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And Thus It Came to Pass

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Tags Business CyclesMonetary Theory

08/19/2007

August 2 saw Matthew Beller's Daily Article "The Coming Second Life Business Cycle," which sounded at first blush like yet another announcement of the coming Rapture. But it described the fiat money (Linden Dollars) of the fiat world of the Internet, known as Second Life. And sure enough, just like the First Life (this one?), the creation of money out of thin electrons would produce a business cycle.

In the August 16 issue of The Economist appears the article (subscription required, I believe) "Trouble in Paradise" describing the first bank run in Second Life and the bank of that world, Ginko Financial, freezing deposits and refusing redemption of deposits in the "real" dollars that were paid for them.

So, whether in real life or the virtual one, the creation of money by fiat produces booms and busts, and this even in a world in which the "government" can and does create (all) value (the virtual money is spent on virtual land created by the site, and on more-attractive attributes for participants' "avatars," which are the pictorial representations of themselves on the site).

The article seems largely to overlook how this totally controlled laboratory experiment proves the Austrians' main contentions regarding fiat money.

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