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Bitcoin and positive vs. normative economics

krugman.blogs.nytimes.com

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Re: Bitcoin and positive vs. normative economics

#481

Post by atmosx »

yummyfajitas wrote: post #96
atmosx wrote: post #45

Earlier quoted context omitted.

You seem pretty accustomed to economics. Can you explain how exactly or why would anyone buy any items (that's what currencies are for after all) using a deflationary currency? Then again, it's not a design a flaw - as I once thought - it's a clear choice: Why would anyone would want to own a non-deflationary asset? :-) So actually, in my view, BTC as a currency is already failed. No one will be eager to buy online (…

Can you explain how exactly or why would anyone buy any items (that's what currencies are for after all) using a deflationary currency? Why would anyone ever cash out of any position with a positive rate of return? By this logic everyone should stop consuming and put all their money into SPY, or similar market tracking indices. Yet they don't.

Not sure what you're trying to say here, but looks to me that you're confusing currencies with assets/investments.

Re: Bitcoin and positive vs. normative economics

#482

Post by atmosx »

paul wrote: post #159

I'm most bullish on bitcoin when I read articles such as this one, and most skeptical when I read the thoughts of the bitcoin believers. It's truly the most interesting technological development in years, if only because it reveals how little anyone really understands money or economics. Here's another interesting (though imperfect) way of thinking about bitcoin: it's a decentralized corporation, where bitcoins are o…

Although I don't consider economics to be a science by any means, what I'm seeing generally on HN is that programmers have a very good understanding of the possibilities and applications of bitcoin (the protocol) but don't understand much about economics. Not even the basics and I'm not talking about Friedman, Marx, Aristotle, Smith, Keynes, etc.

I'm talking about basic micro/macro-economics.

Re: Bitcoin and positive vs. normative economics

#483

Post by yummyfajitas »

atmosx wrote: post #481
yummyfajitas wrote: post #96

Earlier quoted context omitted.

Can you explain how exactly or why would anyone buy any items (that's what currencies are for after all) using a deflationary currency? Why would anyone ever cash out of any position with a positive rate of return? By this logic everyone should stop consuming and put all their money into SPY, or similar market tracking indices. Yet they don't.

Not sure what you're trying to say here, but looks to me that you're confusing currencies with assets/investments.

I don't see a relevant distinction between them for the purposes of this discussion. Can you explain what you believe the relevant difference is, and why it matters?

(Express your model in maths as much as possible, for the purpose of clarity.)

Re: Bitcoin and positive vs. normative economics

#484

Post by EGreg »

maxerickson wrote: post #479
EGreg wrote: post #478

Earlier quoted context omitted.

But why do you need to sell a name like akqbajauwbzjxu7163jebej? Can't people simply claim names the same way they claim bitcoin wallets?

The goal of Namecoin is to manage meaningful names. I guess a service that provided free names like the one you made there might be an interesting addition.

In that case I don't get it... do I basically get a random name when I mine a namecoin? And then I try to buy names I actually want from someone who has the name I want? And if no one has the name yet then I have to wait until someone mines it?

Re: Bitcoin and positive vs. normative economics

#485

Post by EGreg »

baddox wrote: post #403
XorNot wrote: post #398

Earlier quoted context omitted.

You're under no obligations to actually vote in Australia, just to show up. You can freely get your name ticked off, put a line through all the candidates and write "try harder" and walk out.

Fair enough. It's hardly the worst idea I've ever hear of, nor the most upsetting to be personally (the fact that "modern" Western governments still reserve the authority to perform military conscription is far worse). I would still prefer not showing up for paying the fine.

What about jury duty

Re: Bitcoin and positive vs. normative economics

#486

Post by maxerickson »

EGreg wrote: post #484
maxerickson wrote: post #479

Earlier quoted context omitted.

The goal of Namecoin is to manage meaningful names. I guess a service that provided free names like the one you made there might be an interesting addition.

In that case I don't get it... do I basically get a random name when I mine a namecoin? And then I try to buy names I actually want from someone who has the name I want? And if no one has the name yet then I have to wait until someone mines it?

I don't know the details, but you do still mine coins into a wallet and all that stuff, there are just special types of transactions where you post a bit of data to the blockchain and that data is the domain name you want registered.

Re: Bitcoin and positive vs. normative economics

#487

Post by atmosx »

yummyfajitas wrote: post #483
atmosx wrote: post #481

Earlier quoted context omitted.

Not sure what you're trying to say here, but looks to me that you're confusing currencies with assets/investments.

I don't see a relevant distinction between them for the purposes of this discussion. Can you explain what you believe the relevant difference is, and why it matters? (Express your model in maths as much as possible, for the purpose of clarity.)

Currency[1]: Primarily a medium of exchange.

Asset[2]: Anything that has value and can be converted to cash.

For the purpose of this or any other discussion I've made this argument, the author of the comment/post clearly confuses the two above stated words or uses them interchangeably.

Currencies, in modern economics, are control by central authorities (FED/EBC/etc) which control their performance and try to adjust them. In their optimal status, when the economy goes well currencies loose value (inflation) by 1-2%. This behavior enhances money exchange and induces a spending behavior which is viewed as good for the economy. You will buy a computer today because your money will not buy the same model/computer tomorrow. When you buy something, you fight unemployment, pay taxes to the state and so on.

The computer you buy can be an asset though. The moment you buy it, starts loosing value. You won't go to the grocery store to exchange the computer for tomatoes. You will need a medium to do that, that medium is money (and that's exactly what BTC claims to be, but up until now it's not). The computer though except from an asset is also an investment. It can help you, generate value either in form of entertainment or money (programmers/designer/etc.) but it's still not money. Sure you can exchange it for something but that's not a straight-forward process as buying beers with a currency.

