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Capital flight or devaluation?


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For several months now, I've seen the L$ falling against the US$ after many years of stability (250). For the first time ever, a sell order that I placed at the top of the asking price (258) failed to clear, putting me in an awkward position on tier payment day. While probably unrelated, this followed upon a bizarre billing mistake on SL Marketplace, which took LL a week to correct. Strange days.

As I understand it, the relative price of the L$ is dependent upon two factors:

  1. the money supply (LL-managed sources and sinks)
  2. market-driven supply and demand

So, is LL deliberately devaluing the currency by increasing the money supply or are we seeing capital flight from SL?

I am of two minds. On the one hand, the relative price of tier (relative to a basket of infotainment goods and services) has at least tripled over the past ten years, resulting in a steady decline of estate sims and an increase in abandoned mainland, but it doesn't explain the recent drop unless it was triggered by news of Sansara. On the other, I can easily see LL seeking to draw investment into SL (= direct foreign investment in RL) by devaluing the currency (what Greece desperately needs, but can't do because of the euro).

Anybody out there know what going on?

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There have been a lot of threads and a lot of speculation on both these forums and on SLU.

Just looking at the amounts in buy and amounts in sell compared to say 6 months ago should give the biggest hint that the currency is heading from 258 towards 260.

There will be a point landlords will put up the price of homesteads.

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Deltango Vale wrote:

So, is LL deliberately devaluing the currency by increasing the money supply or are we seeing capital flight from SL?

There is a tremendous amount to read on this subject.

It's a bit speculative, but I personally am convinced that LL is allowing the very slight devaluation of the L$ against the US$ -- that is to say, they are continuing to provide fresh supply at the higher exchange rate -- because otherwise the sinks would naturally rebalance the market at whatever rate Supply chooses. I come to that conclusion because I simply cannot believe that normal market forces could result in such a tiny adjustment.

I'd also point out that, even with the small recent devaluation of the L$ in USD terms, relative to a market basket of world currencies, the L$ is significantly more valuable than it was five years ago, only because of the continued (and problematic) relative strength of the USD compared to most everything except the yen.

In a way, it would be smart for LL to adjust the L$ in the direction it has been moving, to prevent L$-denominated goods and services from growing unaffordable to non-US (and non-Japanese) customers -- except that LL's Land product is strictly USD-denominated, so devaluation of the L$ squeezes Land-intensive uses of the platform (such as rentals).

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Qie Niangao wrote:


Deltango Vale wrote:

So, is LL deliberately devaluing the currency by increasing the money supply or are we seeing capital flight from SL?

There is a
tremendous
amount to read on this subject.

It's a bit speculative, but I personally am convinced that LL is
allowing
the very slight devaluation of the L$ against the US$ -- that is to say, they are continuing to provide fresh supply at the higher exchange rate -- because otherwise the sinks would naturally rebalance the market at whatever rate Supply chooses. I
come to that conclusion because I simply cannot believe that normal market forces could result in such a tiny adjustment.

I'd also point out that, even with the small recent devaluation of the L$ in USD terms, relative to a market basket of world currencies, the L$ is significantly more valuable than it was five years ago, only because of the continued (and problematic) relative strength of the USD compared to most everything except the yen.

In a way, it would be smart for LL to adjust the L$ in the direction it has been moving, to prevent L$-denominated goods and services from growing unaffordable to non-US (and non-Japanese) customers -- except that LL's Land product is strictly USD-denominated, so devaluation of the L$ squeezes Land-intensive uses of the platform (such as rentals).

I agree that LL surely must be doing something, even tho Ebbe has publicly stated they are doing nothing. In any case, it is costing me at extra $50 or so every time I cash out. 

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The most plausible explanation is devaluation. LL increased supply. It is also the simplest explanation.

The capital flight theory doesn't make any sense to me. if people are selling assets then someone else must be buying it, so L$ supply and demand would equate, having no effect. It is also not plausible that there are people with huge stashes of saved L$ who are suddenly dumping it on the market. This would need to have been saved over a long period of time to now have the same effect as new L$.

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Ebbe Linden said in a Lab chat some weeks ago that Linden Lab does not interfere with the currency exchange and this is "the market."

