Tobold's Blog
Monday, December 05, 2011
Wiping virtual vs. real world

I was reading a post on Massively Multiplayer Fallout about Aventurine still not saying whether their Darkfall 2.0 would include a character wipe. And I couldn't help but think that there is a much simpler solution: Instead of wiping everybody's skills, just increase the skill cap significantly, so that the level of the old skills is basically irrelevant in the new system. Thus you effectively have a character wipe, but with somewhat less rage-quitting than if you told everybody to re-roll. Of course this is how World of Warcraft does it in every expansion. Everybody keeps their characters, only their old level and gear count for nothing in the post-expansion world.

The scary thing about this is that it also works in the real world, and is actually one of the more likely outcome of the ongoing debt crisis. To see how this works, let's use a very extreme example: President Obama tells the U.S. Bureau of Engraving and Printing to design a new 1-million dollar banknote (with his face on it), then lets print 300 million of these, and sends one of them to each citizen of the United States. As most Americans with debt have a debt below 1 million dollars, they would all immediately be able to repay all their debt. And a good part of the money would flow back to the local and federal government, where it could be used to pay all government debt as well. With one fell strike the debt crisis in the US would be over (the EU could do the same for theirs).

There are just some problems with that solution: It would result in a huge jump in inflation. If everybody is a millionaire, then a million isn't much money, and doesn't buy you much. And for every borrower having his debt wiped out, there is a lender having his savings wiped out. Basically the people who spent more than they could afford (which includes the government) are rewarded, and the people who did the prudent thing and saved are punished. Furthermore nobody will be willing to lend money to somebody else any more, as after such a precedence nobody could be sure any more that it wouldn't happen again. If the US wanted to borrow more money from the Chinese, the Chinese would insist that the debt would be in Yuan, and not in dollars, so the US can't devalue their debt away in the future.

But while the 1-million dollar Obama banknote isn't likely, a more stealthy version of the same solution is very likely. It even has already started, and been given a positive sounding name: Quantitative Easing. To put this into perspective, in the most recent US round of quantitative easing, nicknamed "QE2", the Federal Reserve created $600 billion of money out of nothing, and used it to pay back government debt, by buying treasury bonds. That is only $2,000 per US citizen, and thus doesn't create that much inflation as $1 million per person would. But the basic principle is exactly the same: More money flows into the economy, allowing people with debt to pay back some of it, while reducing the value and interest rates on savings.

The man who controls the machine which prints the money can never go bankrupt. But he can destroy the value of the currency and thus help debtors and punish savers. And if you think you aren't affected because you didn't lend money to anyone, have a look at your pension scheme: It is a promise to pay you a fixed amount of money in the future. If that fixed amount isn't worth much, your retirement might look a lot different than you imagined.

Intentional inflation has been used in the past to offset debt costs and in fact, is calculated into repayment times and real GDP. Your proposal though would cause havoc because it would create a massive inflationary spike, wiping out trillions in investor held assets. Remember post-war Germany? Not a pretty sight.

As for QE2, they did not print money as is commonly believed. The Fed bought back US treasuries with cash reserves, effectively lowering yields to below zero. This was an attempt to chase investor dollars out of the safe haven of treasuries and back into the stock market.
"Of course this is how World of Warcraft does it in every expansion."

I saw a blue post recently (quite possibly linked from this site) in which WoW devs are considering rebasing stats at some point in the future. Of course that's not quite a wipe, but some characters are sure to be hurt by the concomitant changes.
Is a good post and I agree with almost all of it.

One minor correction. Quantitative Easing doesn't do anything to pay back government debt. Treasury bonds are traded back and forth at different prices, creating that 600 billion, but none of that goes to repaying anything. It's just newly created money injected into the financial sector. The point of QE is to affect _rates_, hoping that will spur growth.

I was really worried about QE because I thought it would create terrible inflation. But, well, it didn't. Shrug. Now I just think it was fairly useless.
Did you know that this is how things always worked? Big or hidden wipes and resets.

There is mathematical proof for that: one dollar left in a bank account with compounding interest would (over hundreds of years) add up to more money than exists on the globe.

Now obviously that cannot happen - therefore wipes must regularly take place.
But none of this happens in a vacum. The value of the dollar has fallen due to QE1 and QE2. Inflation started to creep up and the QE's account for 90% of the increase in the cost of oil since that is pegged to the US dollar.

