Greedy Goblin

Tuesday, April 7, 2009


I wrote about deflation before, but an analysis on WoWenomics demanded answer. They claimed that the deflation is caused by the following things:

1: Mudflation (game-only event caused by new patches: the new items make old ones worthless). I completely disagree as mudflation should not affect items that are not replaced by new drops like tradeskill materials and consumables. Currently they fall with the rest.

2: People are trying to make money by farming endlessly, mass-producing items, decreasing the price of these items. While I agree that it's true, this is not a cause but a consequence. If it was a cause than the price of the grindable items (elementals, ores, herbs) would deflate fast, while the price of rarely dropping items and leveling stuff would stay or even inflate. People could also turn to daily quests from grinding to increase their money income, especially since dailies provide reputation too.

3: The items were overpriced at start and now prices are normalizing. It is true in the first two weeks when dumb kids are wasting the gold they grinded for months in TBC. But we are three months into the expansion and deflation continues. One also has to consider that the term "overpriced" is completely un-scientific. An item worth exactly as much as people pay for it. "Overpriced" usually means "people would not pay that much if they knew X". Most obviously such claims can only be made after X was revailed, in a form "people would not paid that much if only they had known X back then".

4: There are gold sinks that suck the gold out of the market. I agree that they are here and they motivate players to waste their gold. However there were also gold sinks in TBC from 5K epic flyer to Haris Pilton. I seriously doubt that the players developed their motive to ride expensive mounts on Nov 13, and were furgal before. Also notice that the 5K epic flyer was a serious upgrade, while the current gold sinks are completely useless.

5: Alt leveling players pour stuff to the market when leveling their tradeskills. Completely wrong for several reasons: people had alts in TBC yet there was no deflation. Tradeskills are leveled using a few items, so it's responsible for 5 pages of 0.5G Glyph of Voidwalker but not for overall deflation. Tradeskill leveling inflate the price of the tradeskill rough materials, just remember herb prices when inscription was aired.

+1: Tobold wrote that the reason of the deflation is people have no point buying. You don't need gear, enchants, gems, consumables, you can crush Naxxramas in any gear. People have reached the virtual "game over" limit, so why bother buying. The "no challenge will destroy civilization" idea is not new to philosophy, the most (in)famous work is done by a certain mathematician. While it's not possible in the real world, in an artificial enviroment the "you can reach anything without effort" can be (and in WotLK is) reached. Tobold's explanation is true on recession and not true on deflation. It's completely true that people wear less crafted epics than they did in BC. Back in BC-premiere if you were a new clothie and did not have mooncloth/shadowcloth/spellcloth set, you shouldn't bother applying to a serious guild. Now the lvl80 versions of these items are flooding the AH without buyer. So, just as Tobold said, there is much less demand for these items, therefore less are crafted = recession. However people are not just buyers but also sellers. If we assume they reached "game over", they not only stop buying, but they should stop farming. Why would anyone grind elementals or fly circles for mining nodes if he does not need anything? Such person just disappears from the market, does not buy, does not sell.

While some of the above statements are true, none of them is the reason for deflation. I believe the reason is exactly the same like in the real world: the deadly mixture of deregulation and stupid people.

Back in TBC, the epic tradeskill items and all raid boss drops were BoP so practically out of the market. You either raided/PvP-ed them out, or you did not have them, period. Now you can buy them. This means much more people are buying them, so you can trade with them, moving thousands of gold, and you can trade with their materials.

This change opened huge opportunities to businessmen. Both to professional ones, and also to the lucky bastards who won the /roll for the BoE boss drop. In TBC the AH was a side-game like the Shat'ari Skyguard or Ogri'la. You could do it for your own fun, maybe you could gain some nice items, but you could completely miss them. Now AH is a serious source of gear. It's not only a bigger market, but also forced lot of business-illiterates to the AH.