That's actually not true because Linden Lab has always printed Lindens and injected Lindens into the exchange through Supply Linden, to keep the currency "stable" which it was until these awful drops of 10 points or more.

So really, he needs to be challenged by those who can get to him about what Linden's policy is. Have they stopped printing/selling Lindens at the Exchange?

If the money supply is "too large," why can't they put on more land auctions or at least allow more abandoned land to be sold instead of queuing it up on the auction? Really, anyone who asks for a plot of land should be given it for $1/m. It's terrible that so much sits there and the Lindens dither and decide whether/when to put it on the auction.

The other day I asked to buy a 16m square in the middle of my own land that was owned by an old obnoxious ad farmer that finally quit.

I was told by a Linden that I could buy it as "a one time courtesy". Huh? A one-time courtesy on a 16 m square in the middle of my land??? I could understand if that were said about waterfront, but this?

There are just so many questions. Do the Linden sales to the Marketplace count as sinks or sources? What rate do the Lindens sell that revenue from? Or is it in fact a sink, as all sales are "supposed" to be, i.e. the land auction or uploads of textures. We were always told these were sinks because they remove Lindens from circulation. But is the MP also a sink? Because LL has set their sites on having the MP and content exchange be a revenue generator to wean themselves from "land". So what's up?

I see businesses quitting or moving to the MP so I'm inclined to think it's capital flight. I always have new customers even from very new residents but I also see some quietly retire and not log in and go away, unannounced or announced. 

The notion that this cash surplus is from people cashing out to buy the grandfathered buy-down is ridiculous, I've explained why so many times I'm tired of it but ask if you can't understand.

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This doesn't make sense.

It's been 10 years since the Linden was worth quite a bit more than the 248 that it WAS worth for many years -- until this year moved it to 258 or worse.

I have kept records for years of the Lindex and if you want to see them, IM me inworld.

I agree that LL is likely doing something, and if they are still printing Lindens, that seems like malpractice. Maybe they have a great deal more sales on the MP, with people giving up land and moving to the MP, and maybe they haven't adjusted how they used those dollars which I believe are supposed to be sinks. It might be that.

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Prokofy Neva wrote:

This doesn't make sense.

It's been 10 years since the Linden was worth quite a bit more than the 248 that it WAS worth for many years -- until this year moved it to 258 or worse. [...]

But those are exchange rates against the US$, and the US$ has increased in value quite dramatically in the past few years against most other world currencies:

http://www.xe.com/currencycharts/?from=USD&to=EUR&view=5Y

http://www.xe.com/currencycharts/?from=USD&to=GBP&view=5Y

http://www.xe.com/currencycharts/?from=USD&to=AUD&view=5Y

http://www.xe.com/currencycharts/?from=USD&to=CAD&view=5Y

and so a flat exchange rate of L$ / US$ means the L$ gets increasingly expensive to foreign buyers.

One consequence: it's not a sure thing to look at a merchant's cash-out total and conclude that the higher exchange rate has hurt the bottom line: It may be that sales to foreign buyers would have been lower had the L$ not devalued in US$ terms, making the L$ more affordable in the buyers' native currencies. (That's impossible to really measure, though, and it would be a bolder economist than I to assert it's really happening.)

The point I was making about rentals: Tier is still paid in US$s, so the L$ being marginally more affordable in € or £ or whatever does no good come tier-payment date. And we know the Land product pays most all the bills at LL, so however they fiddle with other cash flows, it's the only thing that really matters.

Also, very good point about Marketplace, one that I've been pondering. Seems to me that the L$-denominated commissions on Marketplace sales must constitute sinks, and probably the largest of all. If I recall correctly, though, the LL takeover of SLX and SL Boutique or whatever it was called -- I think all that happened after they quit reporting on L$ source and sink volumes, so we don't really know the proportions anymore. (I think it's clear sources have dried-up considerably, with many fewer Premium stipends being paid and making it into circulation.)

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Upon reflection and having read the posts (thank you all), I am inclined toward the theory of devaluation.

