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Krugman on BitCoin

krugman.blogs.nytimes.com

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Re: Krugman on BitCoin

#131

Post by sneak »

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.

To paraphrase jwz (like that's never been done before), "When the rebuttal to your argument is 'The Industrial Revolution', generally that means that you've lost the argument."

:)

Re: Krugman on BitCoin

#132

Post by runako »

danenania wrote: post #42
cperciva wrote: post #19

Earlier quoted context omitted.

There's a difference between some goods -- electronics -- getting cheaper every year and all goods getting cheaper every year. Deflation isn't necessarily a problem; but runaway deflation is, and the structure of bitcoin makes deflation a self-perpetuating cycle.

"There's a difference between some goods -- electronics -- getting cheaper every year and all goods getting cheaper every year." Which is what exactly? People buy electronics even though they get cheaper every year but they wouldn't buy Xs if they got cheaper every year? Can you give me an example of some Xs?

Houses are a one example. Suppose you're looking at buying a house that's $200k. Then assume that you live in a deflationary environment where all goods get cheaper every year, say by 10%. The immediate conclusion is that in 1 year, the house you want will cost $180k. If you can wait 2 years, $162k, and so on. So while you may eventually buy as the house still has utility, you are likely to delay the purchase as long as possible to avoid losing money to deflation.

(The opposite of this scenario is housing inflation, and causes people to buy houses sooner and for more money than they would ex-inflation. This makes some sense if the inflation continues as buyers expected.)

This scenario is different from single goods getting cheaper every year in that when the prices of all goods are going down, it's very clear that the value of money is also going down. Deflation slows spending primarily via expectation of future deflation, so across-the-board price declines will have more impact transmitting deflation expectations than mixed signals (electronics down, oil up).

Re: Krugman on BitCoin

#133

Post by alenlpeacock »

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…

Inflation/deflation has very little impact on the poor; the poor spend almost 100% of their income within a short window of receiving it just to survive. From the view of poverty, saving money is a rich man's luxury, and worries about inflation/deflation rates goes along with it.

For those with excess money, inflation does encourage investment. Under a steady inflationary pressure, it is irrational to hoard your excess money under a mattress or put it in the bank and earn interest, because interest won't keep up with inflation. Your money evaporates away under that scenario. Instead, if you want to act rationally, you would look for other places to put your money where it could outperform inflation. That's the only way you have a chance of holding onto the value it represents.

Deflation discourages spending, but it also discourages investment. Sure, you could justify rolling the dice on some investments to try to outperform the constant bump in value you get every day from deflation, but why bother with that extra risk? If you just sit on your money, trying not to spend it, you'll have way more value in the future than you could ever hope to get out of it today.

This isn't about saving vs. spending, it's about using money for what money is meant for -- exchange of value for value, not as a durable permanent store of value.

Re: Krugman on BitCoin

#134

Post by ohashi »

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…

Why can't investment and consumption be encouraged? The more money that is invested into companies leads to more salaries being paid, which leads to more consumption. That is the basic theory at least. The details of course can be debated such as 'trickle down economics.'

Re: Krugman on BitCoin

#135

Post by nazgulnarsil »

"So how’s it going? The dollar value of that gold has fluctuated sharply, but overall it has soared. So buying into gold has, at least so far, been a good investment.

But does that make the experiment a success? Um, no. 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 gold.

Bear in mind that dollar prices have been relatively stable over the past few years – yes, some deflation in 2008-2009, then some inflation as commodity prices rebounded, but overall consumer prices are only slightly higher than they were three years ago. What that means is that if you measure prices in gold, they have plunged; the gold economy has in effect experienced massive deflation.

And because of that, there has been an incentive to hoard the gold rather than spending it."

I'm willing to stomach lots of negatives to take away the government's power to inflate to pay for war. Historically inflation has always been for war.

Re: Krugman on BitCoin

#136

Post by sneak »

kbob wrote: post #121

The next hacker currency should keep Bitcoin's strengths, i.e., decentralization and anonymity, and lose its weakness, the fixed supply. Is anyone working (in public) on the problem of designing a currency that adjusts its supply algorithmically based on appropriate metrics? Sort of a Greenspan-o-matic? I've thought about this for all of 90 seconds, and it seems like the metric might be some combination of transactio…

Most people who use bitcoin don't believe that the fixed supply is a weakness. A lot of us are vastly frustrated at the previous lack of an easy-to-tranact-in pseudonymous INflation-proof currency. The others that were in common use (eGold, Liberty Reserve, and Pecunix) have all become relatively unsafe recently due to their centralized natures.

That said, there are bitcoin-network forks out there that remove the maximum cap on new coins, if I recall correctly. You are welcome to go and use one of those if you choose.

Re: Krugman on BitCoin

#137

Post by Astrohacker »

sirclueless wrote: post #60
danenania wrote: post #30

Earlier quoted context omitted.

You don't need to take away people's purchasing power to encourage them to invest. If an economy is growing, there will always be higher returns in investment than in holding cash. Monetary expansion encourages unsustainable consumption and debt accumulation. Why is this preferable to saving? When people save, they don't do it with the intention of one day dumping the money in a lake. They are still going to use the…

I don't want to take away people's purchasing power now, I want to sap away their purchasing power over time. If I do that I encourage them to take their money and invest it into a factory producing widgets instead of squirreling it away into a bank. Inflating the value of money gives an unfair advantage to people who use their money to improve the world by producing things. Being in debt sounds like an OK trade to m…

But inflating the money supply doesn't take away everyone's purchasing power. It redistributes it to the people who get the new money.

Re: Krugman on BitCoin

#138

Post by 3pt14159 »

alenlpeacock wrote: post #133
3pt14159 wrote: post #119

Earlier quoted context omitted.

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…

Inflation/deflation has very little impact on the poor; the poor spend almost 100% of their income within a short window of receiving it just to survive. From the view of poverty, saving money is a rich man's luxury, and worries about inflation/deflation rates goes along with it. For those with excess money, inflation does encourage investment. Under a steady inflationary pressure, it is irrational to hoard your exce…

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 year-to-year.

I disagree that deflation discourages investment. Given a stable deflationary rate rational actors will look at the returns their fellow citizens are getting (from say a mutual fund, or even government bonds) and will conclude that their purchasing power can be furthered.

Furthermore, the United States had a (quazi) gold standard for years, as did most of the world, and investment continued.

Re: Krugman on BitCoin

#139

Post by sneak »

He seems to overlook that bitcoins have been worth steadily less and less the last few months, losing some 50% of their value in 60-90 days.

Also: The bitcoin transaction volume has been steadily increasing since its introduction.

This article would carry a lot more weight if it had accurate facts.

Re: Krugman on BitCoin

#140

Post by sneak »

sliverstorm wrote: post #82
alenlpeacock wrote: post #79

Earlier quoted context omitted.

When Bitcoin reaches supply maturity, there will be no more bitcoins to mine, making those that are currently held even more valuable, making those who hold them even more inclined to keep hoarding them, no?

Not to mention, as bitcoins are inevitably lost here and there (a deleted wallet.dat here, a hoarder there, a transaction wired to a mistyped address that doesn't exist) the supply of bitcoins will actually shrink.

Your argument is valid, however I want to point out that the third scenario you describe (mistyped addresses) is extremely unlikely due to a built-in checksum in bitcoin addresses to prevent exactly that.
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