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Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

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Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#41

Post by dmarklein »

crazygringo wrote: post #26
Jtsummers wrote: post #10

Earlier quoted context omitted.

See the original Krugman article. It goes further into explaining efforts to try and rectify their economy, as well as a general discussion on the principles involved.

Well, right. They added more coupons, which fixed the problem. But I don't see how that's significantly different from allowing the price of babysitting to float -- I know doubling the number of coupons isn't exactly the same as making them half as valuable, but it's similar. But since bitcoins simply adjust in value according to market demand, I, as well, don't understand how Krugman's story applies to bitcoin. If e…

It happens all the time in real economies -- virtually every recession. Uncertainty leads to hoarding, which leads to a smaller supply of liquid money with velocity, which leads to deflation.

Even in a world with zero hoarding, bitcoin will deflate indefinitely forever, because production will continue to grow while money supply remains constant.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#42

Post by mncolinlee »

1053r wrote: post #18
ph0rque wrote: post #13

Can someone pro-bitcoin provide a counterpoint to the deflationary spiral criticism? I don't have enough of an understanding in economics to think of one.

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…

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.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#43

Post by ars »

white_devil wrote: post #29
ph0rque wrote: post #13

Can someone pro-bitcoin provide a counterpoint to the deflationary spiral criticism? I don't have enough of an understanding in economics to think of one.

> provide a counterpoint to the deflationary spiral criticism? Is that the retarded idea that no one will buy anything if prices keep falling? Look no further than computers, cell phones and all manner of electronic gadgets. Their prices keep going down, but everyone keeps buying them. If you need/want something now, you'll buy it now. Here's a summary of the article: "The State-Controlled Mainstream Media paints a g…

Why do you think they constantly make more gadgets - always at the same price point? And they work really hard to make sure you want the new one.

In some future world where no one wants the new gadget the price of the old one will stop falling!

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#44

Post by mcantelon »

danielweber wrote: post #31
1053r wrote: post #18

Earlier quoted context omitted.

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…

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.

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.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#45

Post by ars »

pjzedalis wrote: post #37

Coupons are not currency. They were trading coupons of 1 hour babysitting to save from spending real currency on hours of babysitting.

Of course a coupon is a currency. What do you thing a currency is? It's a store of value.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#46

Post by ars »

drcode wrote: post #20
podperson wrote: post #4

Earlier quoted context omitted.

If/when bitcoins ever become an important currency they will have all the same problems as other currencies, and others unique to being bitcoins. E.g. central banks will try to manipulate them, governments will tax and regulate them, and people will speculate on them. Being able to subdivide and increase in value are not attributes unique to bitcoins. Oh, and the article DOES address this exact point.

> Being able to subdivide and increase in value are not attributes unique to bitcoins. I didn't claim that. > Oh, and the article DOES address this exact point. No, they always assume the value of a coin remains constant when discussing subdivision.

> No, they always assume the value of a coin remains constant when discussing subdivision.

If you assume the value of the coin doesn't remain constant that would cause FAR far worse problems, so there is no need to go there.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#47

Post by ars »

drcode wrote: post #27
danmaz74 wrote: post #12

Earlier quoted context omitted.

There won't be a liquidity crisis only if all people dealing with bitcoins will accept to lower their prices in response to the deflation of the currency - this would include workers paid with bitcoin. Not very likely. Would you accept to be paid less and less every year (month, week...)?

> Would you accept to be paid less and less every year (month, week...) Because they'd be able to buy more and more with that money, obviously.

If everyone changed their prices, and their salary all at once you did nothing at all. You just changed a number - you didn't increase the money supply at all.

i.e. the total amount of purchasing power didn't change.

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#48

Post by [deleted] »

1053r wrote: post #18
ph0rque wrote: post #13

Can someone pro-bitcoin provide a counterpoint to the deflationary spiral criticism? I don't have enough of an understanding in economics to think of one.

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…

[deleted]

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#49

Post by dmm »

rayiner wrote: post #34
crazygringo wrote: post #26

Earlier quoted context omitted.

Well, right. They added more coupons, which fixed the problem. But I don't see how that's significantly different from allowing the price of babysitting to float -- I know doubling the number of coupons isn't exactly the same as making them half as valuable, but it's similar. But since bitcoins simply adjust in value according to market demand, I, as well, don't understand how Krugman's story applies to bitcoin. If e…

Allowing the price of baby sitting to float relative to what? It's babysitting all the way down. That's one of the great things about this hypothetical, is that it forces you to think of the underlying barter transactions instead of misleading yourself into treating the currency as having intrinsic value.

The price of an hour of babysitting on a random day in April is 1 unit.

The price of an hour of babysitting on New Years eve is 5 units.

On some nights the demand for babysitting is higher. On those nights the price is higher.

Does that make sense?

Re: Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

#50

Post by Jtsummers »

white_devil wrote: post #29
ph0rque wrote: post #13

Can someone pro-bitcoin provide a counterpoint to the deflationary spiral criticism? I don't have enough of an understanding in economics to think of one.

> provide a counterpoint to the deflationary spiral criticism? Is that the retarded idea that no one will buy anything if prices keep falling? Look no further than computers, cell phones and all manner of electronic gadgets. Their prices keep going down, but everyone keeps buying them. If you need/want something now, you'll buy it now. Here's a summary of the article: "The State-Controlled Mainstream Media paints a g…

Not a downvoter (can't, probably won't when I can), but your tone is unnecessarily aggressive and dismissive, especially considering GP just wanted a rebuttal and made no claims of their own.
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