Exchange rate - corrective action too small - a suggestion

With regard to the value of the L$, it looks to me (from examining GOM) that there is currently no real outstanding support there for the L$ until we get down to US$3.40.

We have to conclude that the LL rating cut announcement doesn't seem to have impressed anyone.

I want real action from LL to restabilise, right now !
This is no environment in which to conduct a business.

I would like to suggest that, in common with RL markets, it is all a question of confidence. All it would take is one simple announcement. Like:

LL wishes to announce that it considers the ideal rate for the L$ in the long term to be US$4/1000. We will be taking action to return it to this rate in the near future, and to achieve stability thereafter. We will not be dealing in the markets, and so actions by big players will still cause fluctuations in the short term. But our policies will ensure the stability of this average value, and you may be sure that it will be regularly reinstated. Our target (though not guaranteed) is that the market should pass through our stabilised rate roughly every month.

My guess is that would do the trick (other opinions ?). All but those in a desperate hurry would no longer need to panic, and I for one would wait patiently for corrective action (depending which side of the equation I was on), confident that it would occur. Enough people doing this, and bingo, it pops back to that rate.

It doesn't really matter in the long term what the stabilised rate actually is, it could be $3.50 if they choose, or any other value. What matters is establishing confidence that it will be stable, and that LL will diligently manipulate their sources and sinks to keep it so.

Once we have this confidence, businesses can plan ahead. At present they sit on ever-shifting sand.

And please don't scream that this is asking for dictatorship and market manipulation. Understand that, once things settle down, the actual rate is not important. Only changes in rate have any effect on us, and the only people who benefit from changes in rate occurring (other than accidentally) are those who try to profit by predicting or manipulating them (ie speculators). Who cares about them ? They have value in RL by helping match prices of real goods in two different territories, but in SL at present we have no good that has a direct RL equivalent.

If we become able to e-shop inworld in L$ for RL goods outside, that will introduce a whole new ballgame, and a fully floating currency might become a necessity, subject to all the multiplicity of pressures from other currencies worldwide. But at present it is unnecessary, and destabilizing.

Ok - that last line was a bit bossy, wasn't it ?
S'gone.

All comments welcome.
Would such an announcement work ? Is it a matter of confidence ?

Ellie, you weren't here in Jan for Philips previous Economic Town Hall were you?

He made the precise statement that you wrote above, almost word for word. Promising to make economic adjustments to keep the L$ relativly stable at around $4 / L$1000.

You're not one of his alts are you?

But he hasn't done it, has he? look at the GOM graph. I have seen no corrective action for months, and this ratings thing seems puny to me, and (by the lack of effect) to everyone else too. And moreover, any hint of a target was omitted this time, making it pretty worthless for reassurance purposes.

We need more than an aside in a Town Hall. We need a major announcement, in the forum, and restated in the "message of the day".

We need it said clearly, out on its own. He has to convince us he means it. It has to constantly be repeated, and in the context of reporting the corrective actions as they are taken. Once we believe it - it will happen. Not much actual corrective action may even be needed once confidence is created. That's how these things work.

He must mean it, and make us see that he means it.

If behind your words is the implication that he said it once, never repeated it, and didn't do it - so who will believe him now ? I have to accede - it will be more difficult. Thats why he must be much more emphatic and pro-active this time.

I can't help wondering whether he is just not quite sure what to do. We know he is still recruiting a VP finance who will have responsibilities in this area. Also he recently posted that they have no economist on staff, and are actually looking for a freelance consultant/adviser to help them out.

Are they just lost ? Unsure what is best to do ?

Frankly, I think many a university economics dept would be delighted to get involved for free, with such a PhD-rich hothouse mini-experimental-world straight in front of their nose.

Almost always, about any topic, yes.

Well look at the position large currency holders are in. LL has made an anouncement that they are going to start working towards increasing the value of the Linden at the very same time that people are paniced about this new LL exchange. They have the perfect opportunity to heighten panic by dumping on the market and then rebuying cheaper Linden in bulk to get ready for an eventual bounce up in the price of the Linden. People don't seem to understand that "cashing out" is not the only time you dump on the market. Dumping if done right can also be a way to make money off of a falling price with no intention of leaving the market for good.

