Tuesday, July 27, 2010

The Death of Paper Money

By Ambrose Evans-Pritchard
The Telegraph, London
Sunday, July 25, 2010

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7909432/The-Death-of-Paper-Money.html


As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974.

Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free ... thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity." Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.

People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason," causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O. Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat."

Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871 billion to $2,024 billion in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.

Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5 percent. This has not happened so far. Ten-year yields have fallen below 3 percent, and M2 velocity has remained at historic lows of 1.72.

As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid-1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.

As it happens, another book from the 1970s entitled "When Money Dies: the Nightmare of The Weimar Hyper-Inflation" has just been reprinted. Written by former Tory European Parliament Member Adam Fergusson -- endorsed by Warren Buffett as a must-read -- it is a vivid account drawn from the diaries of those who lived through the turmoil in Germany, Austria, and Hungary as the empires were broken up.

Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding. The diary of one young woman described the scene at her cousin’s farm.

"In the cart I saw three slaughtered pigs. The cowshed was drenched in blood. One cow had been slaughtered where it stood and the meat torn from its bones. The monsters had slit the udder of the finest milch cow, so that she had to be put out of her misery immediately. In the granary, a rag soaked with petrol was still smouldering to show what these beasts had intended," she wrote.

Grand pianos became a currency or sorts as pauperized members of the civil service elites traded the symbols of their old status for a sack of potatoes and a side of bacon. There is a harrowing moment when each middle-class families first starts to undertand that its gilt-edged securities and War Loan will never recover. Irreversible ruin lies ahead. Elderly couples gassed themselves in their apartments.

Foreigners with dollars, pounds, Swiss francs, or Czech crowns lived in opulence. They were hated. "Times made us cynical. Everybody saw an enemy in everybody else," said Erna von Pustau, daughter of a Hamburg fish merchant.

Great numbers of people failed to see it coming. "My relations and friends were stupid. They didn't understand what inflation meant. Our solicitors were no better. My mother's bank manager gave her appalling advice," said one well-connected woman.

"You used to see the appearance of their flats gradually changing. One remembered where there used to be a picture or a carpet, or a secretaire. Eventually their rooms would be almost empty. Some of them begged -- not in the streets -- but by making casual visits. One knew too well what they had come for."

Corruption became rampant. People were stripped of their coat and shoes at knife-point on the street. The winners were those who -- by luck or design -- had borrowed heavily from banks to buy hard assets, or industrial conglomerates that had issued debentures. There was a great transfer of wealth from saver to debtor, though the Reichstag later passed a law linking old contracts to the gold price. Creditors clawed back something.

A conspiracy theory took root that the inflation was a Jewish plot to ruin Germany. The currency became known as "Judefetzen" ("Jew confetti"), hinting at the chain of events that wouild lead to Kristallnacht a decade later.

While the Weimar tale is a timeless study of social disintegration, it cannot shed much light on events today. The final trigger for the 1923 collapse was the French occupation of the Ruhr, which ripped a great chunk out of German industry and set off mass resistance.

Lloyd George suspected that the French were trying to precipitate the disintegration of Germany by sponsoring a break-away Rhineland state (as indeed they were). For a brief moment rebels set up a separatist government in Dusseldorf. With poetic justice, the crisis recoiled against Paris and destroyed the franc.

The Carthaginian peace of Versailles had by then poisoned everything. It was a patriotic duty not to pay taxes that would be sequestered for reparation payments to the enemy. Influenced by the Bolsheviks, Germany had become a Communist cauldron. Spartakists tried to take Berlin. Worker "soviets" proliferated. Dockers and shipworkers occupied police stations and set up barricades in Hamburg. Communist Red Centuries fought deadly street battles with right-wing militia.

Nostalgics plotted the restauration of Bavaria's Wittelsbach monarchy and the old currency, the gold-backed thaler. The Bremen Senate issued its own notes tied to gold. Others issued currencies linked to the price of rye.

This is not a picture of America, Britain, or Europe in 2010. But we should be careful of embracing the opposite and overly-reassuring assumption that this is a mild replay of Japan's Lost Decade, that is to say a slow and largely benign slide into deflation as debt deleveraging exerts its discipline.

Japan was the world's biggest external creditor when the Nikkei bubble burst 20 years ago. It had a private savings rate of 15 percent of GDP. The Japanese people have gradually cut this rate to 2 percent, cushioning the effects of the long slump. The Anglo-Saxons have no such cushion.

