On Money

Here is how good my students are: first, one sends me this excellent story from the Ludwig von Mises Institute:

Second Life’s economy could reasonably be compared to that of a small foreign country dependent on tourism. Consumers are inhabitants of the real world who take what are essentially pleasure trips to Second Life, perhaps to meet new people at a dance club, shop for virtual clothing, attend a conference, or gamble at a casino. Like real tourists, consumers exchange their real US dollars for Second Life’s currency, the Linden Dollar (L$), typically on a currency exchange run by Linden, called the LindeX. They then use their L$ to purchase goods and services created by other Second Life residents, and if they have extra L$ when they’re done, they can sell their L$ for US$ on the LindeX.

Given the strong evidence that Linden has unnaturally inflated the L$ supply, Austrian economics tells us that there are a couple of potential outcomes that are likely to occur. In the first, Linden will stop running significant deficits at some point. With less L$ available to spend, residents will demand fewer goods and services, leading to lower prices and reduced profits. Previously profitable enterprises will go out of business and the wealth of many residents will decrease, slowing overall economic activity.

The other possibility is that Linden will continue running deficits to the point that a sufficient number of residents and speculators will recognize the L$’s frailty. In what Ludwig von Mises referred to as a “crack-up boom,” everyone will scramble to redeem his L$ for “real goods,” which, in the case of Second Life, is probably the US$.

Yes, if you play in Second Life, I’d recommend you trade your L currency for US currency (and then that for something not tanking, like Euros or Yen). Because one corporation is doing exactly what no central bank – real or fictional – can ever get away with: covering deficits by simply printing money (and, worse, not keeping that money backed by something of actual value).

Following this another sends me to this short animated film:

Which is very interesting, in its easily-accessible discussion of the simple deposit multiplier. Specifically, it discusses the natural implication of this (and the part that really does in the heads of accounting students): most of our money is not backed by gold, foreign reserves, etc., but debt.

It’s some 47 minutes, but quite interesting. Both are good thinking-points, with regard to fiat money.

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