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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 t

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)
  - hexis 15y ago
    No, I think I am correct. Currency exchange rates are prices and in that sense a currency is a good. The typical use of a currency is as a medium of exchange, but people use goods for different reasons. That was my point originally.
- brown9-2 15y ago
  I don't think it's just an assumption - I think it is fair to state that a currency whose primary mission is not to facilitate transactions will fail to catch on. So far BitCoin has failed to catch on.
  - hexis 15y ago
    Part of my original point was that currencies don't have "missions", people do. A person may or may not wish to own a bitcoin in order to facilitate transactions. A person might also wish to own one as a speculative investment. Neither "mission" is necessarily better than the other. Krugman just assumes otherwise.
nextparadigms 15y ago
But won't it also encourage people to be wiser with their money, and not waste them on unimportant stuff? If what you're buying has higher value to you than holding the money, then you'll buy it. Isn't overspending what got us into this financial mess in the first place? And getting into too much debt, whether it's the Government itself or the people. Also the deflation effect should only be this great in the early years of the currency. Once it becomes a solid popular currency (like say the euro or the dollar), and it has reached its maximum of 21 million bitcoins, the deflation should be a lot smaller and insignificant to people who would want to "invest" in keeping bitcoins to themselves, because there won't be an avalanche of people wanting bitcoins anymore, so the value of the currency won't surge so much from that point forward. The currency would become more stable and with a more steady growth as it also becomes affected by the law of big numbers.
- andylei 15y ago
  >> Isn't overspending what got us into this financial mess in the first place? Nope, it was overborrowing. One of the reasons that the economy is sluggish is that consumers are underspending. >> it has reached its maximum of 21 million bitcoins, the deflation should be a lot smaller That's when deflation in bitcoins will get worse, because while wealth will increase, the amount of currency in circulation will not.
  - nextparadigms 15y ago
    Yes, overborrowing, but peopled overborrowed so they can spend more, not to invest.
    - Anechoic 15y ago
      A lot of that overborrowing was to buy homes, a commodity which (according to conevtual wisdom) always increases in value. So yes, a lot of that overborrowing was for investment.
    - lyudmil 15y ago
      People kept spending because there were investments available (housing) which outperformed bank interest rates, 401k's, and pretty much everything else. There was no incentive to save because they were saving merely by owning their homes. This happens when there are bubbles. I don't see how the Bitcoin economy is immune to them, so you wouldn't have actually avoided what happened merely by using a different currency.
nandemo 15y ago
If Bitcoin ever becomes a successful, liquid currency, it will have been partly thanks to the current speculators. They're the ones "mining" the bitcoins. They're taking the risk. In a way, it's similar to gold miners of old. They would invest money in digging and mining for the chance of finding gold. They were in it for the profit. Still, it did benefit other people since there was more gold available for both utilitarian and liquidity purposes.
- jbooth 15y ago
  I think the point isn't about speculators, it's about hoarders. If it becomes a successful, liquid currency, it will be in spite of those hoarding. Coincidentally, with the market looking like it does, at an individual level it's absolutely the right thing to do to hold them, or at best to slowly diversify out, while still not using it for much purchasing. As long as it seems like the right move to hoard them, and their transactional use is a tiny fraction of the amount hoarded, they're not going to be a successful currency as he defines "successful". Closer to a ponzi scheme and/or asset bubble IMO.
  - alttab 15y ago
    Upboat. The guy left with all the bitcoins has a lot of bitcoins. What else?
  - nandemo 15y ago
    Hoarders are also speculators! They're betting bitcoin will go up in value. By the way, "hoarder" is a loaded term. One man's "hoarder" is another man's "saver". Without people who save, there's no way people can borrow, and so on.
- anigbrowl 15y ago
  What risk? All the Bitcoin miners I know are patting each other on the back on how much mining their fancy GPU is doing. Risk: one or more graphics cards (that are also used to play videogames) and a slightly elevated electricity bill from leaving the computer on all day and night. There isn't a lot of effort or ingenuity going on here, just an information asymmetry.
Duff 15y ago
Exactly. Bitcoin is a commodity, not a currency.
- danenania 15y ago
  What's the difference?
  - cube13 15y ago
    Commodities are things people buy. Currencies are what people use to buy commodities with.
    - icebraining 15y ago
      So what's the Swiss Franc right now?
      - scott_s 15y ago
        Note that people treating the Swiss Franc as a commodity is harming the Swiss economy. See http://www.npr.org/blogs/money/2011/08/19/139791374/the-friday-podcast-switzerlands-too-strong-for-its-own-good http://www.npr.org/blogs/money/2011/08/19/139791374/the-frid... and http://www.npr.org/blogs/money/2011/09/06/140211340/swiss-to-everybody-else-go-away-now http://www.npr.org/blogs/money/2011/09/06/140211340/swiss-to...
        icebraining 15y ago
        Yes, that's why I chose that example. The thing is, currencies are and have always been a commodity with many traders. Bitcoin being treated as a commodity does not prevent it from being a currency.
        scott_s 15y ago
        The reason I cited those examples is that once currencies cross a certain commodity-threshold, they become much less useful as currencies. cube13's characterization is a simplification, but I think it still captures their intended uses. Bitcoin's deflation, and the Swiss franc's high value compared to other currencies, harm their ability to act as they were intended to. Right now, I agree with Duffy's original point, which is that bitcoin is more of a commodity than a currency.
vrotaru 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. By that logic the best money will be hot potatoes.
- yahelc 15y ago
  You're not wrong. In one prison, for example, cans of Mackerel served as an internal currency precisely because they had no inherent value. http://online.wsj.com/article/SB122290720439096481.html http://online.wsj.com/article/SB122290720439096481.html
  - vrotaru 15y ago
    As long some commodity (X) gains monetary value (demand for X is demand for a medium of exchange) it no longer needs any other value to function. Still I doubt that cans of mackerel have no other use than monetary in prisons. Not many McDonalds around, beside if those were never consumed their supply would be grow continually which will to "mack" inflation. P.S. Have you missed the point about the hot?

