19 ms·

Krugman on BitCoin

254 points by mef 15y ago

Tichy 15y ago
It seems a bit premature to judge that way. For example now that the exchange rate is slowly falling, more people might be considering to part ways with their BTC. So things might eventually settle down. It is still very early days. Also, I suspect few people realize that they should not hold on to their normal money because governments will continually seek to devalue it (that seems to be the takeaway from the article, that that is the normal procedure for "normal" currencies). Their spending habits are probably more governed by their prospects to earn money in the future, or their savings, rather than a look at the value of their money.
- Tichy 15y ago
  Why the downvotes? Because it is about BitCoin.
danenania 15y ago
He's just begging the question. That a fixed currency supply creates deflation is not a new insight. The idea that this causes 'hoarding' is highly questionable. Prices in consumer electronics fall significantly every year. Does this cause people to hold onto their money instead of buying computers, tvs, and iphones? Of course not. Why would other types of goods be any different? People still need what they need and want what they want and are going to buy those things regardless of what relative prices will be in the future. The difference with a stable currency supply is savers and fixed income earners wouldn't have their purchasing power sucked away from them year after year--on the contrary, they'd become continually wealthier as the economy grows around them.
- sirclueless 15y ago
  Fair enough, but I think most economists would agree that we shouldn't be trying to make savers and fixed-income earners wealthy in the first place. We should make it economically advantageous for the people with money saved up to invest it into the economy.
  - danenania 15y ago
    You don't need to take away people's purchasing power to encourage them to invest. If an economy is growing, there will always be higher returns in investment than in holding cash. Monetary expansion encourages unsustainable consumption and debt accumulation. Why is this preferable to saving? When people save, they don't do it with the intention of one day dumping the money in a lake. They are still going to use the money, just on a longer time scale for a better-considered purpose.
    - sirclueless 15y ago
      I don't want to take away people's purchasing power now, I want to sap away their purchasing power over time. If I do that I encourage them to take their money and invest it into a factory producing widgets instead of squirreling it away into a bank. Inflating the value of money gives an unfair advantage to people who use their money to improve the world by producing things. Being in debt sounds like an OK trade to me so long as it's not pathological.
      - Astrohacker 15y ago
        But inflating the money supply doesn't take away everyone's purchasing power. It redistributes it to the people who get the new money.
  - GoGlobal 15y ago
    yep, butt it still depends on your standpoint - where u stand in the economic ladder matters a lot. If you are on top, you wouldn't want to make extra effort to stay there!
  - jeffdavis 15y ago
    I've always been suspicious of this "spending is better than saving" mantra. I'm sure it's better in some situations, but I don't think it's better in general. The point of an economy is not to spend money, it's to create more wealth for more people by allocating resources efficiently. If someone "hoards" money, and prices are stable, that person is effectively staying out of the resource-allocation business. It doesn't mean that there are fewer resources to allocate, it just means that other people are doing the allocating (even though those people collectively have less money because of "hoarders", prices are lower because of them, too). You can make an argument that everyone needs to take part in efficiently allocating resources, and that makes a lot of sense. But to say that buying a bunch of consumer junk is a good way to do that is ridiculous (and bad for the environment). A middle ground is to buy the things you need, a few things you want, and make conservative investments. That allows most individuals to mostly stay out of the resource allocation business, but still enjoy the benefits.
- FrojoS 15y ago
  I don't agree. The falling prices are holing me and many other frugale people back from buying electronics frequently. The reason people buy new electronics so often, is because there is so much improvement and innovation.
  - danenania 15y ago
    So you'd buy more electronics if the prices went up every year?
    - endersshadow 15y ago
      In economic speak, he's saying he'd be less willing to defer the utility of purchasing electronics if they increased in price every year. Currently, you can invest your money elsewhere at the opportunity cost of foregoing the utility of whatever gadget it is that you want to buy until the utility of said gadget is worth to you what its price is.
- cperciva 15y ago
  There's a difference between some goods -- electronics -- getting cheaper every year and all goods getting cheaper every year. Deflation isn't necessarily a problem; but runaway deflation is, and the structure of bitcoin makes deflation a self-perpetuating cycle.
  - danenania 15y ago
    "There's a difference between some goods -- electronics -- getting cheaper every year and all goods getting cheaper every year." Which is what exactly? People buy electronics even though they get cheaper every year but they wouldn't buy Xs if they got cheaper every year? Can you give me an example of some Xs?
    - sethg 15y ago
      If houses got cheaper every year, very few people would want to buy them, and people stuck with mortgages would have a powerful incentive to walk away from them. If cars got cheaper every year, then people would put off buying new cars for longer. If gold got cheaper every year, then a lot of gold coins would be dumped on the market. If everything got cheaper every year, then people with money in the bank (or under the mattress) have an incentive to reduce how much money they spend, in general. This would lead to factories reducing their production and laying off employees, giving the remaining employees an even more powerful incentive to hang onto their savings.
      - jonkho 15y ago
        The flaw in your argument is that currency is subjected to demand pressures as well. How so? When demand for housing, food, electronics is high, then it automatically implies demand for currency is low. That is another way of saying people are willing to give up currency for real goods; which is another way of saying people are putting less value on the currency over physical goods; which means the barter power of the currency is decreasing; which means lower buying power with respect to the currency. That is key point. This means that there is rise in prices (without monetary intervention) when there is preference to own goods. And we all want goods and services in the end game. But this rise in prices do not spiral out of control because there is demand for currency as well - which really is demand for time preference, that being the choice to consume later on. We also know the demand for time preference is not unlimited because ultimately have to consume to make good of the money. Therefore, with greater population, comes with greater demand for money, but also comes with greater demands for owning/consuming goods. So that is why price levels will not absolutely decline over time because money supply is fixed. In fact, history proves this point -- look at the USA data in pre-federal reserve era.
- endersshadow 15y ago
  That's not exactly an apples-to-apples comparison. But, to answer your question, "Does this cause people to hold onto their money instead of buying computers, tvs, and iphones?" The answer is yes (with qualifiers). Many late adopters are late adopters because they are holding out for a cheaper price for those goods. From personal experience, I've done this very thing (waiting for prices to come down on a TV before I bought it). I put that money into something with a higher return for the time being. But, the reason that's not exactly a fair comparison is that the currency itself (in this case, USD) was not deflating. Ergo, my "hoarding" was actually putting it into something with a better return for the time being, which was available because the currency was stable. If the best return I could get was holding on to my money (instead of putting it in some sort of investment vehicle), then that would be deflation.
  - danenania 15y ago
    "The answer is yes (with qualifiers). Many late adopters are late adopters because they are holding out for a cheaper price for those goods. From personal experience, I've done this very thing (waiting for prices to come down on a TV before I bought it). I put that money into something with a higher return for the time being." But you could have kept waiting and prices would have kept falling. Eventually you spent your money anyway. This seems to indicate that it wasn't the situation of falling prices that prevented you from buying a TV, since that never changed, but some external factor. "But, the reason that's not exactly a fair comparison is that the currency itself (in this case, USD) was not deflating. Ergo, my "hoarding" was actually putting it into something with a better return for the time being, which was available because the currency was stable. If the best return I could get was holding on to my money (instead of putting it in some sort of investment vehicle), then that would be deflation." The currency was deflating relative to TVs. Holding cash does provide a better return than holding a TV. The value of a TV depreciates much faster than cash. That's the point--why would anyone ever buy a TV when if they just held onto their money for a month they could always get a better TV for the same amount? Since TV prices are always falling, this question reduces to: why would anyone ever buy a TV? The answer is pretty simple--people want TVs. At some point if they want one, they're just going to buy one regardless of what the prices are doing, just like you did. So where's the problem?
- aptwebapps 15y ago