This is just one more reason that mr. Obama and his administration needs to be defeated in 2012.
It's more complicated than that. A slight amount of inflation is needed for a healthy economy - otherwise no one has any motive to invest.

Right now the US dollar is at risk of deflating due to the ongoing fallout from the housing crash, coupled with the high rate of unemployment. In layman's terms - creating debt causes inflation, and destroying debt (through defaults and bankruptcies) causes deflation.

The only long-term solution is to re-regulate the financial markets to dampen the cycle of bubbles and crashes.

You'd think that defeating the Obama administration would help, but the problem there is that some of his likely opponents want to turn the US into a feudal aristocracy, and the rest of them want to turn the US into a nightmarish dystopia where the living would envy the dead.

It's all very complicated and I don't see any easy solutions.
It really is a lot more complicated than that, Tobold. You framed the issue in a way that obviously makes the action absurd by deliberately picking an extreme example. The median US household net worth is in the neighborhood of $100,000, and you proposed giving everyone $1,000,000. Figuring a household size of 4, if you gave every person in every family a million bucks, that's multiplying their income by 40. Obviously a billionaire wouldn't get nearly that much benefit proportionally. For people who aren't billionaires though, there's not much difference between two people who had $10,000 or $100,000 before the cash infusion. Both of them still have a million dollars now... give or take.

But providing a social safety net DOES NOT mean giving everyone a million dollars; it means giving them something more like $10,000. This also has an equalizing effect, and it also causes inflation, but it doesn't cause the equivalent of a full game economy wipe as your example mostly does. (And in most real world situations, it's not even as simple as just giving people a flat sum of cash.)

But instead of relating this to a (somewhat) well designed virtual economy like WoW, let me compare it to one of your favorite topics: EVE online. Even if the game designers create what they consider to be a pretty much laissez-faire economy, the real outcome of that system is in some sense no less built into the design than an economy with artificial limitations on personal wealth. The paradigm of the EVE economy is that people can accumulate unlimited wealth; AND, what's more, they can actively apply that wealth to completely screw over new players. I've never played, but from your reviews my impression is that a newbie can go spend hours performing menial labor to gain a foothold, then fly out of the safe zone for a first time... and the guy with the capital warship can completely obliterate him and take all his stuff. As you said yourself, in that kind of environment, it's hard to make meaningful advancement beyond the game equivalent of abject poverty, at least not without sucking up to the right people.

WoW has deliberate measures that prevent these sorts of monopolistic practices. Most of the economic system is closed off from underhanded business practices. You can't get robbed no matter what you do. Also, it requires approximately the same amount of effort for everyone to get from level 1 to level 85, where you can get thousands of gold very quickly through dailies and such.

The rules of the game greatly affect the outcome of the typical player. Pick the wrong rules, and you have a system where power generates more power, and people who didn't start early can't effectively advance in the game due to the rules favoring exponential accumulation of a finite amount of wealth.

When people talk about disparity in income distribution, it's not a case of simple jealousy talking. There's a real issue in countries like Somalia, where the "game design" doesn't effectively mitigate people with power stopping the advancement of newbies.
@ Kazim

EVE isn't that biased toward older player. A young player with the ability to play the market can quickly amass enough wealth to compete with the wealthy players.

The game is made in such a way that better ships get exponentially more expensive without necessarily becoming exponentially powerful.

In many cases, the small gang of budget ships can defeat a gang of billion isk ships.
This is the way the US has reduced their debt after world war 2. It works best if people don't suspect it, but if people find out it still works with lots of regulation - which US and Britain have had in the past for exactly this reason.

Inflation is such a powerful tool that most third world countries use it all the time; at which point it becomes a problem. If the real inflation doesn't beat the expected inflation it doesn't work. If, in fact, you try to have less inflation than people exspect, have fun selling government debt (with interest rates of exspected inflation + x).

Paper money is a wonderful invention - and I am not sarcastic. Well done inflation created by a few select smart people can solve many problems which are otherwise unsolvable without a complete reset (usually civil war).

It's just the problem of deciding who these people are and how to keep their self interests in check. This is why central banks are declared to be more or less indepedent. If politicians, who want to be elected, are allowed to print money they never need to raise taxes again to hand out benefits - get reelected. That puts countries into the same trap that oil-rich countries find themselves in.

Well, I could write more. But it's late ;)
A couple of technical points (minor)...

