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Town Hall Question: L$/US$ exchange rate target?

Ricky Zamboni
Private citizen
Join date: 4 Jun 2004
Posts: 1,080
03-20-2006 09:31
This question was originally posted in response to the request for question for last week's town hall meeting. Since this has been such a hotly debated topic in recent months and many users depend on L$/US$ exchange to fund their tier etc., it would be nice to get an unambiguous answer to this question. So, here's a repeat (with minor modification) of the question for Philip/Vasudha/whoever is currently in charge of matters economic:

"In the past, you have quoted a target exchange rate of L$250/US$. Given the consistent slide (this thread is one example of many) toward lower valuations and the fact that the premium account stipend implies a Linden-purchased exchange rate of L$361/US$, are you prepared to:
(a) Admit LL's stewardship if the economy had been completely inadequate and implement measures to drive the rate back up to your target?
(b) Re-evaluate the target rate, and place it lower (perhaps on par with the equivalent cost of the stipend received over the course of a year)?
(c) Give up on the notion of a target rate, and let the market 'do what it will'?
or
(d) Something else?

And please don't try to claim as you have previously that the L$ is in fact stable. That is demonstrably incorrect and it would be an insult to your users to make such a claim."
Philip Linden
Founder, Linden Lab
Join date: 18 Nov 2002
Posts: 428
03-30-2006 12:04
Hi,

Let me try and give an update on how we are trying to manage the economy, and also correct a misconception around price 'targets' versus 'trends' that I feel we have created by our choice of words:

Linden Lab controls one variable that we can adjust to influence the economy: the rate at which new money is introduced into the system in the form of stipends (the largest factor), traffic awards, and other smaller incentives. At present, we are adding about 7% per month to the economy (money supply) with new money. By comparison, the population and overall transaction rate of SL is growing at a rate closer to 20% or so per month.

Our strategy in managing the economy is to watch a number of factors and make changes to the amount of new money based on what we think is best. Some of the factors we watch include: the growth rate of new users, the growth in the total in-world user-to-user transaction volume, and the exhange rate at which people are trading currency.

Right now the economy is growing rapidly, both in terms of new users, and also the overall amount of goods and services per user that are being bought and sold. This means that we need to put new money into circulation. As the economy grows and matures, its rate of growth will naturally slow, and this will mean that there will be less new money to put into the economy. So, in general, stipends and other new money sources should be expected to decrease as the economy matures.

One high-level goal within this strategy is to try and keep the Lindex currency exchange rate fairly constant. This is different than having a price 'target', because what we are looking at is not the absolute currency price, but the rate at which it changes over time. We've confused folks a couple times by using the expression 'price target', which we shouldn't have done. The absolute rate (250:1, or 275:1, or 300:1, etc) isn't really that important, because if it changes slowly, folks can just reprice goods and services as desired to match their prices to a desired 'real-world' value. So when we watch the Lindex, we are looking for trends that seem to be moving the price continuously and at too great a rate up or down. But this is hard problem! Sometimes, like in real-world markets, the movement of the currency exchange prices is not due to 'fundamentals' like the rate of new money, but is instead just random fluctuation caused by speculation, etc. The Lindex volume is still small compared to real-world markets, and any economist will tell you that less volume equals more 'volatility' - if there are fewer people trading, you can expect the prices to move around more. In the last 5 months or so, the Lindex has moved about 20% in terms of the exchange rate. Most world currency markets move less than that, but not tremendously less. So overally we feel like the LindeX is pretty stable for it's lower volume.

As discussed above, we will continue to watch for trends and make adjustments to the new money rate in response to those trends. This is a learning experience for all of us and for the overall community - we will do our best to keep things as stable as we can.
_____________________
Philip Linden
Chairman & Founder, Linden Lab
blog: http://secondlife.blogs.com/philip