  The idea that this causes 'hoarding' is highly questionable. It can cause hoarding. It's not a given. But it can get into a downward spiral. Does this cause people to hold onto their money instead of buying computers, tvs, and iphones? Of course not. Are you sure? No one would argue that all people would stop buying all consumer electronics, the question is: what would sales be like with stable prices? I don't know how to answer it but I don't know how you can say for sure that sales are not lower than they would be with stable prices. Or rather, I am sure it is possible to construct models to try to understand the relation but I am doubtful that you have done so or have a particular model in mind. Please correct me if I am wrong. The difference with a stable currency supply is savers and fixed income earners wouldn't have their purchasing power sucked away from them year after year--on the contrary, they'd become continually wealthier as the economy grows around them. Generally inflation is priced into interest rates. If you look at countries with much higher inflation they tend to have much higher basic interest rates. Krugman's arguments in the post are pretty brief, he's just stating his opinion and not conducting a thorough examination. Likewise, I don't find your arguments very persuasive but that doesn't mean that you are wrong and he is right.
- Duff 15y ago
  Electronics are not commodities -- you get value out their use. Electronic devices would have to fall in price enough to exceed the value of having and using the device. If you look at people's behavior with a commodity like gasoline, you'll see similar behavior. When prices go up, people will "top off" their cars more frequently. When prices are falling, people tend to go further between fill-ups.
  - danenania 15y ago
    "Electronics are not commodities -- you get value out their use. Electronic devices would have to fall in price enough to exceed the value of having and using the device." So how much would computers have to fall in price every year before people stopped buying them?
    - Duff 15y ago
      The number depends on your cost structure. I can tell you that where I worked, we traditionally planned on keeping most servers in service for 40-72 months. When Nehalem processors came out, the economics shifted, and there was a financial case for retiring devices at 24-36 months and consolidating them into virtual machine clusters. Without that consolidation opportunity, we probably would have extended the lifecycle of our server longer to preserve cash in 2009.
  - jackpirate 15y ago
    People definitely do that with electronics too. As prices have dropped, people are upgrading their computers or buying their first more often. I'd wager the rate of consumption has been directly proportional to the rate of price drop for electronics. Of course, we are unlikely to see computer prices rise anytime soon.
- ww 15y ago
  "People still need what they need and want what they want and are going to buy those things regardless of what relative prices will be in the future." What about "investors" instead of "consumers"? Right now an investor simply makes a choice between losing money by sitting on it (through increased supply ... printing money leads to inflation) or investing. If the money supply were fixed would that not make it more attractive to investors to sit on assets?
  - danenania 15y ago
    Prices decrease under a stable money supply because the economy grows. Goods and services are being produced more efficiently and are therefore more plentiful relative to the same quantity of money and therefore cheaper. Growth in the value of money will simply reflect baseline growth in the value of the economy as a whole. There are still much higher returns available to investors who are willing to take greater risks--no external motivation is necessary. Monetary expansion doesn't alter this basic relationship, it just ruins the currency as a reliable store of value.
- sprovoost 15y ago
  I've never seen convincing evidence that inflation is a good thing (to be honest I haven't spent my life searching for it). It is however pretty easy to see why inflation is good for people in power, in particular governments; it's a hidden tax. And yes it does encourage people to spend, in fact it encourages people to borrow and then spend. Even borrow so much that it crashes the system. So as far as I'm concerned the fixed money supply is about the only good property of Bitcoin. Other than that it's a ponzi scheme and it's a lot more cumbersome than electronically traded gold.
  - lyudmil 15y ago
    One could make a case that moderate inflation isn't a bad thing. Inflation generally happens when the economy is producing close to its capacity (think of a factory working overtime to meet a lot of demand - at some point they make the same amount of money in fewer hours simply by raising their prices). This means that you'd also expect pretty decent employment, etc. You certainly don't want runaway inflation, but a healthy economy would have some.
  - tptacek 15y ago
    A slow, predictable devaluation in the currency encourages individuals not to store large amounts of value in the currency. It doesn't simply encourage people to spend; it also encourages people to allow better-positioned entities to allocate capital, which is why new business ventures don't need to go door-to-door to fund new factories. Individuals are crappy at allocating capital, because they have small amounts of it and are too busy mastering Dentistry or Architecture to build expertise in risk management. Unsustainable debt is an orthogonal issue. We've encouraged unsustainable debt not by allowing our currency to inflate, but by failing to regulate lenders and by offering them incentives to ignore risk management. Again, though: this "is a little inflation good, and is a little deflation bad?" thing is a fake controversy that dignifies Bitcoin. Bitcoin isn't a currency; it's a gambling game powered by a distributed transaction system that may or may not on any day function well enough for two parties to exchange dollars for off-label hosting services without either one losing their shirt.
wgx 15y ago
tl;dr: The soaring value of bitcoin forces those holding currency to hoard it. The Bitcoin economy has, in effect, experienced massive deflation.
- endersshadow 15y ago
  He also touches on a great point: What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. This is where I think Bitcoin fails as a currency. While some people invest in currencies, the point of currencies is to allow goods and services to flow through the economy. Currency is and should not be primarily an investment vehicle.
  - hexis 15y ago
    Currencies are goods like any other goods and the people who own them have divergent purposes. When Krugman writes "we want [a monetary system] to facilitate transactions and make the economy as a whole rich", he's assuming a lot. Obviously, some of the people who own bitcoins right now are not interested in facilitating financial transactions to the detriment of their net worth. So, for people who want that facilitation, bitcoin isn't getting the job done, but the people who are using bitcoin as an investment are getting just what they want. Those two conditions could flip fairly quickly down the line, but that's how these things go. But for Krugman to just assume that only one of these is an acceptable condition just begs the question.
    - johnny22 15y ago
      I prefer currency to asset. I wouldn't hold bitcoins to spend.
    - endersshadow 15y ago
      Currencies are not goods and should not be thought of as goods. They are mediums of exchange[1]. They may be backed by goods (such as gold), but currency itself should have no inherent value (otherwise, it's a terrible medium of exchange). What you're talking about are securities[2]. There is a distinct difference. Bitcoins are ostensibly a security masquerading as a currency. [1] http://en.wikipedia.org/wiki/Currency http://en.wikipedia.org/wiki/Currency [2] http://en.wikipedia.org/wiki/Security_(finance) http://en.wikipedia.org/wiki/Security_(finance)
userulluipeste 15y ago
Had read it. It's not serious at all. The arguments there are out of touch with reality. For example: "What that means is that if you measure prices in Bitcoins, they have plunged; the Bitcoin economy has in effect experienced massive deflation." For this argument alone, one may look at https://www.bitcoinmarket.com https://www.bitcoinmarket.com and see exactly what kind of person Krugman is.
- dasil003 15y ago
  Uh, where are the BTC prices on that site? If you want to come across as anything other than a froth-mouthed crackpot hurling ad-hominems at a respected economist, you need to offer up some actual data. Granted, Krugman didn't either, but he's got a reputation to fall back on, you've got nothing.
  - gwright 15y ago
    I'm not sure Krugman's reputation is as reputable as you suggest. Some might even call him a "froth-mouthed crackpot hurling ad-hominems". Not me of course, I wouldn't want to hurl ad-hominems in place of a real argument. Better to appeal to authority.
    - St-Clock 15y ago
      > I'm not sure Krugman's reputation is as reputable as you suggest I know that winning the Nobel Prize is not the end of the world and that there are often political motives behind these prizes (Obama anyone?), but between believing a guy who won a Nobel Prize in economics vs. believing a random guy on HN with no real argument, the choice is easy (to me at least). To the best of my knowledge, Krugman rarely (if ever) hurls ad-hominems: he always tries to explain why he strongly disagrees with conservatives, tea party, or Obama. The adjective he uses for them almost always fit his explanations.
      - IanDrake 15y ago
        In economics people win for their work, not their winning personality. Krugman won for "his analysis of trade patterns and location of economic activity" - http://www.nobelprize.org/nobel_prizes/economics/laureates/2008/ http://www.nobelprize.org/nobel_prizes/economics/laureates/2... Hayek also won the Nobel Prize and would undoubtedly disagree with almost everything Krugman believes. He won for "pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena" - http://www.nobelprize.org/nobel_prizes/economics/laureates/1974/ http://www.nobelprize.org/nobel_prizes/economics/laureates/1... I don't believe the gold standard is a good for our mandated monetary system, but I also don't believe forced currency monopolies and gold confiscation should exist in a "free" country - http://en.wikipedia.org/wiki/Executive_Order_6102 http://en.wikipedia.org/wiki/Executive_Order_6102
