Predictable L$ deflation

First, I am going to outright state that the free market is always the best way to go. Most of the time, there is no way around it. Unless you have an unlimited supply at a fixed price and an unlimited demand at a fixed price, there is no way to really control the market. If there is a difference in price between the buy and sell, you will still find a sub market within that range.

That being said and since I have been watching the L$ USD market for over 2 years now, I have been able to see some trends. There seems to be 2 major influences on the conversion rate. Land and new people. If I had more of the hard data, I could better refine my theory, but I am going to stick with it for now.

Land was, and still is, a very hot commodity. People wanted land. Land prices kept rising. People wanted that land. As the price for land rose, so did the demand for the L$ to buy that land. The massive release of land that was the snow sims put a huge damper on the value of the L$. Land prices dropped and continued to drop for some time. Then came the “land on demand” model of sim releases, and the land values stabilized. About this time a few major changes came about to SL. You had the free basic accounts, the elimination of telehubs, the closing of GOM and opening of LindeX, and full sim only releases of land. The full sim only releases for the most part caused the price of land to really stabilize. The telehub change had a limited effect on the economy because of the Linden buy-back offers that they had. There was also the loss of some business, but I believe that it was more of a minor effect. The change over between GOM and LindeX caused the effect of people relisting at what the sellers thought would be an ideal price. It was a basic reset of the L$ market done by the sellers.

The change over to free accounts I think had a huge effect on the economy. SL saw a huge influx of new players. New players don’t have very much to start with. They need new clothes, new skins, new animations, land to live one, and numerous other things to get themselves started. This was a great boom the exchange market. These new people told others, they joined, told other, etc. Once these new people got what they wanted, they had no great need for the L$ any longer. They get money from clubs, games, stipends, and how ever else the earn money. Now they have money and nothing to spend it on. So they decide to sell it. With the rate of growth not as high any longer and with more people trying to sell L$, the price of the L$ falls. People will undercut each other to sell their L$ quicker. That is human nature, and there is not much that can be done about it. The value stabilizes when the supply and demand reach and equilibrium. It has again reached that point at about 280l/1usd.

This is just a really simplistic overview of what I have seen over the last 2+ years. I have a few more theories that include Ginko and other investments that affect the economy, but those are much less refined, and mostly unsupported. It basically comes down to just a few factors: Supply of L$, saving of L$ in accounts, wanting of new content, new players, and land. You change any of these factors and you will have a change with the exchange rates.

You make several good points. Wanted to reply to a couple. Excellent post.



Just a personal opinion-- I believe people will buy the same amount of L$ regardless of a 25 cent difference. If they want 1000 L, they're not going to let a quarter stand in their way.




Yes, I didn't intend to indicate that GOM failed because it wasn't making money. It's obvious they closed down because they could not continue working with Linden Lab. What indicated their failure was the constant extreme fluxuation of the market. When they finally closed, the L$ had dropped to what... $3.35? People were almost always unhappy. Either the buyers were screaming because L$ were way too high, or sellers were screaming because it was too low. Folks only seemed happy when it was about $4 / 1000... which in itself would seem a strong indicator at what the market is willing to bear.




Part of the major problem with the existing system is lack of controls. Although I'd personally like to see the L$ set at a fixed amount (because to be honest, I don't think any other way actually works well)... there at least has to be controls placed on the present system or things are as you pointed out, going to get pretty messy.





Anshe Chung and IGE had every other seller on the market to contend with. They couldn't maintain a stable market because their competition was unstable and constantly undersold them by taking a reduced profit on sales. Linden Lab wouldn't have that problem, since (according to them) they're not in this for the profit. They just want to facilitate quick and easy transactions.

No, things never stay the same. Even at a "set rate" market, that set rate may go up or down, depending on the RL economy. If there is RL inflation, the set rate may have to be altered to meet that fact. But at least it could be altered, rather than wait and hope on a fickle market that has no control.

