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The flaw in the argument is that BitCoin is not (currently) a unit of account (we don't price contracts or goods or services in BTC), and is (nearly) infinitely

by 1053r 14y ago

The flaw in the argument is that BitCoin is not (currently) a unit of account (we don't price contracts or goods or services in BTC), and is (nearly) infinitely divisible. So even if 90% (or 99%) of all BTC is being hoarded, the other 10% (or 1%) can be divided up for use in transactions. That much speculations will cause wild gyrations in value and massive short term volatility, but the people using BTC to transact JUST DON'T CARE. I really don't care if I'm buying my $1000 flat screen with 1 BTC or 0.0001 BTC. Neither does the merchant. I bought the BTC, sent it to the merchant, and the merchant sold it so quickly that the value didn't change much, and we are happy. So that's the short term. In the long run, the volatility might decrease as the total market capitalization increases to 10x or 1000x of its current value. Then we can start to think about using it as a unit of account. If we do, we may enter a deflationary spiral, but by then BTC will already be used in an enormous swath of the economy. So I interpret Krugman's argument not so much that BTC CAN'T take over the world, but that it SHOULDN'T take over the world. (I'm not sure if I agree. Many economists have been arguing over this point for decades, and I'm not smart enough to sort it all out.)

danielweber 14y ago
That's using Bitcoin merely as a payment mechanism, where both the buyer and the seller hold onto it for as short a time as possible.
- mcantelon 14y ago
  I think Bitcoins role as a store of value that can be used for payments makes for a pretty good tool. Like gold, except able to have ownership transferred, even in small micropayment-sized portions, without a cost incurred.
  - pyoung 14y ago
    I agree that this is the appropriate way to look at bitcoin. It is not so much a currency at the moment, it is more like an asset, like stocks, bonds, or gold. If we assume bitcoin is an asset, we are not seeing deflation per se, we are seeing an increase in value. A store of value that can be anonymously transferred and exchanged without significant costs has some inherit value in society. The only problem with bitcoin, is that if we consider bitcoin to be an asset, than it's price is entirely determined by speculation and nothing else. At least with gold, there are industrial/commercial uses for it that put a lower bound on the price. Not so much with bitcoin. Personally, I don't need an anonymous store of value, so if I am going to be speculating, I would rather do so with stocks of companies, as those are actually backed by the value of the company itself. I may throw some money into bitcoin just for fun, but I wouldn't do it to use it as a currency. My gut is telling me that most people jumping in are not interested in using it as a currency either. Of course, this doesn't necessarily mean bitcoin won't become more like a currency in the future. It is possible that it will stabilize. Considering that the world has never really seen anything like this before (well there were a few attempts that failed in the past), it is impossible to predict what is going to happen.
    - mcantelon 14y ago
      >it's price is entirely determined by speculation and nothing else Its price is based on the work required to make the coins and the properties of a minted coin (can't be forged, etc). The coin has virtual properties, but they're still useful properties.
ars 14y ago
That is not a flaw in the argument - that is a flaw in your understanding of the argument, which makes you think this is a valid rebuttal. Money is supposed to represent value. Not to actually be value. There are new humans arriving in the world all the time. And new resources are being mined from the earth, and created intellectually all the time. If the money supply does not match these new things then the currency fails. You can't just do a "currency split" and issue more notes - doing that effectively tells everyone their resources are half as valuable which is clearly wrong - the value of the resources didn't change. You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails.
- danielweber 14y ago
  You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails. I think many of the bitcoin fans reject this. They want to be able to hold (say) 1/1000th of the world's wealth, and be able to keep on holding 1/1000th of the world's wealth as long as they don't spend any of their hoard. It's like trying to create a financial crisis because you expect to be on the right side of it.
- crazygringo 14y ago
  > You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails. That's only if you want the currency to maintain a stable value, neither inflationary nor deflationary. Alternatively, the currency will have deflation. It's not obvious that that necessarily implies "failing".
  - james1071 14y ago
    No one will be able to use it for transactions because everyone will hoard it-buying the currency will be impossible.
- trhtrsh 14y ago
  > sum total of money available is equal to the sum total of value in the world. This part is not completely accurate when you consider that money changes hands over time as value is created. (Multipliers) If the someone produces 1 widget per day (different person each day), and someone else consumes 1 widget per day (and becomes the producer the next day), 1 widget-dollar is needed forever to help move the widgets. If the pattern of production and consumption is more complicated, we need more dollars (debt) to keep track. The sum total of money needs to be something like the sum total of all current unsettled debt, and it needs to be less than the amount of future production of the debtors, in each's share (or else they will default). It gets more complicated from there.
mncolinlee 14y ago
Unfortunately, deflation is not so simple a concept. If your currency quickly deflates and hoarders EXPECT it to deflate, no one will be interested in lending and the economy will suffer. Lending is not an optional feature in a modern economy. You need some level of lending to have credit balances with merchants or investment in stocks and bonds. An economy without lending can take few risks on innovation, such as YCombinator has. They also have less incentive to spend money hiring employees because the risk/reward ratio is higher. A currency that continuously deflates is also likely to hit a liquidity crisis when everyone attempts to sell at once and the exchanges stop buying. We've already seen exchanges stop selling or choose to impose hurdles to buyers because Bitcoin demand was too high. Until they resolve the money supply issues, the Bitcoin is likely to remain merely an expensive and risky proxy for illicit drugs.
- wmf 14y ago
  This is a bit of a nit, but the real exchange(s) does not buy or sell anything; it just matches orders. So you should probably say "...a liquidity crisis when everyone attempts to sell at once and the noobs stop buying".
- drcode 14y ago
  If deflation is (let's say) 4%, why wouldn't people be greedy and let people borrow it at 6% or something?
  - mncolinlee 14y ago
    1. Deflation isn't fixed. Lenders have to make a guess about the spectrum of possible future rates of deflation, inflation, or even the abandonment of the currency. 2. Lenders seek profit, not revenue. 6% interest on 4% deflation is hardly greedy. You're ignoring the risk/reward ratio. Deflation causes defaults because existing loan costs become more onerous. 6% on 4% would almost certainly be a net loss after defaults. The high risk of default during deflation is part of why interest rates hit 18% in the 1980s. 3. Deflation is typically a product of most people having less access to your currency. Debtors would make an estimation that they could afford your loan at a lower-priced Bitcoin (in currency and labor costs). They'll be more likely to default when the currency is more scarce either due to the worse exchange rate of money or exchange rate of labor.
deleted 14y ago
[deleted]
james1071 14y ago
Your scenario of an ever increasing currency is impossible, because everyone will hoard it. No transactions will be possible because it will be impossible to buy.

