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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

#71

Post by bcoates »

wmf wrote: post #56
tlrobinson wrote: post #40

"Now, it’s worth noting that this fatal flaw of Bitcoin is not a fatal flaw for all cryptocurrencies or algorithmic currencies. One can imagine a Bitcoin-like currency with a smart algorithmic central bank (indeed, Bitcoin does have an algorithmic central bank–just an economically illiterate one)." It's also worth noting that it's theoretically possible for Bitcoin's "monetary philosophy" to change over time. If a ma…

Realistically, Bitcoiners can't even agree to fix unspendable UTXOs. I can't imagine that they would ever agree to devalue their own holdings.

What is there to fix? Can't a minority client just blackball UTXOs, allowing them to exist in the blockchain but refusing to publish or accept transactions built off them?

By definition, a UTXO is not in the history of good money.

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

#72

Post by DasIch »

unoti wrote: post #33
wwweston wrote: post #28

Earlier quoted context omitted.

Float compared to what? The price of an hour of babysitting was always 1 because the only thing on the exchange is an hour of babysitting. I suppose you could argue some hours of babysitting are more valuable than others, and people could negotiate, say, 4 hours for 5 coupons or vice versa. It's not clear this either (a) wasn't already done on some ad hoc basis (I'd imagine if it was agreeable to both parties, it'd p…

Float compared to supply and demand in a free market. Instead of issuing 1-hour coupons, they should have issued an arbitrary currency, say, Shillings. Then buyers can request babysitting paying at 1 shilling per hour, and sellers could say that they want 1.3 shillings per hour. The value of the currency needs to float with supply and demand. The whole argument in the article is a pathetic straw-man. The value of bit…

The value of bitcoins floats with supply and demand, that is correct. However the demand for any currency is tied to the supply/demand for the total number of goods that are sold/bought with that currency. As the value of these goods rises over time towards infinity demand for bitcoins will rise over time towards infinity. Supply of bitcoins on the other hand is inevitably slowing down and thereby the value of bitcoins will rise towards infinity.

This makes it very cheap to "import" goods but prohibitively expensive to "export" any. It also provides a huge incentive not to spend or lend any money. Demand will fall, loans will be harder to get, innovation will come to a standstill and overall the economy will collapse.

This is called deflation and this is why we have huge central banks full of well educated people carefully monitoring the economy to adjust inflation and deflation.

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

#73

Post by snowwrestler »

drcode wrote: post #32
snowwrestler wrote: post #24

The key point is that bitcoin is not actually a currency (like the dollar or euro), it is a commodity (like gold or silver). Thus it will be subject to speculative bubbles and unpredictable swings in value, and the typical holder will not be able to do much about that. Central banks and fiat currency remove the danger of speculative bubbles...or at least, they centralize the danger to a single, publicly controlled en…

> they centralize the danger to a single, publicly controlled entity. Come to think of it, we should centralize the backbone for the internet in the white house basement, so that we "centralize the danger to a single, publicly controlled entity."

The core address data of the Internet is in fact centralized on behalf of the U.S. government by ICANN.

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

#74

Post by james1071 »

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…

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.

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

#75

Post by james1071 »

crazygringo wrote: post #63
ars wrote: post #39

Earlier quoted context omitted.

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…

> 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".

No one will be able to use it for transactions because everyone will hoard it-buying the currency will be impossible.

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

#76

Post by maxerickson »

johnny4000 wrote: post #53
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.

Seems to me it's an argument for the status quo, so if you are say Warren Buffet it is a vary valid concern. If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. That sounds like a pretty aweso…

If you are going to insist on a deflationary economy, you have to admit the possibility of wages going down over time.

For a cartoon example, with high enough deflation and a less than perfect job market, that debt might represent more years of work when you are 35 than it did when you were 25.

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

#77

Post by [deleted] »

dmm wrote: post #65
rayiner wrote: post #52

Earlier quoted context omitted.

How does that fix the problem of people hoarding coupons by not going out, decreasing the underlying economic activity that creates the need for the coupons in the first place?

If nobody goes out then the price of babysitting approaches zero: everyone want to babysit, no one wants to go out. Once the price is 0.0001 units, why not go out? The benefit of staying in is minimal.

[deleted]

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

#78

Post by gluczywo »

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.

Note the contradiction: It was diagnosed that the recession of recent years was caused by uncontrolled lending which was possible thanks to issuing money by central banks and keeping low interest rates in this way. At the same time bitcoin that is free of this flaw and prevents reckless lending is criticized.

Deflation and hoarding was never a real problem. Baby-Sitting Co-op IS a silly story that does not scale. Gold had similar deflationary property as bitcoin and somehow it was used in trade for ages. Critics miss the point that monetary wealth is useless if you can't spend it, so at some point hoarders will say: enough, it's time to use some life. At the end of the day, money is just numbers with the potential to convert it to comfortable life.

My selfish, self-interested side says: I would wish more hoarders who collect numbers and don't convert it, so they don't use real world resources. They leave more for me!

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

#79

Post by rayiner »

dmm wrote: post #65
rayiner wrote: post #52

Earlier quoted context omitted.

How does that fix the problem of people hoarding coupons by not going out, decreasing the underlying economic activity that creates the need for the coupons in the first place?

If nobody goes out then the price of babysitting approaches zero: everyone want to babysit, no one wants to go out. Once the price is 0.0001 units, why not go out? The benefit of staying in is minimal.

So your solution is deflationary collapse?

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

#80

Post by pyoung »

mcantelon wrote: post #44
danielweber wrote: post #31

Earlier quoted context omitted.

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.

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.

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