Invisible hands and exchange rate caps

Hi,

I took both Economics and Finance in college, and I loved Finance. I mean, I GOT what Finance was all about. I also grokked some basic Economics, but frankly, some of what the instructors were saying might as well have been in Martian. I could parrot it back on tests, but it made no particular sense to me.

So, being bored and all, and having noticed that there are some fairly sharp and opinionated thinkers who hang out here (and maybe a couple of practicing RW economists?), I thought I'd come a-trolling for some wisdom.

OK: right now, the GOM L:USD exchange rate for small trades is 1000L/$4.00, or 250:1.

Scenario: I max out my SL per-card allotment by rezzing four Premium alts on my long-suffering little Visa card. I'm going to quantize the schedules for the monthly outlay to Linden Labs and the bi-weekly Linden flow to my alts, just to keep things simple...unless somebody thinks that's discarding an important datum. We'll just say I pay LL every four weeks. I'll also ignore stuff like GOM processing fees, etc.

USD outlay: $49.75
Linden income: 10,000

If I don't do a thing with my avie set, I've just purchased Lindens at the exchange rate of roughly 200:1. It's costing me to have those four losers sitting around. But obviously, if something happens and the strength of the Linden increases to drive the rate below 200:1, I potentially start making money with no effort, even if it's only a few cents per month.

I know that little exercise was a total yawn for most of you, but I wanted to set that out as my baseline before asking for your opinion. The one I'm really after is, could that ever happen? Could the exchange rate theoretically stabilize for awhile at, say, 175:1, at which point you're actually talking about generating real pocket change with no particular effort or talent? (Well, except for refraining from in-game stipend expenditures, which is tougher than it looks ) Or would some invisible hand move in to keep the Linden from reaching that magic break-even point to start with?

As far as more visible hands go, my first thought was that LL would step in to keep this from ever happening. But then I thought, "Why? What do they care if SL suddenly turns red-hot and a percentage of the growing avie population is simply here to churn money? In fact, the Lindens would probably go up and do a Conga line on the roof at lunch break. Premium accounts are still funding for LL."

Really, that's it. I'm just looking for thoughts, not so much as to why this trend in the Linden could happen, but as to what would inhibit it and why.

I apologize that this is basic stuff, but as I said, I really don't "get" Economics as much as I'd like. Oh, and I do notice that some very vocal RW practitioners tend to disagree on fundamental issues, yes?

-- jj

You've hit the nail on the head.

It actually PAYS to play SL.

Literally.

If you put every single $L you recieve into GOM. I'd imagine that not many basic account holders do that, they'd rather buy things ingame.

Shhhhh !

This is not at all far-fetched. near the end of last summer, the exchange rate had climbed up to ~$5.80/L$1000. I know of a couple of people who actually created several alts at that point to farm their stipend.

Wrong numbers.
You can even do much better if you pay quarterly or annually. the latter means 6 USD/month.
So, with 4 alts, that's 5 avis altogether, that's 30 USD/month.

While you can purchase extra accounts on a quarterly basis for $22.95, it bills you immediately so you'd have to hang in there to feel the benefits.

So think of it more in terms of $9.95 to get 2000 Lindens, which, even paying $4.20/1000 Lindens, you could get for $8.40 on the GOM. A lot of the time, using the game subscription as the way to purchase Lindens is just going to be way more expensive than just going and buying them on GOM. That's why it is not worth it "gaming the alts" on the subscriptions, although it is worth using them as place-holders in land groups to prevent a malicious officer recall leading to the loss of your land.

Yes, they pay you to play the game...sort of. You'll have to organize it yourself, getting the GOM account set up and waiting 30 days for certain privileges to kick in.

The other fact is that each one of these accounts has the 512 free tier and $512 first-land purchase option.

So you could get the 4 accounts, buy first lands for a total of $2048, link them into a more coherent and valuable 2048, and sell that for even 10 times what you paid for it, so let's say now you have $20,480 (this is going to be very rare, of course, you're more likely to have $12228.) Then add you weekly stipend, and let' say you have a stake of some $15000 or so to play the game.

Well......so? It's hardly anything. Good, prime land to resell at a lot more than that will be very rare. You will also have all kinds of expenses dressing your av, getting vehicles, etc.