The next question is: Why I should own a currency? Because the local authority (a government) impose you to use it's currency to pay taxes. Currencies are never adopted, they are always enforced to populations by supreme state governments, as means of exchange. There is no other for anyone wanting to own an inflationary currency, except for that fact that you can't do anything without it. Of course in my example, I take for granted that we're talking about a relatively healthy state. Otherwise, people will prefer a foreign, more stable (less inflationary, or deflationary if possible currency. Note that less inflationary means deflationary for them anyway).

Now, BTC introduces a currency that has some characteristics. One of them is that it's finite[4]. So, deflation is chosen here by design.

Say you have 2 credit cards: 1 from BoA with USD and one issued by a third party linked to your BTC account. You enter in a grocery store and you need to pay, which one you think most people choose? The rational choice is to use the USD because it's an inflationary currency, while BTC is not.

Then, why Satoshi choose to add deflation in BTC: Because otherwise no-one would even care holding any. What kind of value an inflationary digital (non-backed) currency could ever have? None.

Bitcoin is better viewed as Gold in digital form. Say you have 10.000.000.000 USD and you wanna convert that money into some asset. Would you chose a 5 year old asset or a 5.000 old year asset to do that? The rational (obvious) choice is gold. It's 5.000 old and pretty much stable, BTC as long as we know can turn to ~ 0 tomorrow if the big players choose to opt-out or USA/CN/EU/RU decide to ban it.

Why is all this relevant for the purpose of this discussion: Because the commenter (Aqueous iirc) is talking about bitcoin as a currency and not an as an asset.

NOTE: Currency is viewed as assets at FOREX[3] but I'm sure it's not relevant for the purpose of this discussion.

[1] http://en.wikipedia.org/wiki/Currency

[2] http://en.wikipedia.org/wiki/Asset

[3] http://en.wikipedia.org/wiki/Foreign_exchange_market

[4] 20,999,999.9769 BTC. - https://en.bitcoin.it/wiki/FAQ#How_long_will_it_take_to_gene...

Re: Bitcoin and positive vs. normative economics

#488

Post by saalweachter »

natrius wrote: post #480
saalweachter wrote: post #461

Earlier quoted context omitted.

The mining network shedding capacity is a bad thing for Bitcoin. If 90% of the network is powered down to reduce transaction fees, that gives someone the opportunity to buy up 20% of it on the cheap and corrupt the network. Bitcoin has to use as many resources as possible to stay secure.

This is the biggest practical flaw I've understood so far, but it still seems fixable. If Bitcoin becomes uncompetitive with traditional payment systems and mining activity decreases, miners could collectively decide to alter the mining reward.

The problem with keeping mining rewards high is that Bitcoin is supposed to be deflationary.

Right now the mining rewards being minted increase the Bitcoin supply at a rate of 11% per year. If demand for Bitcoin were constant, this would amount to 11% inflation. Demand for Bitcoin is currently increasing, so it is net deflationary, but this only lasts as long as the demand for Bitcoin is growing constantly. If you kept mining rewards high after the demand for Bitcoins had stabilized, you'd have five times the inflation of the dreaded US dollar, as you paid for your infrastructure costs through inflationary taxation.

(Which Benjamin Franklin and I actually like, but that's another issue entirely.)

Re: Bitcoin and positive vs. normative economics

#489

Post by jjindev »

XorNot wrote: post #346
jjindev wrote: post #252

Earlier quoted context omitted.

All currencies rely on belief (like those flats in Monty Python). It is possible that gold could lose global belief, but unlikely, given the long history of belief. The US dollar too could lose faith, but again, a pretty good history of trust. Bitcoin? I think belief and trust battle novelty a bit. Will enough people believe, in 20 years, to power the computations necessary at that point? Or will a more novel and exc…

Gold isn't a currency at the moment. Even if no one wanted gold for its store of value properties, they'd still want it for electronics, science etc. at which point the market would revitalize.

In a literal sense we have gold coins. I guess it's interesting that governments mint and sell them for a thin premium on bullion prices. And then, yeah, I'm sure there are things you could buy with a pocket full of Krugerrands. Really though, governments are giving you this opportunity to go off their currency standard. If you want to keep part of your wealth, near-cash, in gold coins, you don't have to use American Eagles to do it.

Re: Bitcoin and positive vs. normative economics

#490

Post by icambron »

wpietri wrote: post #469
icambron wrote: post #340

Earlier quoted context omitted.

Krugman actually takes that on directly in the article: > I have had and am continuing to have a dialogue with smart technologists who are very high on BitCoin — but when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how it’s a terrific medium of exchange. Even if I buy this (which I don’t, entirely), it doesn’t solve my problem. And…

Regarding your last bit, I'd guess his notion of "successful currency" is observational. There have been a lot of currencies, so it's pretty easy to look at the ones that have lasted versus the ones that haven't. Being a store of value is a goal if you want people to hold a currency. For example, when I was an exchange student in Ecuador long ago, the Ecuadorian sucre was not seen as a good store of value. Better-off…

I tend to agree, and my musings to the contrary were mostly just spitballing.

But to play devil's advocate because it's fun: to the degree to which it is useful to hold onto the currency you also use as a medium of exchange, then perhaps that does provide a value floor. In other words--assuming it is successful as a means of exchange--the fact that you have to pay a transaction cost to get out of a BTC position means you'd rather hold onto BTCs so you can use them later at no penalty. So then they would have intrinsic value, based on your aversion to trading them for something else; anything that makes you want to hold BTC other than their market price counts. The question there because which is the chicken and which the egg: being a successful means of exchange or being a good store of value? And of course, whether that transaction fee provides a meaningful enough floor.

I'm not convinced of that either, and it's especially weird to have the thing enforcing the floor to be falling, but it's fun to think about.

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