Op/Ed: Financial Myth Busting Edition
by Jessica Holyoke on 18/12/07 at 8:26 pm
by Jessica Holyoke
In my time at the Herald, I’ve seen bank failures, aborted mergers, strange actions by the stock exchanges and company failures. I’ve also experienced first-hand what happens when residents believe that we’re in a "virtual economy" or "fictional economy." Residents subscribe to a number of myths that affect how they view everything around them.
It’s a Virtual Economy
Many residents view the in-world economy as a virtual one. A fictional economy is what the WSE describes what we are doing, most likely for legal reasons in Australia. Just calling our economy fictional or virtual does not make it so. We, as residents, buy and sell real things. It is just that these real things are represented more by electrons then atoms. These items we buy and sell are as real as software, pictures, stock options or futures. I really own a SexGen bed. I really own various dance programs. I really paid someone to have a logo made in SL. I don’t fictionally own objects and items.
When Ted Castronova wanted to study a virtual economy, he decided against using Second Life. A number of people thought that was foolish because SL already has an economy. But SL is not like other MMO economies for two reasons; the LindeX makes asset prediction impossible and residents do not make predictable economic choices.
In World of Warcraft, a person enters and has no gold. Players have to earn gold by grinding or maybe dueling other players. If you see a level 10 and a level 70, it is likely that the level 70 has more gold and assets than the level 10. And their economic choices are limited. Both players are likely to spend on skills training, material or weapons that are appropriate to their class or race.
In SL, you do not have that same level of economic certainty. Someone who’s been here for three years may have fewer lindens than someone who’s been here a week. Possibly due to the newbie bringing money in or the oldbie taking money out or the oldbie getting by without any money and using freebies. The LindeX makes basic asset predictions impossible when compared to a WoW situation.
Purchasing decisions are also not easily predictable. The Gorean slave girl, just for fun, might have bought a combat helicopter. She can’t use it on Gorean lands, but there’s nothing stopping her from making that economic decision. In WoW, her experience and in-game role would have prevented her from buying items she is not meant for. In the real world, no one is able to just purchase a combat helicopter. In SL, those limitations do not exist.
Banks and Stock Exchanges in SL Are Bad Ideas
One of the beautiful things about capitalism is the ability for resources to be put to their best use. Its the basis of supply and demand, but its also the basis for capital investing. The safest thing to do with your Linden Dollars is to take them out of SL. The second safest thing to do with your Linden Dollars is to leave them alone in your in-world wallet. But if you leave your Lindens in your in-world wallet, they are not being put to use. That’s where the banks and stock exchanges come in.
Say there are a hundred residents with L$100 they do not have a use for. They deposit those Lindens in a bank which takes the L$100,000 and buys land. The owner decides to develop it commercially so that he can have cash reserves, income generation and the ability to pay interest. Those residents enabled a mall to be built, which further drives the in-world economy.
In the stock exchange example, someone has a business idea, but they don’t have the money or capital to exploit the idea. The entrepreneur holds an IPO to raise money. The residents with left over Lindens buy shares of stock. In exchange for an ownership interest and a portion of the profits, they fund the entrepreneur’s venture. The venture may do well, it may not. Either way, the economy is growing based on the initial investment.
These investments are high risk. An investor still needs to do research before investing just as an investor would do in the real world. Additionally, that investment can be completely lost. That does not make investing bad, just risky.
Failure Means Fraud
Once I was able to explain the details of the July Ginko Crash to a business person not familiar with all of the intricacies of SL. As I’ve written before, the July Ginko Crash was due to the gambling ban and casino owners cashing out, accusations of being a ponzi, and technical difficulties with the Grid the weekend after the ban was put into place. People were having difficulties withdrawing from Ginko, which drove down depositor confidence. As I was explaining the details, the business person responded, how would any bank without insurance or government backing, deal with that kind of loss of depositor confidence and deposits?
Sometimes entrepreneurs might not know what to do, either due to a lack of training or due to education not knowing what to expect in a SL economy. Just because they fail does not mean that they are frauds. This does not excuse all fraudsters, but you have to find more proof of fraud than just a bank failure.