There is a clear temptation for the West to extricate itself from the errors of the Greenspan asset bubble, the Brown credit bubble, and the EMU sovereign bubble by stealth default through inflation. But that is a danger for later years. First we have the deflation shock of lives. Then -- and only then -- will central banks go to far and risk losing control over their printing experiment as velocity takes off. One problem at a time, please.

Saturday, July 10, 2010

An Overview of Pecunix

The July 2010 issue of DGC Magazine has an enticing overview of the Pecunix digital currency system which covers its history, jurisdiction, and governance. Organized and existing under the laws of the Republic of Panama, Pecunix is rapidly becoming one of the trusted, established players in the field of digital currencies and financial privacy.

Pecunix, Part 1

Pecunix, Part 2

From the article:
"When e-gold Ltd. began operating, the concept was to create a closed digital system backed by the value of gold. (even the accounts are denominated in grams and ozs.) The operator of the system would not risk dealing directly with any retail customer and thus not engage in any risky financial transactions with unknown parties.
Consequently, the e-gold operation did not accept any direct customer funds. Retail transactions all flowed through a network of third party independent exchange agents. This set up became a sort of ‘defacto’ DGC model for a number of years. Pecunix still operates today as e-gold did in it’s early years.

Similar to the Federal Reserve which creates the currency but only deals with other banks, this DGC model manages the digital gold currency system but never deals directly with any retail customers. Just as you can’t ‘drive through’ the Federal Reserve Bank and cash your weekly paycheck, you could never send a wire transfer or payment directly to e-gold or Pecunix.

Using this original DGC model, no customer information is ever requested or verified when opening & operating a Pecunix account. The checking of ID, the verification of a customer’s real identity and requesting a source of funds on any transaction... these are all non-existent requirements within the Pecunix system just as they were for e-gold during it’s boom years.

Identical to the original e-gold model, the Pecunix operator is simply responsible for the day to day technical aspects of the online payments and the maintaining of the assets backing the digital units. Since they don’t deal directly with any retail customers the concept is that they should not be required to ‘know’ any of them or ask ‘what’ they do with their funds. This is the basic idea of privacy and freedom that digital gold currency pioneered across the Internet. Physical cash like notes and coins have certain anonymous properties and digital currency systems, in particular, digital gold currency was created to mimic those properties.

The Pecunix digital gold currency system continues to operate today exactly as it did from day one back in 2002. However, because of it’s jurisdiction and certain issues with the Federal Government, e-gold has modified it’s model to include strict verification of all account holders similar to PayPal."

Tuesday, July 6, 2010

Honest Money Through Bearer Shares: A Proposal

By kind permission of Paul Birch, The Cobden Centre has reproduced "Honest Money", his essay setting out a proposal for honest money through bearer shares, previously published in October 2000. Paul’s own site may be found here: www.paulbirch.net.

Thursday, July 1, 2010

Suiting Up for a Post-Dollar World

By John Browne
Euro Pacific Capital, Inc.
Friday, June 25, 2010

http://www.europac.net/externalframeset.asp?from=home&id=18958&type=browne

The global financial crisis is playing out like a slow-moving, highly predicable stage play. In the current scene, Western governments are caught between the demands of entitled welfare beneficiaries and the anxiety of bondholders who fear they will be stuck with the bill. As the crisis reaches an apex, prime ministers and presidents are forced into a Sophie's choice between social unrest and bankruptcy. But with the "Club Med" economies set to fall like dominoes, the US Treasury market is not yet acting the role we would have anticipated.

Our argument has always been that the US benefits from its reserve-currency status, allowing it to accumulate unsustainable debts for an unusually long period without the immediate repercussions of inflation or higher borrowing costs. But this false sense of security may be setting us up for a truly monumental crash.

There is fresh evidence that time is running out for the dollar-centric global monetary order. In fact, central banks outside the US are already making swift and discrete preparation for a post-dollar era.

To begin, the People's Bank of China has just this week decided to permit a wider trading range between the yuan and the dollar. This is the first step toward ending the infernal yuan-dollar peg. While the impetus behind this abrupt change remains a mystery, I have a sneaking suspicion that, as my colleague Neeraj Chaudhary explained in his commentary last week, the nationwide labor strikes were a prime motivator.

In response to the 2008 credit crunch, the Fed printed so many dollars that the People's Bank of China was forced to drive Chinese inflation into double digits to maintain the peg. The pain has fallen on China's workers, who have seen their wages stagnate while prices for everything from milk to apartments have skyrocketed. This week's move indicates that, regardless of its own policy motives, the Communist Party can no longer afford to keep pace with the dollar's devaluation. The result will be a shift in wealth from America to China, which may trigger a long-anticipated run on the dollar, while creating investment opportunities in China.

