Linden Dollar Management

I think we're talking fire and brimstone times here, and I think the US and other citizens would be stuffed. It's the governments I'd watch. I think they'd want something if they had a few million US dollars.

I'm not sure how a thing like that would play out. Guess there are no international rules for it as such. If you look at the US you see they have gold, you figure a note from them is good for something. But if there was a war tomorrow and they just said "Not gonna pay out on dollars" then I don't know what you do. Bomb them?

Their gold would be gold, obviously, after a war. Would nations trust a Dollar II from the USA? Who knows. The gold in America IS america's value. It's america's money. You can't trade a buck for a gold bar anymore, but I know that's where I'd look if I wanted proof my buck was worth more than a piece of paper.

The US has only 11 Billion in Treasury owned Gold as of August 30.
(http://www.fms.treas.gov/gold/current.html)

There are about three-quarters of a trillion dollars of U.S. currency in circulation; the majority is held outside the United States.
(http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html)

The US government's Budget was -
revenues: $1.862 trillion
expenditures: $2.338 trillion, including capital expenditures of NA (2004 est.)
( http://www.cia.gov/cia/publications/factbook/fields/2056.html)

Gross Domestic Product
GDP:
purchasing power parity - $11.75 trillion (2004 est.)
(http://www.cia.gov/cia/publications/factbook/geos/us.html)



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If every ounce of gold were taken from earth and shipped to the Aliens you mention -

It wouldnt even be taking a drop out of the bucket.

So what happens if tomorrow isn't a sunny day, doesn't that mean the whole US economy is on borrowed time, especially with the debt and all?

That's scary, I'm gonna buy me some gold...

Additional: I always assumed the US had enough gold to back itself up. If it's running short, all the rest of that money is essentially just paper... What's going to stop it falling out the sky?

If the US economy were to collapse likely gold would be the last thing youd need to worry about.

It would have little value compared to Fuel, Oil, Food, Weapons. Becuase the collapse of the world economy would mean colapse of social order in most of the civilized world.

The thing I'm worried about is that you're right. I figured the US might have some overhang, i.e. a few more dollars out there than they have gold, but the figures you quote are a lot more dollars out there than gold. So I'd say the US currency is floating on air, with nothing really to catch it.

I think I'll pretend this thread never happened and live again in happy ignorance...

8000 tons X 2000 pounds per ton = 16,000,000 pounds

16,000,000 pounds X 16 oz per pound = 256,000,000 ounces

256,000,000 ounces X $470 per ounce = $120,320,000,000.00 worth of gold

I think that's right.

There isn't enough gold and silver in the known universe to prop up all of the monetary transactions going on.

The US's GDP is something like 11 trillion dollars. That's just the US... the World's is something on the order of 36 trillion.

90% of it is technically non-existent, except in data centers and on bank mainframes. Bill Gate's wealth is 99.9% in a computer somewhere, he doesn't have piles of money.

Yes, if/when a majority of people go "why am i using this green thing, anyway?" the US dollar will collapse, and with it, most of modern civilization

THat's why most folks don't think about that and continue pushing green pieces of paper around.

LF

Wouldn't the problem be then that the ever-increasing landscape would continually devalue through lack of scarcity?

Currency today just needs a standard and trade. So maybe the L$ could increase in value if it were used to trade for items other than in-world IP and USD.

Just some 0.02L$

I am not sure the 8000 tons number is right per the August 30 , 2005 report.

This seems to agree with what I read that many Governments are in the process of Liquidating sustantial portions of their gold reserves.

Reguardless 11 billion or 120 Billion - its not enough money to do much to influence the economy.

The damage from Katrina will cost more.

The war in Iraq will cost more.

I do think Jsecure is basically right in that the Value of Dollars is based on "Air" -sort of

Its only valuable becuase the US has Industry, Services, Entrprenuers, Wealth creation, A big advanced Military, etc.

