Why would stabilizing L$/US$ rate automatically stabilize the economy?

Atm LL is cutting ratings bonuses. Although this is a good idea, considering the fact bonuses are 'unfair' as is explained in several other threads, it's also been considered to increase the number of money sinks in SL. Basically to stabilize the L$/US$ rate.

How does this work?, It's pretty basic.
1. Residents get less money each week
2a. Residents either spend less on content/land/services each week or
2b. Residents buy more L$ at an exchange service
3. Merchants sell less L$ at an exchange service
4. As L$ demand increases and supply diminishes the L$/US$ rate rises.


So what is the effect of this on the money earned by:

A. Small content creators / service providers, who are not using exchange services:
1. As people have less money to 'spend' they will sell less products / services.
2. The content creator ends up with less L$ to spend him/herself.

B. Content creators / service providers , who are using exchange services:
1. As people have less money to 'spend' the creator will sell less products / services.
2. The earned L$ can be sold for a higher rate, which will compensate for the loss, but one will end up with a more or less equal balance.
3. No need for any price changes by the merchants to change their economic situation.

C. Land merchants, who are using exchange services:
1. As people have less money to 'spend' , land merchants will probably need to reduce land prices.
2. The earned L$ can be sold for a higher rate, which will compensate for the loss, but one will end up with a more or less equal balance.

D. Land/Shop rental service providers, who are using exchange services:
1. People usually rent for a fixed amount of L$ per week/month. This is probably not going to instantly change.
2. The earned L$ can be sold for a higher rate, which will increase the profit
3. Eventually the price point for renting will (hopefully) correct itself to the higher L$/US$ rate

So what is the global effect on the economy? (The stabilizing factor)

1. The amount of traded content will actually reduce.
2. The amount of traded land will be reduced and/or land prices will get lower.
3. The L$/US$ rate will stabilize/increase, but the only ones directly profiting from this are the ones using 'fixed cost' services, like rental services. Others will either lose out or come out even.


There is one major difference between virtual economies as Second Life and RL economies. This is manufacturing costs. This means that the cost of content production is basically zero. By reducing the amount of L$ in the economy, and the 'buying power' of the general resident, no real stabilization of the economy is happening. Just a smaller throughput of content, which can be manufactured at no cost...

The only reason I can see to introduce more money sinks, is that the amount of content/land atm is getting depleted, or the throughput of new designs is too high, forcing designers to come up with new items too fast. I don't believe either is the case.

Meanwhile we have a large population of residents who feel a reduction in buying power and the resulting psychological effects. This is usually one of the major causes for a recession.


Contra:
It could well be the cast that a lot of residents have a fixed, need/want for content/land/services etc. in SL which is (partly) independent from their RL budget. By reducing L$, they are forced to spend more RL money on SL, increasing the amount of US$ spent on SL and allowing all selling parties (and eventually LL) to earn more.


Let me be clear, I'm not an economics whiz (rather the contrary).
I'm just trying to understand the mechanisms of a virtual economy.
So my question: Is the concept that L$/US$ stabilization will automatically stabilize the economy or the concept that a higher L$/US$ rate will increase profits just as viable as the opposite effect?

There are no "manufacturing businesses" in SL, so the fact that it costs nothing to make duplicates of something means that the analogy to RL manufacturing industries is invalid.

There are many examples in RL where "manufacturing costs" are low or zero, such as the music industry, or book publishing, or computer software. You have to compare SL businesses to those industries, not "manufacturing".

SL content creators spend many, many hours making an original, and then they sell copies. The "manufacturing cost" of the copies must be calculated by dividing the cost original by the number of copies sold. (Of course, you have to quantify the cost of the original, perhaps by using minimum wage or some other valuation of time and energy.)

They don't know how many they will sell, so they have to guess. If they don't sell enough copies, they "lose money". If they sell extra copies, they "make a profit". If you want to look at content creating as a business in SL, that's the way to do the math.

As for your question about whether stabilizing the exchange rate would automatically stabilize the economy, I would ask the opposite: what would be the effect of failing to stabilize the exchange rate?

Some people would toil away creating things even if there was no money in it. But there are some people who would be discouraged if they got less and less US$ out of their work over time. It would be a disincentive.

Stable exchange rates are necessary for building confidence of investors (i.e., those who invest money *OR* time.) If some people lose confidence, then the whole economy suffers. This is a very basic economic principle, and one of the few that virtually all economists agree on.