Just days before China's announcement, Russian President Dmitry Medvedev rattled his monetary sabre by telling the press of his intention to lead the world toward a new monetary order based on a broad basket of currencies. Giving strength to his claim, the Central Bank of Russia announced that it would be adding Canadian and Australian dollars to its reserves for the first time. Analysts suggest that the IMF may follow suit. While Russia floats in the limbo between hopeless kleptocracy and emerging economy, it does possess vast natural resources and a toe-hold in both Europe and Asia. In other words, it will be a strategically important partner for China as it tries to cast off dollar hegemony.

Speaking of Europe, the major powers there are moving toward a post-dollar world by rejecting President Obama's calls to jump on America's debt grenade. The prescriptions coming from Washington translate loosely to: our airship is on fire, so why don't you light a candle under yours so that we may crash and burn together. Given that dollar strength is largely seen as a function of euro weakness (as Andrew Schiff discussed in our most recent newsletter, debt troubles in the eurozone's fringe economies have created a distorted confidence in the greenback. However, as you might imagine, Europe has higher priorities than being America's fall guy. Led by an ever-bolder Germany, the European states are wisely choosing not to throw themselves on our funeral pyre, but to wisely clean house in anticipation of China's rise.

In another ominous sign for the dollar, the Financial Times reported Wednesday that after two decades as net sellers of gold, foreign central banks have now become net buyers. What's more, more than half of central bank officials surveyed by UBS didn't think the dollar would be the world's reserve in 2035. Among the predicted replacements were Asian currencies and the euro, but - by far - the favorite was gold. This is supported by Monday's revelation by the Saudi central bank that it had covertly doubled its gold reserves, just about a year after China made a similar admission. There is no reason to assume these are isolated incidents, or that the covert trade of dollars for gold doesn't continue. To the contrary, this is compelling evidence that foreign governments are outwardly supporting the status quo while quietly preparing for the dollar's almost-inevitable devaluation. What people like Paul Krugman believe to be a return to medieval economics may, in fact, be the wave of the future.

In peacetime, hardened troops will likely tolerate a blowhard general for an extended period; but when the artillery opens up with live ordnance, an ineffectual leader risks rapid demotion. The newspapers are now riddled with hints that foreign governments have lost faith in Washington and the dollar reserve system. It seems to me only natural that after a century of war, inflation, and socialism, the next hundred years would belong to those people who hold the timeless values of hard money and fiscal prudence. Unfortunately, our policymakers are not those people.

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. Reprinted with permission.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2008 bestseller "The Little Book of Bull Moves in Bear Markets" and his newest release "Crash Proof 2.0: How to Profit from the Economic Collapse." Click here to learn more.

Wednesday, June 30, 2010

Conservation of Objects in MMORPG Games

By Ken Griffith
Game Research
Tuesday, October 24, 2006

http://game-research.com/index.php/articles/conservation-of-objects-in-mmorpg-games/

INTRODUCTION

Over the past decade as Massively Multiplayer Online Games (MMOG’s) have grown more numerous the need for a different approach to the management of “game objects” has become evident. Because an MMOG world, regardless of the genre, is populated with objects that players can take, use and trade, it is inevitable that in-game economies develop.

Unlike the real world, game objects are “virtual” and can therefore be created infinitely by the game host with zero marginal cost. This situation can create problems and limitations for the game world and its human participants.

By adopting a software model that conserves the creation of persistent objects several existing problems may be solved as well as opening the door to new possibilities for online games.

This paper sets forth an object management model that is based on theory from the disciplines of economics, financial cryptography, and sociology.

GAME-INFLATION: THE PROBLEM

Description of the Problem
A significant problem with current MM games is in-game inflation and deflation. As the game world progresses in time, the constant creation of persistent game objects in the form of regenerating NPC’s creates imbalances in the ratio of certain objects in the game relative to other objects. This problem may manifest itself in the form of skyrocketing prices of game items in terms of “game money” or the opposite (price deflation) may occur if other objects regenerate faster in the game than money objects.

Ultimately the problem is caused by the unlimited creation of persistent objects in the game world.

One example of the havoc this can create for players of the game is the case where money is so easy to come by in the game that scarcity becomes meaningless. Players buy up all of the outfitting items at the in-game merchants. Game hosts may respond to this by increasing prices in the in-game merchants to consume more money.

This creates a problem for new players because they have to kill an extremely large number of NPC’s in order to save up enough money to buy even the most basic items. In-game inflation creates an ever-widening gap between low-level players and high-level players who started playing significantly earlier.