If This is So Good, I Should Invest My Out of World Assets.
That is the worst advice anyone can give regarding SL investing. And partially it goes back to the analogy of investing in SL being like gambling. "Bet with your head, not above it." Investing Lindens that are sitting in your in-world wallet is one thing. Buying new Lindens simply to invest is another. All of the real world protections, insurance, bankruptcy liquidation, government oversight, are lost if you invest your real world assets in Second Life. Linden Lab takes many steps to keep the Linden dollar seen as a digital right and not a currency, so they will not step into the shoes of a government to protect your investment. Additionally, it raises issues as to tax consequences for investments in SL with RW assets. It is better to leave your money outside unless you need it in-world for something that you personally are going to use, such as purchasing land or starting your own business, as opposed to investing in others.
Angel
Dec 18th, 2007
Umm 100 * 100 = 10,000 not 100,000
10,000 buys not quite 1,024M2 of land in SL currently. This would be, with about 200 prims in total, a very small mall with very little return.
Jessica Holyoke
Dec 18th, 2007
how about a thousand residents with L$100? or ten thousand?
One order of magnitude…..
Buckaroo Mu
Dec 18th, 2007
Er…
“Say there are a hundred residents with L$100 they do not have a use for. They deposit those Lindens in a bank which takes the L$100,000 and buys land.”
Something tells me you’re not an economist. You know, ’cause… 100 x 100 = 10,000, not 100,000. Just sayin’.
The Grid Live
Dec 18th, 2007
Second Life News for December 19, 2007
From: Wayne Porter Ebay powers Second Life and Live Gamer and Twitter Blackjack Quote from the site – It seems odd that eBay, which powers the land auctions for Second Life, missed out on this incredibly lucrative opportunity. Surely the thought of sel…
Lao-Tzu
Dec 18th, 2007
Jessica ignore the fools who cannot wait to pounce on anyone when they make a mistake. These people only seem to hunt for reasons to attack in order to seem superior. Your article was well written and summarizes the issue perfectly. Keep up the good work and do not let these anonymous, cynical people who can ONLY find negative things to say affect you.
Smart Lindens for Your Second Life Money
Dec 19th, 2007
Latest Second Life Financial News
From: Second Life Blog Economic Key Metrics for October and November 2007 Quote from the site – Key takeaways: In November, we had another slight reduction in overall Logged In User Hours (our first drop was back in August) that is related to the Unpla…
Blak Hax
Dec 19th, 2007
You fail to mention how SL banks and stock exchanges fail, not because they’re scams, but because its all make believe, tra-la-la bullshit. The stock exchanges for the most part aren’t based on any tangible assets, thats why there is no disclosure. Its a bunch of fucking morons roleplaying wallstreet with no idea how it really works.
the story is the same throughout SL,
Do you think psychopaths like Cinda Valentino really know anything about crime??
Do you think those morons racing to see who’s script is faster can drive their peice of shit 1980′s sunfire properly??
Do you think those sickos raising E-Children should even be let near a real human child???
Do the JLU really know how to fight crime?
Do furries really know about being a wild animal and what that entails?
the answer to all of these things is NO!
so it shouldn’t be a surprise that the SL economy fails hard.
Investing in an SL stock exchange makes about as much sense as handing your money over to a down syndrome.
Blak Hax
Dec 19th, 2007
SL banks and stock exchanges do not succeed, not because they’re scams, but because its all make believe, tra-la-la bullshit. The stock exchanges for the most part aren’t based on any tangible assets, thats why there is no disclosure. Its a bunch of morons roleplaying wallstreet with no idea how it really works.
the story is the same throughout SL,
Do you think psychopaths like Cinda Valentino really know anything about crime??
Do you think those morons racing to see who’s script is faster can drive their peice of crap 1980′s sunfire properly??
Do you think those sickos raising E-Children should even be let near a real human child???
Do the JLU really know how to fight crime?
Do furries really know about being a wild animal and what that entails?
the answer to all of these things is NO!
so it shouldn’t be a surprise that the SL economy sucks.
