The Coming Recession . . .

[Borodog]

. . . in Second Life.

Matthew Beller wrote a great article on The Coming Business Cycle in Second Life.

The equivalent of the state in SL is the company that runs it, Linden. Linden controlls the money supply, the Linden Dollar, or L$, which is exchanged on the LindeX at a pegged exchange rate of 270L$ per $1US. $US can be sold for L$ on the LindeX and vice versa.

The kicker is that Linden has been inflating the L$ by around 6% per month, more than doubling per annum. Per Austrian analysis, this is setting SL up for a recession, that could go down in a couple of ways; either Linden will have to stop the credit expansion, causing consumers to tighten their virtual spending and causing virtual businesses to fold, or eventually people will realize the L$ is on shaky grounds, and there will be a flight from the currency to real world wealth, namely the $US.

Since Linden has been inflating the L$ unbacked by real world assets, the company could litterally go bankrupt in the real world if they continue to sell on the LindeX at the fixed exchange rate of 270L$ to $1US. Linden will either have to suspend L$ redemption in $US, or jack the exchange rates. Either way, customers will learn that they don't actually have the wealth they thought they did. People are going to be massively pissed, feel cheated (which they would be), and leave the game. As Beller points out, SL has an economy essentially like a small foreign country depending on tourism. When the tourists realize they've been suckered, the SL economy will experience a steep decline, if not a total collapse.

Beller doesn't go into it, but this is really a perfect virtual experiment in inflationary business cycles, and beautifully models the effects of government intervention in and control of the money supply via an inflationary fiat currency.

Excellent read.