have a few hundred content creators creating content to sell to each other and we all know most content creators don't buy much of other people's stuff, because they can make it their self. If SL wants to be one big medium for content exchange between content creators, that is fine, but once again, that wouldn’t be SL, and the population would shrink drastically. Thus further hurting the value of the L, as well as losing Linden Labs revenue. Cheers!

Clear and well reasoned.

Except - I don't accept that LL has to give away L$. The game's free for heaven's sake, so, let people BUY their L$ on Lindex.

A further method of controlling the money supply would be to cease flooding the land market. A land scarcity would increase the value of the L$ no end. And please the Land Barons of course - but everything has a downside...

As was pointed out in your initial thread, the problem is not Lindex or a free market exchange. The reason the $L is fdecreasing in value is that there are just too many of them being introduced into the economy. Your "solution" will just create a perpetually increasing wait to sell $L. A fixed price system would fail miserably as it would take too long to sell $L.

Two things can reverse this trend:
1 - Introduce less new $L into the economy.
2 - Get people to spend more USD to buy $L.

Hello! We're all economists here. Can't you tell?

Ye gads, another economically literate person.

I've said this before too. The only people this inflation really hurts in the long run are those that rely on stipends. The likely outcome is their stipend will have less and less buying power until things balance out, and the exchange rate stabilizes.

Linden lab doesn't need to cut stipends, since the problem is self-limiting. 500L will just become more and more worthless until stipends are at the correct levels to sustain the economy without causing inflation. My guess is on somewhere between 300-500L/USD.

Those of us who buy and sell lindens to conduct business are the least affected by inflation, unless you happen to be a casino owner that holds 300,000 lindens in game or something. In that case you will have a one-time loss, could be a pretty significant one.

Anyway, like the hitchhiker's guide says ... Don't panic.

Yawn.... It's late here, I'm for bed. Tomorrow is going to be such a fun day. Enjoy yourself Schwan.

I don't expect he does Jamie - but I'm sure you'll let him know.

Yes, I am tired of this socialist "free money" streak that permeates SL. Nothing is free, people!

Convincing arguements!

You are right. But it sure helps lubricate the financial machine to have at least some money flowing in. Obviously right now the price of the Linden is (or was) out of line with the amount of Lindens being poured into the economy.

I think it would make sense to cut off the basic stipend after a month or so. It wouldn't be a huge impact but it would help the linden stablize quicker. I don't think it's a necessary move, but I think it would be a smart one. It would be a small added incentive to upgrade too.

You've never bought my stuff.

Never had to, I own it all and its all free for the taking.