I believe the reason of the deflation is that businessmen and lucky bastards could rip insane amount of gold from the morons. I had 50K at the end of TBC with more than a year playing., with about 1.5K/week income. That was pretty nice back then, I had 5K before I was 70, no grind for the epic skill. Now I have 10K/week. I doubt that my skills grew 700% overnight.

I believe deflation comes from the following scheme:
  • The moron wants epix that he cannot get from VoA, Sarth+0, Plague and Spider quarter
  • The moron goes to AH or spam /trade
  • The moron makes a very unfavorable trade
  • The businessman or the lucky bastard get lot of gold for minimal work, either spend it on some useless vanity, or simply keeps it, removing gold from the system.
  • After the purchase, the moron is broke, he has no money to support his needs. So he keeps on grinding to get some money, yet it's me who get money on his farming, by relisting his eternals as expensive crystals. So despite his hard work, he stays poor, farms more, makes me more rich. You load sixteen tons, and what do you get? / Another day older and deeper in debt. / Saint Peter, don't you call me, 'cause I can't go / I owe my soul to the company store.

If my scheme is true, than it's true for the real world economy too, and the recession-deflation will continue until governments don't make strict restrictions on the markets to save the dumbs from the consequences of their dumbness. The common saying "The worst private owner is better than the best bureaucrat" will change into "The dumbest bureaucrat is wiser than 90% of the customers".

The Great Depression was not a mistake of the free markets, it is the free market in its perfect form. All those unemployed and starving people suffered not because of some mistake or "evil", but because of their own ignorance. According to Darwin, they must die. Of course I'm not telling to let 70-80% of the population die. I'm telling that we cannot have free markets without 70-80% dieing, since they are too ignorant to be able to take care of their money. The Great Depression ended when Roosevelt threw "free market" ideas into the wind, introduced New Deal, where the great income of the businessmen was taxed and the money was spent on creating jobs for the people in form of constructing roads and dams. Notice that in the New Deal Roosevelt forced the taxpayers (the 20-30%) to spend their money on roads and dams. Very much anti-free market action, but worked.

The economical crisis of today is nastier than the Great Depression, since the governments can't create work so easily like back then, when unskilled manual labor had value. Nowadays when a machine can do the work of thousands of menial workers, you can't send out the unemployed people to dig holes (actually you can, but it's pointless). Today only the skilled work is needed. So the only way out is to elevate taxes and spend them all on education, turning these dead weight of mindless carcasses into thinking human beings.

I'm unsure if a democratic country, where the dumb's vote worth just as much as yours can implement this, neither I care. If it will be China to implement this New-education-deal, than I'll be happy to join them. In the meantime, we need more regulation to buy enough time for the morons to finish the schools.

