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Bitcoin The Almighty Buck Technology

Krugman On Bitcoin and the Gold Standard 601

Posted by timothy
from the break-enough-windows-to-encourage-spending dept.
twoallbeefpatties writes "Prominent Keynesian economist Paul Krugman has left a note on his blog at NYTimes about his view of Bitcoin, discussing its similarity to the gold standard and suggesting a drop in 'real gross Bitcoin product' as its users hoard the currency rather than spend it."
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Krugman On Bitcoin and the Gold Standard

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  • Keynesian? (Score:2, Insightful)

    by MicktheMech (697533)
    Qualifying Krugman as a "prominent Keynesian economist" is like calling Stephen Hawking a "prominent Einsteinian physicist". I call shenanigans.
    • by msauve (701917)
      If he were really a Keynesian, he'd be encouraging the Federal Reserve to get busy mining bitcoins.
    • Re:Keynesian? (Score:5, Insightful)

      by Jonner (189691) on Thursday September 08, 2011 @06:40PM (#37346150)

      Qualifying Krugman as a "prominent Keynesian economist" is like calling Stephen Hawking a "prominent Einsteinian physicist".

      I call shenanigans.

      That analogy would make sense only if the theories of John Maynard Keynes [wikipedia.org] were as universally accepted as those of Einstein. Economics never has been and probably never will be as testable a science (if it's a science at all) as physics.

      • Re:Keynesian? (Score:5, Insightful)

        by geekoid (135745) <(dadinportland) (at) (yahoo.com)> on Thursday September 08, 2011 @06:56PM (#37346320) Homepage Journal

        But you can learn from historic reactions to varies pressure. For example Austerity has never gotten anyone out of a recession. Now, if people would look at that, look at it's history and act upon that, we wouldn't be having these issue in Washington.

        So the testing part is looking at previous success a failure, and the prediction side would be using the previously success as a reaction to current economic situation and seeing the results.

        You can't really do it in the lab, yet, but you can apply it.

        • History also shows that Keynesian policies can fail to address an economic crisis. This led some Keynesian advocates to rethink things, including the often ignored "future" costs and unintended consequences of "today's" Keynesian stimulus, and develop the approach of Monetarism.
          http://en.wikipedia.org/wiki/Monetarism [wikipedia.org]

          Is Keynesian theory wrong, not quite, just incomplete. Not a universal solution. Its like physicists moving from Newton to Einstein. Its not that Newton was "wrong", he just had an incomple
          • by Wonko the Sane (25252) * on Thursday September 08, 2011 @07:33PM (#37346708) Journal

            Keynsian theory stated that the government should run deficits during cyclical depressions and surpluses during periods of growth that fully pay down the debt to "smooth out" the business cycle .

            The second half prescription has never once been practiced because a government running a surplus is as unnatural as water flowing uphill.

            • Re: (Score:3, Insightful)

              by WhiplashII (542766)

              In this way, it is much like Communism: "It only doesn't work because no one does it right!" The fact is, expecting a government entity to impose limits on itself in order to make a plan work is tautologically identical to saying it doesn't work.

              • by m.ducharme (1082683) on Thursday September 08, 2011 @11:23PM (#37348002)

                And yet, there are governments in the world that do impose limits on themselves and make plans work. Something doesn't become logically impossible just because it's not within your experience.

              • by Wildclaw (15718)

                In this way, it is much like Communism: "It only doesn't work because no one does it right!" The fact is, expecting a government entity to impose limits on itself in order to make a plan work is tautologically identical to saying it doesn't work.

                And that is why fiat currencies are so superior to the gold standard. With a fiat currency you always have the ability to pay back any debt, but at the same time there is also no need for it as you can always print the interest you need to pay.

                Government debt in essence becomes little more than a subsidize on private savings. Of course, governments can still screw up in the short term, but unlike with a more primitive system like the gold standard you aren't screwed in the long term.

        • Re:Keynesian? (Score:4, Interesting)

          by superwiz (655733) on Thursday September 08, 2011 @07:37PM (#37346750) Journal

          For example Austerity has never gotten anyone out of a recession.

          Wow! That is incredibly untrue. Shrinking government spending (while deregulating private activity) caused a boom in China. It has also made Germany the only stable economy in Western Europe in the recent years. Austerity itself is a loaded word. It's not that the government has to just cut the money it spends. It has to also get out of the way. For example, cutting government expenses by shifting them to the private sector, is not going to solve anything. It will only increase regulatory costs. But cutting government expenses by cutting government involvement has been beneficial in most economies in which government had previously was TOO involved in economic activity.

          • That only works if there is demand in the private sector for jobs which occurs in a growing economy. During a recession, cutting public jobs will just increase unemployment which lowers economic activity.

          • Shrinking government spending (while deregulating private activity) caused a boom in China. It has also made Germany the only stable economy in Western Europe in the recent years.

            You attribute complicated situations to a single cause; it's a very simple-minded argument, and misses a host of other reasons that have caused Germany to be very stable and China to undergo their boom.