For experienced high-level players, the game developer has to create ever-harder challenges to keep the game interesting. These high level players may end up with thousands or millions of game money units in their accounts and nothing significant to buy with it. Thus the game money decreases in utility per unit for high-level players. In fact, a cottage industry has sprung up to sell guides to players of certain games to show them how to make hundreds of thousands of game money units per week or month .

In-game inflation causes the return on time invested to decrease for low-level players as well. The number of low-level creep slayings required to save enough money to buy basic items to outfit the player tends to grow as the price index in the game rises.

As time progresses the hyperinflation becomes more pronounced until it eventually becomes a dampening factor on player enthusiasm, as well as a hindrance for recruiting new players to the game.

The Cause of the Problem
In-game inflation is caused by the fact that NPC’s in the game constantly regenerate along with various items that they carry. When PC’s kill NPC’s the players collect the items and can use them in the game. Some items will perish with use, for example those that confer “buffs” to the player character. Others, notably money, are persistent and can be exchanged in the game but not destroyed. (Unless the developer creates a money-sink in the game such as a store that sells items to players and erases the money.)

When persistent objects are created on regenerating NPC’s they will accumulate over time in the game to the point where their value falls due to the supply greatly exceeding the demand. In the case of game money this process manifests itself as in-game price inflation.

This is similar to the root problem that causes inflation the real world, except in that case it is national treasuries that constantly print new currency for use in government spending. Online gamers may find some familiarity in the situation in Germany after World War I. In 1923-27 German Reichsmarks were printed and spent by the German government in such copious quantity that it was actually cheaper to burn a wheelbarrow full of Deutschmarks in the furnace than to use them to buy fuel oil or firewood. This was the first time that the German currency suffered from raging hyperinflation. Notes were printed in denominations of 50 trillion and 100 trillion. One billion paper marks became equivalent in value to one gold mark and many families lost their life savings overnight before some form of stability was restored .

Inadequate Solutions
There are several measures that game developers can currently take to put a bandage on the problem, but these solutions ultimately require a great deal of micro-management because they do not attack the root of the problem - which is the generation of persistent objects on regenerating NPC’s.

For example one superficial approach to the inflation problem is to create money-sinks in the game, in the form of “merchants” that sell items to players for game money and then erase the game money obtained. Another form of money sink is to create new areas of the world with more merchants and items to be purchased.

Money-sinks have not proven to be very effective in controlling inflation because the number of regenerating money sources (NPC’s) greatly outnumber the practical capacity of in-game money-sinks. New areas of the game also have regenerating NPC’s that carry money, so the problem tends to accelerate with the increase of creep generation points in the game. Players generally spend more time killing NPC’s and solving quests than offloading their money at in-game merchants.

CONSERVATION OF OBJECTS

Rather than micro-managing the problems that result from a flawed object management model, it makes more sense to change the model from the very beginning of a game development project.

MMOG’s, whether for entertainment or other purposes, are inevitably simulations of certain aspects of the real world. Therefore, it makes sense to modify the game model to more closely reflect the real world in order to reduce or eliminate economic problems in the game.

Before describing the new model, let us first examine the laws of economics in the real world.

The conservation of mass and energy effectively operates in the universe so that mass and energy can be transformed but not created or destroyed. (There have been recent challenges to this theory, but for our purposes here it suffices.)

Any given sub-system in the universe may experience a net import or export of mass or energy. Energy travels faster and is easier to import and export than mass. So, taking the planet Earth as an example, we have a system where mass is effectively conserved (excepting nuclear reactions, which are negligible), but energy is effectively unlimited because of the constant import of new energy into the system. The sun and stars radiate energy that enters the Earth’s system, and the Earth and its atmosphere radiate excess energy back into space in the form of IR radiation.

The resulting biological system on earth has a constantly replenished input of solar energy. This means that biological objects (flora and fauna) have an unlimited capacity for the capture of energy, and therefore regeneration; but mineral objects are limited by their relative finite supply on the Earth.

The only effective limitation on biological activity is the availability of space and relative availability of water. This is true because the availability of bio-active trace elements and chemical building blocks is far greater than the maximum biomass that could cover the earth’s surface.

As the designers of the fictional “Matrix” found in the movie by that name, human beings like to play in virtual worlds, but we tend to be unhappy unless the world reflects the real world that we were programmed to live in. In order to translate these realities into a game model, we must recognize the difference between regenerating objects and persistent objects. Plants and animals and fuel from plants and animals are renewable resources, while metals, some minerals, and certain chemicals are finite in their supply. Certain elements and compounds are so common as to be effectively unlimited in their supply. This would include rocks, air, salt water, and in some cases fresh water.