Investing in an SL stock exchange makes about as much sense as handing your money over to a down syndrome.
Wendell Holmer
Dec 19th, 2007
“The safest thing to do with your Linden Dollars is to take them out of SL. The second safest thing to do with your Linden Dollars is to leave them alone in your in-world wallet.”
You know, Jessica, I have been reading your well-researched stories on Ginko, and the one question that they didn’t answer is, What kind of idiot would invest real assets in a make-believe bank? As you point out, we don’t need banks and stock exchanges here for capital formation. The money comes from outside. If you have a project that requires L100,000–well, most people can raise $400.
If someone has a great idea and wants investment capital, he and the investors should exchange their real life names, sign some real life legal documents, and use real life dollars to buy the inworld currency they need.
Prokofy Neva
Dec 19th, 2007
Possibly due to the newbie bringing money in or the oldbie taking money out or the oldbie getting by without any money and using freebies. The LindeX makes basic asset predictions impossible when compared to a WoW situation.
This is the most absurd thing I’ve ever read about the SL economy, and utterly flawed.
People don’t “take money out,” as when they sell their Lindens, someone else buys them. For every person leaving and cashing out, another person comes in. That person may not reinvest, but that’s a separate issue.
There are utterly, rock-solid predictable metrics for the SL economy which are all amply displayed on the economic statistics page, with which Jessica shows no passing familiarity: a) monthly tier, which means X number of people always have to cash out their Lindens to pay their tier b) stipend day, on Tuesdays; c) texture upload sinks, which are fairly regular; d)seasonal shifts with special merchandising days like Halloween or Christmas; e) outages, Wednesday patches, predictable post-patch patches, etc.
Take a big chart, mark holidays, outages, stipend days, plot the SL economic statistics against it, and you will have something as predictable as the rain in Spain falling mainly on the plain.
SqueezeOne Pow
Dec 19th, 2007
Here’s how I looked at my “investment” when WSE started out. I got in on the ground floor and bought a decent share of HCL stocks as well as some others. Then all the technical issues started coming up and I pretty much ignored WSE altogether for about 5 months while they figured it out. I wasn’t really worried if I lost that money because it was all earned from sales and I hadn’t been putting my RL money into SL for a little while at that point.
Once the dust settled I went back to WSE to see what the status was and made about a 250% profit and withdrew most of my money immediately. I left a couple thousand L$ in their system so I could play with stocks some more and made enough to keep that fun going for a while until the whole Ginko thing happened. Again I wasn’t worried because it was all literally “play money”…which is all L$ really is if you try thinking about it objectively.
The problem with SL…or rather SL people…is that it’s ALL roleplay but people like Jessica and Prokofy don’t know it and can’t disconnect from it so they try to apply RL effort to a series of 1s and 0s. At least many of us military players know its a game and treat it as such!
All it would take for so many people’s efforts and money to be a complete waste is for LL to go bankrupt or for them to open source the server side of things (which is why I think certain people are so adamantly against it). No more living off of another company’s services…at least not in the way so many of you do now.
So yeah, it IS all roleplay and L$ IS play money. You’re all basically buying tolkens at Chuck E. Cheese’s which I think is what LL originally intended. The difference in this case is people will trade you real money for your tolkens outside of the restaurant!
Kudos if you can make money off of people’s willing naivety and whoa unto the willing naive. It’s a game!
SqueezeOne Pow
Dec 19th, 2007
You guys really need to fix your comment system here. This “not published because of spam” bullshit gets old quick!
Here’s how I looked at my “investment” when WSE started out. I got in on the ground floor and bought a decent share of HCL stocks as well as some others. Then all the technical issues started coming up and I pretty much ignored WSE altogether for about 5 months while they figured it out. I wasn’t really worried if I lost that money because it was all earned from sales and I hadn’t been putting my RL money into SL for a little while at that point.
Once the dust settled I went back to WSE to see what the status was and made about a 250% profit and withdrew most of my money immediately. I left a couple thousand L$ in their system so I could play with stocks some more and made enough to keep that fun going for a while until the whole Ginko thing happened. Again I wasn’t worried because it was all literally “play money”…which is all L$ really is if you try thinking about it objectively.