What about WoW? Well, I'm completely positive that:
  • the deflation will continue
  • the low prices will discourage material farming, causing a recession
  • wast majority of the players will be permanently low on money, being unable to buy crafted items or paying the repair/consumable cost of raiding
  • I will reach money cap in 2009 with less play than I had in TBC
  • Blizzard (the government of WoW) will have to do something to address this problem
What can Blizzard do:
  • Implement more daily quests: will increase my income significantly, no other effect
  • Increase daily quest rewards: will do a one-time inflation step, devaluing the businessmen's money, but still leave the vast majority broke
  • reinvent BoP on crafting: would force lot of people to reroll professions, and re-leveling would need materials, forming a demand for them. Questionable if it could work, since nerfed raids could be completed without these BoP items.
  • Put CD on BoE epic crafting: would provide profit for crafters, encouraging leveling crafting professions, creating demand for materials.
  • un-nerf instances and raids, forcing the players to either learn (opposite of dumb) or leave. This would solve the problem, but not in a way Blizzard wants.
  • introducing hard servers: this would separate the smart from the dumb, protecting the latter from the former, would solve the problem, since on easy servers there would not be economy, everyone would farm for himself
  • New Deal: "If the players donate 10K metal bars, 10K cloth/leather, 10K herbs, a magic tower is created in Orgrimmar, providing +10% damage and healing for all guildmembers both in PvE and PvP, the list of the bigest donators are written on the side of the tower" It would encourage businessmen to buy materials for donation, sending their money into the market.
One can ask what a person can do against deflation and recession, both in WoW and real world. The good news is that you actually can do something against it.
  • If you are poor, you can do the most by improving your economical knowledge, learning how to spend smartly, and how to make more money. By making more money, you can spend more, and by spending, you send liquidity into the markets. In WoW: find out how could you make money and spend it on crafted gear, enchants, gems. By doing so, you not only improve your gear but also give jobs to the crafters and material-farmers.
  • If you are rich, you can do the most by supporting valuable efforts, like gearing up a resistance tank, or a healer/tank gear for a respecing DPS of your guild. By doing so, you give jobs to the crafters and material-farmers. Be careful though not to waste your efforts into help-begging M&S. Giving something to them equals to throwing it to the trash heap. In real world, supporting education and scientific research are such things while charity is a big no!
  • And above all, if you are rich, teach your guildmates how to make money too. The deflation is caused by the dumb people who are poor, therefore forced to sell their items/workforce cheap. Every dumb converted into thinking human being makes the economy healthier and the world better.


Yaggle said...

Hopefully they will add more recipes for craftable items that at add utility and vanity. A lot of the rep. stuff is better quality, and a lot of the craftable items look the same or worse. And a lot of them look worse than the BC items. When I look at the crafted items on the AH now, mostly I think "ugly useless overpriced junk" so I don't want to buy and I don't want to craft it and sell it either. I get depressed just thinking about it :(

Ngita said...

While your not all wrong and I hate to pick some parts are just so incorrect.

"people had alts in TBC yet there was no deflation" Their was massive deflation of many items over the course of tbc, wotlk is no different.

"causing a recessionwast majority of the players will be permanently low on money, being unable to buy crafted items or paying the repair/consumable cost of raiding" simply lol virtually every raider walks out of a farm raid patting themselves on the back for the gold they just made. Consider this my raiding main does no gathering besides fish, I sells nothing besides greys,I have done no quests this year outside Hodir and oracles, I have received no money from my very rich banker alt. I have spent 1000's on repairs, patterns and multiple mounts and yet I still about 5k more gold then I started the year with.

"NEW DEAL" their is allready "blue" out their indicating thats a option.

Hombre said...

I've read the entire second half of this article on your site before - still a good analysis, though.

Narkondas said...

I tend to agree with Ngita. Raiding used to be a costly affair that more or less forced you into farming to be able to keep paying the bills of repair % consumeables.

The raiding guilds have always been a factor in the economy - but with WotLK we see that:

- There are more raiding guilds, since content is easier
- They are not buying much (they need very little in the way of consumeables due to lack of content difficulty)
- They are selling various BoE drops that are leftovers from the raids - competing with eachother on this - driving prices downs.
- On top of all that they pretty much make up their losses (repair etc.) by gold drops from raids alone.

The result of the above is that the raiders are effectively not "key players" in the market the way they used to be.

They do buy in two areas:
- Glyphs (will dramatically decrease come 3.1)
- Enchants (New gear => New enchants)

The end result is a market with fewer players - because the large group that was there by neccessiry (to pay weekly repair bill) is no longer motivated to play the market.

Jezebeau said...

Your argument against Tobold's point is flawed. They no longer need the items listed on the AH, so they stop buying, but they still want convenience and vanity goods like motorcycles, mammoths, and +1 Rings of Teleport: Dalaran. They keep farming and listing items on the AH because they reason that trade and manufacture can't possibly be less efficient than daily quests.

Anonymous said...

I've been trying to teach a few people from my guild how to make money, sadly they just ended up being a sorse of supply for myself.

