Krugman on BitCoin • Hacker News Board

Re: Krugman on BitCoin

#251

Post by sethg » Thu, Sep 08, 2011, 3:53 AM UTC

DennisP wrote: post #240

khafra wrote: post #182

Earlier quoted context omitted.

stevenwagner shows by example why this isn't so, but to spell it out: If you were buying a CPU as an investment like a share of a mutual fund, to buy, hold, and sell, you'd want to wait as long as possible. In fact, you'd never buy one; we pretty much always expect the price of a given CPU to go down in the future. But if you're going to use it to generate value, you should buy it as soon as your expectation for the…

That makes sense, but what I'm wondering is: why doesn't the same argument apply to all products in the presence of deflation? It seems to me the real problem of deflation is that debts get harder to pay off, not that people put off their purchases. But the "deflationary spiral" of delayed purchases is what people keep talking about, and I haven't heard a good reason why the tech industry is uniquely exempt from that…

Deflationary spirals happen when the average price of everything, economy-wide, is going down. It’s perfectly normal for some things in the economy to get cheaper while other things get more expensive. Consumer technology is conspicuous and the way it gets cheap is conspicuous, but it accounts for a small proportion of what the average American spends money on. (The average American spends a small proportion of his/her income on consumer electronics because they’re so cheap.)

Re: Krugman on BitCoin

#252

Post by caf » Thu, Sep 08, 2011, 3:57 AM UTC

michaeldhopkins wrote: post #239

caf wrote: post #226

Earlier quoted context omitted.

Why would you ever lend money at a negative interest rate? You can always get 0.00% with virtually no risk just by socking the money away in a secure location. This is the heart of the problem with deflation (and deflationary currencies like bitcoin) - there's a 0.00% floor on the time cost of money.

Yes, you are right of course. The interest rate could not rationally go down below zero, but there would still be demand for loans during the deflationary period, so there would be other compensation (like equity in a business) in exchange for the load so that the risk/return would be proportionate to the risk-free rate of holding cash.

There will certainly be demand for loans, but the supply and demand curves for loans may not intersect anymore, meaning that no loans are made (because given a deflation rate of 5%, a nominal interest rate of, say, 1.5% (only a very small premium over the minimum risk-free rate of 0.00%) is still a real interest rate of 6.5%, which may be more than many of the loan customers are willing to pay.

In other words, deflation makes financing any risky enterprise much harder, so only the mostly highly profitable projects succeed. This makes sense, because in a deflationary environment just holding a pile of cash is a profitable endeavour.

Re: Krugman on BitCoin

#253

Post by caf » Thu, Sep 08, 2011, 4:01 AM UTC

jarek wrote: post #242

msbarnett wrote: post #195

Earlier quoted context omitted.

He's saying that the characteristics of bitcoins make it a lousy currency (people have little incentive to spend or loan it). Whether or not it's an asset worthy of investing in is a separate question. (I'd argue that it isn't, but that's a separate issue from the characteristics that make it a bad currency).

As an investment, it's like gold but without the intrinsic value part and the "historically used as an investment for the past couple of millenia" part.

The intrinsic value of gold is quite a bit less than its market value, though - it's very hard to separate that from the "historically desired" aspect.

If you want intrinsic value, you're probably better off investing in good quality rifles.

Re: Krugman on BitCoin

#254

Post by notahacker » Thu, Sep 08, 2011, 4:04 AM UTC

sesqu wrote: post #161

maratd wrote: post #84

Earlier quoted context omitted.

> Perhaps when Bitcoin reaches supply maturity the value will stabilize I absolutely hate Krugman, but this is Econ 101 and even he gets it right. Bitcoin was a flawed experiment from the start because it has an absolute supply limit. Reaching that limit won't help. It'll make things worse. The money supply needs to expand for healthy economic activity and growth. If it doesn't, weird shit starts to happen. Here's an…

> In a normal economy, the population is constantly expanding. That may be, but the western world is then abnormal. US population is projected to peak at 2030, and a number of countries already have negative population growth. Exponential growth assumptions should not be made for long periods ahead. http://en.wikipedia.org/wiki/List_of_countries_by_population...

In addition to population growth the need for an increase in money supply is also driven by increases in productivity per worker, which is enabled by technological progress. If, on the same fixed income, technological progress leads to the people of the 2030s expecting to have pet androids, HIV vaccinations and flying cars (we've been waiting a while for those) in addition to all the stuff they'd need to have to keep up with the Jones', the prices of the stuff we have now have to deflate.

I don't think we'll reach a peak of technological progress in the 2030s.

Unless, of course, economic stagnation is encouraged by discouraging the inherently risky process of investment by making the average return zero.

Re: Krugman on BitCoin

#255

Post by notahacker » Thu, Sep 08, 2011, 4:31 AM UTC

3pt14159 wrote: post #119

rabidsnail wrote: post #98

Earlier quoted context omitted.

Inflation encourages the savers to put their money to work (by investing in the stock market, for example) so that the amount of money that they have increases in proportion to the growth of the overall economy. This is a benefit.

