Tuesday, February 24, 2009

I wish the Goblin would stick to making money in Wow. . .

I don't like to get into topics like this because Wow is my "escape" from real life. Its a game, I treat it like a game, its fun for me. In real life I work in the securities industry, so I think I have an above average understanding of how the economy works in the real world.

If you have read this post completely ignore it. The goblin gives an incomplete and often incorrect assessment of things. Wow is not a real economy. It lacks a lot of the mechanisms of a real economy. The biggest thing Wow lacks, and the general reason for a lot of our problems in the economy right now is debt.

In the real world, a large driver of the economy has been debt. You borrow money from someone that has it with the promise that it will be paid back. Individuals do it to finanace houses, cars, school, all kinds of things. Institutions loan money between each other to loan to individuals. The federal government and the states solicit these loans in the form of bonds (as a side note, the Chinese government is one of the biggest investors in US treasury bonds). The interest that is paid on these loans is the price that is paid for the service, in addition to the promise that the principal amount will be paid back.

The system works pretty well based on one major assumption: the loans will be paid back on time to the lender. Some default risk is built in, and generally bonds with a higher risk of default can pay out higher yields (commonly referred to as junk bonds), the trade off for risk of default is a higher interest payment.

The problem with our current system is that people are borrowing more than they are able to pay back, which has started a chain reaction. Person A defaults on a loan to Bank A, which then cannot pay back it's loan to Bank B, who then does not have money to lend out, so has to lower its rates to person B, who then has to borrow money to pay back to Bank C, its a vicious cycle that unfortunately we have become somewhat locked into. Maybe after billions in "write-offs" of bad debt, we will reach some sort of equilibrium, but that is one of the true reasons behind our current problems.

The point of all this is that Wow has no such system, so any comparison between Wow's economy and the real world will be at best incomplete and at worst downright wrong.

Stay tuned for my upcoming post on Death knight tanking, I much prefer talking about that to anything involving my real life job ;)


thedoctor said...

Hell ya...preach on brother Fish!

I always thought it was funny how the goblin makes numberous posts about how the WoW economy and the real life economy are very silmar.

Ya right, I could go on and crit your comment section with my wall of text...but I will just say that I agree with you 100%.

Goblin is great at making wow gold and blogging about it, that is why we love him. He should stick with that in my opinion.

Anonymous said...

Hey Fish,
if ppl are interested in knowing a little more about the credit crisis, they could maybe check this out.

I was put onto it by notpatrick.