The problem with SL…or rather SL people…is that it’s ALL roleplay but people like Jessica and Prokofy don’t know it and can’t disconnect from it so they try to apply RL effort to a series of 1s and 0s. At least many of us military players know its a game and treat it as such!
All it would take for so many people’s efforts and money to be a complete waste is for LL to go bankrupt or for them to open source the server side of things (which is why I think certain people are so adamantly against it). No more living off of another company’s services…at least not in the way so many of you do now.
So yeah, it IS all roleplay and L$ IS play money. You’re all basically buying tolkens at Chuck E. Cheese’s which I think is what LL originally intended. The difference in this case is people will trade you real money for your tolkens outside of the restaurant!
Kudos if you can make money off of people’s willing naivety and whoa unto the willing naive. It’s a game!
SqueezeOne Pow
Dec 19th, 2007
You guys really need to fix your comment system here. This “not published because of spam” bullshit gets old quick! But I digress…
The problem with SL…or rather SL people…is that it’s ALL roleplay but people like Jessica and Prokofy don’t know it and can’t disconnect from it so they try to apply RL effort to a series of 1s and 0s. At least many of us military players know its a game and treat it as such!
All it would take for so many people’s efforts and money to be a complete waste is for LL to go bankrupt or for them to open source the server side of things (which is why I think certain people are so adamantly against it). No more living off of another company’s services…at least not in the way so many of you do now.
So yeah, it IS all roleplay and L$ IS play money. You’re all basically buying tolkens at Chuck E. Cheese’s which I think is what LL originally intended. The difference in this case is people will trade you real money for your tolkens outside of the restaurant!
Kudos if you can make money off of people’s willing naivety and whoa unto the willing naive. It’s a game!
Angel
Dec 19th, 2007
> “Jessica ignore the fools who cannot wait to pounce on anyone when they make a mistake.”
Meh, it’s an article espousing care in finances and a $90,000 order of magnitude error is ummm, not very careful. Proofread Jessica.
> “Do you think those sickos raising E-Children…” blah blah
*giggles* I love the term E-Children, but still think pixel-Kid is better. I will certainly say E-Parent instead of Mommy and Daddy tho.
Actually Blak, both my e-parents have RL kids as well and as a person involved with children in real life I know that I would rather them deal with some of the kids in my care than the heroin addicted, hepatitis infected, teenage single Moms who are paid $6,000 per child to procreate under my countries Baby Bonus. They then promptly buy more smack and the baby is born addicted.
Lets add another E- grouping, the E-Rebel, those chan-tards who rather than make a meaningful real life protest against real world injustice like hmmm the Iraq invasion, or the Afganistan invasion or protest for change in something trivial like hmmm nuclear power or global warming or whaling will instead sit, infested in pimples, overweight and with greasy hair in Mom’s basement… making their contributution to the betterment of society by messing with someone’s video game.
Yes, the E-Rebel, the first generation of E-Losers in human history.
@SqueezeOne… Hmm, you are starting to make sense to me… I’m starting to like your POV.
Kalel Venkman
Dec 19th, 2007
The core of the problem is that unlike real world currencies, the Linden is not collateralized. Since the Lindens are free to redefine the value of the synthetic currency as they see fit, any so-called investments made in terms of that currency are impossible to describe in real value.
While the semantics of whether or not Second Life is a game could be argued for days on end (and have been elsewhere), it is still true that transactions measured exclusively in Second Life terms are impossible to measure or regulate. The notion of financial institutions based on this artificial currency would seem, therefore, to be suspect on its very foundation.
IntLibber Brautigan
Dec 19th, 2007
Kalel, what makes you think the US Dollar is collateralized? Its not, its a fiat currency without any backing whatsoever, its real name is the Federal Reserve Note, which congress said is as good as real money (i.e. gold and silver as the Constitution states), but really isn’t cause its not backed by anything, and your transactions with it, for the most part, are completely electronic (debit card, credit card, direct deposit etc), so for the most part your daily life is paid with space monies. The L$ is 100% as fake as the USD.