Well, you can make a group out of your avs and get the 10 percent bonus on the land put in the gruop -- well let's say 204 m2. Well....so? What are you going to do now with 2252?

In other words, even huffing and puffing, running the credit card and the new avs ragged, you're still not going to get the equivalent of money that you could just go and buy on the GOM.

It pays to play SL if it remains successful and stable for another 12 months. So it all depend on how likely you think that will be the case

This is the biggest missunderstanding from each of the assorted threads over the years on this subject. Linden Lab DO NOT pay anyone other than their employees. (I assume they pay their employees...)

Yes, if the GOM goes much above $4.5 you could theoretically sell your L$ stipend for more than your subscription charges, but you're not selling them back to Linden Lab. You're selling them to other users. So for each person that makes a profit, someone else is out of pocket... The net result being that no body would buy from you and hence the price would drop, and there is the "invisible hand" of the market economy.


It would be wonderfull if the GOM rate stayed at $6 / 1000, then everyone could make a profit selling their stipend.. couldn't they? No.

But the GOM rate never reaches that and it's precisely because of the cost of the LL subscription itself, and what Lindens get generated to players out of that subscription. That sets the natural cap on the currency rate.

No, it's not a "misunderstanding" with yourself as purveyor of "right understandings" and "wisdom," it is an *actual common sense and correct understanding* that might run counter to your understanding (which is in fact a misunderstanding).

Honestly, even if you can't concede that somebody else could be right, and you wrong, at least don't set yourself up as "the truth-knower" and everybody else as suffering from a "misunderstanding." Geez.

I said "sort of " precisely because none of us are on LL's payroll (at least there may be some lurking who are but generally ordinary players are not). But anyone can cash out their stipends, and with a pretty good exchange rate around $4, pay for a lot, if not all their subsciption cost. Many people have realized this. In fact, not a lot of people do exclusively this because they enjoy spending money in the world on fun things.

Let me explain what your "misunderstanding" is: The idea that there is some kind of scarcity, and that economic transactions "hurt" somebody each time they "help" somebody, merely belongs to one school of thought about economies (Marxism).

There's another school of thought, called capitalism, especially of the liberal market variety, which says that value is added, not harm caused to anybody.

When I buy the Lindens from one player selling them, he has value in his RL now. When I sell the Lindens to somone in the game, he can use them for buying clothes or homes or vehicles and enrich his world and enrich the economy and make more people earn and spend money. It adds to richness and diversity. It adds value. It makes others come...and they do come. It doesn't cause the harm you say.

To portray this as robbing Peter to pay Paul, or to claim that "someone makes a profit at another's expense" when they cash out Lindens is merely to let us know that wittingly, or unwittingly, you have a set of economic beliefs -- as ardently held as any religion, but merely a belief, nothing more, not "the truth".

You're belief that scarcity and poverty is all that can be expected from this world...that sooner or later everyone will stop buying...is simply belied by the truth. They didn't. Indeed, the currency exchange rate ROSE, even allowing for cyclical periods of heating up, and that means there is more value and more appreciation in this game.

When the Lindens stop giving out the stipends, then the value will increase more. We'll get to see how much people really value their virtual worlds. And I'm willing to bet it will be A LOT.

The fact is that when you sell your Lindens, someone must buy them. That is axiomatic. It's not an ideological stance which can be argued away. It's fucking reality.

Interesting post, Judah. As I am not an economist, It would be interesting to see the L$::US$ exchange rate against the US$::<some stable measure like globally weighted exchange rate>. Your post led me to postulate that perhaps the L$ is rock steady and it is fluctuions in the US$ that cause variation of L$::US$.

Just a wild speculation. I'd love to see if that can be demonstrated or falsified.

I believe Alts on the same CC do not get first-land privileges, athough I may be wrong.

T

The scenario mentioned above would have worked over the past 12 months, however over the next 12 months it can change dramaticaly. Just imagine if 500 people go for that idea and create 50 accounts each paying annualy and selloff their stipends on gom, it would result in additional sale orders of 50,000,000 L$ worth at GOM every month, i realy don't wanna imagine the rate of usd/l$ over the next 12 months if that's the case.