pnathan 15y ago
One thing that might be interesting to consider is wealth distribution over population growth. Thought experiment: Say our money supply is fixed (10 million dollars), and there are 1 million people in our economy. Everyone averages out to holding about 10 dollars. Everyone goes on a massive baby-making spree, and in 10 years, there are still 10 million dollars, but 2 million people in the economy. Average wealth is $5 per person. Either prices dropped (unlikely, demand has doubled in this ideal world), or everyone is averaging to be poorer. To my mind that thought experiment demonstrates the need for the supply of money to keep pace with population growth. I might be wrong, I am not an economics student, and there might be angles I've missed.
- daedhel 15y ago
  But the absolute variation of the value the 5$ represent is based on systems that can't exist with a limited total amount of money. What will hapen is that if the population doubles, then the 5$ will also double. Laws of demand and supply.
- jotto 15y ago
  in your thought experiment, the buying power of a unit of currency would go up so the prices would go down. a big reason for a non-fixed money supply is so the government has the ability to change the money supply to maximize employment
- harryf 15y ago
  But money isn't static. It circulates. Liquidity etc. It's more like electric current - if your system allows it to circulate fast, it will enable more buying...
- WillyF 15y ago
  I'd argue that the supply of money should keep pace with production, not population growth. Though you'd expect those two to be strongly correlated.
martythemaniak 15y ago
What I find far more interesting about BTC is its decentralized and (mostly) anonymous nature, rather than arguments about fixed money supply.
- wanorris 15y ago
  This is certainly key to the appeal to the current enthusiasts, but (to pick an obvious example) suitcases full of dollar bills or Krugerrands are also decentralized and anonymous, compared with centralized and usually non-anonymous methods such as credit card transactions or bank transfers. Most people don't find these other decentralized and mostly anonymous currencies to be especially interesting unless they are engaged in illicit activities or traveling to places where the banking system cannot be relied upon. I expect the actual appeal is that the value is these attributes in common with the fact that it is virtualized -- i.e. the value resides in data rather than in a physical object such as dollar bills or gold. With data, you don't have something tangible that you have to smuggle across a border in person, you just store it safe somewhere and retrieve it over a secure computer connection wherever you need it. Or alternatively, you could use bitcoins to purchase something else virtual anonymously. (If you use it to purchase something physical, than there is an audit trail attached to the transference of the physical goods that defeats some if not all of the value of the anonymity.) Perhaps this makes bitcoins especially useful for some scenarios, but overall I haven't yet seen any use cases that lead me to believe that this is a breakthrough of any particular kind.
- ansy 15y ago
  BitCoin is no more anonymous than your IP address. As soon as your BitCoin address can be tied to your identity, such as by trading through a major exchange, your transactions might as well have your name on them. Like IP, anonymity can be emulated through routing mechanisms. Basically laundering your packets and coins. Tor, the state of the art in this kind of anonymity, is not without faults. And there isn't really an equivalent to Tor for BitCoins that I know about. Related, I know BitCoin can be run over Tor, but this is not the same as a Tor for BitCoin. This merely protects against traffic analysis to tie your BitCoin account to your IP address. Tor for BitCoin might look more like a network of wallets that simulated a perfectly noisy economy. If A wanted to pay B, A's coins would go everywhere to B, C, D, E, F and so on. Over time coins would pass in and out of people's wallets until at some point the right number would stick to B's wallet equal to the number A sent. Hopefully, the ones that stick to B's wallet will be a mix of ones that A actually sent and other coins being anonymized by the network. There are obvious flaws in this design. But hopefully it helps illustrate why BitCoin isn't anonymous and the difficulty of making it anonymous.
kokey 15y ago
I don't get the problem with hoarding. Most people don't hoard gold, property or tech stocks during times when the price looks like it's increasing constantly. There is a point where it makes sense to sell some after it has made some gains. In reality, unless buyers make a massive mistake in the valuation of BitCoins, the current gains in BitCoins value should taper off at some point.
- Duff 15y ago
  What's the basis for that statement? How many pre-1965 US Quarters and Dimes do you run into during daily commerce? Answer: Very few, since they are hoarded by collectors for their silver value.
- corin_ 15y ago
  People don't hoard stocks or property when the value of what they own is constantly increasing?
snorkel 15y ago
"What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin." Spot friggin' on, Mr. Krugman. Bitcoin's supply limiting design has added a psychological dimension that encourages collecting. Perhaps when Bitcoin reaches supply maturity the value will stabilize but for now its value just too unstable to be used as a currency.
- deleted 15y ago
  [deleted]
- alenlpeacock 15y ago
  When Bitcoin reaches supply maturity, there will be no more bitcoins to mine, making those that are currently held even more valuable, making those who hold them even more inclined to keep hoarding them, no?
  - sliverstorm 15y ago
    Not to mention, as bitcoins are inevitably lost here and there (a deleted wallet.dat here, a hoarder there, a transaction wired to a mistyped address that doesn't exist) the supply of bitcoins will actually shrink.
    - zach 15y ago
      Wow, that's an excellent point. That doesn't happen easily with gold. People retrieve gold from ships sunk hundreds of years ago. Actually, is there an efficient way that physical gold or other precious metals can be intentionally destroyed or put beyond use? Has anyone tried to use this technique to corner a market? What would happen if Hugo Chávez actually got his hands on 211 tons of actual gold and announced he has verifiably shot half of it into the sun? Presumably, you could make money on such an event through the options market. So it's a great point that it's comparatively easy to do such a thing with Bitcoin. It's even entirely possible to do it by mistake (i.e. a programming error). Physicality is a fantastic hedge against loss.
shivak 15y ago
His description of Bitcoin is technically incorrect. As described in the original Bitcoin paper, workers are not necessarily "miners" and may be funded by transaction fees. Bitcoin isn't susceptible to hoarding because, unlike gold, it has no intrinsic value. An alternative explanation for the rise in value: the Bitcoin ecosystem is under heavy development. The value of Bitcoins is possibly soaring in anticipation of this infrastructure i.e. its utility as a currency. I wouldn't rely on Krugman's blog for serious analysis.
- Robin_Message 15y ago
  The monetary value of gold is in excess of its intrinsic value — exactly like Bitcoin. It's only a question of degree. And "shiny things" as a motivation for mining explains gold and Bitcoins.
  - shivak 15y ago
    Yes, but the reason why is not exactly the same. That point is lost on Krugman, who equates gold and Bitcoin on that basis.
monochromatic 15y ago
Krugman is focusing on the least important aspect of bitcoins, supply.
bradharper 15y ago
He couldn't care less about Bitcoin. What he does care about though is the chatter amongst non-Keynesian economists about the need for an objective currency, i.e., a gold standard - a force that would utterly devastate his precious welfare state. Accordingly, an opportunity to ridicule Bitcoin is a perfect segue to take sneaky, conniving, collectivist jabs at gold.
alenlpeacock 15y ago
There's another argument against fixed currencies like bitcoin that should resonate with the hackernews crowd, and it's this: A currency with inflationary pressure incentivizes investments into new enterprises. A currency with deflationary pressure, instead, discourages investment outside of banking. Here's why. With a slight inflation, money slowly loses value. Even if you put it in the bank and earn interest, it loses value over time. So the rational thing to do, if you have a lot of excess money, is to find places to put it where it outperforms inflation, where it has a chance of not evaporating over time. With deflation, money is instead guaranteed to be more valuable tomorrow than it is today. Sure, you could still try to invest some of it to try to outperform the gain you get from deflation, but it would be completely rational to just stick all of it in the bank, and live the good life forever, as your money automatically becomes more money (because its buying power increases), every day. Why is there so much money managed by VC and Angel funds? While not the only reason, I'd claim it has a lot to do with inflation. And, of course, I'm making things more b&w than they really are. Both massive inflation and massive deflation are really bad things. Currency that stays largely stable, or that deflates/inflates slowly over time, seems to work out fine.
- BarkMore 15y ago
  A counter-argument is that people invest in new enterprises even when the banking real interest rate is positive.
  - sneak 15y ago
    To paraphrase jwz (like that's never been done before), "When the rebuttal to your argument is 'The Industrial Revolution', generally that means that you've lost the argument." :)
    - BarkMore 15y ago
      My snark decoder is broken. Please explain the parent comment.
  - alenlpeacock 15y ago
arvinds 15y ago
He should have added a link to this alltime classic - a good macroeconomics, deflation 101 tutorial: http://www.slate.com/id/1937/ http://www.slate.com/id/1937/