The US government basically says "we have all these people and they do all these things and we have all this stuff - so our Word and our money are good for something. If we borrow your money, were good for it."

There is inflation because the amount of currency relative to the amount of wealth increases. It's that simple. Back in the days of the gold standard, where gold -was- money, and the dollar was just a measure of gold, like the pound, there was deflation most of the time. Except for when they found a lot of gold, then there was inflation (nothing compared to what goes on now, but still, it existed). Gold is not magic, it's just... gold.

Yes, and then people learned the hard truth, that they can't rely on governments either, seeing as all government have defaulted on their notes.

I think its a little more indirect than that. US residents trade with other US residents using the US dollar. Why? because they always have.

When US residents buy things, they pay for them in US dollars. So, Honda, if you want to sell me a car, then you better be willing to take my US dollars, because that's what I have. Volvo, you too.

It isn't so much that the US government says anything at all. (Not anymore, anyway.)

Enter: foreign exchange. What the US government DOES regulate are the MONEY SUPPLY, INTEREST RATES and TAXES. Those are the mechansims by which a government can influence the value of its currency against other currencies. The mechansims are complex -- bank reserve requirements, tax rates, fed funds rate, etc.

SL does not have either a banking system (which creates money when banks lend more money than they hold in deposits) or taxes. The SL economy is therefore absurdly simple compared to a real national economy. There are striking similarities, but when it comes to exchange rates, it is inanely simple supply and demand. Nothing at all like a real currency.

Buster

True enough but when the US government is selling bonds and borrowing money its basically saying "our money is good" especially when it is foreign investors.

Jsecure, please believe I mean no offense when I say, please go to a high school somewhere in the US and take Economics 101. The US economy simply does not work the way you keep saying it does. I've seen a LOT of correct information being given out by numerous people on this thread, much of which is well footnoted, but you seem to keep ignoring it. I believe this may be because the information is being thrown at you peicemeal without much cohesion between the concepts, as is the nature of forum discussions. Let me try to clarify a few things by explaining the system as a whole.

First, let me cover a very basic principle, the concept of value. Any item, be it a US dollar, a gold bar, a loaf of bread, the computer you're using right now, whatever, is only as valuable as you beileve it is. There is no such thing as inherent or absolute value. Value is relative, and it is determined simply by what you are willing to give up in order to possess something. The US dollar, for example, has value simply because the people of the United States (and others) are willing to give up goods and services in order to have it, and vice versa. One of those goods might happen to be gold for some people, but that in no way means that the dollar is "backed by gold". It is in fact backed by everything and nothing. Like anything else, it has value only because people believe that it does. That's it.

Now, obviously for you, gold has tremendous value. That's fine; a lot of people on this planet share that opinion, but where you keep erring is in your assumptions about why that is. You have chastized people on this thread for saying the US dollar has value "just because it does", but you seem to keep failing to realize that gold (or anything else) has value for exactly the same reason. Gold is only "valuable" to those who want it and who are willing to give up other things in order to possess it. To others, it's worthless. If you doubt that, just have yourself dropped off in the middle of a deep dark jungle somewhere with a sack full of gold and see just how much it's worth there. I can assure you that within a day your two, you'd trade it all for a good machete, some mosquito repellant, a book of matches, and maybe a compass.

As for your question about why the US government stockpiles gold if not to back the dollar, well, the government stockpiles a lot of "valuable" things. There's a grain reserve, an oil reserve, hell, they've even got reserves of people like the medical reserve, the armed forces reserves, etc., but none of those things exist to in any way "back the dollar". The government holds these things in case they should be needed in an emergency. That's it. (Of course, we're all pretty conscious lately of the fact that they don't always do such a great job of deciding exactly when and how to tap into these emergency resources, but that's another topic.)

In response to your question about the economy being "on borrowed time," the answer is of course it is. It has been since day one. As a matter of fact, all economies are. Like I said, it's all about belief. The "economy" is simply a measure of what people currently believe about the "value" of the things that are available for trade. Let's break it down to microcosmic example just for a second to offer some simple understanding.