Their excuse last night was "I've leveled this profession and it doesn't sell so I just vendored it's items" I told them not to do that and ended up buying their product for 4 times the vendor price, they are happy with the sale, I sell the item for 1.5-6 times what i got it for.

I think people don't have the patience to sell items, if it doesn't sell within 48 hours (or 24 default if your not using auctioneer) they automaticly class the item as void and should be vendored as being useless.

Its like for example the titanium plating which was introduced last patch, it's not a great seller even for an enchant, BUT on my server no one else sells it, I sell 1-2 a week at 149g each, but thats still a profit of 93g from what i got the materials for.

I think they problem for people is appathy, or lazyness or mabye even lack of confidence in their sales.

Any tips on breaking this mentality of people or are they doomed?

Cingy said...

A nice addition to the analyses would be to add the view of Schumpeter on business cycles. His view was that most people have nothing to add to the market than labor, with the exception of entrepreneurs who innovation. This innovation is what causes profit for entrepreneurs until everything has been immitated to death. In the cause of this process wages, and in response prices, decrease because their marginal value is decreasing.

In Schumpeter's view innovations always come in waves, created by the collapse of the old system. He was the one that named this cycle after Kundrachiev.

In wow, innovation waves are created by content patches. After each patch we will see entrepreneurs find new profitable combinations and prices of grinded mats and products go up, until all combinations have been copied and deflation sets in again.

Anonymous said...

I wonder if WoW deflation will be increased by real world economics.

People at the moment are 'enjoying' the credit crunch, having less money to spend and having to work harder.

Perhaps this means that they will have less money to spend purchasing gold from illicit sources (which is a source of inflation)?

TristanPEJ said...

What would you consider the poor people? I don't play with the AH too often, and I dropped 1600g on a BoE pair of gloves because they are BiS and I want to be Ulduar ready.

Still I think I would be considered Middle-Class with 7k gold and for the most part I don't find myself money starved.

Chris said...

Tristan -

I'm about where you are. Before I started buying up stuff that I'm thinking will go up with the patch, I was at about 10k spread amongst all my toons. I think we're "middle class" as you say - not super-rich, but a lot better off than M&S.

By the way, my "investments" have been a shit-ton of prospected saronite (I have about 60 of each kind of blue-quality uncut gems), 100 or so Frost Lotus, 25 Titansteel Bars, 30 Ebonweave, and a bunch of enchanting mats. I have 4 toons, so the stuff that I can craft myself I have been (the gems/ebonweave/bars).

Anonymous said...

Interesting article, but your analysis of FDR and the New Deal is flawed. FDR's New Deal policies had almost no measurable effect on moving the United States out of recession. At best, you could say that his charismatic public persona helped give the country optimism. Far more important was the brewing World War 2 crisis across the pond. With the massively increased demand for a number of key industries, the US economy rather quickly got back on its feet.

Application to WoW? If blizzard can increase the demand for several key "industrial" areas of WoW, we will see the strength of the currency correspondingly increase. The magic tower idea is probably a step in the right direction. It'd also be interesting if Blizzard introduced some kind of weekly attunement fee for instances, requiring guilds to farm (or purchase) certain mats before they could run their instances.

Honors Code said...

"I'm unsure if a democratic country, where the dumb's vote worth just as much as yours can implement this, neither I care."

I don't think it can, but this is hardly a new idea.

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse (money-benefits) from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship." - The Decline and Fall of the Athenian Republic (1776) By Alexander Fraser Tytler, Scottish professor of history at Edinburgh

Honors Code said...

If you want to find out how we got into this mess in the 'real world', and where we’re going, I recommend you check out

csdx said...

to address mudflation:
The reason that old stuff, even tradeskill materials and consumables drop in price is that less people use them. Espeically in WoW, where a significant number of people are at the level cap, it's the end-game materials and consumables that are most used. No one really needs any of the old lvl70 or even 60 materials anymore, thus reducing demand and overall price. Also the amount of time to gather these materials is less, due to more powerful characters (can ignore mobs or just drop them that much faster). Thus, assuming that the price of something is partially a function of the time it takes to acquire, it will suffer a decrease due to the new expansion's power levels.

