Gigs Shrugged

This isn’t just a panic.  The market has fundamentally shifted and there isn’t sufficient buying pressure to sustain the amount of L$ that are being printed through stipends and etc.

This was bound to happen at some point because no network can grow forever.   Not quite a ponzi, but ponzi-like in the sense that Linden Lab’s actions required constant growth that never leveled off or dropped.

So anyway things should continue to bounce around.   The only thing keeping a lid on the L$ at all is because people have ingrained ideas about the worth of the L$, which leads speculators to lay down big bets when the L$ bounces up.  If it weren’t for people willing to pick up “cheap” L$ at 300, we’d have much more of a breakout.

This psychological inertia won’t last forever.  There’s only a few possible outcomes I see:

• Linden Lab takes action to revalue the L$
  • Accepting tier in L$… comes straight off the bottom line, the owners and VC will not like this one.
  • Cutting stipends retroactively.   If they just cut stipends while retaining premium membership the way it is users will be upset.  So if they go this way, they’ll have to do something drastic: get rid of premium entirely, for every account regardless of age.  They’d have to make this effective on the renewal date so this measure would take about a month to really start having an effect.
• Linden Lab does nothing.  Demand for L$ may increase, but it’s June, so that’s kind of doubtful with people doing things outside.

There should be some solid foundation this weekend as demand picks up again.  Around the beginning of July, things might get nasty.  I predict fireworks around July 4th.

Tracer Graves writes:

You obviously feel we are heading for economic disaster.  What kind of window of time to you think things have before everything just collapses? Contrarily, what kind of economic indicators would it take for you to reconsider your fears?  at what point in time?

I don’t know that things will “collapse”.  I think telling you where my savings is might be instructive in terms of my outlook.

Most of my small retirement investment is still in S+P index funds.  I have some positions in foreign gold and metals mining companies that I hope will hedge against the worst.  They have turned out to be very profitable investments thus far.  I still view a total collapse as unlikely, but possible.

I believe that the massive cash injections were a mistake.  I believe that we will pay for them through inflation and malinvestment.   The worst case scenario is a runaway feedback loop of prince and wage inflation combined with massive government spending and currency rebasing that is a hallmark of foreign hyperinflation scenarios.

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Since the Seventh Sun is discontinued currently, and I am not sure of the future hosting situation there, I am reproducing this article for historical interest here.

Gigs’ Corner: SL Grid 08

by Gigs Taggart, Correspondent

This month begins a new regular feature of The Seventh Sun by contributing correspondent, Gigs Taggart. Gigs is a software engineer who is working with Zero Linden and others on the next generation architecture for the Second Life (SL) grid. This month’s topic is the development of an open grid, what Linden Lab refers to as “SL Grid 08.”

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I found this today:

I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its Constitution; I mean an additional article taking from the federal government the power of borrowing. I now deny their power of making paper money or anything else a legal tender. I know that to pay all proper expenses within the year would in case of war be hard on us. But not so hard as ten wars instead of one. For wars would be reduced in that proportion besides that the State governments would be free to lend their credit in borrowing quotas.

The Writings of Thomas Jefferson Being His Autobiography, Correspondence, Reports, Messages, Addresses, and Other Writings, Official and Private By Thomas Jefferson

Every dollar in existence is backed by exactly 1 dollar of debt. It is impossible to increase the money supply without increasing aggregate debt. It’s also impossible to decrease debt without decreasing the money supply by the exact same amount.

That’s one reason the Fed is pumping out money like crazy, and congress is spending it. As the debt markets unravel, people are paying off debts, and other debts are being declared total losses and being written off and new debt isn’t being offered as much… all of this causes money supply contraction.

So why are they spending and creating so much money?

The optimistic answer is that they are doing it to prevent deflation. The cynical answer is that they are spending money because they can, giving it to political friends in massive pork spending contracts, and the Fed giving directly to politically friendly bankers, in the most massive wealth redistribution scheme this country has ever seen. Except it’s not the socialist kind of wealth redistribution, it’s the kind where a corrupt government transfers money from everyone to its political friends. The worst sort of crony corrupt capitalism. And yes, Obama is a party to it.