In the US money is created by the Fed Reserve either via electronic credits OR by having the US Treasury print physical money. (this is why all currency is printed as Federal Reserve Note at the top between the numbers in banner font)

So a US paper dollar is a physical manifestation of US currency that is a debit with the US Federal Reserve where by US law it can be exchanged to settle all debts public (taxes) private (food). (that is why in fine print lower left says "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE")

Oh and the Fed is chartered with the dual goal of Full Employment AND Price Stability.

In the EU the ECB is specifically chartered to maintain price stability through strong currency policies. Everyone is begging the ECB to QE but they are refusing on charter/treaty grounds.

So in essence the Fed can print forever the ECB can't... unless there is a massive market disruption and they invoke emergency powers.

The parallels you draw to a Wipe = new monetary system vs Inflate = new monetary system that puts previous creditors and debtors in different circumstances is interesting.

From a game perspective I have been dismayed by how WOW treats it's players in the virtual economy. Every expansion or point release is up to the whim of Ghostcrawler with no rhyme or reason. All this leads to me having no confidence in the Wow economy and so I don't invest too much time/money in it.

In the Real World the ECB will have to decide if the risk of having people lose confidence in the Euro is worth the risk to Expand the monetary base.

As we speak Germany is having their bond spreads widen to the point that it appears that the low credit rated PIIGS are dragging them down. Since the Euro was founded on the mighty D-mark this is in essence a run on German creditworthiness. Where will the Germans go in this emergency? Will they inflate by allowing the ECB to print and save the Italians or shrug and let them sink?

The world waits with expectation... but I hope that the Germans are not as flighty as Ghostcrawler.
This is a topic of great concern for me and I've been thinking about how to hedge against inflation and more importantly, what I consider to be the after effects.

Primarily because my belief is that the US and the Euro Zone will have to "print" money (in some fashion) to solve the current economic problem. This will, in turn, cause inflation.

In order to resolve the resulting inflation, the fed and bond market will, in turn, need to raise interest rates. Otherwise, treasury bonds will be worth nothing and banks won't make anything on lending. And when banks stop lending, the economy grinds to a halt (as seen in 2008).

If you are older and worried about retirement, you can can hedge against inflation by buying TIPS bonds which are US Treasury bonds that are protected against inflation.

You can also hedge by buying Gold ETFs (symbol GLD) which trade like stock but are backed by Gold. Gold (and other commodities) are a good hedge against both inflation and currency devaluation.

If you had invested in $10,000 GLD in 2005, it would currently be worth $38,000. By contrast, the S&P 500 has been almost flat over the same period of time.

However, I find Gold is also risky because as the economy gets better, Gold prices will drop as people move money back into other investments.

If you are willing to take the long view and retirement is far off -- then the blue chip stocks should be safe enough. In the 70s, the last time we had high inflation in the US, stocks had some short-term problems but long term were fine.

The very best hedge against inflation is to fix yourself into long-term debt at what are currently low rates.

As mentioned above, as inflation goes up -- so will interest rates. If you can fix into a 30 year loan for your house, then that is one big expense (housing) that becomes immune to inflation.

Housing prices are even less predictable. Inflation should cause them to rise, however, rising interest rates will keep it flat or even continue to decrease them.

Either way, however, your "buying power" to own a house is going to decrease, so in my opinion, you are better off locking in long-term now.
This post is quite wrong. See here for why, but in a nutshell:

Printing money in a depression is not inflationary. The Fed has expanded its balance sheet (in effect, printing money) by a tremendous amount, but inflation is low, and though it ticked up a bit recently, that was mainly from a commodities price spike; it's already coming down again.

Why is that? A better question is to ask why printing money usually does cause inflation. Imagine I've got a fresh stack of counterfeit 100s. I want to hire a maid to clean my house. If we're at full employment, all the maids are already taken, so I have to steal one from somebody else by offering one more money. That increases maid prices on the margin, and happening throughout an economy, causes inflation.

Now imagine we're in a depression (as in, look outside). There are hundreds of unemployed maids desperate for a job. Now I take my fresh stack of 100s, but I only have to pay the going rate, or even less, to get my maid. Then this maid takes her money and buys some shoes, so the shoemaker adds another shift. That cobbler takes his money to the bar, so the barman can upgrade his TV, and so on. It's a miracle!

Another way of saying this is that recessions are caused by an excess demand for money (monetarism), which is exactly the point of the conservative hero Milton Friedman.

Mind you, this only works if there's mass unemployment and extra capacity from some demand shock, like from, say, a giant financial crisis. But until we're at the "natural rate" of employment, there's no way to touch off a wage-price spiral.
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