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)
- hexis 15y ago
  No, I think I am correct. Currency exchange rates are prices and in that sense a currency is a good. The typical use of a currency is as a medium of exchange, but people use goods for different reasons. That was my point originally.
brown9-2 15y ago
I don't think it's just an assumption - I think it is fair to state that a currency whose primary mission is not to facilitate transactions will fail to catch on. So far BitCoin has failed to catch on.
- hexis 15y ago
  Part of my original point was that currencies don't have "missions", people do. A person may or may not wish to own a bitcoin in order to facilitate transactions. A person might also wish to own one as a speculative investment. Neither "mission" is necessarily better than the other. Krugman just assumes otherwise.

nextparadigms 15y ago

But won't it also encourage people to be wiser with their money, and not waste them on unimportant stuff? If what you're buying has higher value to you than holding the money, then you'll buy it. Isn't overspending what got us into this financial mess in the first place? And getting into too much debt, whether it's the Government itself or the people. Also the deflation effect should only be this great in the early years of the currency. Once it becomes a solid popular currency (like say the euro or the dollar), and it has reached its maximum of 21 million bitcoins, the deflation should be a lot smaller and insignificant to people who would want to "invest" in keeping bitcoins to themselves, because there won't be an avalanche of people wanting bitcoins anymore, so the value of the currency won't surge so much from that point forward. The currency would become more stable and with a more steady growth as it also becomes affected by the law of big numbers.

andylei 15y ago
>> Isn't overspending what got us into this financial mess in the first place? Nope, it was overborrowing. One of the reasons that the economy is sluggish is that consumers are underspending. >> it has reached its maximum of 21 million bitcoins, the deflation should be a lot smaller That's when deflation in bitcoins will get worse, because while wealth will increase, the amount of currency in circulation will not.
- nextparadigms 15y ago
  Yes, overborrowing, but peopled overborrowed so they can spend more, not to invest.
  - Anechoic 15y ago
    A lot of that overborrowing was to buy homes, a commodity which (according to conevtual wisdom) always increases in value. So yes, a lot of that overborrowing was for investment.
  - lyudmil 15y ago
    People kept spending because there were investments available (housing) which outperformed bank interest rates, 401k's, and pretty much everything else. There was no incentive to save because they were saving merely by owning their homes. This happens when there are bubbles. I don't see how the Bitcoin economy is immune to them, so you wouldn't have actually avoided what happened merely by using a different currency.