There is a further distinction between objects that are consumed with use and those that persist. A leather jacket is effectively persistent (though in real life it will eventually wear out within one to five decades of use). A potato is perishable.

Also, in the case of the leather jacket we see that some perishable regenerating things (cows) can be converted into “effectively” persistent items, at least for the relative time scale of human beings. We see this in some game worlds where regenerating items such as polar bear skins in Everquest can be manufactured into various useful objects in the game.

The game world may mimic the real world with regard to converting perishable objects to non-perishable ones, where the only effective limitation on the creation of persistent objects from regenerating sources is the market price of the finished product. For example, if every human being in the world devoted all of his or her spare time to making denim blue jeans out of cotton fibers, the only limitation on the production of infinite blue jeans is the fact that the cotton-supply that is only limited by the arable land where cotton can be grown. However, given infinite time an infinite number of blue jeans could be created. In reality this does not happen because the price of blue jeans would fall as the supply increased.

Schema
The conservation schema for a game world should recognize two super-classes of objects: persistent and perishable. Persistent objects will be conserved while perishable items may be generated without limit in the game because they are constantly destroyed as they are used.

Here are example subclasses for each super-class:

Perishable:

· NPCs : (NPC’s exist, they die, they regenerate.)
· Products from NPC’s : Meat, hide, fur, etc.
· Fuel : (Food, drink, fuel, wood, power-ups, buffs, ammo, spells etc.)
· Vegetation (trees, bushes, logs, etc.)

Persistent:

· Money : Gold, silver, currency, etc.
· Weapons
· Armor
· Containers
· Special Items

Conservation Engine
The conservation model requires an engine that controls the creation and transfer of persistent objects according to the following rules:

1. Only the conservation engine may create new persistent objects.
2. In all other cases persistent objects can be transferred, and in some cases destroyed, but not created.

Implications
The implications of conservation of objects include:

1. Persistent objects must be recycled in the game. Therefore the game will require a mechanism to recycle persistent objects from players back to NPC’s in the game (if the game has NPC’s). For example, a rule could be made that if a player character is killed by an NPC some or all of the player character’s inventory is transferred to the NPC, or a general account for NPC’s to draw items from.

2. A conservation economy allows the option to directly correlate game objects with real-world objects. For example game money could represent and be convertible to real money, allowing a new game genre that is a hybrid between online gambling and pure entertainment MMOG’s. (This can only work for a conservation engine that is effectively spoof-proof. Otherwise, bugs in the conservation engine might allow the creation of game objects that can be “converted” to real money/objects, allowing the cheater to economically exploit, and possibly bankrupt the game system.)

ACCOUNTING

The Game Currency
The conservation of money means that there is a finite supply of money in the game world. No new money is created in the game; it is only transferred around inside the game. An additional option is to allow money to be imported and exported to and from the game world and the real world, as if the game world is a country in the real world. (This is called a “convertible money model” is covered in the paper “Convertible Money Economies for MMO Games” by the same author.)

Keeping Track of Conserved Objects
Any conservation model requires an accounting system to prevent the unlimited creation of money and other persistent objects inside the game. This is especially important for games that plan to use the convertible money model because a dupe bug could allow a player to get million gold pieces for nothing and cash them out, which would ruin the backing of the game money. These issues have already been worked out for online gaming and online digital currency systems using a set of algorithms and functions collectively referred to as “financial cryptography”. Because of the work done in these other fields the most difficult problems have already been solved, often by several completely different methods.

In order to prevent the unlimited creation of conserved objects in the game, it is necessary to control the way conserved objects are created and transferred. Developers in the field of financial cryptography have invented several methods of doing this kind of thing. One approach is the use of a “book-entry” database system that keeps track of every individual object in massive table.

The other approach to object management, that may be better suited to MMOG’s (and is much more elegant), is to use “signed digital coins” to represent objects and even player attributes (hit points, size, strength, etc.). When an object is used or transferred it is “spent” and a new coin for that object is created for the new recipient. Rather than keeping a massive central database of who owns what, the digital coin model merely maintains a “spent coin number” database to guard against double spending. Possession of a coin constitutes ownership, so the system doesn’t need to worry about who owns what until they actually use or transfer the item. This allows a game to be designed that pushes inventory management down to the client machine, but prevents cheating through the use of digital signatures on the coins.

The digital coin model is harder to understand mathematically, but it is alleged to use 1/10th the processing power and is probably better suited for MMOG’s that run on multiple linked servers . There are many papers and even patents published on digital coin systems , but none that I know of that presently apply the concept to object management in MMOG’s.