The primary problem with financial transactions in SL is risk and accountability. There is no deposit insurance, there are no banking or securities regulations. The public is too lazy for the most part to accept that the lack of such means the burden is on THEM, YOU, ALL OF US, to hold fraudsters and scammers accountable. When Luke refuses to pay interest on his bonds, or seizes the assets of someone he owes money to, its the duty of the public to protest that by voting with their money and divesting from that exchange. If they dont like, or like, how someone invests the money they entrust to them, by all means, take it back, withdraw, sell your stock, etc.
There is no government here to do any of this for you, the community is all we have, our collective will, to hold individuals responsible for their actions. Thats what freedom is about. While the JLU likes to hold itself up as a quasi-government in SL, and estate owners are held up as ‘land barons’, nothing will be accomplished without the public, EVERYBODY, recognising the interest of everyone in refusing to deal with those who scam or steal.
Government is supposed to represent the people, and have the ability to enforce the will of the people. Well we dont have any ability to enforce the public will OTHER than to vote with our L$. Thats it. Thats the start and end of the power each of us has to make SL a better place. Despite many disappointments in the behavior of people to date, I remain hopeful that the public can recognise not only when a crook is a crook, but that the public has the power to do something about it.
Prokofy Neva
Dec 20th, 2007
No, freedom and government by the people and “the public” does NOT mean putting Intlibber in charge, especially of the SEC in SL. No way in hell.
Anyone who would hire goons and deliberately grief other people to destroy their business is not to be trusted, pure and simple.
The blackmailing methods used on Arbitrage Wise are very disturbing. You don’t start a serious probe of fraud by calling a political crony like the Whip. There is something terribly off about all of this. Beware.
DaveOner
Dec 20th, 2007
Hey Prok…what the fuck are you even talking about? Shouldn’t you be more worried about how your son (played by Danny DeVito) is trying to get Billy Crystal to kill you?!
Anyway back to reality…IntLibber has a very valid point. These “financial institutions” are only getting anywhere because people give them money. Sure they might have RL money to put into it at first but a bank is pointless if other people don’t put their money in…and it can’t go anywhere when people take thier money out.
Don’t “invest” any more than you’re willing to lose. SL economics and finance is, in fact, a game with about as many consequences as a game of Kick Ball in 6th grade. Don’t be the one kid that shows up in a custom made Kick Ball uniform!
Rev Blak Hax
Dec 20th, 2007
@prokofy
“Anyone who would hire goons and deliberately grief other people to destroy their business is not to be trusted, pure and simple.”
isnt writing slander articles with base-less accusations pretty much the same thing?
ohhh the hypocracy
RoFLKOPTr
Dec 20th, 2007
@Angel:
“rather than make a meaningful real life protest against real world injustice like hmmm the Iraq invasion, or the Afganistan invasion or protest for change in something trivial like hmmm nuclear power or global warming”
Maybe I am in support of the destruction of all those damn towelheads. Maybe I don’t want nuclear waste in my drinking water. Maybe I know the truth about global warming and realize that it is all a big LIE.
@Angel (again):
“Proofread Jessica.”
…
“under my countries Baby Bonus”.
country’s*
Proofread, Angel.
@IntLibber FatAgain (LOLPUN):
“what makes you think the US Dollar is collateralized? Its not, its a fiat currency without any” blahblahstfu
I actually feel compelled to agree with Kalel… as much as it hurts me to do so…. because L$ and US$ are COMPLETELY different. United States currency may be called “Federal Reserve Note”, but note that it also says “Legal Tender”. For as long as the United States exists (it will exist for a long time, trust me), those notes will have as much worth as is printed on their face.