It's not tough to imagine. The rate would be pegged into the ground within a month as the market became flooded with too many L$. Assuming demand remains constant, they would inevitably end up selling L$ at a loss after the first month or so. Though I can envision a couple of scenarios in which demand does not remain constant, none of these provides a great enough rise in demand to offset the drastic increase in supply.

In this regard, the market is self-regulating. The more money they attempt to unload, the less that money is worth. It would be unfortunate for those of us who are actually active members of SL, as the L$ would become devalued. However, it would probably return to its prebust level given enough time. There's no guarantee that more farmers wouldn't then come and attempt to milk the economy. In this regard, it would be a boom-bust, predator-prey, milker-milkee relationship which could be described by the Lotka-Volterra equations.

Of course, this assumes that everything remains constant. That's probably a fatal assumption, which doesn't accurately reflect reality. If you'd care to speculate, feel free. I'm sure at some point, the Lindens would take action at some point to curtail this behavior anyways.

I'll tell you what is fucking reality, Ardith. What is fucking reality is that just because I sell my Lindens and someone else -- willingly, voluntarily -- buys them, doesn't mean I've taken a gain and they've taken a loss.

They've got a gain. They've got Lindens. And they use them. To spend. Enriching other people.

So spare me your fucking realities, because you didn't get my fucking point, which is not the bare mechanics of the transaction, but Surina's concept:


So for each person that makes a profit, someone else is out of pocket... The

Um, just not true. Nobody loses. Everybody wins.

If I sell Lindens, somebody gives me dollars. I get RL dollars, I pay my bills.

If I buy Lindens, I get Lindens, I do stuff in the game.

I am challenging the idiocy that somebody gets ripped off here or loses something. They don't!

No one said that someone gets ripped off. Nor was it implied. The question is whether or not someone loses something. Unfortunately for your cass, it is UNDENIABLE that someone must lose something in order for the transaction to occur! In exchanging L$ for US$, someone MUST lose the L$ and someone must lose US$. Considering that currency exchange requires a comission if you use any service, then quite literally something is lost on every transaction! However true that may be, that wasn't the point which anyone was trying to make. You haven't quite grasped what Surina was suggesting. Her point is that someone must supply the L$ for the transaction. If alot of people are selling their L$, the value of the L$ MUST, by the most fundamental laws of economics, decrease in worth relative to the US$. If everyone is selling their L$, then the actual worth of the L$ is, amazingly enough, zero. The supply has completely outstripped demand, as everyone is looking to sell and not to buy. If only a few people are selling, then some people can actually convert their stipend to real cash and realize a net gain. However, the effectiveness of this decreases drastically as more people do it. Not to mention other external sources of fluctuation in the market.

That is why you aren't getting paid by the Lindens to play. The cost of your Lindens, which is really only a momentary price based upon current supply and demand, is paid by another player. The Lindens give you currency which costs them nothing and which is completely worthless to them, and some people pay you what they perceive the worth of those L$ to be. Thus, you are not being paid by the Lindens. Even if the L$ they give you are sometimes exchangable for real money, the FACT is that the person who is buying those L$ is the one subsidizing your gameplay.

Different preferences set different values for parties, that is the reason both parties will WIN with a transaction.

Let's say there's a lady, and she has a men's razor. It's not much valuable to her, she can't use it.
Then there's a man, he has a make-up set. Not too valuable for a man.

Then they meet. They exchance their items. Did anyon lose? No. Did anyone win? YES!!!
Because the man now has a razor, whis IS more valuable to him than the make-up set he could've possibly just trashed.
The woman also won, because she now has a valuable (to her) make-up set, and she only lost a razor she would've probably thrown out.

So yes, both people can win from their perspective, and that is the exact reason the TRANSACTION exists.

(Okay, this isn't entirely from my head, I did read a bit of economy just ouf of interest a year or two ago

Now, now, sir, there's really no call for such rudeness in these forums. Polite disagreement is fine, but personal attacks are not generally accepted and could get you abuse reported. As you are new around here, I'll assume you didn't know that.

Malachi, when Ardiff says "fucking reality" to me, I merely reiterate back to her "fucking reality" and double it for good measure. If that's incivility, well, you've come to the wrong address. Go talk to Ardiff, and tell her to stop that crap.

The one who started using "primitive" language is the one to blame, however replying in similar "primitiveness" isn't the way to go unless you want this thread to get two steps closer to get removed instead of one.