A Sample Schema for a Book-Entry Object Conservation Engine
For this paper we will simply assume a book-entry model where the game engine has a database for “persons” in the game, which can include player and non-player characters. This database contains a table for inventory where each entry has the player id and the object id type. One approach for this model is to create an additional inventory table with the same fields called “conserved objects”. Write access to this table will be limited to two functions, MINT and TRANSFER.

Each player character has an account as a “person”, and NPC’s would either have individual “person” accounts, or one master “person” account representing all NPC’s (The Creep Trust Fund). Likewise, each special conserved object would require an entry in the database with the owner_id, class_id, and quantity. Money and special objects can both be handled in the same table this way.

Your object_class table will have entries specifying the properties for each object type (class_id).

The Mint
Regardless of which accounting method is used, conserved objects in the game can only be created or destroyed by the “Mint”. The Mint is a function that adds or removes conserved items from the game world. The Mint would create the items and money to initially populate the game world with value, and occasionally to add new conserved items for the occasional balance tweak after the game has gone live, or to add new areas and objects when expanding the game.

When creating new scenarios, quests, or zones, the Mint will be used to populate the new area with persistent objects.

The Mint is much more important in a convertible system. Whenever a player or the game host imports or exports money to or from the game, the Mint function will be called.

Object Transfers
The second important function in the game accounting system will be the Transfer function.

The first practical application for in-game transfers involves what happens when a player kills an NPC. While there are several ways to approach this, here is one practical way to maintain conservation of money in the game with the least amount of database processing power.

Instead of having a different “person” account for every creep in the game, there is just one master account for all creeps and NPC’s.

When a player character gets killed some or all of his inventory items, including money, on his corpse can by picked up by other players, or the same “regenerated” player if he can get there fast enough. If no one picks up the items within a certain amount of time then any conserved items, including money, go into the creep fund. An alternative would be a master account for each class of NPC or creep. So, if a gnoll kills your character, your money goes into the gnoll account, etc.

When a player kills an NPC, a function is called that determines after the fact what items will be found on the NPC’s corpse. Suppose you set the rule so there is a 33% chance that “Creep Type X” will have 6 units of money, as well as any other non-conserved items that might randomly appear on the corpse. The function is called in the event of NPC_death, and in this case determines that this creep’s corpse should have 6 units of money. The function queries the “Creep Fund” to see if it has at least at least 6 units of money in it. If “yes”, then a Transfer is made from the Creep_Fund to that particular NPC corpse. The Transfer function should be the only function other than the Mint with “write access” to the “conserved_inventory” table, so you shouldn’t have to worry about other functions making unauthorized transfers. This control precludes the possibility of “dupe bugs” creating money from nothing. Like a player corpse, if no one loots the creep corpse in a certain amount of time then the conserved items on the corpse are transferred back into the Creep Fund and the non-conserved items are erased.

But what if the Creep Fund is empty? In that case, even though the “creep_death” function called for 6 units, the transfer is denied and no transfer takes place. The creep corpse has zero money on it. Other inventory items can be recycled in this manner as well.

This method solves the financial implications of the Dupe Bug Problem because:

1. Except for the initial outlay to populate the game world, the Creep Fund is financed entirely by player characters that get killed.

2. If a dupe bug exists, the worst thing that can happen is the player cleans out the Creep Fund. Even if the player cashes all of his game money out, the game host doesn’t lose any money and the integrity of the backing of the game money stays intact. The creep fund will be replenished soon enough by all of the newbie players getting killed on the battlefield. The game host might want to add a routine to flag players who suddenly get rich to have a human look at what the player did to see if there is a dupe bug. If a player finds a dupe bug and exploits it for money, you can be sure he will go back to the same place and do it again and again until the bug is fixed. It isn’t a serious problem as long as the game maintains the conservation of money.

This set of rules would also tend to encourage increased player cooperation. If one player gets his character killed then his buddies can guard his items or carry them with them until his regenerated character can join back up and get his stuff back. Loners would tend to loose more money and items to the Creep Fund than players that group with others.

CONCLUSION

A game schema that properly maintains the conservation of persistent objects can potentially solve the supply demand problems currently associated with MMOG game economies. Furthermore, the use of conservation of game objects allows the possibility of convertible game economies where game currency is fully exchangeable for real money.

Comments may directed to the author of this paper at the following email address:
griffith at goldeconomy.com

TERMS

Buff(s) - One-use items that improve the player’s statistics.

