There has been some discussion lately on the Big Board about HSX inflation, and how it is causing stocks to become overvalued. The usual statement is along the lines of “SCRM2 added 2 million to the accounts of whoever held it. Now there is too much money around, causing stocks to become overpriced. HSX needs to do something to take care of all this money, such as a reset, an income tax, or allowing players to exchange H Bucks for real products.” I think it is time for the Cinemeconomist to chirp in with a column about how inflation applies to the HSX.

In the real world, inflation is pretty well understood. It is rising prices. It is caused by the money supply growing faster than what is needed by the economy. The chief way this happens is for the Central Bank (In the U.S., the Federal Reserve Bank) to miscalculate and inject too much money into the economy directly, or by keeping interest rates too low, allow too much money to be injected by banks making loans. Also, in times of major economic crisis, people can lose faith in the currency, and start spending it faster, increasing the “velocity of money”, the number of times currency changes hands in a given time period. When this gets out of hand, it is called “Hyperinflation”. The cure for inflation is to bring the money supply under control by reducing the amount of dollars in circulation. This is usually done by raising interest rates.

So, how does this apply to the HSX, which recently saw a lot of money enter due to the rise in SCRM2? The answer is, it doesn’t apply. HSX is not a true market, it is a market simulation. In a real market, SCRM2’s rise in price would not be given to you out of the blue. You would have to have found someone who owned it who was willing to sell it to you at $60 per share, and after the opening weekend, you would have to find someone who was willing to buy it at $112 per share. Money is not created, it merely changes hands. In the real world every stock sold represents a stock bought, and vice versa.

HSX offers a market simulation. When you buy a stock, HSX’s computer creates the shares, and sells them to you, or if you sell a stock, HSX buys them from you and the shares disappear. If more people are buying than selling, HSX raises the price of the stock. The amount they raise the price is determined by Volatility, an artificially determined number which HSX is free to adjust, move, or alter as they see fit, to make sure the simulation runs well.

The problem with the recent excessive rise in prices on HSX then, is only indirectly a problem with the money supply, it is instead a problem with volatility being too high. Yes, removing money from the system would provide a short term fix to the problem, but that would only annoy people. The easy solution is for the HSX is to decrease the volatility on all stocks, accounting for the extra money chasing them, when a lot of money is created by a hugely successful adjustment.

Now, a general reset or exchanging H-bucks for real products may be decent ideas for other reasons, but using them to solve the problem of HSX inflation is like moving your couch and soundproofing your living room walls to take care of a TV that is too loud, instead of just turning the damn thing down.

Tom Miller