You can't have it both ways. Either consumption is encouraged via inflation or investment is encouraged. For example, say that prices were slightly deflationary, as they are with computer equipment, across the board.* I could easily make the case that saving goes up! Why? Well if I took my goldbucks and lent them to you at 1% interest we would both be happy. My total return would be something like 3% per year (2% def…

Actually you can have it both ways. In an inflationary economy there are essentially two viable alternatives: consumption or saving. Holding cash above and beyond the amount needed for liquidity is an irrational preference.

In a deflationary economy, it becomes a very valid option which will serve to drive down the other two, particularly investment in productive assets

In a deflationary economy, holding cash offers a net return equivalent to the average investment return, without the associated risks or loss of liquidity. Essentially investment would become equivalent to spread betting (the costs of running an investment operation being analogous to the bookmaker's spread which makes it certain the average investment returns a loss); you'd only consider it if you thought you were a lot smarter than the rest of the market.

Given falling prices, it would also be more appealing to delay consumption than it is now, though people would still need and want things.

The economy won't come to a complete standstill - people people would continue to buy what they need and some investors would be tempted to gamble. But it would certainly slow down.

Re: Krugman on BitCoin

#256

Post by guelo » Thu, Sep 08, 2011, 4:40 AM UTC

jarek wrote: post #242

msbarnett wrote: post #195

Earlier quoted context omitted.

He's saying that the characteristics of bitcoins make it a lousy currency (people have little incentive to spend or loan it). Whether or not it's an asset worthy of investing in is a separate question. (I'd argue that it isn't, but that's a separate issue from the characteristics that make it a bad currency).

As an investment, it's like gold but without the intrinsic value part and the "historically used as an investment for the past couple of millenia" part.

The intrinsic value of bitcoin is as an uncensorable way to transfer money, for example to donate to Wikileaks when Visa and Paypal won't let you. It becomes more valuable the more governments try to stop transactions. This is why I'm bullish on it.

Re: Krugman on BitCoin

#257

Post by guelo » Thu, Sep 08, 2011, 4:44 AM UTC

api wrote: post #218

maratd wrote: post #210

Earlier quoted context omitted.

You're assuming the government turns on the printing press and then spends some money on some social programs? That really doesn't happen anymore (if it ever did). Various operations by the Treasury and Fed affect the banks. Then you get a shiny new credit card in the mail. I wouldn't call that wealth redistribution.

It is. It's upward wealth redistribution.

Unless the person at the top is loaning his money, then inflation is distributing downwards.

Re: Krugman on BitCoin

#258

Post by guelo » Thu, Sep 08, 2011, 4:49 AM UTC

padmanabhan01 wrote: post #149

maratd wrote: post #84

Earlier quoted context omitted.

> Perhaps when Bitcoin reaches supply maturity the value will stabilize I absolutely hate Krugman, but this is Econ 101 and even he gets it right. Bitcoin was a flawed experiment from the start because it has an absolute supply limit. Reaching that limit won't help. It'll make things worse. The money supply needs to expand for healthy economic activity and growth. If it doesn't, weird shit starts to happen. Here's an…

But isn't one rule of money that it should at least hold it's value? Isn't that the main reason gold was used before? What is the point of using something as money if it keeps decreasing in value?

The goal of an economy should be to produce as much as possible given the available resources. The goal of money should be to facilitate this happening. Money in itself is not a resource of an economy, it is a tool used to lubricate transactions.

Re: Krugman on BitCoin

#259

Post by Amincd » Thu, Sep 08, 2011, 4:51 AM UTC

maratd wrote: post #84

snorkel wrote: post #33

"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…

> Perhaps when Bitcoin reaches supply maturity the value will stabilize I absolutely hate Krugman, but this is Econ 101 and even he gets it right. Bitcoin was a flawed experiment from the start because it has an absolute supply limit. Reaching that limit won't help. It'll make things worse. The money supply needs to expand for healthy economic activity and growth. If it doesn't, weird shit starts to happen. Here's an…

"Think of the psychological effect of having to CONSTANTLY lower your prices on your goods. At some point, you'll hang yourself. You want to charge more, not less. It is absolutely depressing and has a real effect."

This is not a big deal and people adapt to what provides the maximum real profit. You're only going to get depressed if you're used to the old trend of ever increasing prices.

Re: Krugman on BitCoin

#260

Post by notahacker » Thu, Sep 08, 2011, 4:52 AM UTC

alenlpeacock wrote: post #141

3pt14159 wrote: post #138

Earlier quoted context omitted.

The poor and lower middle class do not spend 100% of their money 100% of the time. But nearly 100% of any saved money a poor person has is in the form of raw cash, or non-interest paying bank accounts. The rich can afford to move their money to more stable currencies and commodities in an inflationary environment. They are more likely to have insights and are way less likely to spend a large portion of their wealth y…

Deflation removes some of the incentives for investment, but I agree -- not all of them. And in practice, to most rational actors a mild deflation is almost indistinguishable from a mild inflation. It's when either of those swing wildly that we have issues. Bitcoin increased in value 11x in the six months from Sep'10 to Feb'11. That would be a major problem if we were all using bitcoins instead of dollars.

It's not just the wild swings; it's the systematic tendency towards deflation [mild or otherwise] inherent in Bitcoin: a closed Bitcoin economy reaches zero deflation only where population and productivity growth is zero.

Mild deflation is indistinguishable from mild inflation to a rational investor only where he expects said mild deflation to be temporary, offering him positive average returns on long term investments.