Creep(s) - Industry term referring to “monsters” and other NPC’s in the game that can be killed by the players.

Creep Fund - A money account into which dead player’s gold is transferred. As creeps are regenerated their pockets are funded with money from the creep fund. This conserves money.

Creep Tax - When a creep loots a player corpse a percentage of any money found is transferred to the Creep Tax account for the benefit of the game host.

Dupe Bug(s) - A coding error that enables a player in a MM game to obtain the same item over and over again with no additional expenditure of time or resources. When there is a dupe bug for money the player can get “rich”.

Financial Cryptography - The science and art of using cryptography to protect and authenticate the transfer of financial assets in an online environment.

Inflation - Increase in prices of tradable items in the game world caused by a constantly growing money supply inside the game.

MMOG - Massively Multiplayer Online Games with thousands of players who interact with one another and the game environment.

Non-Perishable(s) - Game items that persist or cannot be destroyed with use: includes money and other objects.

NPC(s) - Non-player character. I.e. monsters, merchants, creeps, slaves, etc.

PC(s) - Player Character. I.e., the player’s in-game persona or avatar.

Perishable Object(s) - Game items that disappear with use.

Persistent Object(s)- Game items that are not destroyed with use and remain in the game world as inventory perpetually.

Power-up - An item that confers a Buff to the PC as soon as the player touches it. It disappears rather then being added to inventory.

Ken Griffith is a website developer at Clinch Mountain Communications and former editor of The Gold Economy Magazine. Reprinted with permission.

Monday, June 21, 2010

Gold Reclaims Its Currency Status as the Global System Unravels

By Ambrose Evans-Pritchard
The Telegraph, London
Sunday, June 20, 2010

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7841961/Gold-reclaims-its-currency-status-as-the-global-system-unravels.html

We already know that the eurozone money markets seized up violently in early May as incipient bank runs spread from Greece to Portugal and Spain, threatening the first big sovereign default of our era. Jean-ClaudeTrichet, the president of the European Central Bank (ECB), talked days later of "the most difficult situation since the Second World War, and perhaps the First."

The ECB's latest monthly bulletin gives us some startling details. It reveals that the bank's "systemic risk indicator" surged suddenly to an all-time high on May 7 as measured by EURIBOR derivatives and stress in the EONIA swaps market, exceeding the strains at the height of the Lehman Brothers crisis in September 2008. "The probability of a simultaneous default of two or more euro-area large and complex banking groups rose sharply," it said.

This is a unsettling admission. Which two "large and complex banking groups" were on the brink of collapse? We may find out in late July when the stress test results are published, a move described by Deutsche Bank chief Josef Ackermann as "very, very dangerous."

And are we any safer now that the EU has failed to restore full confidence with its E750 billion (L505 billion) "shock and awe" shield -- that is to say after throwing everything it can credibly muster under the political constraints of monetary union? This is the deep angst that lies behind last week's surge in gold to an all-time high of $1,258 an ounce.

The World Gold Council said on Friday that the central banks of Russia, the Philippines, Kazakhstan, and Venezuela have been buying gold, and Saudi Arabia's monetary authority has "restated" its reserves upwards from 143 to 323 tonnes. If there is any theme to the bullion rush, it is fear that the global currency system is unravelling. Or, put another way, gold itself is reclaiming its historic role as the ultimate safe haven and benchmark currency.

It is certainly not inflation as such that is worrying big investors, though inflation may be the default response before this is all over. Core CPI in the US has fallen to the lowest level since the mid-1960s. Unlike the blow-off gold spike of the Nixon-Carter era, this rally has echoes of the 1930s. It is a harbinger of deflation stress.

Capital Economics calculates that the M3 money supply in the US has been contracting over the past three months at an annual rate of 7.6 percent. The yield on two-year Treasury notes is 0.71 percent. This is an economy in the grip of debt destruction.

Albert Edwards from Societe Generale says the Atlantic region is one accident away from outright deflation -- that ninth Circle of Hell, "abandon all hope, ye who enter." Such an accident may be coming. The ECRI leading indicator for the US economy has fallen at the most precipitous rate for half a century, dropping to a 45-week low. The latest reading is -5.70, the level it reached in late-2007 just as Wall Street began to roll over and crash. Neither the Fed nor the US Treasury were then aware that the US economy was already in recession. The official growth models were wildly wrong.

David Rosenberg from Gluskin Sheff said analysts are once again "asleep at the wheel" as the Baltic Dry Index measuring freight rate for bulk goods breaks down after a classic triple top. The recovery in US railroad car loadings appears to have stalled, with volume still down 10.5 percent from June 2008.