I've seen several debates about fixed-rate vs variable-rate L$ sales and in all of them, I've never seen anyone give one actual, stands-up-to-scrutiny reason why setting the L$ at US$4/1000 wouldn't work. Not one, and I've read them all. Other users have made the same comment, but they're often hissed out of the conversation. It's not a popular stance-- but there are more than just a couple of people who realize that it's a very valid method of doing business. It would give Linden Lab immediate and ultimate control over the distirbution of the L$ (although some would shudder at that concept) and at least grant them the power (whether that power is used correctly or not) to influence the stability of the L$ on a moment's notice.

Of course, it has to be understood that proper sink/fill procedures would be in place. Without those, even a set economony won't work well.

Well-presented arguments though. Some good points. Let me ask: continuing the use of a stock-market type system such as LindeX is set up on, what steps would you take to stabilize the current economy?

A couple of things agreed: the stippend system really needs to be looked at. When the money market is glutted, ya don't keep handing out more money. I know everyone screams at even the mention of reducing or eliminating some stippends, but hey, that's the greed speaking. The common-sense of it is obvious.

Although I propose a set-rate value, as mentioned above, I haven't proposed it become set in concrete and never change. The idea of set rate is that Linden Lab sets the sale value of the L$ according to RL currency movement. The idea isnt' to "freeze" the value of the L$-- it's to make it more stable. If RL currency inflates, the L$ will need to move along with it or in a year, sellers will be getting less for their sales.

No system is perfect, especially in today's RL economy. What I'm really against right now is putting total control of the money market in the hands of a very chaotic, unregulated market system.

I'm not saying I'm absolutely, without-a-doubt right. But for sure, GOM wasn't and LindeX isn't.

That is an incredibly alarming amount. There are people on SL who make their livings from sales and land rentals. Can you or I imagine our paychecks fluxuating by this amount each month? Take US$.... ordinarily we make say, US$1000 a month. However, because of "market fluxuation"... this month we'll only make $800 instead. Ooops! There goes being able to buy food this time around!

20% is way too high an acceptable fluxuation allowance. In RL, if the economy fluxuates just a few percent in a year people start sweating.




That's the big problem. With folks relying on SL wages to pay RL bills, there's only so long one can hold out in a fluxuating market before caving to the lowest bid tier on the list just to get the L$ sold and pay the electricity.

Simple. I would review both the sinks and sources of L$. Temporally have more sinks then sources until the L$ raises, and then make them equal when it is near a value I like. Keep watching to make sure this value is sustained. Make adjustments as needed.

I was trying to say it in a longer post, you said it quite eloquently. The thing that alarms me is that they rarely add ways of destroying $L, and they sell their premium account at a price that does not come close to averaging out at a L$250/US$1 value.

I would suspect the main reasons are more psychological than anything else. Though Asimov's Psychohistory does not officially exist, the concepts are grounded in the collective common sense (or lack thereof ) in large groups of people.

Has anyone sited reasons under that line of reasoning Wayfinder? If not than I have one or two of my own, but want to prevent repeating anything.

Interesting concept. Foundation is a classic series. Go for it and let's see what happens.

Hi Wayfinder,

First, let me provide some textbook definations that might help some.

Inflation and deflation are internal to a country. It is a measure of the first delta of the cost of a country's internal goods vs it's currency. So the terms inflation and deflation do not apply to foreign exchange. (ie: The value of one currency to another) Instead, the terms valuation and devaluation are used.

I think that you are looking fo the term davaluation in the $L vs the $USD.


That being said, you have made some very interesting points. I agree with some, disagree with others, and have different causitive theories overall.

First let me say that fixing the currency exchange rates in this situation would be disasterous. Most people don't relaize that currencies exchanging with each other have two vectors to look at, rather than just the value variable. A currency exchange requires a price AND liquidity consideration. In other words, if you try to set a price on a currency that is trending in a definate direction, then the buyers for one currency will quickly overpower the sellers for the other. In this case, resetting the Linden back to 250 per USD would quick seize up the movement of the transactions, due to the fact that the merchants in SL would want to sell much more then the people wanting Linden would buy. The extra $30L per USD actually attracts enough USD to keep the market fluid TODAY. Tomorrow, the buyers of $L might not pay as much, or could pay more.