Let's say the owner of a bakery believe that the loaf of bread that cost a dollar yesterday should cost $1.50 today. Let's say his customers agree, no matter how reluctantly, to pay that $1.50. Well, the "value" of a dollar just dropped a bit inside that bakery. The dollar used to be worth a loaf of bread; now it's only worth 2/3 of a loaf.

Now, magnify that example to include every single good and service in the country, and you've got the national economy. We happen to measure that economy in terms of dollars, but the dollar itself is pretty meaningless. It's worth exactly as much as what people are willing to part with in order to have it or what they're willing to take in order to part with the dollar, no more, no less. That's it.

So, a dollar is no more "backed by gold" than it is by anything else. It's "backed" by people's belief that it's something that should be accepted in exchange for other things. As I said, it's backed by everything and nothing. The government doesn't need to have things to back its currency with, gold or otherwise. That's just not the way it works.

In fact, it's not even the US government that makes our money. They manufacture the physical currency, sure, but bills and coins represent only a very small percentage of the actual money in the ecenomy, and the amount of currency the mints manufacture has nothing to do with the amount of money in the economy. They manufacture only as much as people demand. That demand is determined by how much people withdraw from bank accounts.

Most money is virtual. It exists only as numbers. How much of it exists is not controlled by anyone, not even by the government. It's controlled by everyone as direct finction of banking activity. Banks create money, not the government. The government only provides regulations and resources for what to do with it, but it's the banks that actually create it, and that, I can assure you, has absoultely nothing to do with how much government gold is in Fort Knox.

Money is created every time a bank gives a loan. To illustrate this, I'll give you another simple example. Let's say I put $100 in my checking account at my local bank. The bank operates on the assumption (belief again, we talked about that, remember) that I won't withdraw that $100 for a while, so they consider most of what I deposited to be theirs to play with. Now let's say you go to that same bank and get a loan for $50 and you walk out with the cash. The bank had the $50 to give you because I just gave them $100. However, since the $100 I gave them is mine, I can theoretically withdraw it at any time. That means the bank just created $50 to give you, and the local money supply just increased by that amount.

It doesn't stop there though. Let's say you go to the store and you spend that $50. The store owner then deposits it in his bank account. Now the bank has even more money to lend, meaning its money-creating power has just increased. As soon as the bank makes its next loan, the money supply has increased again.

That's where money comes from. Banks lend out what we deposit. The lendees put their newly borrowed money in the bank, and then the banks lend that out. Before you know it, there's tons of money all over the place.

Sound like shaky ground? Well, it is, but that's how it works. It's stabilized only by the belief (belief again) that it's statistically unimaginable to think that every single depositor would withdraw their money all at once. Were that to happen, the economy truly would collapse. It's all one ginat house of cards, held together by nothing more than a belief system.

The process regulated by the Federal Reserve to keep it all under some modicum of control. Too much money created too quickly and easily means too much inflation, so the job of the The Fed is to attempt to keep things balanced by forcing banks to weild their power as responsibly as they can. But when it all comes down to it, the economy is only as stable as the beliefs and actions of the people who participate in it. It could all come crashing down at any moment. It stays up simply because we believe it will, and we act in accordance with those beliefs.

None of that has anything whatsoever to do with gold. Got it? Good.

Okay, so how does all this relate to the Linden Dollar. Well, it's pretty simple. Your notion that the Linden Dollar needs or would benefit from some sort of backing is fundamentally flawed. The Linden Dollar doesn't need backing any more than the US dollar does. Its value is determined, like anything else, simply by what people are willing to pay for it. The reason they're willing to pay for it is because there are other things they want that it can be traded for, not because it's backed by land or anything else.