However, counter to this run the generally increased availability of gold (new expansion = bigger numbers for everything), and fewer suppliers. These forces tend to dominate all the previous non-endgame content, as they weren't heavily in demand before, thus experienced no dropoff. Which is why the price for starting mats can go up each expansion.

Anonymous said...

Gevlon, your analysis of the Great Depression and today’s recession is flawed. Henry Morgenthau (FDR's Treasury Secretary) testifying before the House Ways and Means Committee in May of 1939 said, “We have tried spending money. We are spending more than we have ever spent before and it does not work…After eight years of this Administration we have just as much unemployment as when we started…And an enormous debt to boot!”. As the poster above stated, it was WWII that brought the US out of the Great Depression. Also, the current US recession is NOT worse than the Great Depression. It’s the worse recession since the Carter administration of 1976-1980.

Merlot said...

Large volumes of stupid people paying over the odds for items should result in prices going up, not down. Is this not simply a consequence of supply outstripping demand?

In Wrath, Blizzard did several things to reduce the demand for trade goods and crafted items:

- reduced the number of consumables available for raids

- reduced the requirement for consumables in raids

- reduced the need to level professions (buying is easier)

- reduced the attractiveness of crafted items (heroic and raid gear equally accessible)

Yet people who need gold still turn primarily to farming and crafting to make it. Hence, the market gets increasingly flooded with items of lesser and lesser value.

This is the stage we should have reached much later in the expansion, when content was exhausted and the countdown was ticking to the next pac. But Blizzard lowered the entry requirement to end-game content without understanding the consequences it would have on the economy.

If Blizzard wants to reverse deflation, doesn't it need to address the inherrent value of goods? BoP epics, more high-end recipes, more raid consumables and a greater need to use them.

Notmyrealname said...

I can only speak to the markets I'm most familiar with on my server as a scribe/enchanter who buys herbs and enchanting mats to make glyphs and enchanted Vellum with, then profits from marking up the finished good.

Finished good prices have deflated somewhat in my markets primarily due to increased competition. Where before there were only two or three organized businessmen, my faction is currently supporting about eight and may see more when dual specs launch. We're all undercutting to whatever level we can while still maintaining an acceptable profit margin and waiting to see who blinks and walks away first.

It is inevitable that prices will fall as more businessmen try to capitalize on the same number of customers. At the same time, herb prices have held steady and in some cases increased during peak hours as more people play in the glyph market and/or level inscription with plans to compete.

At the same time, enchanting mats are down somewhat over the last few weeks. I'm guessing there's some competition among sellers who are using other professions to produce DE mats with, but I'm not in that business so I don't know for sure.

The current gold sinks are a joke. I could afford anything I want, but why tie up capital in something as dead end as a novelty mount when it provides no benefit at all for those of us who play the economic mini-game?

kyrilean said...

"Why would anyone grind elementals or fly circles for mining nodes if he does not need anything?"

I already have a repair mount. I have enough for dual specs on my two level 80s. I have no other real expensive desires at the moment.

However, I spent 3 hours this weekend mining and made 2500g. Why? Because making gold is kind of a game in and of itself. :)

Derrok said...

Something that seems to be missing is the impact of new content patches (which we are expecting soon).

New BoP items need to be enchanted and gemmed, while most raiders are pretty much in (their)BIS available gear currently. This will create additional demand for enchanting mats and gems, which will drive up cloth and ore demand.

Blizzard's 'New Deal' is essentially adding content / arena seasons.

The Standing Dragon said...

... hangon, Gav. Just one thing:

Deflation isn't /really/ "the deadly mixture of deregulation and stupid people." The Great Depression may have its survivalist draw, certainly.. but. Er. That's kind of not how it all works.