Buster

I would like to add also that content creators DO have costs, such as upload charges, and the cost of the software they use. Have you priced Poser or Photoshop lately? And they pay tier fees for their land/shops.

Those costs are real, and offsetting them is important for many content providers.

Buster

RL profit is based on amount of sales and the current exchange rate.
When the rates go up, but sales go down, the resulting effect is no change. Increasing L$ rate by diminishing sales is not going to change the merchants situation.



I agree on this. I tend to have a 'gut' feeling that stabilizing the L$ rate is a 'good' thing for the economy. My problem is that i can not find a logical explanation for this, as I tried to explain above.
They only conclusion I can have at this time is: Don't use logic on economics, there's too much social/psychological effects involved. (I tend to have a pure logical analytical mindset, that's why I keep misunderstanding the principles, I guess

Stabilizing the $L mainly has the advantage of helping people find the right price for their goods. No one can look at their product and magically know the perfect price to sell at. If you add the complication of a dramatically changing $L value, then it becomes almost impossible to find the right price to sell something at. It can get discouraging if you can never guess if the money you made today will be worth anything the next week. It can also be frustrating if you constantly have to lower your prices just so people can afford them with dramatically more expensive $L. The $L will always change price, and the economy will change in other ways, but a fairly stable $L simplifies planning for a business.

Now there are two groups I know of that benefit from an unstable $L; those that speculate on the $L market and those that sell large amounts of land. Those that speculate on the $L only make money when the $L goes up and down. If it stays the same, then the market is worthless to them. I say it helps those that sell land, because I sell land. A majority of my money comes from the average resident mispricing their land horribly. If people constantly have a wrong opinion about what land is worth, then I constantly make money by spending time to find out what it is worth.

I would still rather have a stable $L however, because I would like to see SL grow and improve in all aspects. I'm not just in SL to make money. I'm also in SL to enjoy it. It is easier to enjoy a world with more and better content, and I believe the quality and quantity of content increases when people find it easier to get something back for their work. It is easier to get more back when you can price products at the best price.

Why would stabilizing L$/US$ rate automatically stabilize the economy?

I am afraid, Damanios, that the answer to this question is not accessible to a simple and obvious explanation. Economics is not a simple subject, and requires meticulously clear thinking, and preferably a mathematical model, like those run by RW governments. I wish we had one, as I find it hard too. We can easily mislead ourselves.

In fact, stabilizing L$/US$ rate on its own wouldn't do it. Changes in numbers of users, their enthusiasm to buy, the attractiveness of wonderful new things to tempt them, what else they need or want to spend on. It's all dynamic and evershifting, and sellers, to achieve the best they can, need to be responsive and quick thinking. But what they don't need, if it can be avoided, is huge, involuntary, unpredictable, across-the-board changes in everybody's prices. As caused by an unstable exchange rate.

Its not so much that stabilising the exchange rate automatically stabilises the economy. Its more that not doing so adds a huge unnecessary destabilising factor to the inevitable changes and drifts which are always in progress, and are usually much smaller and more predictable. Just because you have a headache doesnt mean you must let someone keep jabbing you with a knife.

When the currency rises or falls, in effect, in US$ terms, all prices rise and fall together. Yet the trader's costs are mostly in US$, and do not move with them.
And consumers are actually making spending choices which involve choosing between real and virtual expenditure.

So everything shifts around, some traders may gain, some may lose, and any which have made effort to find the optimum price are messed up, earn less, and have to start trying to work it out all over again.

Even if all traders had a simple mechanism to slide their prices up and down to keep them constant in US$ terms ( which scripting could in principle do), the problem is not solved because consumer choices would still change unless absolutely everything inworld tracked the US$, including their stipends.

Economists handle these questions about what happens to the seller's volume, and income, when he changes price, or has change forced upon him like this. The concept they use is "Price Elasticity of Demand". It is definitely not simple or obvious.

I posted about this earlier, in the remote event that you find it interesting:
/130/bd/60193/1.html#post630642
Here is another, relating to the question of whether LL should trade in the currency market:
/130/ed/60185/1.html#post631179

It is true that in our virtual world the marginal cost of manufacturing (ie the cost of making one more) is almost always zero. But this doesn't invalidate the economics around price, volume, and return.