If the "value" of the Linden Dollar goes down, it is only because the things people want to trade them for aren't as badly desired. The way to combat that is to increase demand for those things and to lessen the supply of Linden Dollars on the market. Setting aside some sort of SL land reserve does neither. The land has no inherent value any more than anything else. You're operating on the assumption that people will somehow always magically want land at steady rate, the same way you assumed they'll always want gold at a steady rate. That assumption is erroneous. The "value" of land, gold, or anything else fluctuates all the time. Remember, value is never absolute. It can ONLY ever be measured in term of how much of one thing are people willing to part with in order to possess some amount of another thing. It can never be stable for anything, as people's wants and needs change all the time.

The way to "manage Linden Dollars" as you put it is not to manage them at all. LL tries to act like The Fed by periodically changing the amount of supply, but in the end, the economy in SL, just like in the real world, will be whatever it is in relation to how people believe and behave. If you want to increase the value of the Linden Dollar, go create something that people want to buy with it, and do your best to encourage people to believe that Linden Dollars are valuable. It is people's spending habits that determine the health of an economy. No amount of creative thinking about how to enforce value of currency will ever change that.

I was with you right up until there...

Beware the law of unintended consequences.

If people increase the creation of things that other people want, this will increase the velocity of money (i.e., people will spend money sooner than they would have, meaning the same money gets spent more times per month.) Oddly enough, increasing the velocity of money is inflationary -- it has the same effect as increasing the money supply! Generally, increasing production does not curb inflation, just the opposite. Cutting production does. Increasing the savings rate does. (In other words, if people STOP spending money and start saving it instead, the value of the currency goes UP. If people stop sitting on money and start spending it, the value of the currency goes DOWN.)

Buster

I completely disagree. If people flock to buy a certain thing, the price of that thing almost always goes up. People charge as much as they can get. Here's the model: Increased demand for item = increased price for item = more $L needed to buy item = people need to buy more $L in order to get the item = demand for $L goes up = increased price for $L...

We're not talking about increasing the supply of pre-existing items here. SL doesn't and can't work that way, as mass production is infinite in a digitial world. What I'm talking about is creating newly attractive items that people will want to spend their money on. Money is worthless unless it is used. No one is going to go out and buy Linden Dollars simply to stockpile them. They'll only do so if there are things they want to buy inworld.

It's content that draws people into SL, and it's content that is the reason for the economy. If there are things people want inworld, then they need to buy $L to get those items. If there aren't, then they don't. It's a pretty simple concept.

It is a well settled principle of economics that increasing the velocity of money and increasing the supply of money have exactly the same effect -- inflation. This is absolute fact, and cannot be disputed.

It does not matter whether you are increasing "pre-existing items" or not. It has no bearing at all. If you make more items available for sale, that is the same as "increasing production". It induces people to spend more (or more often) than they otherwise would, which is inflationary. Increased spending = increased velocity of money. This is also well settled economics and can't be disputed. (Unless you want to argue with virtually all economics textbooks!)

What can be disputed, I think, is whether these RL principles apply to SL or not. I think they do in this case, but that obviously doesn't make it fact. (As I've said elsewhere, there are HUGE differences between the $L and a real currency. But when it comes to the fundamentals, I think they behave similarly.)

If people decide to buy $L using $US in order to spend the $L, then that does create a temporary unit of demand for $L relative to $US. This unit of demand is offset by a unit of demand for $US in return for $L when the producer cashes out. These two units of demand cancel each other out.

The only way these two units of demand don't cancel each other out is if producers keep the $L instead of cashing it out (i.e., "savings".)

What props up a currency is increased savings, not increased spending. If people have a perception that the value of the currency is falling, they are likely to unload it and minimize their holdings of it. Nobody wants to sit on a liquid asset that is decreasing in value. A falling currency feeds on itself, because there is no savings. If the currency is stable, on the other hand, then people will be willing to sit on a pile of money just in case they might need it later. If there is a significant transaction cost for selling and then buying back the currency, then that creates an incentive for people to hold onto it. They balance the cost of getting out and back in against the cost of holding onto it. (I think this is what is propping the $L up a bit right now -- people are hoarding it because GOM going away will make it more expensive to do round trips later, so if they think they might need $L later, they are getting it now and keeping it. This is called "Savings"! )

Economics is the study of feedback loops. It is very common for these feedback loops to produce results that are opposite of what people expect. This is why there are periodic cycles -- because people are surprised by events that unfold differently than they expect, and they overreact.