- jtolle 15y ago
  I was going to mention that article too. It's a great explanation. Money and monetary systems are human creations, not laws of nature.
  - arvinds 15y ago
    Yeah - it always amuses me to read these long detailed arguments on these threads from people who seem to not have understood basic macroeconomics.
    - scrollbar 15y ago
      Econ isn't a science. There are schools of economic thought that completely contradict "basic economics" taught in schools today, and you can't possibly prove that one or the other method is correct. Hence, Economics: the dismal science.
      - arvinds 15y ago
        I have to disagree here. Yes there are schools of thought, but questions like "how does a market work?", "what causes deflation?" are pretty well studied and agreed upon. This is one of those very basic settled questions with a very clear accessible explanation.
bdr 15y ago
1. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. Bitcoin is facilitating transactions. The Bitcoin economy is growing, slowly. There are a lot of people, including funded startups, working on making it useful in more cases. It's far, far too early to say that Bitcoin isn't facilitating enough transactions. 2. Bitcoin hoarding is not due to the fixed total supply, but due to the expectation that the Bitcoin economy will grow. If there was built-in inflation at 3% and the economy was growing at 20%, hoarding would still happen. 3. No matter how much hoarding is happening, there will be some exchange rate from Bitcoins to dollars. The existence of a traded exchange rate is proof that some people think Bitcoins are not undervalued. These people will be willing to spend their Bitcoins. 4. The claim that Bitcoin is worthless because of guaranteed deflation is self-contradicting. 5. Volatility is bad for a currency, but this is an addressable problem. Bitcoin-priced marketplace The Silk Road offers its sellers currency-hedged escrow. 6. Even if it fails as a currency, Bitcoin is interesting and novel as a technological invention. For the essence, see the last paragraph of Hal Finney's insightful email from 2008 (and the surrounding thread): http://www.mail-archive.com/cryptography@metzdowd.com/msg09996.html http://www.mail-archive.com/cryptography@metzdowd.com/msg099...
- shazow 15y ago
  Agreed. Couple more points that may not be obvious: 7. Even if Bitcoin is not a useful currency today, not only is it a novel tech invention but it is also a useful medium of exchange (akin to credit cards). You can buy coins temporarily just so you can buy something from Amazon.com and have it shipped to Africa (as one Bitcoin startup does international shipping for many US-only retailers). 8. Bitcoin could be a useful currency someday, but it might take 200 years. What most people don't realize is that all the properties of Bitcoin (such as the maximum supply or its present growth) can be adjusted with a new genesis block at any point (effectively forking the currency). If the majority of the network clients agrees with this fork, Bitcoin continues under the same name. Side note: I remember hearing that Gavin was going to start a non-profit to help guide (read: sort-of regulate) the official Bitcoin fork. Not sure if this happened, I've been out of the loop. 9. There is no way Bitcoin as it is today could reach any kind of significant scale, purely from the perspective of the protocol. Bitcoin was built with the intention of evolving further down the line. This is part of what makes the technology really interesting.
deleted 15y ago
[deleted]
Astrohacker 15y ago
Krugman prefers the dollar, which has a supply that is constantly inflated by the central bank. But if the dollar is so good, why do people have to be forced to use it? (You have to pay your taxes in dollars, and you have to accept payments for debt in the form of dollars.) And how come bitcoin adoption has radically grown even though no one is forced to use it?
- scott_s 15y ago
  The dollar is so good because people are forced to use it. It's the currency of the land, which is enforced by the government. Hence, people use it. That bitcoin adoption has grown significantly does not necessarily mean it will remain as a viable currency in the future.
kbob 15y ago
The next hacker currency should keep Bitcoin's strengths, i.e., decentralization and anonymity, and lose its weakness, the fixed supply. Is anyone working (in public) on the problem of designing a currency that adjusts its supply algorithmically based on appropriate metrics? Sort of a Greenspan-o-matic? I've thought about this for all of 90 seconds, and it seems like the metric might be some combination of transaction volume, a price index, number of users, and the current money supply.
- sneak 15y ago
  Most people who use bitcoin don't believe that the fixed supply is a weakness. A lot of us are vastly frustrated at the previous lack of an easy-to-tranact-in pseudonymous INflation-proof currency. The others that were in common use (eGold, Liberty Reserve, and Pecunix) have all become relatively unsafe recently due to their centralized natures. That said, there are bitcoin-network forks out there that remove the maximum cap on new coins, if I recall correctly. You are welcome to go and use one of those if you choose.
  - kbob 15y ago
    How would I find one of the forks?
    - sneak 15y ago
      https://bitcointalk.org/index.php?topic=7500.0 https://bitcointalk.org/index.php?topic=7500.0
nazgulnarsil 15y ago
"So how’s it going? The dollar value of that gold has fluctuated sharply, but overall it has soared. So buying into gold has, at least so far, been a good investment. But does that make the experiment a success? Um, no. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in gold. Bear in mind that dollar prices have been relatively stable over the past few years – yes, some deflation in 2008-2009, then some inflation as commodity prices rebounded, but overall consumer prices are only slightly higher than they were three years ago. What that means is that if you measure prices in gold, they have plunged; the gold economy has in effect experienced massive deflation. And because of that, there has been an incentive to hoard the gold rather than spending it." I'm willing to stomach lots of negatives to take away the government's power to inflate to pay for war. Historically inflation has always been for war.
- halad 15y ago
  Exactly! You can substitute Bitcoins in that text for gold, Swiss Franc or even Brazilian Real. What a ridiculous pseudo-criticism by Krugman. Perhaps Econ 101 is escaping me, but the idea of deflation being dangerous is massively overstated. First of all falling prices mean a higher standard of living for everyone in the economy. Second, nobody is going to indefinitely put off purchases due to a decreasing price level. Time is a factor in demand, and you require food today, fuel tomorrow and a new laptop before 2020 would be handy. Even if the price of the 2020 Macbook Pro/Air equivalent has fallen to 100 USD.
sneak 15y ago
He seems to overlook that bitcoins have been worth steadily less and less the last few months, losing some 50% of their value in 60-90 days. Also: The bitcoin transaction volume has been steadily increasing since its introduction. This article would carry a lot more weight if it had accurate facts.
mathmate 15y ago
The problem is about finite amount of BitCoins. What happen if you introduce a new coin, SubBitCoin, such that a BitCoin is ten SubBitCoins (the quantity of coins is increased ten fold) and you must pay something for the change. Increasing the cost of changing the coin and introducing in the future a different ratio: A BitCoin is only 9 SubBitCoins eliminate the problem.
jerrya 15y ago
Hmm, I am curious how this link was accepted, when I have the exact same link in my submission from 16 hours ago. I thought the submission mechanism elimated duplicates. http://news.ycombinator.com/item?id=2968548 http://news.ycombinator.com/item?id=2968548
nazgulnarsil 15y ago
Pro-inflationists a simple question for you. Inflation creates an incentive to invest. Fine. But why should the level of inflation and thus the risk profile for investors be determined by a single authority? Why not multiple competing currencies whose rates float against each other? Let the market figure out an optimal rate of inflation. The wild guesses and uncertainty of the Fed resetting the rate is surely inferior.
- pessimizer 15y ago
  The world already works like that. You can buy money from countries other than the US, you know.
  - nazgulnarsil 15y ago
    Legal tender laws should be abolished is the thrust.
    - khafra 15y ago
      What's the advantage you get from even more currencies that you don't get from today's basket of international currencies? The only one I see is that, if you build a big enough reputation to issue your own currency, you get to collect seignorage. In exchange for that, you now have to carry n different currencies to make sure you can buy gas at a Shell station and an Arco; small retailers go out of business because they can't afford the overhead of combating so many varieties of counterfeiting--which, while still technically illegal, is much harder to prosecute--medium sized retailers go out of business because of the accounting overhead of setting appropriate prices when several currencies could be undergoing hyper(in|de)flation at any time. I'm not sure that's a good trade.
tequilarection 15y ago
"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." Paul Krugman, 2002. (http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip...)
r4vik 15y ago
He's totally overlooked one aspect of bitcoin, it doesn't matter if it's deflationary if all I'm using it for is selling drugs and converting bitcoins into cash straight away or using it as an intermediary step in sending large amounts currency around the world anonymously. Who cares if it doesn't work great as a currency (if you believe deflation is a bad thing), it still has a lot of utility.
joeycfan 15y ago
All the bitcoin naysayers are wanking at the orgy. Bitcoin is the proof of concept that an Internet currency can be done.
iradik 15y ago
Theory of money and credit by ludwig von mises: http://mises.org/books/Theory_Money_Credit/Contents.aspx http://mises.org/books/Theory_Money_Credit/Contents.aspx (free HTML or pdf)

