The Cost of Deregulation

This link always cracks me up. I think it shows, better than anything I can think of, the high cost of deregulating financial markets. Plus British comedy is wonderful.

http://www.youtube.com/watch?v=mzJmTCYmo9g

I'm Back... for a WoW Recession?

I'm Back.

Hey guys. To all 6 of you that will read this I hope you had a good holiday.

I'm going to start writing here at this blog again as well as The WoW Economist. I feel like this is a better forum to write stuff that would be less interesting to mainstream readers. I'm going to continue my other work, but my main focus is still using my ramblings for the basis of a paper on virtual economies.

I think most of the discussions about inflation and deflation are way off. What is especially strange is the discussion of recession in WoW. According to wikipedia, a recession is " a significant decline in economic activity spread across the economy lasting more than a few months, normally visible in real GDP growth, real personal income...(etc.)" That's of course an abbreviated definition, but it is the part that is germane to our discussion. It is my opinion that we don't have the tools to accurately measure economic activity so the term can't be used to describe our situation. Most economic activity doesn't take place in the market. In that respect, the wow economy is like a third world country. Familial ties and bartering are far more common than market activity. I provide my goat's milk to my cousin and he provides me with eggs. Or my neighbor trades me eggs from his chickens for cheese. Blizzard is able to monitor all of these transactions. They are the ultimate Big Brother. But we don't have the tools.

The Goblin disagrees, but it isn't the first time, and won't be the last. I think it may just be a difference of terminology rather than a difference in ideas.

Either way the deflation discussion is premature. Perhaps inflationary pressures won't be what I thought, but there will a higher price level than in the Burning Crusade. Prices were extremely high after launch which is normal but not sustainable for most goods. Now prices are plunging with buyers not around during the holidays and those willing to pay the premium already have what they need in many markets.

Overall equilibrium prices will be higher. Enchanting prices on my realm will be much higher, because I have the resources to make it so. It is a buyers market right now, and those of us with the resources should still be stocking up.

I'm Moving

I have been offered an opportunity to blog on www.thewoweconomist.com and I'm going to take him up on it. John Murphy is the founder of the site and we hope to be able to work together closely to be able to offer complete and concise articles on the WoW economy and our adventures in the auction house. This week's business report will be up soon on the new site. Thanks for reading, and I hope you'll continue at my new home.

Why Having Too Much Gold is Bad… or at least inefficient

Economists call it liquidity. To WoW players it is the sick amount of gold you have collecting dust. Maybe it makes you feel good to see that crazy high number. You have made some good decisions in the auction house or made a bunch of gold crafting, or you spent a lot of time farming. (ick.) The point is you amassed a WoW fortune. Congratulations. So what are you going to do with all of that gold? You could buy the cool mount with a passenger seat or other status items to show how rich you are, but that would have the unfortunate side effect of making you far less rich.

The problem is that you can’t swim in it like Scrooge McDuck. Looking at it makes you feel good I’m sure. You could do that. It would certainly be a better idea than the mammoth mount. Let’s make that option number one: Staring at your money.

What is even better than that is investing the gold. There are no stocks or bonds in WoW though, and the bank doesn’t pay interest. So you have to find out where to put your gold. The one thing we know for sure though is that gold sitting in your bag is doing nothing at all for you. (Above what you need for expenses of course) What you should want is to have your gold out working for you. There are tons of opportunities out there.

1. Pick up enchanting. (Just not on my server.) Disenchanting has made me more gold than everything else I’ve done in the game put together. Level 35 alts can disenchant just about everything in the game but Northrend epics.

2. Lower your profit requirements. Whatever markets you make your gold in, take a slimmer profit margin. This will increase the amount of capital you have invested in the market by giving you more opportunities.

3. Diversify. Tread into new territory. It is great to be an expert in a niche market, but opportunities can quickly dry up if your activities are limited to one segment of the economy.

4. Dig deeper. Look at your professions closer. Where can you make more profit? Read more blogs like this one. There are lots of people with different theories. Pick and choose what you think would work for you.

5. Don’t be afraid to lose. Everything might not work out with every investment. That doesn’t mean to stop investing. You learn from your bumps and bruises.

Whether you decide to invest or just stare at your gold make sure to have a good time, and please don’t buy that silly mammoth mount. It doesn’t make people /gasp, it makes them /giggle.

Disenchanting lvl 80 epics???