by 1053r 14y ago

danielweber 14y ago

That's using Bitcoin merely as a payment mechanism, where both the buyer and the seller hold onto it for as short a time as possible.

mcantelon 14y ago
I think Bitcoins role as a store of value that can be used for payments makes for a pretty good tool. Like gold, except able to have ownership transferred, even in small micropayment-sized portions, without a cost incurred.
- pyoung 14y ago
  I agree that this is the appropriate way to look at bitcoin. It is not so much a currency at the moment, it is more like an asset, like stocks, bonds, or gold. If we assume bitcoin is an asset, we are not seeing deflation per se, we are seeing an increase in value. A store of value that can be anonymously transferred and exchanged without significant costs has some inherit value in society. The only problem with bitcoin, is that if we consider bitcoin to be an asset, than it's price is entirely determined by speculation and nothing else. At least with gold, there are industrial/commercial uses for it that put a lower bound on the price. Not so much with bitcoin. Personally, I don't need an anonymous store of value, so if I am going to be speculating, I would rather do so with stocks of companies, as those are actually backed by the value of the company itself. I may throw some money into bitcoin just for fun, but I wouldn't do it to use it as a currency. My gut is telling me that most people jumping in are not interested in using it as a currency either. Of course, this doesn't necessarily mean bitcoin won't become more like a currency in the future. It is possible that it will stabilize. Considering that the world has never really seen anything like this before (well there were a few attempts that failed in the past), it is impossible to predict what is going to happen.
  - mcantelon 14y ago
    >it's price is entirely determined by speculation and nothing else Its price is based on the work required to make the coins and the properties of a minted coin (can't be forged, etc). The coin has virtual properties, but they're still useful properties.