254 points by mef 15y ago

Tichy 15y ago

It seems a bit premature to judge that way. For example now that the exchange rate is slowly falling, more people might be considering to part ways with their BTC. So things might eventually settle down. It is still very early days. Also, I suspect few people realize that they should not hold on to their normal money because governments will continually seek to devalue it (that seems to be the takeaway from the article, that that is the normal procedure for "normal" currencies). Their spending habits are probably more governed by their prospects to earn money in the future, or their savings, rather than a look at the value of their money.

Tichy 15y ago
Why the downvotes? Because it is about BitCoin.

danenania 15y ago

He's just begging the question. That a fixed currency supply creates deflation is not a new insight. The idea that this causes 'hoarding' is highly questionable. Prices in consumer electronics fall significantly every year. Does this cause people to hold onto their money instead of buying computers, tvs, and iphones? Of course not. Why would other types of goods be any different? People still need what they need and want what they want and are going to buy those things regardless of what relative prices will be in the future. The difference with a stable currency supply is savers and fixed income earners wouldn't have their purchasing power sucked away from them year after year--on the contrary, they'd become continually wealthier as the economy grows around them.

sirclueless 15y ago
Fair enough, but I think most economists would agree that we shouldn't be trying to make savers and fixed-income earners wealthy in the first place. We should make it economically advantageous for the people with money saved up to invest it into the economy.
- danenania 15y ago
  You don't need to take away people's purchasing power to encourage them to invest. If an economy is growing, there will always be higher returns in investment than in holding cash. Monetary expansion encourages unsustainable consumption and debt accumulation. Why is this preferable to saving? When people save, they don't do it with the intention of one day dumping the money in a lake. They are still going to use the money, just on a longer time scale for a better-considered purpose.
  - sirclueless 15y ago
    I don't want to take away people's purchasing power now, I want to sap away their purchasing power over time. If I do that I encourage them to take their money and invest it into a factory producing widgets instead of squirreling it away into a bank. Inflating the value of money gives an unfair advantage to people who use their money to improve the world by producing things. Being in debt sounds like an OK trade to me so long as it's not pathological.
    - Astrohacker 15y ago
      But inflating the money supply doesn't take away everyone's purchasing power. It redistributes it to the people who get the new money.
- GoGlobal 15y ago
  yep, butt it still depends on your standpoint - where u stand in the economic ladder matters a lot. If you are on top, you wouldn't want to make extra effort to stay there!
- jeffdavis 15y ago
  I've always been suspicious of this "spending is better than saving" mantra. I'm sure it's better in some situations, but I don't think it's better in general. The point of an economy is not to spend money, it's to create more wealth for more people by allocating resources efficiently. If someone "hoards" money, and prices are stable, that person is effectively staying out of the resource-allocation business. It doesn't mean that there are fewer resources to allocate, it just means that other people are doing the allocating (even though those people collectively have less money because of "hoarders", prices are lower because of them, too). You can make an argument that everyone needs to take part in efficiently allocating resources, and that makes a lot of sense. But to say that buying a bunch of consumer junk is a good way to do that is ridiculous (and bad for the environment). A middle ground is to buy the things you need, a few things you want, and make conservative investments. That allows most individuals to mostly stay out of the resource allocation business, but still enjoy the benefits.
FrojoS 15y ago
I don't agree. The falling prices are holing me and many other frugale people back from buying electronics frequently. The reason people buy new electronics so often, is because there is so much improvement and innovation.
- danenania 15y ago
  So you'd buy more electronics if the prices went up every year?
  - endersshadow 15y ago
    In economic speak, he's saying he'd be less willing to defer the utility of purchasing electronics if they increased in price every year. Currently, you can invest your money elsewhere at the opportunity cost of foregoing the utility of whatever gadget it is that you want to buy until the utility of said gadget is worth to you what its price is.
cperciva 15y ago
There's a difference between some goods -- electronics -- getting cheaper every year and all goods getting cheaper every year. Deflation isn't necessarily a problem; but runaway deflation is, and the structure of bitcoin makes deflation a self-perpetuating cycle.
- danenania 15y ago
  "There's a difference between some goods -- electronics -- getting cheaper every year and all goods getting cheaper every year." Which is what exactly? People buy electronics even though they get cheaper every year but they wouldn't buy Xs if they got cheaper every year? Can you give me an example of some Xs?
  - sethg 15y ago
    If houses got cheaper every year, very few people would want to buy them, and people stuck with mortgages would have a powerful incentive to walk away from them. If cars got cheaper every year, then people would put off buying new cars for longer. If gold got cheaper every year, then a lot of gold coins would be dumped on the market. If everything got cheaper every year, then people with money in the bank (or under the mattress) have an incentive to reduce how much money they spend, in general. This would lead to factories reducing their production and laying off employees, giving the remaining employees an even more powerful incentive to hang onto their savings.
    - jonkho 15y ago
      The flaw in your argument is that currency is subjected to demand pressures as well. How so? When demand for housing, food, electronics is high, then it automatically implies demand for currency is low. That is another way of saying people are willing to give up currency for real goods; which is another way of saying people are putting less value on the currency over physical goods; which means the barter power of the currency is decreasing; which means lower buying power with respect to the currency. That is key point. This means that there is rise in prices (without monetary intervention) when there is preference to own goods. And we all want goods and services in the end game. But this rise in prices do not spiral out of control because there is demand for currency as well - which really is demand for time preference, that being the choice to consume later on. We also know the demand for time preference is not unlimited because ultimately have to consume to make good of the money. Therefore, with greater population, comes with greater demand for money, but also comes with greater demands for owning/consuming goods. So that is why price levels will not absolutely decline over time because money supply is fixed. In fact, history proves this point -- look at the USA data in pre-federal reserve era.
endersshadow 15y ago
That's not exactly an apples-to-apples comparison. But, to answer your question, "Does this cause people to hold onto their money instead of buying computers, tvs, and iphones?" The answer is yes (with qualifiers). Many late adopters are late adopters because they are holding out for a cheaper price for those goods. From personal experience, I've done this very thing (waiting for prices to come down on a TV before I bought it). I put that money into something with a higher return for the time being. But, the reason that's not exactly a fair comparison is that the currency itself (in this case, USD) was not deflating. Ergo, my "hoarding" was actually putting it into something with a better return for the time being, which was available because the currency was stable. If the best return I could get was holding on to my money (instead of putting it in some sort of investment vehicle), then that would be deflation.
- danenania 15y ago
  "The answer is yes (with qualifiers). Many late adopters are late adopters because they are holding out for a cheaper price for those goods. From personal experience, I've done this very thing (waiting for prices to come down on a TV before I bought it). I put that money into something with a higher return for the time being." But you could have kept waiting and prices would have kept falling. Eventually you spent your money anyway. This seems to indicate that it wasn't the situation of falling prices that prevented you from buying a TV, since that never changed, but some external factor. "But, the reason that's not exactly a fair comparison is that the currency itself (in this case, USD) was not deflating. Ergo, my "hoarding" was actually putting it into something with a better return for the time being, which was available because the currency was stable. If the best return I could get was holding on to my money (instead of putting it in some sort of investment vehicle), then that would be deflation." The currency was deflating relative to TVs. Holding cash does provide a better return than holding a TV. The value of a TV depreciates much faster than cash. That's the point--why would anyone ever buy a TV when if they just held onto their money for a month they could always get a better TV for the same amount? Since TV prices are always falling, this question reduces to: why would anyone ever buy a TV? The answer is pretty simple--people want TVs. At some point if they want one, they're just going to buy one regardless of what the prices are doing, just like you did. So where's the problem?
aptwebapps 15y ago
The idea that this causes 'hoarding' is highly questionable. It can cause hoarding. It's not a given. But it can get into a downward spiral. Does this cause people to hold onto their money instead of buying computers, tvs, and iphones? Of course not. Are you sure? No one would argue that all people would stop buying all consumer electronics, the question is: what would sales be like with stable prices? I don't know how to answer it but I don't know how you can say for sure that sales are not lower than they would be with stable prices. Or rather, I am sure it is possible to construct models to try to understand the relation but I am doubtful that you have done so or have a particular model in mind. Please correct me if I am wrong. The difference with a stable currency supply is savers and fixed income earners wouldn't have their purchasing power sucked away from them year after year--on the contrary, they'd become continually wealthier as the economy grows around them. Generally inflation is priced into interest rates. If you look at countries with much higher inflation they tend to have much higher basic interest rates. Krugman's arguments in the post are pretty brief, he's just stating his opinion and not conducting a thorough examination. Likewise, I don't find your arguments very persuasive but that doesn't mean that you are wrong and he is right.
Duff 15y ago
Electronics are not commodities -- you get value out their use. Electronic devices would have to fall in price enough to exceed the value of having and using the device. If you look at people's behavior with a commodity like gasoline, you'll see similar behavior. When prices go up, people will "top off" their cars more frequently. When prices are falling, people tend to go further between fill-ups.
- danenania 15y ago
  "Electronics are not commodities -- you get value out their use. Electronic devices would have to fall in price enough to exceed the value of having and using the device." So how much would computers have to fall in price every year before people stopped buying them?
  - Duff 15y ago
    The number depends on your cost structure. I can tell you that where I worked, we traditionally planned on keeping most servers in service for 40-72 months. When Nehalem processors came out, the economics shifted, and there was a financial case for retiring devices at 24-36 months and consolidating them into virtual machine clusters. Without that consolidation opportunity, we probably would have extended the lifecycle of our server longer to preserve cash in 2009.
- jackpirate 15y ago
  People definitely do that with electronics too. As prices have dropped, people are upgrading their computers or buying their first more often. I'd wager the rate of consumption has been directly proportional to the rate of price drop for electronics. Of course, we are unlikely to see computer prices rise anytime soon.
ww 15y ago
"People still need what they need and want what they want and are going to buy those things regardless of what relative prices will be in the future." What about "investors" instead of "consumers"? Right now an investor simply makes a choice between losing money by sitting on it (through increased supply ... printing money leads to inflation) or investing. If the money supply were fixed would that not make it more attractive to investors to sit on assets?
- danenania 15y ago
  Prices decrease under a stable money supply because the economy grows. Goods and services are being produced more efficiently and are therefore more plentiful relative to the same quantity of money and therefore cheaper. Growth in the value of money will simply reflect baseline growth in the value of the economy as a whole. There are still much higher returns available to investors who are willing to take greater risks--no external motivation is necessary. Monetary expansion doesn't alter this basic relationship, it just ruins the currency as a reliable store of value.
sprovoost 15y ago
I've never seen convincing evidence that inflation is a good thing (to be honest I haven't spent my life searching for it). It is however pretty easy to see why inflation is good for people in power, in particular governments; it's a hidden tax. And yes it does encourage people to spend, in fact it encourages people to borrow and then spend. Even borrow so much that it crashes the system. So as far as I'm concerned the fixed money supply is about the only good property of Bitcoin. Other than that it's a ponzi scheme and it's a lot more cumbersome than electronically traded gold.
- lyudmil 15y ago
  One could make a case that moderate inflation isn't a bad thing. Inflation generally happens when the economy is producing close to its capacity (think of a factory working overtime to meet a lot of demand - at some point they make the same amount of money in fewer hours simply by raising their prices). This means that you'd also expect pretty decent employment, etc. You certainly don't want runaway inflation, but a healthy economy would have some.
- tptacek 15y ago
  A slow, predictable devaluation in the currency encourages individuals not to store large amounts of value in the currency. It doesn't simply encourage people to spend; it also encourages people to allow better-positioned entities to allocate capital, which is why new business ventures don't need to go door-to-door to fund new factories. Individuals are crappy at allocating capital, because they have small amounts of it and are too busy mastering Dentistry or Architecture to build expertise in risk management. Unsustainable debt is an orthogonal issue. We've encouraged unsustainable debt not by allowing our currency to inflate, but by failing to regulate lenders and by offering them incentives to ignore risk management. Again, though: this "is a little inflation good, and is a little deflation bad?" thing is a fake controversy that dignifies Bitcoin. Bitcoin isn't a currency; it's a gambling game powered by a distributed transaction system that may or may not on any day function well enough for two parties to exchange dollars for off-label hosting services without either one losing their shirt.

