Economy — 13 November 2008
Essay: Virtual Economy – Root Cause Analysis of The Current Financial Crisis

In a statement made to a congressional committee on April 3, 2008, the Chairman of the Federal Reserve Bernanke said that “if Bear Stearns had been allowed to fail, it would have led to a “chaotic unwinding” of Bearn Stearns investments held by individuals and other financial institutions. Moreover, the adverse impact of a default would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability”[1].  In an article published by Newsweek, October 11, 2008, Daniel Gross writes [3]: “Back in 2002, Apple’s stock was trading far below the level of cash on its books, ascribing a value of zero to its brands and products, compared with several billion at the height of the boom”.  Both statements refer to the existence of two views of the economy: a real economy which is reflected by the level of cash on corporate books, and an inflated, exaggerated view which is reflected in the current stock values of the market.  The second view of the economy will be referred to as a virtual economy in this article. Virtual economy, in this context, differs from what is being called virtual economy commerce [2], where customers trade in a virtual imaginary product with certain specifications and an imaginary value. However, this will not be the subject of this study.

The second type of virtual economy (VE) is the one that is important and is strongly related to the failure of the financial capitalist system as is being witnessed today. VE allows the economy to appear much larger than its real size. This economy is based on the assumption that the real money will not be tapped into and therefore, it is possible to deal with an assumed larger (virtual) value for the money. A good example of this scenario is the case with Donald Trump. He ran projects worth billions of dollars, while being more than 50 million dollars in debt. He was about to file for personal bankruptcy in 1989 when he was pressed to pay some of his debts.

A parallel concept to virtual economy exists in computer systems, where the concept of virtual memory is used. Virtual memory is a special type of organisation which allows the memory in the system to appear much larger than the real size of the memory. With this type of organisation, it is possible to execute program applications which require much larger memory than the system actually has. Virtual memory organisation in computer systems remains a smart way of running applications. However, there are some cases where an application may break the limits of virtual memory and cause the system to thrash, i.e. to fail. This happens when an application insists on using more than the size of real memory instantly, at one given time.

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