ars 14y ago

That is not a flaw in the argument - that is a flaw in your understanding of the argument, which makes you think this is a valid rebuttal. Money is supposed to represent value. Not to actually be value. There are new humans arriving in the world all the time. And new resources are being mined from the earth, and created intellectually all the time. If the money supply does not match these new things then the currency fails. You can't just do a "currency split" and issue more notes - doing that effectively tells everyone their resources are half as valuable which is clearly wrong - the value of the resources didn't change. You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails.

danielweber 14y ago
You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails. I think many of the bitcoin fans reject this. They want to be able to hold (say) 1/1000th of the world's wealth, and be able to keep on holding 1/1000th of the world's wealth as long as they don't spend any of their hoard. It's like trying to create a financial crisis because you expect to be on the right side of it.
crazygringo 14y ago
> You need to issue more currency so that the sum total of money available is equal to the sum total of value in the world. Any currency that doesn't do that fails. That's only if you want the currency to maintain a stable value, neither inflationary nor deflationary. Alternatively, the currency will have deflation. It's not obvious that that necessarily implies "failing".
- james1071 14y ago
  No one will be able to use it for transactions because everyone will hoard it-buying the currency will be impossible.
trhtrsh 14y ago
> sum total of money available is equal to the sum total of value in the world. This part is not completely accurate when you consider that money changes hands over time as value is created. (Multipliers) If the someone produces 1 widget per day (different person each day), and someone else consumes 1 widget per day (and becomes the producer the next day), 1 widget-dollar is needed forever to help move the widgets. If the pattern of production and consumption is more complicated, we need more dollars (debt) to keep track. The sum total of money needs to be something like the sum total of all current unsettled debt, and it needs to be less than the amount of future production of the debtors, in each's share (or else they will default). It gets more complicated from there.

mncolinlee 14y ago

Unfortunately, deflation is not so simple a concept. If your currency quickly deflates and hoarders EXPECT it to deflate, no one will be interested in lending and the economy will suffer. Lending is not an optional feature in a modern economy. You need some level of lending to have credit balances with merchants or investment in stocks and bonds. An economy without lending can take few risks on innovation, such as YCombinator has. They also have less incentive to spend money hiring employees because the risk/reward ratio is higher. A currency that continuously deflates is also likely to hit a liquidity crisis when everyone attempts to sell at once and the exchanges stop buying. We've already seen exchanges stop selling or choose to impose hurdles to buyers because Bitcoin demand was too high. Until they resolve the money supply issues, the Bitcoin is likely to remain merely an expensive and risky proxy for illicit drugs.

wmf 14y ago
This is a bit of a nit, but the real exchange(s) does not buy or sell anything; it just matches orders. So you should probably say "...a liquidity crisis when everyone attempts to sell at once and the noobs stop buying".
drcode 14y ago
If deflation is (let's say) 4%, why wouldn't people be greedy and let people borrow it at 6% or something?
- mncolinlee 14y ago
  1. Deflation isn't fixed. Lenders have to make a guess about the spectrum of possible future rates of deflation, inflation, or even the abandonment of the currency. 2. Lenders seek profit, not revenue. 6% interest on 4% deflation is hardly greedy. You're ignoring the risk/reward ratio. Deflation causes defaults because existing loan costs become more onerous. 6% on 4% would almost certainly be a net loss after defaults. The high risk of default during deflation is part of why interest rates hit 18% in the 1980s. 3. Deflation is typically a product of most people having less access to your currency. Debtors would make an estimation that they could afford your loan at a lower-priced Bitcoin (in currency and labor costs). They'll be more likely to default when the currency is more scarce either due to the worse exchange rate of money or exchange rate of labor.

deleted 14y ago

[deleted]

james1071 14y ago

Your scenario of an ever increasing currency is impossible, because everyone will hoard it. No transactions will be possible because it will be impossible to buy.