The National Association of Home Builders' index of "future sales" fell in May to the lowest since the depths of slump in early 2009. RealtyTrac said home repossessions have reached a fresh record. A further 323,000 families were hit with foreclosure notices last month. "We’re nowhere near out of the woods," said the firm.

It is an academic question whether the US slips into a double-dip recession or merely grinds along for the next 12 months in a "growth slump." For Europe, nothing short of a sustained global boom can lift the eurozone out of the deflationary quicksand already swallowing up the South.

Spain had to pay a near-record spread of 220 basis points over German Bunds last week to clear away an auction of 10-year bonds, roughly what Greece was paying in March. Leaked transcripts of a closed-door briefing to the Cortes by a central bank official revealed that Spanish companies have been shut out of the capital markets since Easter. Given that the Spanish state, juntas, banks, and firms have together built up foreign debts of E1.5 trillion, or 147 percent of GDP, and must roll over E600 billion of these debts this year, this is a crisis unlikely to cure itself.

Read the rest of the article.

For further reading:
"The gold standard: generator and protector of jobs", Hugo Salinas Price, June 16, 2010

Medvedev Promotes Ruble as World Reserve Currency

By Paul Abelsky
Bloomberg
Saturday, June 19, 2010

http://www.bloomberg.com/news/2010-06-18/medvedev-talks-up-russia-s-ruble-as-global-reserve-currency-of-the-future.html

Russia wants the ruble to be one of the world’s reserve currencies as President Dmitry Medvedev renews his push to reduce the dollar’s dominance and make Moscow a global financial hub.

“Only three, five years ago it seemed like a fantasy” to create a new reserve currency, Medvedev said yesterday in a speech in St. Petersburg, Russia. “Now we are seriously discussing it.”

Medvedev, who has repeatedly called for a supranational currency to match the dollar, said discussions with China are continuing on broadening the global options. Russia sold U.S. Treasuries for a fifth consecutive month in April, the U.S. Treasury Department said June 15. The world may need as many as six reserve currencies, Medvedev said.

“It’s something that’s obviously needed,” he said at the St. Petersburg International Economic Forum. “Developing a financial center in Moscow will considerably help to strengthen the ruble’s position as one of the reserve currencies.”

Reasserting Power

Medvedev’s comments underline Russia’s ambition to reassert its global power following the financial crisis. Gross domestic product shrank 7.9 percent last year, the worst contraction since the fall of communism in 1991, after the credit crunch sent commodity prices plunging.

If a country wants to alter the world economic order, including the number of reserve currencies, it must become an international financial center, Bank of Israel Governor Stanley Fischer said in an interview yesterday.

“For a currency to be a reserve currency, you have to have capital markets in which you can sell it and buy it very easily,” Fischer said. “New reserve currencies don’t emerge by fiat. They emerge as countries change.”

The ruble and the yuan may by 2015 be added to the basket of currencies that set the value of International Monetary Fund units called special drawing rights, Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill said. O’Neill coined the BRIC term in 2001 to describe the four nations -- Brazil, Russia, India and China -- that he estimates will collectively equal the U.S. in economic size by 2020.

Free Float

The ruble “has as many reasons to be in it as the pound,” he said today in an interview in St. Petersburg. “If Russia really wants to be in it, it’s got to allow people to use it all over the world.”

Allowing the ruble to trade freely is “very important,” O’Neill said.

“Inflation targeting is key,” he said. Without a shift to an inflation targeting regime, the ruble “isn’t going to be part of the SDR. You can’t have it both ways, really, unless the Chinese change the rules, which they might do by the end of this decade. China is going to be so big.”

Russia may “come very close to floating the ruble” in the course of one year to 18 months, Bank Rossii Chairman Sergei Ignatiev said in April. Even so, the central bank doesn’t need to take on legal obligations to stop intervening in the currency market, he said.

Yuan Flexibility

The People’s Bank of China today said it will allow more yuan exchange rate flexibility and reform of the exchange-rate mechanism as the nation’s economic recovery has “cemented” after the global financial crisis.

Medvedev said he envisages a new economic hierarchy allowing emerging-market giants such as Russia and China to drive the global agenda as the world emerges from the first global recession since the 1930s.

“We really live at a unique time, and we should use it to build a modern, prosperous and strong Russia, a Russia that will be a co-founder of the new world economic order,” he said.

Read the rest of the article.

For further reading:
"Russia Backs Stronger Rivals to Dollar", The Wall Street Journal, June 19, 2010
"Medvedev sees single currency dream in G8 coin gift", Breitbart, July 10, 2009