See, when you are using gold and silver as currency, sure it has insurance right there being in your hand, but it is not a currency. You will have no economy in such a situation. And if the government were to put a serial number on every coin… who says it can’t be counterfeited? Gold and silver coins would be the easiest things ever to counterfeit ever. So you are left with gold and silver in vaults, and representations on cotton paper… United States currency. Federally sanctioned currency is just that: Federally sanctioned. It is federally insured. It is nationally recognized. And if the US government were to somehow be removed from existence, those notes would still exist. And with all those billions of notes in existence, there is not a CHANCE of them no longer being recognized by everybody. Sure, it may no longer be legal tender, but it must still be recognized as tender, because that’s all people will have for money. It will never, ever go away.
Now, on to Linden dollars. With those, you have gold and silver in vaults (US), with representations being numbers printed on cotton paper (US currency), all of which are sent by the customer to Linden Lab, which are represented electronically as Linden Lab’s property (financial institutions), which is then converted into spacemonies (L$), which are represented with ones and zeros and then distributed among the people who buy them. If LL wanted to take the money and run, they could do so… easily…. What most people don’t seem to realize is that Second Life is a GAME; managed by a COMPANY; taking real MONEY; converting it to FAKE, UN-INSURED “money”; and then PROMISING (promises don’t hold up in court, dumbasses) to give you real money in exchange for the fake money. There are some missed steps in logic here, IntLibber. Sure, when you REALLY get down to the nitty-gritty of the US economy, you may find that we don’t have as much gold and silver as we do money, but that is a government. Linden Lab is a multi-million-dollar enterprise… the scum of the world… and if they are ever backed into a corner by the “residents” (LOL) about a big issue, they could press the “off” button and be gone with all your money… never to be seen again.
tl;dr stop comparing L$ and US$, because they are not alike in any way.
SqueezeOne Pow
Dec 20th, 2007
RoFLKOPTr is almost right. US money would be the first to go in the path to the US Government ceasing to exist.
So far we’re following in the footsteps of the Roman Empire before it fell in several ways…more imports than exports…military might being challenged by barbarians on many fronts…people refusing to go into military service…general morals of the population deteriorating (gladiator shows vs. reality TV, UFC, celebrity worship, etc.)…a corrupt system that those in charge refuse to reform because of the luxury it affords them…
Their economy came apart and their money became worthless before the Roman Empire went away. When the US Government is on it’s way out (we still have a while I believe) the money will be one of the first things to go.
But otherwise I agree that L$ and US$ can’t be compared as there is actually a US government but not an SL government.
RoFLKOPTr
Dec 20th, 2007
@SqueezeOne
No, I am completely right.
How many US citizens do you know of that actively partake in the trading of goods and services for the United States dollar? I’m sure you know at least a couple. That being said, who, of those people, would be willing to accept that all of their hard-earned cash is suddenly invalid? Probably no one. Since nobody will ever accept that fact, the US$ will continue to be used for the same purposes and by the same people until an alternative, federally sanctioned form of currency reappears. Until that time, though, even if the US is long gone, the US$ will not cease to exist.
anon
Dec 20th, 2007
No money is intrinsically worth anything unless it is in itself is a product. Shut up unless you want to go back to the barter system, intblubber.
Jessica Holyoke
Dec 21st, 2007
In seeing some of the reaction to my article, I believe I need to clear some things up.
When I was writing this, I was focused more on the individual, or the microeconomic side of things. And I stand by the statement that predicting what individuals will spend on is difficult compared to real life, where SL does not have necessities, or other MMORG’s, where buying choices are more limited.
But a good point taken is that this article does not address the economy as a system, or on the macroeconcomic scale. Trends are more visible and predicatable on the macro side, as opposed to the micro side. I’ll have to go back to the library for the next economic piece, only because there are so many interesting things going on with the economy on a macro scale.
And yes, I’ll use Excel to make sure my math is correct.
Bee Mizser
Dec 24th, 2007
US Dollars are as valid as the Pound here in the UK. They have an intrinsic value backed by gold.
If you look at any British note it has a signed statement. “I promise to pay the bearer on demand the sum of X Pounds”. That actually refers to the value of the note being paid in gold by the Governor of the Bank of England. Now I suspect you would have to jump through hoops to get this and in reality you would get it at gold scrap value which is barely an ounce of gold per pound.