Deflation occurs when demand falls, which forces a price correction downward to entice buyers to buy again. This causes prices to fall, of course - and it actually increases the 'work' value of a single currency 'unit' - your dollar buys more. Unfortunately, in the vicious and brutal nature of a balance sheet, deflationary pressure cuts into raw value profit margins - your cost to produce item x may also be falling, but the item x you made last week was at the higher price.

The Great Depression's economic cause is any number of historical milestones you care to name - but it came down to the fact that it was the end result of an unchecked deflationary spiral. Simply: People started having less money, so they bought less 'stuff'. Prices fell to compensate, which meant businessess had less working capital to run with. Employees are then laid off to take some of the strain off the balance sheet (plus, honestly, as buying slows down, capacity is left unused - no sense employing folks for empty capacity, right?). This takes one more earner out of the pool - unemployed people have no money to spend, after all.

So.. less is bought. Prices fall. People get laid off. Less is bought. Prices fall... /that/ is a deflationary spiral.

Most people in the Great Depression were caught in that spiral - nobody was buying the things the entrepeneurs were producing. The Keynesian response is: invest in infrastructure. The government combats a deflationary spiral by employing individuals in projects that, as they add money to the economy and 'restart' business, offer even higher capacity than what was available before. Keynes was essentially /right/ - if the market breaks, you have to fix it by giving people the means to buy, and the best way to do that is to have them build out what will be the engine of their own prosperity.

WoW is /not/ the real world - items really don't wear out and break often, necessitating replacement. The market, such as what exists, is only as strong as the need of those who participate in it.

The deflation you see going on is a direct function of that - there are more and more suppliers of goods, coupled with steadily reducing demand. This intersects in prices falling - no more, no less. The key here, though, is the steadily reducing demand.

When you buy an enchantment, you don't ever need to /rebuy/ that enchantment until you replace your gear. When you buy gear, you don't need to rebuy it every six months - you just pay the repair bill and keep going. Glyphs? Same. Gems? Same.

Oh, sure - some items are repurchased when roles are switched - that sort of thing. There will always be /some/ demand - but it's not enough to sustain prices found at the game's inception. The longer the game runs, the lower those prices will go... until they hit whatever new equilibrium works.

Markets really are very simple things - what makes them complex is identifying the factors that change the supply and demand curve. In this particular case, the market identification is simple: People don't have any need for this stuff. They've hit their respective endgames... and once you're there, you buy once and you're largely done.

On the other hand, content patches reset the endgame. Buying ramps up: new gear means new enchantments, new content means new permutations and new outfitting to push through it. And the cycle starts over.

Deflation has little or nothing to do with entrepeneurship or 'smart businessmen'. In fact, innovation in business is only useful if you can get someone to buy your end product. If people have no money... well. You're on your own in the market.

Anonymous said...

Does no one thing this could just be the post-expansion rush wearing off? I wouldn't say it is a recession so much as a correction.

When the expansion hit a lot of people came back into the game and a lot of people were just hitting 80 and getting geared up. This created a huge demand. Most people were more interested in getting into raids than grinding, so there was a great demand and low supply.

Now that initial wave has broken and receded. We're back to the trickle of demand from the people who are leveling alts or just hitting 80 now. I don't think this will change until the next expansion.

Simply put, there was a surge of demand. That's gone now, as well as there being more supply, but I don't think it is a recession so much as a steady state.

Anonymous said...

csdx, I disagree. I have focused on buying/selling tradegoods to make money, and I have found that the mid level metals like mitrhil, truesilver and thorium are always understocked on the ah and thus slowly increasing in value, whilst the high level mats farmed by level 80's is oversupplied and thus prices are slowly going down each week.

Russell said...

A few comments:

1) Quoting "Sixteen Tons" in your tirade about ripping off morons is, IMHO, a little offensive. That song is about how coal companies would keep miners in wage slavery by paying them in scrip only usable at the company store, not how the coal companies would skim off the excess value created by miners too stupid to auction off their coal appropriately.