Whoever controls the volume of money in our country is absolute master of all industry and commerce…when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.

-James Garfield, 20th President

The passage below is reminder of how far Linden Lab has gone from their original dream of being “bigger than the web”.  Self-limiting decisions such as this “adult ghetto”, banning people for “unacceptable fantasies”, and in general, moving further and further from the concept of a common carrier, and turning into something more and more like AOL in 1995…  a sandboxed playground for kids and people who can’t figure out how to use anything better.

Linden Lab wrote, in December 2006:

We could never write a set of rules that would work for all people all the time, nor could we enforce them across a population that is growing so rapidly. Instead, we believe that the best way to foster communication and expression is to put power into the hands of the people by giving you better tools for local control. And that’s what we’ve been doing for several months now. [...]
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I’ve been a libertarian for a while.  Mostly small L, but the party guys don’t bother me too much, even if I do think they are a little extreme.  It used to be the case that libertarians would tend to defend the idea of “intellectual property rights”, after all, something with “property rights” in its name surely is something worthy of libertarian defense.

In recent years though, it seems there has been a shift.  Increasingly, libertarians are recognizing that “intellectual property” is largely government tinkering with the free market, similar to price controls or anti-gouging laws.  It’s not a clear cut case either way, however.  Creative output is the fruit of someone’s labor, after all.

I noticed this shift a while back, and it seems that others have too.  Today I got the Mises Daily email, and it included a book review for “Against Intellectual Property” by David K. Levine and Michele Boldrin.  Being good capitalists, mises.org themselves are offering the book for sale.  I have not yet read the book, but its existance in the bookstore of mises.org is a strong sign of the times:  “Intellectual Property” has lost yet another former ally.

For the first time ever, the Second Life Peak Monthly Cash Flow economic statistic has shrunk in seven out of nine income categories.  In the two other categories, it remained nearly flat.  Residents with significant L$ income of over $200 per month dropped from 4377 to 4277, a loss of 2.2%.  The November data indicates continuation of the slowdown that was first seen in October’s data.

Linden Lab has also censored the data regarding islands lost per month, claiming that it wasn’t an accurate reflection.   The massive loss of islands is a direct result of Linden Lab’s disasterous price increase on Openspaces.  December data will likely be worse, continuing the Second Life recession.

I have been watching the money supply closely, getting email alerts when they update the data.

Today they just added “recession bars” to mark the current recession.

St. Louis Fed: Series: BASE, St. Louis Adjusted Monetary Base

The recession bars go back to about November 2007 up to today.

Of slight note is also the monetary base has leveled off at 1.5 trillion, contracting very slightly over the last couple weeks.

This is still an increase of 76% in the last 11 months.

A critic writes:

Apparently, economic systems have something akin to wave-particle duality in quantum mechanics - sometimes their behaviour can be accurately predicted using very simple laws, other times they are chaotic and emergent.

That’s actually true. The pricing problem is hard and likely computationally intractable in a central management paradigm. It requires omniscience to solve 100%, and damn close to omniscience to even do a decent job.

There is a way to get relatively high pricing efficiency though, by distributing the task among every consumer and every supplier in the market. It’s not 100% efficient, but it is the method that incorporates the most amount of information, and does so in near real time. It is probably the oldest emergent system in existence, and it is subject to the normal failures that plague all emergent systems. But it does work, and can achieve very high efficiencies.

As an example, a national size power grid is an emergent system that sometimes behaves chaotically (cascade failures). It’s a relatively simple emergent system that is easier to manage and predict, compared to some.

A single electrical generator in that grid is much easier to predict. It is governed by the relatively simple laws of electromagnetics and physics.

That’s the definition of emergence, that on one level, the system is made up of simple and predictable interactions, but on the macro level, it’s much more chaotic, and exhibits complex interaction.

“There is no need for the federal reserve to monetize any of this borrowing … I do not expect additional inflationary consequences from this”  - Bernanke’s testimony to congress, 9/24/08

The initiatives call for the Federal Reserve to buy up to 600 billion dollars in mortgage securities with another 200 billion dollars allocated for asset-backed securities to help get credit to consumers.