Long gone are the days when LL published economic data and consulted the residents on matters of strategy and policy. The comparison with 2006-2007, when LL posted almost daily, is stark. The company is now tighter than a rat's a**, announcing a vapid update maybe once every six months. I can't think of any other company that is so walled off from its customers.

As is well know, my opinion of the Board of Directors and senior management is low. I watch in amazement (horror) as the company lurches from banality to idiocy as if it were a film by Lars von Trier filmed at a secret location in Zimbabwe. Needless to say, a once brilliant project (Second Life) has over the past 10 years become a quagmire of mistakes built on errors wrapped in confusion. It's no surprise it failed to achieve its original potential.

Thus, like Venezuela, Argentina and Brazil, the chickens of poor leadership and bad policy have come home to roost. Unless there is a military coup at Linden Lab, the current leadership has no choice but to devalue its currency. Will the IMF and World Bank eventually step in to save LL? Funny thought. More likely, as with Yahoo, it will be sold.

While there has no doubt been capital flight, it has taken the form of chronic bleeding rather than hypovolemic shock. Drip, drip, drip, estate sims have vanished from the grid. Many residents have moved to the mainland where land prices are lower. Even so, finding anyone with a last name is a rare event worth of an introductory IM. Meanwhile, LL remains oblivious to the situation, choosing to build a new world based on a rather flimsy business model.

I must conclude, therefore, that Linden Lab is probably devaluing the currency - and will continue to do so - to promote inward investment in a stagnant economy.

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As Qui pointed out, the cheaper L$ is making SL more affordable, especially for residents outside US. There may be no other reason for devaluation. For this reason I won't be raising my prices. Since I'm an Australian merchant I have benefited from an expensive US$.

As for capital flight, there's no significant change in user numbers (Ebbe confirmed this) and the LindeX daily volume has been steady for many years. Merchants have been reporting that sales are stable. I have three stores on MP with different product types - there has been no significant change in sales volume. Estate sims may be vanishing but that money must be going elsewhere, or we'd be seeing the LindeX daily volume trending down.

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  • 2 weeks later...

I have been a landowner in here for over 6 years now. At that time Estate owners were fleeing in droves and selling or abandoing their Estates and running off with their clients money. Another thing that affected SL would  be the new  marketplace. A lot of tenants that sold items left their land rentals as they no longer needed land for displays or stores as they  could sell their items for inworld creations pretty much off and out of the world they were made for. For awhile all they needed was a 1 prim marketplace box in world and a sandbox to work in if needed.

Also thru 2014-2015 I seem to recall the Linden was doing really well for selling which was a good thing holding at about 7.54-7.57/2000L (regular selling rates not using the Lindex). After they announced the crackdown on Casinos and 3rd party Linden resellers and even clubs(gray area) cause more tenants to leave or shut down along with the fees etc for the casinos and game creators to get licensed. I suspect that  was a major cause for the drop to the $7.47/2000Lnear the end of 2015. A lot of companies who had to hold onto a lot of Lindens for their businesses were no longer needed. 

Now for this year and perhaps the end of 2015 the Linden dropped  to $7.41- $7.47 / 2000L between Jan-April. After the announcement about buying into grandfathered Estates for a nice hefty fee, it plumeted yet further to $7.18-7.21/2000L From when it started so I suspect it will stay that way or even lower unil at least October when the Grandfathered pricing sale ends. From there wether it will recover anytime soon will be highly doubtful in my opinion.  

I would strongly suggest Capital flight being the cause based on the above. 

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You realize those numbers amount to a "plummet" of less than 6% over all those years, right? If that's capital "flight" it's surely the most stately procession of capital that's ever befallen a currency.

I mean, it could be the case, but it's such a tiny economy, I'd expect more dramatic effects, especially given all the scary-sounding causes cited for its troubles.

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Jason1 Draconia wrote:

Also Check the size of SL Estates/SIMs as well. I am pretty sure about 6 years ago there were about 31000, now it is about 24200?     

Closer to 32,000 actually. But there's not much new there. The number of sims has been dropping at a fairly steady rate of about 100 a month for five years now. The decline has been speeding up recently (266 fewer sims last 30 days) but it's too early to say if this is a trend or just temporary.

In any case, it does not seem to have any direct connection to the recent devaluation of the Linden dollar.

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