Buster

Chosen, I'm very glad that this thread "closed" with you explaining the basics of Economics. I mean, almost a hundred posts discussing wild theories and assumptions are a bit tiring! Your post was refreshing — thanks for thoroughly explaining the basics!

Living in the European country with the least "printed money" in circulation (in relative terms to its population, of course) I have had almost two decades or so to get used to the concept that money is purely virtual — just bytes in computers. Two thirds of the money circulating around here just "circulate" between computers. Yesterday I just had one Euro cent in my pocket (really!). That was the amount of physical money I owned in the entire world. The rest is spread through some 5 or 6 bank accounts (I keep forgetting how many) where I transfer it using a Web site with the look and feel of something not unlike GOM. Part of my "virtual money" is on PayPal, which is not even a "bank". And part of what I own is, of course, in L$. That surprises my friends and colleagues every day I explain to them that the L$ is as "valuable as the Euro or the USD" — just because 56,500 people believe it is.

We already had some discussions here about the intrinsic value of the Linden Dollar. As the discussion there showed, the question was flawed — nothing has an intrinsic value these days, everything has a relative value.

If you need to be comfortable about "what the L$ is backed up with" (since it's definitely not gold, neither the office furniture at LL...), you could barely try to convince people that it's the grid servers — virtual land. At least, they have some "measurable worth": objects dropped on virtual land consume CPU, bandwidth and hard disk space. To an extent, these are "limited resources", and, thus, "valuable". The L$, in a way, defines a relationship that measures how much a chunk of CPU/bandwidth/disk space is "worth" for a group of people. Still, this analogy is stretching and bending reality, so it may not apply. On the other hand, Shaun Altman and his Cyberland stock market exchange uses this principle to "back up" their business venture: Shaun issues "shares" that are vaguely tied to virtual land; if the company disappears, at least you get some of the land in return.

Truly, if we wish to talk about "virtual worlds", all that takes is to attend Economics 101 The contemporary money economy is one of the most successfully virtual world established so far...

Buster, I think where we're failing to see to eye to eye is on the issue of who's doing the spending and who's doing the saving. I think both of our explanations are equally correct, and equally incomplete. The health of an economy and the strength of its currency is determined by savings AND by spending. Taken to extremes, I think it's pretty easy to see what I mean. If everyone were to save every penny, then no one wound spend, which would mean disaster. If everyone were to try to spend every penny, then no one would be able to collect, which would also mean disaster. The key is in the balance between the two. Let me offer my view of how this tends to work in SL.

To use myself as an example here, I'm a content creator, which means I obviously sell inworld items. The money I collect by doing that is what pays for the land I hold. Every 3 months, I sell whatever portion of my Linden Dollars is necessary to pay my tier fee. The rest just sits there, as I really haven't much other use for it. I almost never buy anything because I can make pretty much whatever I want myself. The only way I generally spend money inworld is on uploads. I suppose that makes me quite a saver, so by your definition, I'm good for the economy. However, I wouldn't be able to do any of that saving if no one were buying. The two are interwined. So, by my definition, I'm still good for the economy because I encourage people to spend.

Now obviously, not everyone has the same habits as I do, but I think the vast majority of content creators take in a lot more than they spend. That helps keeps the Linden Dollar valuable by both our definitions.

Of course, there are other professions besides just content creation, but since I've never been involved in them, I can't really speculate on what the habits of those people are. Perhaps some of them could comment.