It is all absolutely fascinating, and now LL are recruiting an economist as consultant, things could get more interesting yet.

Absolutely not. That is the whole essence of the difficulty. Some products go one way, some another, depending how demand and price interact. And on how costs relate. And where the prices were on the curve in the first place. And whether they started off too low, too high, or correct for optimum return. If they were correct, the situation always ends up worse, and so even the average situation is that the seller makes less - until he is clever enough to get his prices back to the best level (now totally unknown).

There is an assumption here that the economy is unstable or rather, more unstable which I think is unreasonable.

lol, if it makes you feel better, what I do is a gamble. I could lose money if I guess wrong. If I lost most of my money would that make you smile?

Korvin does the economy a service by providing, with his trades, pricing data to other users who want to set the prices for their land.

I'm a new user. I don't know if there's a way to track what real estate investors like Korvin buy and sell and for what prices, or if that data is confidential, but even if it is not quantitatively accessible in the game, it's informally accessible in terms of people remembering what they sold for and others remembering what they bought for. He provides a stabilizing factor by getting land to its correct price.

And if you can figure out some way to track him, and evaluate the factors in his land purchases, then you don't have to do as much research about how to price your own land to sell or prospective buys.

That's how it works in RL, and that's how it works in SL. Investing means research.

Rather than frowning, you'd do better to hire him as an appraiser to tell you what the property you have to buy or sell is worth before you put a price on it, or pay him to give you a private class on valuing property in SL.

Hiring him as an appraiser both makes it unethical for *him* to be the one buying your land or selling it to you, but also saves you all that tedious research time.

Don't frown at him. Hire him.

Julie

Actually there is a safer thing you can do. There is always the chance that I or someone else can give you bad advice. The land market is not an exact science. If I had a single peice of land to sell, what I would do is contact several known land barons and ask them what they would offer for your land. Even if you don't sell to them, you have a base price to work from. You now have the choice of selling to the highest buying land baron that day, or waiting and selling the land yourself for a little more. Alot sell way less than a land baron would even give as a low offer. Realize that prices change though, so if you don't sell to a land baron that day, they may not give you the same price later. Some land barons I know of off the top of my head in alphebetical order are:

Anshe Chung
Calvin Millions
(me)Dark Korvin
(my alt)Ender Albion
Garnet Psaltery
Konigmann Lipp
MarmelaGramela Doesburg
Nickiam Solvang
Philo Hatfield
SL Loonie
Tonny Bravo

If you are pissed that I did or didn't list you, IM me in world and I'll change the list.

Then if you want you could always ask for an estimate of actual price for a fee with the caveat that it may not be a perfect estimate. Just go with your gut, this isn't meant to be an ad.

I think the analysis can be much simpler than the original poster elaborated. The money supply has to scale with the gross production of goods and services or inflation will result. The bonus pool was always explicitly unspecified in order that Governor Linden could tweak the money supply to keep pace with production. The removal of bonuses is simply a declaration that the bonus pool will now be zero.

As the appeal of SL has broadened, a smaller fraction of the players are providing goods or services; that is, there is a rise in the pure-consumer class. Stipends have been explicitly declared in a way that the bonus pool has not and reductions there would be a much more bitter pill than the removal of bonuses. Nevertheless, for every non-producing player, more money enters the economy every week which may well be outpacing production.

All of this is said with no mention at all of external exchange rates because I don't think they bear on the issue of inflation hence internal economic stabilization. It may be the case that the money supply is still outpacing production and more sinks will ultimately be necessary; however Governer Linden has traditionally been very careful to not make abrupt fiscal changes in order to reduce upheaval. Also, the phrase "pure-consumer class" is simply a definition and not a judgement of validity or merit.

I frown because I (used to) work as an appraiser in SL and now educate people on how to value their own land.

Yes, I provide those classes free of charge. And my appraisal services were free of charge. I did accept tips, which were often gratefully given.

In RL, there are strict laws and professional organizations to oversee property transactions - in SL there are none. The few times I have suggested the introduction of anything like that, I met with quite a bit of opposition and ridicule from - well, let's leave names out of it at this point. No-one in their right mind in RL would buy or sell property without using an appraiser.

I am fundamentally against the principle of making money by taking advantage of people's ignorance. That's not going to be changing any time in the future, sorry. I am now retired from the SL real estate business and in training to become a RL real estate agent, where paying a fee for professional services is the accepted norm.