Krugman on BitCoin • Hacker News Board

Re: Krugman on BitCoin

#261

Post by Amincd » Thu, Sep 08, 2011, 4:54 AM UTC

brown9-2 wrote: post #221

stevenwagner wrote: post #179

Earlier quoted context omitted.

Finance 101, its called hedging. You can invest in dollars, euros, bitcoins, google, gold, food or whatever. They all have relative leverage and are all investments. Purchasing bitcoins means to investing in a share of the bitcoin economy. Its a startup currency which has never happened before. The increase in trading value has created an enormous amount of funding for bitcoin startups.

But what about the people that want to use it as a currency, to buy things? If everyone views it as an investment, and not a vehicle for trade, it will fail as a currency / never take off as a currency. A lot of this logic is circular - the value will continue to rise because people will keep investing because the value will keep rising, etc.

People are not all going to hold on to it and not spend. Some people are going to feel that due to hoarding, it won't become a currency, and hence it's not a good investment, and will be more likely to spend.

Re: Krugman on BitCoin

#262

Post by Amincd » Thu, Sep 08, 2011, 4:56 AM UTC

msbarnett wrote: post #195

stevenwagner wrote: post #184

Earlier quoted context omitted.

I would not short gold or Apple either, the risk would be huge! So are you agreeing that bitcoins will become worth more then? So I shouldnt take a bitcoin loan out, I should take a dollar loan out and buy bitcoins with it. Or you are saying bitcoins are bad so they will go down in value ... and I should... whaaat?

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).

But this contradicts itself. If it makes it a lousy currency, then people wouldn't expect its value to rise, and hence would have an incentive to spend it, hence it would be a good currency and its value would rise.

Re: Krugman on BitCoin

#263

Post by caf » Thu, Sep 08, 2011, 5:10 AM UTC

sesqu wrote: post #176

2arrs2ells wrote: post #157

Earlier quoted context omitted.

If money is decreasing in value, it gives people a huge incentive to do something with it - buy something or invest. As long as the decrease to the value is small (1-3%) and predictable, this is a good thing .

I don't really buy this argument. People invest to increase their capital, not to stop it from decreasing. When inflationary pressure is actually tangible, money becomes a hot potato that no one wants, and poof, there goes the economy in a blaze of hyperinflation. Arguing that inflation is good is tantamount to arguing that illiquidity is good. If I were to argue for inflation, I would go with some other angle, like…

In between "hot potato that nobody wants to hold" and "gold brick that nobody wants to relinquish from their grasp" lies the happy medium that we need.

Re: Krugman on BitCoin

#264

Post by caf » Thu, Sep 08, 2011, 5:23 AM UTC

BarkMore wrote: post #104

alenlpeacock wrote: post #92

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 lo…

A counter-argument is that people invest in new enterprises even when the banking real interest rate is positive.

Ahh, but they only invest in new enterprises that they feel are likely to significantly out-perform the prevailing real interest rate (risk free rate of return).

Significant deflation raises the bar, by putting a floor under the risk free rate of return.

Re: Krugman on BitCoin

#265

Post by joeycfan » Thu, Sep 08, 2011, 5:45 AM UTC

All the bitcoin naysayers are wanking at the orgy.

Bitcoin is the proof of concept that an Internet currency can be done.

Re: Krugman on BitCoin

#266

Post by TruthElixirX » Thu, Sep 08, 2011, 5:55 AM UTC

euroclydon wrote: post #200

danielsoneg wrote: post #122

Earlier quoted context omitted.

The other big problem is that debt loads don't drop along with prices - which effectively makes them rise. Falling prices (which lead to falling wages) + stable debt loads make it far harder for debtors to pay off their debts, which puts even further drag on the economy.

Wow, for all I've read about Austrian Economics, I've never heard that simple yet devastating argument.

Austrians don't advocate for a deflationary currency, they advocate for competing currencies. Rothbard, one of the "pillars" of Austrian Economics, even stated that The Great Depression was due to deflation not inflation.

Lots of people that scratch the surface of Austrian Economics immediately start shouting the ills of inflation and such.

