Dorothy the goldfish is imagining Elmo reading his Twitter stream… and what would it say? Who would he follow? And who would follow Elmo?

Elmo; “Computer, who’s following me on Twitter? Starbucks, Microsoft, and WalMart? Hey wait, Twitter is selling advertising. What’s up with that? Let’s ask Mr. Noodle.”

Mr. Noodle (in mime) “Everyone is promoting something on Twitter otherwise nobody would use it.”

Murray Monster: “Hey, I thought that Twitter was supposed to give everyone an even playing field. Otherwise, nobody would go to school to learn how to actually produce anything. Ovejita!!!

Ovejita (translated from Spanish): “Yeah, everyone spends time and energy building social capital in their community. Now Twitter lets rich guys can come along and just buy access. Why then should the rest of us work so hard?”

Big Bird: “Sponsored Tweets allow Brands to buy a seat at the head of the line. What about my Tweets? Does this build or diminish my social equity?”

Grouch: “Yeah, isn’t that great, Twitter is built on social currency. Now you don’t have to produce social capital, you can just buy in. Watch the social currency devalue!!”

Count Von Count; “ah ah ah, I can count the people leaving Twitter, ah, ah, ah… 50, 40, 30, 20 million,… ah ah ah”

Abby Cadabby; “I’m comfortable with who I am in a pink dress and can just cast a barrage of nasty Tweet spells on those unfair Tweeters”.

Baby Bear: “The only ones who really benefit are National and International Brands – what do they care about what happens here on Sesame Street, let alone in the forest where grandpa bear still lives?”

Grouch: “Quit complaining, the big Twitter moments will be revolutions, airplane crashes, assassinations, natural disasters, celebrity indiscretions, political extremisms, etc. I know that only the most respectable Grouchy brands will jump into any trash can that’s burning with eyeballs….can you say Voyeur?”

Burt and Ernie: “Who said Voyeur?”

Gordon the Shopkeeper: “Then there is the subject of conflict of interest. Can a brand dispel, displace, or disproportion negative Tweets by purchasing out the social media space? Will Mr. Hooper’s store have to buy tweets just to be stay in business?”

Elmo: “Thanks guys. If Twitter makes a little bit of money and goes public, they will eventually want to make more money and more money and more money until people are fighting over the next Christmas Toy Craze. Will this invite a competitor, a disruptive technology, or speculators? Let’s ask a Baby.”

Baby: [confused look]

Elmo: “Thanks baby, What does the future hold? Even Elmo has to worry about profit margins on character marketing. It’s only a matter of time before I will Tweet and my tweets will be followed – but the question becomes; by whom?”

Editor’s note; The following analysis by Daniel Indiviglio from The Atlantic regarding a NYT article is foreboding of an unknown future.  Half insightful synthesis and half tongue-in-cheek, this article suggests that virtual currency may impact the current monetary system.  The conclusion is brilliant suggesting that the national debt could be paid in virtual currency.  It seems quaint now, but what would happen if the dollar fails?  During the Mexican Crisis, citizens emptied WalMart because today’s peso would be buy fewer Levies tomorrow – and it happened very fast. Get this and get it well: currency is a social agreement. People will trade what ever people agree to trade.

by Daniel Indiviglio

Is Virtual Currency A Real Problem?

All that time spent playing video games may finally be paying off. Literally. According to a fascinating New York Times article today, virtual currency — credits to buy stuff in video games — is being taken very seriously. China worries that make-believe video game money could affect its ability to control its money supply. As a result, it’s slapping limits on virtual currency. I’m not kidding.

From the NY Times:

Some people have even traded virtual currencies in China, and exchanged them for clothes, cosmetics and other goods. Last year, nearly $2 billion in virtual currency was traded in China, according to the China Internet Network Information Center. Some experts say they believe there is a much larger underground economy in the virtual world.

And it gets wackier:

Some smaller gaming companies have even set up what are called virtual sweatshops, cramped quarters where young people play online games to earn credits that the companies then sell at a profit to overseas customers in Taiwan, South Korea and even the United States.

So what’s the threat? The Times asks a telecommunications professor from Indiana University.

“This action shows that at least one government is concerned about the way virtual worlds challenge its control of society,” Professor Castronova said in an e-mail message Tuesday. “As virtual currencies take over more and more purchasing power, control over the effective money supply shifts from the central bank to the game developers.”

Interesting theory, but I’d rather someone whose background is a little closer to economics weigh in. Because currency isn’t my specialty, I consulted an economist far more qualified to talk on this than me: Randall S. Kroszner. He is a professor of economics at the University of Chicago’s Booth School of Business. He’s also a former Fed governor, so he knows a thing or two about central banks and money supply.

He couldn’t speak to the specifics regarding China as he is not familiar with the details. But I asked him whether virtual currency could really be a threat to money supply, in general. He said:

It could have an impact on currency demand and the so-called velocity of money.
It can complicate the task of a central bank in trying to anticipate what currency demand will be, but much like with other innovations (ex: credit cards, etc.) that hasn’t led to an undermining in the ability to control the money supply, but it does make the task a more challenging one for the central banks.

So virtual currency could make managing money supply more difficult, but so do other things like credit cards, which we probably think are okay.

I also think virtual currency seems like any other good — just more efficient as a means for exchange. For example, there’s nothing stopping people from trading ounces of gold for products. An exchange rate exists between gold and real currency. Wouldn’t a similar kind of exchange rate hold for virtual currency and real currency? Kroszner agrees:

In principle, it’s exactly the same thing as an exchange rate between a particular commodity, wheat, gold, television sets, and the local currency.

In theory, virtual currency could affect money supply. But that it would affect money supply in a very significant way seems like a stretch. As a result, China might intend to limit virtual currency for reasons more important to it than money supply concerns. Such reasons might include censorship aspirations or a dislike of black markets.

Whatever China’s rationale, I’ll be interested to see if similar controls turn up in other countries. I suspect it’s just a matter of time before Uncle Sam decides to slap some virtual taxes on virtual transactions here in the U.S. Maybe we can close the deficit with virtual money!

Facebook is testing a virtual currency, because it’s cool and they can do it. They are not alone, the gaming industry has been at it for a long time for people who want to be more “productive” in the game space.

There is no mention, however, whether a Facebook currency could be used as a medium of exchange in the event of hyperinflation and the crash of the US dollar.  I can find nobody, writing anywhere today, that is willing to cross this proverbial line in the editorial sandbox.

I personally witnessed a devaluation in Mexico. Like a tsunami, the “adjustment” happens relatively fast as values ’snap’ fluctuate relative to other currencies.  Then very interesting things start to happen in the community. People will literally empty WalMart because most goods will be cheaper today than tomorrow.

As with other hyperinflation events, black markets form around various items such as gasoline, cigarettes, or Levis as people require some medium of exchange in order to buy necessities such as groceries and cooking fuel.

A Facebook currency may just be what communities will use to get through the event.  However, a Facebook Currency would likely be temporary because it could not be used in Banks to capitalize assets – or, by government who can’t figure out how to tax it.

Now the question becomes, what type of social currency could be intermarry with dollars?

Here is a hint; the dollar is backed by debt which is a promise to be more productive in the future. Conveniently, “innovation” is also a promise to be more productive in the future. Two such currencies are of the same species and can intermarry yielding new economic life.

The degree to which any ‘virtual’ currency is interchangable with the dollar is the degree to which it represents human innovation. Chew on that, Facebook.