The true problems with the Linden devaluation lie in two factors:

1) All goods on SL are in the economic category of SUPER DURABLE GOODS. That means that once they are purchased, they never wear out. In the real world, pantyhose run, and cars eventually break down. This causes a constant demand for these products. In SL, once it's purchased, it's yours forever, so to speak. This means that older residents who have purchased most of what they want have very little impact on the economy compared to the newby with only their starter clothes. Therefore, the value of the Linden is, in a heavy part, dependant on the amount of new players. A good percentage of those players will pony up $10 or more USD, rather then spending time camping. If enough of them do that, then the buyers of Linden will force the per USD price down as they buy up the quick Linden and move on to the more expensive. The opposite is true if there are not enough new players. (This assumes that the enough newbys purchase extra Linden to overpower the stipends of the others.)

2) Land prices vs population. Land ownership over the minimum allotment creates a demand for Linden sales as the landowner attempts to convert rents and other income from the property into USD to pay for the land use fees. As the population increases, that demand for USD goes down, but every new private island will currently add a new demand of up to $195 USD in the Linden to USD transactions, which adds to the devaluation.

I hate to say it, but like most economies, the variables are extremely difficult to weigh without some very complex analysis. The best I can currenctly say is that the trend is currently gong towards devaluation.

As far as shopowner profits go, the classic model states that they should trend twoard less prifitability as more competition enters the market, but more profitability as more consumers enter the market.

The simple answer is that, "It's complicated". The true measure is the question "Who are the customers". If the people making money from this game comprise less then 10% of the income that Linden gets from the game, and there are more shops going in each day, then why should they care if the Linden is being devalued on the cashout? Also, if the business owners comprise less than 5% of the total population, and the other 95% are enjoying themselves, can you present a compelling reason to change? You will have to to convince Linden to change a system that is very sucesfull for them.

Dean

that's a good post catnip.

Really we have been seeing devaluation of the currency without tremendous corresponding inflation... the basic cost of goods in SL has not risen, because the sellers in SL tend to react slowly to exchange rate changes. However, i agree that devaluation is a very important concern however.

I agree that demand is definitely lessened by the fact that we have very little in the way of non-durable goods. We also have no necessities (like food).

I don't totally agree with your analysis of new player vs older player buying activity -- there's no data of course, so it comes down to anecdotal evidence. But you might be surprised how many older residents continue to ahve fun shopping.

We need both growth in new players and continual regeneration of demand from the existing base by release of new "gotta have" content.

Land rentals is an interesting issue. Renting is a more economical way to own land in SL with the current tier discount pricing scheme. Yes, landlords need to convert their rental-income L$, which adds to the pressure, but then again, there are probably a lot of renters who pay by buying L$ on the market.

And yes, I wholeheartedly agree with the post that says currency exchange should be a free market. We have a supply-demand problem as it is. If you try to artificially fix the rate, the supply side is going to get all choked up and that could become as damaging to content creators as the very volatility they are threatened with today.


[p.s. I fail to understand the need to pat oneself on the back with an "I told you so". There have been many people concerned about devaluation of the currency for quite some time. ]

I'm no good with economics, so just a couple of uneducated thoughts.

Oldbies are crap consumers basically. The longer we stay in SL, the less enchanted we are at things which used to amuse us when we were new. So this is one place to hit, cooking up new ways for oldbies to want to spend again, and also preventing them from boring themselves to the point of quitting. We keep hearing that we need some form of a bigger money sink, but theres none in sight.

A silly example for the above, maybe, selling 'advanced prims' which have movable vertices. So for example, I can purchase an advanced box prim for say 50L each from the client tools, and this box prim has all its corners adjustable in any location within its limits, so I'm not limited to the regular hollow, cut and twist functions. And this prim, while requiring more bandwidth, still takes up one prim on the land. Of course, the various options for selling things made from these need to be thought out, but basically, selling advanced options for the more experienced users.