You brought up a good point, which is the question of whether or not RL economic principles apply to SL. The answer, as I'm sure you're aware, is yes and no. Certainly many things are equal in both worlds, but one distinct difference is that in SL there are no bare necessities, no living expenses. No one spends a dime that they don't volunteer to spend. Therefore, they need to be continually encouraged to spend SOME money, or there will be no economy. That's the basis of my earlier statement that if you want to help the economy, you should make something that people want to buy. This is, for lack of a better term, an all volunteer economy. People need reasons to participate, and for the overwhelming majority of people, that reason is simply that they saw something shiny at the store today that they wanted badly enough to buy some Linden Dollars for. I really can't think of any other reason that people would buy them. Can you?

I mean, sure there are those who play the money market, who try to make money out of nothing simply by buying low and selling high, but I'm convinced that in SL, those people are scarce, just as they are in RL. Remember, to sell high, they've got to find people who are willing to pay high. I'm pretty sure that in most cases, that means the guy who wants to buy that shiny new must-have blingy magical giant phallus or that scenic new fantastic parcel of dream land, not the other guy who's also trying to play the market. Do you agree?




Oh, and Gwyneth, thanks for the kind words.

In SL, just as in RL, there are really two layers to the economy: There is the production/consumption underpinning, and then there are the frothy speculators on top. Speculators add liquidity to the market. For example, because there are land speculators in SL, you can always sell your land quickly by setting a low price. Speculators are on the lookout for bargains, and when they see one, they snap it up. If there were no speculators, then you might not be able to sell your land no matter how low you set the price, because there might not be a buyer who is ready to actually use the land. So maybe you could sell it, and maybe you couldn't.

Speculation doesn't make the economy work, however. Speculative investors lubricate the market, and they magnify market swings. But without the underpinning of genuine consumers, there can be no economy. Too much speculation makes it a casino, not an economy.

Those who speculate on the markets without producing anything play a valuable role. Despite producing nothing of value. They are "market makers" -- without them there is no liquid market, fewer chocies when you want to buy, fewer opportunities when you want to sell.

As for who's doing the spending and who's doing the saving, that does not matter so much as whether there is saving or there is spending. Lots of factors influence both. The appropriate value for the total money supply in SL is equal to the sum of the amount of money each person thinks is appropriate to keep around for himself. If, on average, everyone thinks $1,000 is a reasonable amount of money to have around, then $1,000 times the population is an appropriate money supply. It is factors that influence how much money people decide to have that influence the exchange rate. Not the amount they decide to spend. (One can argue that these two numbers are related, becuase one reason to have money is to be able to spend it. But it is the having, not the spending that affects the value of the currency.)

If there are things to save up for, then people might save up for them. So if you modify the premise a bit and suggest that the introduction of sufficiently expensive consumer goods would prop up the currency, there is some logic in that. If people are saving up to buy things, then, well, they are saving.

What is needed is either (a) less money in the overall economy, or (b) a tendency for people to keep more money on average.

The habits of the population are a huge factor. If people get into the habit of dumping their $L as soon as they have $1,000, then that has a more negative effect than if they have a habit of dumping their $L as soon as they have $10,000. Habits are the result of moods, trends, rumors, and human nature in general.

I would add that RL currencies like the US$ are a lot more complicated because of the way the banking system multiplies the money supply at a fluctuating rate. When borrowing slows, for whatever reason, the money supply contracts. Leveraged borrowing vastly complicates economics. SL is dirt simple by comparison.

Buster

Well as for me I've been off at a job interview, and also seeing my girlfriend.

The revelation that the US gold reserve is actually not used to back up US dollars i.e. nobody will get gold in exchange for notes is a weird revelation.

But I'm right with Lordfly on this one. The system we have now is a load of rubbish. But challenge the worthless bits of paper and most of modern civilization collapses, so it's the rock or the hard place

I'm gonna just shut my mind to the reality of it and hum a nice tune...

See, it's not that "SL isn't a game", it's that everything else is a game too The only way to opt out is to settle on another planet (or better yet, at Jovian Lagrange Point 4, but I digress).

Best of luck with the job