wgx 15y ago

tl;dr: The soaring value of bitcoin forces those holding currency to hoard it. The Bitcoin economy has, in effect, experienced massive deflation.

endersshadow 15y ago
He also touches on a great point: What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. This is where I think Bitcoin fails as a currency. While some people invest in currencies, the point of currencies is to allow goods and services to flow through the economy. Currency is and should not be primarily an investment vehicle.
- hexis 15y ago
  Currencies are goods like any other goods and the people who own them have divergent purposes. When Krugman writes "we want [a monetary system] to facilitate transactions and make the economy as a whole rich", he's assuming a lot. Obviously, some of the people who own bitcoins right now are not interested in facilitating financial transactions to the detriment of their net worth. So, for people who want that facilitation, bitcoin isn't getting the job done, but the people who are using bitcoin as an investment are getting just what they want. Those two conditions could flip fairly quickly down the line, but that's how these things go. But for Krugman to just assume that only one of these is an acceptable condition just begs the question.
  - johnny22 15y ago
    I prefer currency to asset. I wouldn't hold bitcoins to spend.
  - endersshadow 15y ago
    Currencies are not goods and should not be thought of as goods. They are mediums of exchange[1]. They may be backed by goods (such as gold), but currency itself should have no inherent value (otherwise, it's a terrible medium of exchange). What you're talking about are securities[2]. There is a distinct difference. Bitcoins are ostensibly a security masquerading as a currency. [1] http://en.wikipedia.org/wiki/Currency http://en.wikipedia.org/wiki/Currency [2] http://en.wikipedia.org/wiki/Security_(finance) http://en.wikipedia.org/wiki/Security_(finance)

userulluipeste 15y ago

Had read it. It's not serious at all. The arguments there are out of touch with reality. For example: "What that means is that if you measure prices in Bitcoins, they have plunged; the Bitcoin economy has in effect experienced massive deflation." For this argument alone, one may look at https://www.bitcoinmarket.com https://www.bitcoinmarket.com and see exactly what kind of person Krugman is.

dasil003 15y ago
Uh, where are the BTC prices on that site? If you want to come across as anything other than a froth-mouthed crackpot hurling ad-hominems at a respected economist, you need to offer up some actual data. Granted, Krugman didn't either, but he's got a reputation to fall back on, you've got nothing.
- gwright 15y ago
  I'm not sure Krugman's reputation is as reputable as you suggest. Some might even call him a "froth-mouthed crackpot hurling ad-hominems". Not me of course, I wouldn't want to hurl ad-hominems in place of a real argument. Better to appeal to authority.
  - St-Clock 15y ago
    > I'm not sure Krugman's reputation is as reputable as you suggest I know that winning the Nobel Prize is not the end of the world and that there are often political motives behind these prizes (Obama anyone?), but between believing a guy who won a Nobel Prize in economics vs. believing a random guy on HN with no real argument, the choice is easy (to me at least). To the best of my knowledge, Krugman rarely (if ever) hurls ad-hominems: he always tries to explain why he strongly disagrees with conservatives, tea party, or Obama. The adjective he uses for them almost always fit his explanations.
    - IanDrake 15y ago
      In economics people win for their work, not their winning personality. Krugman won for "his analysis of trade patterns and location of economic activity" - http://www.nobelprize.org/nobel_prizes/economics/laureates/2008/ http://www.nobelprize.org/nobel_prizes/economics/laureates/2... Hayek also won the Nobel Prize and would undoubtedly disagree with almost everything Krugman believes. He won for "pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena" - http://www.nobelprize.org/nobel_prizes/economics/laureates/1974/ http://www.nobelprize.org/nobel_prizes/economics/laureates/1... I don't believe the gold standard is a good for our mandated monetary system, but I also don't believe forced currency monopolies and gold confiscation should exist in a "free" country - http://en.wikipedia.org/wiki/Executive_Order_6102 http://en.wikipedia.org/wiki/Executive_Order_6102

pnathan 15y ago

One thing that might be interesting to consider is wealth distribution over population growth. Thought experiment: Say our money supply is fixed (10 million dollars), and there are 1 million people in our economy. Everyone averages out to holding about 10 dollars. Everyone goes on a massive baby-making spree, and in 10 years, there are still 10 million dollars, but 2 million people in the economy. Average wealth is $5 per person. Either prices dropped (unlikely, demand has doubled in this ideal world), or everyone is averaging to be poorer. To my mind that thought experiment demonstrates the need for the supply of money to keep pace with population growth. I might be wrong, I am not an economics student, and there might be angles I've missed.