I saw an odd opportunity today. I've been reading a bunch of different blogs about flipping high level epics, but I am wary of entering into new markets without sufficient history or knowledge. I like sitting on a pile of useless gold even less than I like taking risks though. The way I see it my gold should be working for me instead of sitting in a big pile. So I checked out the high level items on my server today with eye at trying to flip them for a quick profit. I saw a couple of epic chest pieces posted at 250g or so which I thought was odd.

They were crafted, so my guess is that whoever made them powerleveled and forgot that other boneheads were doing the same thing as him. The question though, is whether I buy and repost higher or disenchant and post my first ever elusive abyss crystals.

The price of the armor to me seems ridiculously low, but I don't know for sure. The numbers also could be a little off, because I got them from my laptop that is only update a few times a week at work.

My decision eventually came down to the fact that the market for abyss crystals is and will be larger than the market for frost resist plate gear, and there is no deposit on the auction house for enchanting mats, so I can try and get the highest price I can without worrying about a failed auction.

Dream Shard Speculation

Dream shard prices are crazy low. Demand is irrationally low. I use my usual strategy of selling a full stack and then individual shards as well, and I only sold one. The expansion is still very new, so the economy has a lot of stabilizing yet to do. But surely the enchanters on my realm needed more than one dream shard from me. Small shards aren’t much better. So everyone that took the strategy I’ve been preaching for the last week or so is sitting around with a crap load of shards they can’t sell at a decent price. I’ve bought 20,000g worth of armor/weapons to disenchant, with about half of that being Northrend gear. I am about back to even with tons and tons of inventory to still go through. My return on investment last week was over 100% and I expect the same for this week, but these dang shards are piling up.

I’m not worried about it at all though. In fact I think it is very good. I’ve been buying up other people’s dirt cheap dream shards for 10g a piece. I am going to be plowing as much gold as I can into them. There are so many uses for these shards. I can’t imagine these low prices being an equilibrium level.

As a side note, what the crap is up with the abyss shards? The droprate for high level wrath items is 1% according to enchantrix, but I haven’t gotten one yet. I know someone has because there were four of them on the auction house for 500g a pop.

How to Fight Northrend Inflation

The WoW Economist has an interesting post about inflation in Northrend. In it they asked a question about whether the mechanisms in Wrath will be able to safeguard the buying power of that gold. They talked about the issue in terms of regulating the amount of currency in the game, which is essentially monetary policy. This is only half of the picture.

First off, I think it is important to note that while economists that deal with monetary policy have the twin tools of interest rate and money supply manipulation, those aren’t the only economists that deal with macroeconomic policy.

Blizzard’s control of the money supply in WoW has to do with droprates and spawnrates. It would be inaccurate to say that there is an unlimited amount of gold in the game, because you can only skin or mine or kill so fast. Blizzard knows on average the value in gold of one person logging in for one hour. Let’s say that value is 50g. They can reduce that amount or increase it by changing spawnrates and droprates.

Our Blizzard Overlords control fiscal policy as well in the WoW economy, which is the other half of the economic toolkit. In the real world this would be collecting taxes and spending money. It is here that I believe that gold sinks can enter the analysis.

Large gold sinks act as a luxury tax. The ridiculous 20,000g mount is a great example of this. It is a status item that would be really tough to justify as an expense, but it will be popular for reasons that fascinate me.

The smaller gold sinks act as a regressive income tax. Everyone pays the same rate for repairs, training, mail service and flightpoints.

These gold sinks are used to reduce aggregate demand, which is the fiscal policy tool used to maintain price levels. People have less gold than they would otherwise, which keeps prices ideally from rising at all, but realistically it will keep them from rising as much.

In the real world some people benefit from inflation. If I owe you $10,000 this year, and next year the purchasing power of $10k is half of what it is this year, in effect my debt is reduced by half. But there is no debt in wow. So there are no real winners when our currency is inflated. But some people lose a lot less than others.

The big losers are the casual players who vendor a lot of white and green drops that they get while questing. These players will have far less purchasing power in wrath than they did in BC.

The smaller losers are people that read blogs like this one. If you have large reserves of gold you should be cringing a little bit, because your purchasing power is being reduced as well, but at least you have the power to fight it. You need to invest in mats that will only increase in relative value rather than keeping vast sums of gold.

The trick is that who knows what investments are good and what investments are bad. What we do know for sure though is that the value of gold will continue to decrease.