Obviously for pretty much everyone, such small amounts of gold are not practical as currency so the promisary system of money works. But believe me, for every dollar/pound/euro/etc in circulation, there is somewhere an equivalent amount of gold/silver/platinum/etc held in a reserve.
Sitearm Madonna
Dec 24th, 2007
Excellent article!
Seraph Nephilim
Dec 26th, 2007
[To prefix this, some of you may find this tl;dr, but I'm tired of people making blanket assertions that are blatantly false. Just because *you* believe something doesn't make it true -- back it up, especially if you're in the middle of an argument that's the online equivalent of "did not", "did too", "did not", "did too". At that point, put up or shut up -- back up your statements of "fact". And while I'm using Bee's statement as a springboard, I don't mean to single out Bee -- others are doing it as well.]
Bee Mizser: “But believe me, for every dollar/pound/euro/etc in circulation, there is somewhere an equivalent amount of gold/silver/platinum/etc held in a reserve.”
That is completely incorrect. US Dollars, at the very least, are “fiat currency” — they are *not* backed by anything. (Google on the term for full explanation, but this Wikipedia article is informative: http://en.wikipedia.org/wiki/Fiat_currency )
The lack of backing with precious metals for the US Dollar is made perfectly clear by this statement of the United States Treasury: “Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything This has been the case since 1933. The notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are “backed” by all the goods and services in the economy.” (from http://www.treas.gov/education/faq/currency/legal-tender.shtml )
As for the United Kingdom, “[t]he British government ended the convertibility of Bank of England notes to gold in 1914 to fund military operations during World War I. By the end of the war Britain was on a series of fiat currency regulations, which monetized Postal Money Orders and Treasury Notes….In the UK the pound was returned to the gold standard in 1925, by a somewhat reluctant Winston Churchill….The British government abandoned the standard again on September 20, 1931. Sweden abandoned the gold standard in October 1931, the U.S. in 1933, and other nations were, to one degree or another, forced off the gold standard.” (Wikipedia, http://en.wikipedia.org/wiki/Gold_standard “Abandoning the standard to fund the war”)
Now, that’s not to say that *some* precious metals aren’t held in reserve by central banks to help keep a currency stable. However, very few countries do so at the 100% rate you state. (Switzerland apparently being one such country.)
Note that while most of the quotes are from Wikipedia, which some do not consider a reliable source (a point which I would contend, since studies have show it to be as reliable as published encyclopedias, like Britannica), I made a point of also quoting the United States Treasury’s website, which should certainly be considered a definitive source.
SqueezeOne Pow
Dec 27th, 2007
@RoFLKOPTr:
History proves you wrong. Look at the Depresson.
So does the current economic situation in the US. The dollar is shit right now and is almost worth as little as Canadian money. Europeans come here to do their cheap shopping!!
Now take a look at Mexico. Their money isn’t worth much to anyone and yet they still have a government that’s in control…as corrupt as it is.
The money is one of the first things to go when a nation comes apart.
You also ignore the fact that the US Government isn’t just going to close up shop and say “we’re done”. No, in order for the government to come apart there has to be a LOT of crazy shit happening on a national level for a long time. No one will be using USD to purchase goods and services if the government’s gone because the nation would be in a completely different state unlike what we’re used to seeing if the government fails like we’re talking about.
Let’s look at the Depression once again. The average person was getting services and goods through bartering and not much else. My Great Grandparents (yes and I’ve even met my Great Great Grandmother when I was really young) told me stories of how they paid for doctor visits by cooking up a turkey for the doctor and stuff like that. Money was more of an afterthought because of what was going on with the economy.
The US Dollar won’t be around once the US Government (the only thing backing it up) is gone. Just because there will be a bunch of people that really want it to still be worth anything doesn’t mean it will be.
kill the fed
Jan 1st, 2008
if people assess the risk/return of a virtual investment favorably, then they should most certainly invest their RL assets! i turned a well timed 1500$ investment in late 2006 into over 30k$ through the end of 2007. boo yah! if you think that virtual investments are not investments, then you could miss some good opportunities. you have to take the risk to get the reward though…