daedhel 15y ago
But the absolute variation of the value the 5$ represent is based on systems that can't exist with a limited total amount of money. What will hapen is that if the population doubles, then the 5$ will also double. Laws of demand and supply.
jotto 15y ago
in your thought experiment, the buying power of a unit of currency would go up so the prices would go down. a big reason for a non-fixed money supply is so the government has the ability to change the money supply to maximize employment
harryf 15y ago
But money isn't static. It circulates. Liquidity etc. It's more like electric current - if your system allows it to circulate fast, it will enable more buying...
WillyF 15y ago
I'd argue that the supply of money should keep pace with production, not population growth. Though you'd expect those two to be strongly correlated.

martythemaniak 15y ago

What I find far more interesting about BTC is its decentralized and (mostly) anonymous nature, rather than arguments about fixed money supply.

wanorris 15y ago
This is certainly key to the appeal to the current enthusiasts, but (to pick an obvious example) suitcases full of dollar bills or Krugerrands are also decentralized and anonymous, compared with centralized and usually non-anonymous methods such as credit card transactions or bank transfers. Most people don't find these other decentralized and mostly anonymous currencies to be especially interesting unless they are engaged in illicit activities or traveling to places where the banking system cannot be relied upon. I expect the actual appeal is that the value is these attributes in common with the fact that it is virtualized -- i.e. the value resides in data rather than in a physical object such as dollar bills or gold. With data, you don't have something tangible that you have to smuggle across a border in person, you just store it safe somewhere and retrieve it over a secure computer connection wherever you need it. Or alternatively, you could use bitcoins to purchase something else virtual anonymously. (If you use it to purchase something physical, than there is an audit trail attached to the transference of the physical goods that defeats some if not all of the value of the anonymity.) Perhaps this makes bitcoins especially useful for some scenarios, but overall I haven't yet seen any use cases that lead me to believe that this is a breakthrough of any particular kind.
ansy 15y ago
BitCoin is no more anonymous than your IP address. As soon as your BitCoin address can be tied to your identity, such as by trading through a major exchange, your transactions might as well have your name on them. Like IP, anonymity can be emulated through routing mechanisms. Basically laundering your packets and coins. Tor, the state of the art in this kind of anonymity, is not without faults. And there isn't really an equivalent to Tor for BitCoins that I know about. Related, I know BitCoin can be run over Tor, but this is not the same as a Tor for BitCoin. This merely protects against traffic analysis to tie your BitCoin account to your IP address. Tor for BitCoin might look more like a network of wallets that simulated a perfectly noisy economy. If A wanted to pay B, A's coins would go everywhere to B, C, D, E, F and so on. Over time coins would pass in and out of people's wallets until at some point the right number would stick to B's wallet equal to the number A sent. Hopefully, the ones that stick to B's wallet will be a mix of ones that A actually sent and other coins being anonymized by the network. There are obvious flaws in this design. But hopefully it helps illustrate why BitCoin isn't anonymous and the difficulty of making it anonymous.

kokey 15y ago

I don't get the problem with hoarding. Most people don't hoard gold, property or tech stocks during times when the price looks like it's increasing constantly. There is a point where it makes sense to sell some after it has made some gains. In reality, unless buyers make a massive mistake in the valuation of BitCoins, the current gains in BitCoins value should taper off at some point.

Duff 15y ago
What's the basis for that statement? How many pre-1965 US Quarters and Dimes do you run into during daily commerce? Answer: Very few, since they are hoarded by collectors for their silver value.
corin_ 15y ago
People don't hoard stocks or property when the value of what they own is constantly increasing?

snorkel 15y ago

"What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin." Spot friggin' on, Mr. Krugman. Bitcoin's supply limiting design has added a psychological dimension that encourages collecting. Perhaps when Bitcoin reaches supply maturity the value will stabilize but for now its value just too unstable to be used as a currency.

deleted 15y ago
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alenlpeacock 15y ago
When Bitcoin reaches supply maturity, there will be no more bitcoins to mine, making those that are currently held even more valuable, making those who hold them even more inclined to keep hoarding them, no?
- sliverstorm 15y ago
  Not to mention, as bitcoins are inevitably lost here and there (a deleted wallet.dat here, a hoarder there, a transaction wired to a mistyped address that doesn't exist) the supply of bitcoins will actually shrink.
  - zach 15y ago
    Wow, that's an excellent point. That doesn't happen easily with gold. People retrieve gold from ships sunk hundreds of years ago. Actually, is there an efficient way that physical gold or other precious metals can be intentionally destroyed or put beyond use? Has anyone tried to use this technique to corner a market? What would happen if Hugo Chávez actually got his hands on 211 tons of actual gold and announced he has verifiably shot half of it into the sun? Presumably, you could make money on such an event through the options market. So it's a great point that it's comparatively easy to do such a thing with Bitcoin. It's even entirely possible to do it by mistake (i.e. a programming error). Physicality is a fantastic hedge against loss.

shivak 15y ago

His description of Bitcoin is technically incorrect. As described in the original Bitcoin paper, workers are not necessarily "miners" and may be funded by transaction fees. Bitcoin isn't susceptible to hoarding because, unlike gold, it has no intrinsic value. An alternative explanation for the rise in value: the Bitcoin ecosystem is under heavy development. The value of Bitcoins is possibly soaring in anticipation of this infrastructure i.e. its utility as a currency. I wouldn't rely on Krugman's blog for serious analysis.

Robin_Message 15y ago
The monetary value of gold is in excess of its intrinsic value — exactly like Bitcoin. It's only a question of degree. And "shiny things" as a motivation for mining explains gold and Bitcoins.
- shivak 15y ago
  Yes, but the reason why is not exactly the same. That point is lost on Krugman, who equates gold and Bitcoin on that basis.

monochromatic 15y ago

Krugman is focusing on the least important aspect of bitcoins, supply.

bradharper 15y ago

He couldn't care less about Bitcoin. What he does care about though is the chatter amongst non-Keynesian economists about the need for an objective currency, i.e., a gold standard - a force that would utterly devastate his precious welfare state. Accordingly, an opportunity to ridicule Bitcoin is a perfect segue to take sneaky, conniving, collectivist jabs at gold.

alenlpeacock 15y ago

There's another argument against fixed currencies like bitcoin that should resonate with the hackernews crowd, and it's this: A currency with inflationary pressure incentivizes investments into new enterprises. A currency with deflationary pressure, instead, discourages investment outside of banking. Here's why. With a slight inflation, money slowly loses value. Even if you put it in the bank and earn interest, it loses value over time. So the rational thing to do, if you have a lot of excess money, is to find places to put it where it outperforms inflation, where it has a chance of not evaporating over time. With deflation, money is instead guaranteed to be more valuable tomorrow than it is today. Sure, you could still try to invest some of it to try to outperform the gain you get from deflation, but it would be completely rational to just stick all of it in the bank, and live the good life forever, as your money automatically becomes more money (because its buying power increases), every day. Why is there so much money managed by VC and Angel funds? While not the only reason, I'd claim it has a lot to do with inflation. And, of course, I'm making things more b&w than they really are. Both massive inflation and massive deflation are really bad things. Currency that stays largely stable, or that deflates/inflates slowly over time, seems to work out fine.