The people with huge influence on the market win both directions. They will be able to buy the same Linden they sell today for cheaper later at the prices they caused through panic, and then they sell that same Linden they get from people who panic for more as LL takes more and more steps to raise the Linden in the long run. I'm not too worried about the market in the long term. The market right now is just reacting to those trying to make a quick buck with their influence. You are right that confidence is important. If people didn't panic they would probably make more money. The problem is that no matter what is said, there are always people that let their emotions get the best of them when it comes to money.

Look at RL experience. Pronouncements by central bankers often do more harm than good when perceived by the market to be hollow.

When a target rate is trumpeted and not met, markets have LESS faith, not more. So a central banker dare not make dramatic statements unless willing to back it up. Casually dropping an non-commited wish is one thing. "We want the the exchange rate to be $4" is quite another.

Everybody already knows that there is a soft $4 target. We also know that LL won't spend real money achieving that target by, for example, intervening in the market and buying $L on GOM. A commitment could be expensive to keep, because speculators would bet against it. It would be a market game of chicken where the currency gains some strength as speculators churn the bounce, but when the bounce runs out of steam, there would be a crash. That's what happens in the real world. You'd have to cut stipends to zero to prevent it.

Buster

I smell pump-n-dump (not accusing any of you guys... just sayin' I smell it)

Hmmmm... thats very interesting, Buster. May I ask, do you not see LL as potentially having immensely more raw unconstrained power in its world than any RL government in theirs ? Its only constraint is not driving residents away, and attracting more. Isn't in a MUCH better position to make its targets stick in at least the medium term, against any speculative attack ? Lags and feedbacks might cause some oscillating about, but at rock bottom they really do have the upper hand, do they not. In ways of which most RL governments can only dream ?

Speculators can really turn a market upside down. Black Wednesday (http://en.wikipedia.org/wiki/Black_Wednesday) was caused largely by speculators which force the British Pound out of the European Exchange Rate Mechanism. In fact speculators got rich by the goverment's vain attempts to prop up the pound. What is interesting about this is that it demonstrated that eventually the markets will prevail no matter what a central goverment or bank could try and do, so the speculator won the day and UK taxpayer lost out due to the amount of money wasted to try and prop the pound.

All this I absolutely concede. But SL know it, which is why they have adamantly, and correctly, refused to intervene directly in the market.

My point is - I feel they have so much more power than a RL government, that a firm announcement of stabilising intentions and targets, backed by medium term adjustment of sinks and sources, would be much more likely to work than in RL. By which I mean - more likely to have a really big effect on our confidence and beliefs, enough to drive things to target promptly, and keep them there. Be a nice self-fulfilling prophecy. Provide it is done with sufficient emphasis and determination, and reinforced regularly.

Remember also, if they detect serious speculative attempts at destabilising for profit they can implement any sanctions they wish, including total confiscation of assets, banning from markets and even expulsion from the world. Attempts at avoidance via multiple alts, split transactions, and many credit cards in different names would be tedious and would significantly erode the rewards, and maybe still fail to avoid detection.

I have already seen them say somewhere that the market will be filtered for "dubious" transactions or some such words. Anybody noticed that even GOM removed our ability to fill ridiculous orders ? So people are already thinking about excluding potential abuse.

They would never face any popular outcry to prevent them from dealing firmly with demonstrable misbehaviour - and popular outcry is all they ever have to fear.

Maybe I am completely wrong and naive in this, but I do think these questions are worthy of careful consideration, and the value of price and exchange stability to a our still nascent business community is so high that it is a prize deserving of effort.

Boom and bust, and the continual forcing of unpredictable price movements onto the market are continuously damaging to businesss, not only in the crippling of future planning, the uncontrolled losses and gains in asset value, but also in knocking carefully made pricing decisions continually askew.

For some details on why these fluctuations matter, and why even enforced price drops are not something to cause wide rejoicing, as some seem to think (and why most rational traders would soon be forced counteract them), see
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Isn't this all fun ? I'm learning and relearning so much. And even better - it matters !

There is a market tool that can be used with regards to unpredictable price movements, namely hedging. This form of transaction should allow business to remove some of the unwanted risk that can occur, in this case the risk and problems of fluctuating exchange rates.

International companies use hedging a lot, especially for example hedging the dollar as it has taken a tumble on the world markets in the last few years.

So its a possibility here...

You're absolutely right, Hair. It could help. Lets push GOM to do it.

On the other hand it only helps with repatriating the income, which must be pre-estimated.

Doesn't help with the changes in number of items sold, profitability, and the demand curve which result from the alteration in consumer buying power and RL v SL purchasing choices.