2) Your analysis of the Great Depression is disastrously incorrect. You seem to view these sorts of things in unfailingly moral terms--i.e., the farmers in Oklahoma deserved 10 years of desperate poverty because they were ignorant. Actually, they were victims of a depression entirely beyond their control.

The Great Depression was triggered by a stock market crash and exacerbated by profoundly ignorant government policy. A depression is basically a loss of demand. People cut their spending, which closes stores, which loses jobs, which cuts spending, etc. Add to that a series of cascading bank failures and protectionist trade laws, and there you go. It's a macro-scale procyclical phenomenon which has nothing to do with the moral aptitude of the individual players for the most part. It's a technical problem. If there's any blame to be had, it should go to the business elites who touched off the crash in the first place by rampant stock market speculation.

This is a key realization. Before the New Deal, we had a major depression every 20 years. Wild successes followed by grinding recessions were as predictable as breathing.

Hoover's response to the Depression was to raise taxes and cut government spending. The insight of Keynes and FDR (also discovered by Hitler) was that massive deficit-financed spending can grow the economy like crazy--in Keynes' memorable phrase, even paying people to dig a hole and then fill it back up again can do the job. Moreover, structural reform can partially eliminate the things that allowed the depression in the first place.

It's a simple realization--that a little structural intervention in the economy is necessary to keep the Adam Smith-style mechanisms working properly (which do work quite well most of the time). These are things like depositors' insurance, bank risk regulation, etc., and the permanent casting aside of an Ayn Rand-style utopia as a preposterous, impossible delusion. Elite businessmen, as we've seen over the past few months, can be collectively just as idiotic as anyone else.

The Standing Dragon said...

To add this to Russell's comment:

If there's any blame to be had, it should go to the business elites who touched off the crash in the first place by rampant stock market speculation.

Which has a nice analogue to the current fiscal crisis, which was largely caused by morgage market risk speculation and followed on the heels of a housing price crash.

In this particular case, the financial elite made two incredibly false assumptions: 1) Prices of housing would continuously rise at the rates we saw in the late 90's/early 2000's, and 2) Diffusing risk across multiple institutions allowed higher levels of leverage as well as assumption of risk that was deemed unacceptable twenty years ago.

Essentially - banks loaned more money on speculation to people who were not qualified to pay for it. When those individuals inevetably defaulted, causing a glut of housing on the market and thus driving the price of housing down, the banks were left holding massive amounts of bad paper - which eventually drove them to insolvency.

Due to those diversified risk agreements, as institutions started to fail, the risk they were guaranteeing defaulted back to 'healthier' institutions, crippling them with risk they thought had been safely diffused.

... your financial experts loaned too much money at too high a risk, and when the collateral price failed, they blew up their own companies.

The Great Depression saw similar rampant speculation, as Russell said, in the stock market. When that bubble inevetably burst due to a routine downturn (much more volitile at the start of the century) ... it triggered failures in the financial system across the board that relied on those assets.

This has nothing to do with stupid people, and everything to do with supposedly very smart people running headlong into risk with other people's money.

The New Deal paved the way for the recovery that happened during WWII and the sudden increase in demand of finished goods. Without New Deal construction, the US wouldn't have been in a position to be able to ramp up production as it did - a prodigious and impressive turnaround in just a few short years. Having the infrastructure meant being able to take extra advantage of the market recovery.

"Morons and Slackers", or stupid people ... had nothing to do with any of that, really.

Sometime said...

You missed the most obvious reason for deflation: players taking a rest or leaving the game due to conquering the content. Now that Ulduar is hitting later today, we should see prices going up again because buyers will be returning and injecting gold back into the market. Those that are returning are unlikely to have large stockpiles of raw materials so it's all win for suppliers when the patch hits. Of course, as content gets cleared and server populations drop again, we'll see a decline (again).