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Krugman on BitCoin

krugman.blogs.nytimes.com

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Re: Krugman on BitCoin

#11

Post by klenwell »

endersshadow wrote: post #5
userulluipeste wrote: post #4

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 and see exactly what kind of person Krugman is.

He means prices of goods and services, not the price of Bitcoins.

Precisely. Imagine some arbitrary point in the past when Bitcoins (B) and Dollars ($) were at parity (around the time the Slashdot article appeared, IIRC). And imagine a product, widgets, that cost $10/ea.

At that time:

$10 -> B10 -> 1 widget

Now move forward to a 10x increase in Bitcoin:

$10 -> B1 -> 1 widget

So the price of widgets went from B10 to B1. Deflation.

Re: Krugman on BitCoin

#12

Post by johnny22 »

hexis wrote: post #8
endersshadow wrote: post #3

Earlier quoted context omitted.

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 vehi…

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 facilita…

I prefer currency to asset. I wouldn't hold bitcoins to spend.

Re: Krugman on BitCoin

#13

Post by danenania »

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.

Re: Krugman on BitCoin

#14

Post by endersshadow »

hexis wrote: post #8
endersshadow wrote: post #3

Earlier quoted context omitted.

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 vehi…

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 facilita…

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

[2] http://en.wikipedia.org/wiki/Security_(finance)

Re: Krugman on BitCoin

#15

Post by sirclueless »

userulluipeste wrote: post #4

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 and see exactly what kind of person Krugman is.

You basically interpreted this backwards. When Krugman says that the bitcoin economy has experienced deflation, he means that a bitcoin is worth more now than it was in the past.

The graph on bitcoinmarket certainly shows this. If I wanted to buy a motorcycle in bitcoins in 2010 I would have needed several thousand. Now I only need a few hundred. Which means that I would have been stupid to spend my bitcoins last year. If deflation continues and bitcoins continue to be worth more and more, then the rational thing to do is never spend my bitcoins at all. And most economic theory says that the more people spend money the healthier the economy becomes so Krugman is arguing that bitcoins are an unhealthy direction for the economy to head in.

Re: Krugman on BitCoin

#16

Post by andylei »

nextparadigms wrote: post #9
endersshadow wrote: post #3

Earlier quoted context omitted.

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 vehi…

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 y…

>> 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.

Re: Krugman on BitCoin

#17

Post by nandemo »

endersshadow wrote: post #3
wgx wrote: post #2

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

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 vehi…

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.

Re: Krugman on BitCoin

#18

Post by onemoreact »

nextparadigms wrote: post #9
endersshadow wrote: post #3

Earlier quoted context omitted.

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 vehi…

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 y…

Let's say the total value of Bitcoin's in the world in 15 years is the same as the total value of Australian dollar's (AUD) in the world. Based on the rate of production it's going to take a massive amount of deflation to get there. That might make Bitcoins a good investment but it also makes them a terrible currency. (~261 billion AUD * 1.1USD/AUD / 21 million bitcoins = 13,600$/bitcoin.)

All of which is beside the point, unlike banking transactions each bitcoin computer needs to be connected to the internet so you can't create a truly secure network. If the average American had 10+$ in bitcoins on their computer a significant number of them would get hacked on a regular basis and simply lose all that money. Which means for the average consumer they need to deposit that money into some sort of bank and there is no FDIC for bitcoins so when that bank is hacked all that 'money' goes up in smoke. I think we may end up with a pure digital currency sometime soon but bitcoin’s don’t really work (yet). If you want secure anonymous transactions we already have cash and several digital equivalents based on cash, but if you want stability commodity bubbles demonstrate that finite quantities does prevent bubbles and their associated crashes.

Re: Krugman on BitCoin

#19

Post by cperciva »

danenania wrote: post #13

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…

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.

Re: Krugman on BitCoin

#20

Post by sirclueless »

danenania wrote: post #13

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…

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.
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