Next, tier fees are holding us back. Part of the reluctance to buy the more 'static' content like furniture, houses, decor, etc. is because of the lack of land to hold these prims. I'm guessing here, but I think clothing and attachments sell the most, because they aren't limited by prim limits. Putting myself in the shoes of a new player, the recurring costs of the tier payments are scarier to me than the one off costs of buying L$ to buy content and land inworld. So, while lowering the tier costs for holding land might sound like a bad move businesswise, it might encourage people to own more land, which in turn, encourages the purchase of L$ to buy stuff to put on the said land. Since theres such a glut in the land department, and the servers are doing nothing much but holding empty space, why not?

It would not work to set a fixed price for the Linden dollar at $250 per L$1000 because there would be more sellers than buyers, and it would be too hard to sell.

They could partially solve the "reluctance to tier up" problem by changing the tier levels so that they rise linearly in 512 or 1024 lots instead of by powers of 2. Rignt now I'd have to pay for another 4600 m2 if I buy 16m2, so obviously I'm not going to buy that 16m2 until my SL income rises quite a bit. If I only had to pay for another 512 m, instead, I might consider it.

Hi Forseti,

Thanks for the praise. As for the pat on the back, I was unaware that I was doing that. If I was, then please do not take it as self aggrandizement. It was not intended that way.

Dean

Wanted to agree for the record. Very good post.



Yup. And even moreso, because just as in RL, oldsters often have more spendable income. I know when I was new here I thought L250 was a fortune. Now, I'll drop that like a shot if I really want something. I spoke with an "oldster" here a few months ago that dropped an average of $80US a month in shopping sprees; she just loved to shop. I don't know as there are any actual demographics on who buys what, but I'd guess newbies aren't the only ones shopping.



I've heard this concept several times so time for me to address it... again.

No one is recommending setting a price on the L$, leaving it there, and doing nothing else. If a "set price" is established, that price needs to fluxuate according to the RL value of the US$. However, it won't fluxuate nearly to the extent that it is now, and the only thing that would make the L$ devaluate would be lack of popularity of Second Life.

It would be essential to first establish better L$ sinks than LL has used thus far. I found it interesting that Catnip referred to the absense of non-durable goods such as food. What if Second Life started requiring people to buy "food" from Linden Lab in order to survive? If you don't eat every X amount of hours you're online, you begin to "starve" (ie, lose buying power... your L$ become worth less by a hardwired conversion factor, with the difference going to a LL black hole). If you starve, you wind up not being able to buy or sell anything at all-- except food. If you buy food, everything is peachy, and the price of food goes directly to Linden Lab to sink into the black hole. The price of food can be adjusted as the economy requires. Viola! Instant heavily-controllable L$ sink.

If handled correctly (which admittedly, is a pretty big "if"... there would not be an excessive climb in the number of L$ being sold compared to the number of L$ being bought (which is actually the case now). The market would even out very quickly and the LL sink process could quickly remove excessive L$ from the market.

Don't like the idea of food? Maybe a sales tax on all purchases made, with the tax going to the black hole. That would be as effective. Gasoline for vehicles? Clothing wearing out over time? There are all kinds of L$ sink ideas that would not only help stabilize the economy... but also make the game more realistic and even possibly more interesting.

(/me holing up and hiding from the massive mob now seeking to lynch me...)

Let's not make it too real. NO fun.

Now, if you could find something FUN to eat up Linden dollars, that would be good.

Yeah, I agree. I'd really hate buying "gasoline" online. I'd set my vehicle on fire first. But there are lots of possibilities. Although I do think it would be interesting to actually have to sit down and eat once in a while. Kind of a fun concept.

If I wanted 'food' to 'survive' I'd play the sims.

lol that wasn't directed at you

I hear that.

However, if "eating" was a required activity on SL (say, once a week or so), it would make pizza parties much more meaningful, wouldn't it?