Most "hardcore" Austrians I know would like a currency that's supply grew with economic growth. Economy grows by x measure then so does the currency, to keep it stable.

Re: Krugman on BitCoin

#267

Post by Eliezer » Thu, Sep 08, 2011, 5:56 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…

> Either consumption is encouraged via inflation or investment is encouraged

That's not true except in an economy already operating at maximum capacity. The argument for a depreciating currency is that it encourages people to spend or invest it, while if you have an appreciating currency, people just hold onto the bank account numbers instead of generating any economic transactions or activity.

Mind you, there are counterarguments and other problems you get from a depreciating currency, but that's the argument.

Re: Krugman on BitCoin

#268

Post by kragen » Thu, Sep 08, 2011, 6:00 AM UTC

euroclydon wrote: post #200

danielsoneg wrote: post #122

Earlier quoted context omitted.

The other big problem is that debt loads don't drop along with prices - which effectively makes them rise. Falling prices (which lead to falling wages) + stable debt loads make it far harder for debtors to pay off their debts, which puts even further drag on the economy.

Wow, for all I've read about Austrian Economics, I've never heard that simple yet devastating argument.

Adam Smith talks about this phenomenon in Chapter IV (The Origin and Use of Money) in The Wealth of Nations:

“By means of those operations [inflating the coinage], the princes and sovereign states which performed them were enabled, in appearance, to pay their debts and fulfil their engagements with a smaller quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations, therefore, have always proved favourable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity.”

It follows, of course, that deflating the currency is favorable to the creditor and ruinous to the debtor; although I can't find where Smith says that, I think he does. In a sense it's worse: the creditor's losses in inflation are limited to the amount she originally lent.

Re: Krugman on BitCoin

#269

Post by sesqu » Thu, Sep 08, 2011, 6:02 AM UTC

tptacek wrote: post #238

sesqu wrote: post #233

Earlier quoted context omitted.

Are you suggesting that goods that retain value are intrinsically illiquid? Certainly, liquidity is not important for investment targets, but I don't think that relationship necessarily goes the other way. Yes, currency is used (where available) for transfer of value because it is highly liquid, but I would not say that liquidity alone disqualifies a potential good from consideration as value storage. Quite to the co…

You are using these words but putting them together in an order I don't understand. Liquidity isn't important for investments? "Quite the contrary" that liquidity doesn't "disqualify" a good as a store of value? Are you saying suitability as a store of value varies inversely with liquidity? Do you park your money in antiques and artwork? Currency "stores a constant amount of value"? It doesn't inflate and deflate?

Okay. I'm a poor communicator, so let's see if I can explain those better.

No, liquidity isn't important for investments. Liquidity is important for trade, and investment is not trade. It's perfectly acceptable for the transfer of long-term investments to take minutes, days, even months.

msbarnett suggested that currency is liquid partly because it cannot store value. I asserted that value stores do not need to be liquid, but it's a nice property for them to have. This is not strictly contrary to non-storing implying liquidity, so that was poor wording.

By currency storing a constant amount of value, I was referring to the fact that the money base is a concrete amount. It comes into existence in exchange for some value, and represents a debt equal to that value. Money is, in very real terms, a store of that predetermined value (convolved with the plausibility of collecting that debt), same as any debt marker.

Re: Krugman on BitCoin

#270

Post by sesqu » Thu, Sep 08, 2011, 6:05 AM UTC

SkyMarshal wrote: post #234

sesqu wrote: post #176

Earlier quoted context omitted.

I don't really buy this argument. People invest to increase their capital, not to stop it from decreasing. When inflationary pressure is actually tangible, money becomes a hot potato that no one wants, and poof, there goes the economy in a blaze of hyperinflation. Arguing that inflation is good is tantamount to arguing that illiquidity is good. If I were to argue for inflation, I would go with some other angle, like…

Inflation != hyperinflation. You're conflating the two in your argument.

Yes. When the argument for inflation is that rational actors should not want to hold on to money, I will conflate it with the scenario where rational actors should not want to receive money.