nandemo 15y ago

If Bitcoin ever becomes a successful, liquid currency, it will have been partly thanks to the current speculators. They're the ones "mining" the bitcoins. They're taking the risk. In a way, it's similar to gold miners of old. They would invest money in digging and mining for the chance of finding gold. They were in it for the profit. Still, it did benefit other people since there was more gold available for both utilitarian and liquidity purposes.

jbooth 15y ago
I think the point isn't about speculators, it's about hoarders. If it becomes a successful, liquid currency, it will be in spite of those hoarding. Coincidentally, with the market looking like it does, at an individual level it's absolutely the right thing to do to hold them, or at best to slowly diversify out, while still not using it for much purchasing. As long as it seems like the right move to hoard them, and their transactional use is a tiny fraction of the amount hoarded, they're not going to be a successful currency as he defines "successful". Closer to a ponzi scheme and/or asset bubble IMO.
- alttab 15y ago
  Upboat. The guy left with all the bitcoins has a lot of bitcoins. What else?
- nandemo 15y ago
  Hoarders are also speculators! They're betting bitcoin will go up in value. By the way, "hoarder" is a loaded term. One man's "hoarder" is another man's "saver". Without people who save, there's no way people can borrow, and so on.
anigbrowl 15y ago
What risk? All the Bitcoin miners I know are patting each other on the back on how much mining their fancy GPU is doing. Risk: one or more graphics cards (that are also used to play videogames) and a slightly elevated electricity bill from leaving the computer on all day and night. There isn't a lot of effort or ingenuity going on here, just an information asymmetry.

Duff 15y ago

Exactly. Bitcoin is a commodity, not a currency.

danenania 15y ago
What's the difference?
- cube13 15y ago
  Commodities are things people buy. Currencies are what people use to buy commodities with.
  - icebraining 15y ago
    So what's the Swiss Franc right now?
    - scott_s 15y ago
      Note that people treating the Swiss Franc as a commodity is harming the Swiss economy. See http://www.npr.org/blogs/money/2011/08/19/139791374/the-friday-podcast-switzerlands-too-strong-for-its-own-good http://www.npr.org/blogs/money/2011/08/19/139791374/the-frid... and http://www.npr.org/blogs/money/2011/09/06/140211340/swiss-to-everybody-else-go-away-now http://www.npr.org/blogs/money/2011/09/06/140211340/swiss-to...
      - icebraining 15y ago
        Yes, that's why I chose that example. The thing is, currencies are and have always been a commodity with many traders. Bitcoin being treated as a commodity does not prevent it from being a currency.
        scott_s 15y ago
        The reason I cited those examples is that once currencies cross a certain commodity-threshold, they become much less useful as currencies. cube13's characterization is a simplification, but I think it still captures their intended uses. Bitcoin's deflation, and the Swiss franc's high value compared to other currencies, harm their ability to act as they were intended to. Right now, I agree with Duffy's original point, which is that bitcoin is more of a commodity than a currency.

vrotaru 15y ago

yahelc 15y ago
You're not wrong. In one prison, for example, cans of Mackerel served as an internal currency precisely because they had no inherent value. http://online.wsj.com/article/SB122290720439096481.html http://online.wsj.com/article/SB122290720439096481.html
- vrotaru 15y ago
  As long some commodity (X) gains monetary value (demand for X is demand for a medium of exchange) it no longer needs any other value to function. Still I doubt that cans of mackerel have no other use than monetary in prisons. Not many McDonalds around, beside if those were never consumed their supply would be grow continually which will to "mack" inflation. P.S. Have you missed the point about the hot?