BarkMore 15y ago
A counter-argument is that people invest in new enterprises even when the banking real interest rate is positive.
- sneak 15y ago
  To paraphrase jwz (like that's never been done before), "When the rebuttal to your argument is 'The Industrial Revolution', generally that means that you've lost the argument." :)
  - BarkMore 15y ago
    My snark decoder is broken. Please explain the parent comment.
- alenlpeacock 15y ago

arvinds 15y ago

He should have added a link to this alltime classic - a good macroeconomics, deflation 101 tutorial: http://www.slate.com/id/1937/ http://www.slate.com/id/1937/

jtolle 15y ago
I was going to mention that article too. It's a great explanation. Money and monetary systems are human creations, not laws of nature.
- arvinds 15y ago
  Yeah - it always amuses me to read these long detailed arguments on these threads from people who seem to not have understood basic macroeconomics.
  - scrollbar 15y ago
    Econ isn't a science. There are schools of economic thought that completely contradict "basic economics" taught in schools today, and you can't possibly prove that one or the other method is correct. Hence, Economics: the dismal science.
    - arvinds 15y ago
      I have to disagree here. Yes there are schools of thought, but questions like "how does a market work?", "what causes deflation?" are pretty well studied and agreed upon. This is one of those very basic settled questions with a very clear accessible explanation.

bdr 15y ago

1. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. Bitcoin is facilitating transactions. The Bitcoin economy is growing, slowly. There are a lot of people, including funded startups, working on making it useful in more cases. It's far, far too early to say that Bitcoin isn't facilitating enough transactions. 2. Bitcoin hoarding is not due to the fixed total supply, but due to the expectation that the Bitcoin economy will grow. If there was built-in inflation at 3% and the economy was growing at 20%, hoarding would still happen. 3. No matter how much hoarding is happening, there will be some exchange rate from Bitcoins to dollars. The existence of a traded exchange rate is proof that some people think Bitcoins are not undervalued. These people will be willing to spend their Bitcoins. 4. The claim that Bitcoin is worthless because of guaranteed deflation is self-contradicting. 5. Volatility is bad for a currency, but this is an addressable problem. Bitcoin-priced marketplace The Silk Road offers its sellers currency-hedged escrow. 6. Even if it fails as a currency, Bitcoin is interesting and novel as a technological invention. For the essence, see the last paragraph of Hal Finney's insightful email from 2008 (and the surrounding thread): http://www.mail-archive.com/cryptography@metzdowd.com/msg09996.html http://www.mail-archive.com/cryptography@metzdowd.com/msg099...

shazow 15y ago
Agreed. Couple more points that may not be obvious: 7. Even if Bitcoin is not a useful currency today, not only is it a novel tech invention but it is also a useful medium of exchange (akin to credit cards). You can buy coins temporarily just so you can buy something from Amazon.com and have it shipped to Africa (as one Bitcoin startup does international shipping for many US-only retailers). 8. Bitcoin could be a useful currency someday, but it might take 200 years. What most people don't realize is that all the properties of Bitcoin (such as the maximum supply or its present growth) can be adjusted with a new genesis block at any point (effectively forking the currency). If the majority of the network clients agrees with this fork, Bitcoin continues under the same name. Side note: I remember hearing that Gavin was going to start a non-profit to help guide (read: sort-of regulate) the official Bitcoin fork. Not sure if this happened, I've been out of the loop. 9. There is no way Bitcoin as it is today could reach any kind of significant scale, purely from the perspective of the protocol. Bitcoin was built with the intention of evolving further down the line. This is part of what makes the technology really interesting.

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Astrohacker 15y ago

Krugman prefers the dollar, which has a supply that is constantly inflated by the central bank. But if the dollar is so good, why do people have to be forced to use it? (You have to pay your taxes in dollars, and you have to accept payments for debt in the form of dollars.) And how come bitcoin adoption has radically grown even though no one is forced to use it?

scott_s 15y ago
The dollar is so good because people are forced to use it. It's the currency of the land, which is enforced by the government. Hence, people use it. That bitcoin adoption has grown significantly does not necessarily mean it will remain as a viable currency in the future.

kbob 15y ago

The next hacker currency should keep Bitcoin's strengths, i.e., decentralization and anonymity, and lose its weakness, the fixed supply. Is anyone working (in public) on the problem of designing a currency that adjusts its supply algorithmically based on appropriate metrics? Sort of a Greenspan-o-matic? I've thought about this for all of 90 seconds, and it seems like the metric might be some combination of transaction volume, a price index, number of users, and the current money supply.

sneak 15y ago
Most people who use bitcoin don't believe that the fixed supply is a weakness. A lot of us are vastly frustrated at the previous lack of an easy-to-tranact-in pseudonymous INflation-proof currency. The others that were in common use (eGold, Liberty Reserve, and Pecunix) have all become relatively unsafe recently due to their centralized natures. That said, there are bitcoin-network forks out there that remove the maximum cap on new coins, if I recall correctly. You are welcome to go and use one of those if you choose.
- kbob 15y ago
  How would I find one of the forks?
  - sneak 15y ago
    https://bitcointalk.org/index.php?topic=7500.0 https://bitcointalk.org/index.php?topic=7500.0

nazgulnarsil 15y ago

"So how’s it going? The dollar value of that gold has fluctuated sharply, but overall it has soared. So buying into gold has, at least so far, been a good investment. But does that make the experiment a success? Um, no. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in gold. Bear in mind that dollar prices have been relatively stable over the past few years – yes, some deflation in 2008-2009, then some inflation as commodity prices rebounded, but overall consumer prices are only slightly higher than they were three years ago. What that means is that if you measure prices in gold, they have plunged; the gold economy has in effect experienced massive deflation. And because of that, there has been an incentive to hoard the gold rather than spending it." I'm willing to stomach lots of negatives to take away the government's power to inflate to pay for war. Historically inflation has always been for war.

halad 15y ago
Exactly! You can substitute Bitcoins in that text for gold, Swiss Franc or even Brazilian Real. What a ridiculous pseudo-criticism by Krugman. Perhaps Econ 101 is escaping me, but the idea of deflation being dangerous is massively overstated. First of all falling prices mean a higher standard of living for everyone in the economy. Second, nobody is going to indefinitely put off purchases due to a decreasing price level. Time is a factor in demand, and you require food today, fuel tomorrow and a new laptop before 2020 would be handy. Even if the price of the 2020 Macbook Pro/Air equivalent has fallen to 100 USD.

sneak 15y ago

He seems to overlook that bitcoins have been worth steadily less and less the last few months, losing some 50% of their value in 60-90 days. Also: The bitcoin transaction volume has been steadily increasing since its introduction. This article would carry a lot more weight if it had accurate facts.

mathmate 15y ago

The problem is about finite amount of BitCoins. What happen if you introduce a new coin, SubBitCoin, such that a BitCoin is ten SubBitCoins (the quantity of coins is increased ten fold) and you must pay something for the change. Increasing the cost of changing the coin and introducing in the future a different ratio: A BitCoin is only 9 SubBitCoins eliminate the problem.

jerrya 15y ago

Hmm, I am curious how this link was accepted, when I have the exact same link in my submission from 16 hours ago. I thought the submission mechanism elimated duplicates. http://news.ycombinator.com/item?id=2968548 http://news.ycombinator.com/item?id=2968548

nazgulnarsil 15y ago

Pro-inflationists a simple question for you. Inflation creates an incentive to invest. Fine. But why should the level of inflation and thus the risk profile for investors be determined by a single authority? Why not multiple competing currencies whose rates float against each other? Let the market figure out an optimal rate of inflation. The wild guesses and uncertainty of the Fed resetting the rate is surely inferior.

pessimizer 15y ago
The world already works like that. You can buy money from countries other than the US, you know.
- nazgulnarsil 15y ago
  Legal tender laws should be abolished is the thrust.
  - khafra 15y ago
    What's the advantage you get from even more currencies that you don't get from today's basket of international currencies? The only one I see is that, if you build a big enough reputation to issue your own currency, you get to collect seignorage. In exchange for that, you now have to carry n different currencies to make sure you can buy gas at a Shell station and an Arco; small retailers go out of business because they can't afford the overhead of combating so many varieties of counterfeiting--which, while still technically illegal, is much harder to prosecute--medium sized retailers go out of business because of the accounting overhead of setting appropriate prices when several currencies could be undergoing hyper(in|de)flation at any time. I'm not sure that's a good trade.

tequilarection 15y ago

"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." Paul Krugman, 2002. (http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip...)

r4vik 15y ago

He's totally overlooked one aspect of bitcoin, it doesn't matter if it's deflationary if all I'm using it for is selling drugs and converting bitcoins into cash straight away or using it as an intermediary step in sending large amounts currency around the world anonymously. Who cares if it doesn't work great as a currency (if you believe deflation is a bad thing), it still has a lot of utility.

joeycfan 15y ago

All the bitcoin naysayers are wanking at the orgy. Bitcoin is the proof of concept that an Internet currency can be done.

iradik 15y ago

Theory of money and credit by ludwig von mises: http://mises.org/books/Theory_Money_Credit/Contents.aspx http://mises.org/books/Theory_Money_Credit/Contents.aspx (free HTML or pdf)