            Germany: A big reason for the economic stability is Germany is due to their very high level of public spending, focused on effect

      • Qualifying Krugman as a "prominent Keynesian economist" is like calling Stephen Hawking a "prominent Einsteinian physicist".

        I call shenanigans.

        That analogy would make sense only if the theories of John Maynard Keynes [wikipedia.org] were as universally accepted as those of Einstein. Economics never has been and probably never will be as testable a science (if it's a science at all) as physics.

        Actually Keynesian theory would be more akin to Newton's. Sometimes useful, but it can fail under some circumstances. As Newton's followers went on to refine things with Einstein's theories, some of Keynes' followers went on to refine things and came up with Monetarism.
        http://en.wikipedia.org/wiki/Monetarism [wikipedia.org]

    • Qualifying Krugman as a "prominent Keynesian economist" is like calling Stephen Hawking a "prominent Einsteinian physicist". I call shenanigans.

      A better analogy would be "like calling John Edward a 'prominent television psychic.'"

      • by Dahamma (304068)

        Ok, but if Krugman is a television psychic, his Friedman equivalents are television evangelists. At least the psychic knows what he's saying is bullshit, and he doesn't try to fleece the masses listening to him.

  • by Baloroth (2370816) on Thursday September 08, 2011 @06:38PM (#37346112)

    By "discussing its similarity to the gold standard" the summary means "he points out one way Bitcoin is flawed." Specifically, that people hoard it instead of spending it (creating an unstable monetary system). Fewer transactions actually means less value, since the whole point of a monetary system that lacks intrinsic value (gold at least had that) is that it gets spent. Since the amount of Bitcoins is limited, and as time goes on the early adopters get "richer" (since less is being mined), they have an incentive not to spend. But the system will only succeed if they do spend and create a thriving system.

    This is a massive gaping flaw in Bitcoin that I haven't seen pointed out yet. It means that Bitcoin will nearly always be a deflationary system. It also requires people to keep investing computing time, while their return on investment only gets less and less over time, and early adopters have no reason to spend, creating fewer transactions to be verified. And this can't be fixed: the limit to the number of Bitcoins is builtin to the system and cannot be changed.

    So to everyone going "not another Bitcoin story!": read it. It actually points out a way that Bitcoin is (possibly) flawed (unlike so many of the stories on /.) And from a real economist, too.

    • by PCM2 (4486)

      a monetary system that lacks intrinsic value (gold at least had that)

      What's the intrinsic value of gold? It has value as a material to make jewelry out of, and that seems to be a lasting thing looking at history, but to my mind it's just a matter of personal preference (I would probably prefer silver jewelry to gold, myself) and therefore a false "value." All it would take would be one famous celebrity soccer mom to come along and claim gold causes autism and the value of gold would drop.

      I always wonder why all the gold bugs aren't talking about instating an oil standard. Oi

      • Gold has an intrinsic value as a material for various technological uses, outside of its use for human adornment (which is really just an extension of its scarcity, just like its use as a currency).

      • by danlip (737336)

        Oil's value is gone once it is used. Gold can be recycled and reused. It has lots of industrial uses too, not just making pretty things. And regardless of whether YOU prefer silver or gold jewelry, the fact is you are pretty much guaranteed you can find someone to trade you something you want for your gold. I agree with you that it's "intrinsic vale" is not really as much as what most people think it is. But unlike money the government can't just print more, so the limited supply is an important featur

        • by PCM2 (4486)

          I don't know about you, but I don't even keep thousands of dollars of paper money. I keep thousands of dollars of imaginary money -- even more compact and durable than gold -- and every so often I go to a machine that gives me a few paper vouchers that are good for trading imaginary money. If the machine gave me gold instead of paper, I guess I'd have to deal with the gold, but that sounds like a pain in the ass. Gold is kind of heavy. But gold, paper, all the same to me -- the imaginary money is what matte

          • by WhiplashII (542766) on Thursday September 08, 2011 @08:37PM (#37347136) Homepage Journal

            No, the real issue is that under the "gold standard", the money supply is related to gold finds - which are random events. It's not like the supply of gold is actually fixed. So someone could find a huge gold vein tomorrow, and crash the world economy. Just like printing money, but done by individuals!

            Also, there is simply the unavoidable result of a fixed currency:

            Country X says "my dollars are worth exactly 1 Y", for any option of Y. You take your money, and short lots of X dollars. Then you counterfeit X's currency (or wait for someone else to counterfeit it). Now your "short" position is worth more than you paid for it. Country X's only hope is to deflate their currency voluntarily each year, to account for counterfeiting.

            This happened to the US several times, and that is why we are now off the gold standard. It's amazing how few people bother to figure that out before advocating the gold standard!

      • by Dahamma (304068) on Thursday September 08, 2011 @07:57PM (#37346888)

        "Intrinsic value" is an economic term, and as such, it's by definition vague ;)

        It's a combination of scarcity, permanence (you can't destroy it - but feel free to delete your bitcoins), physical qualities (and yes, being nice for jewelry is a quality), and it has tended to hold its value over a LONG time (which is the weakest of those arguments IMO, but that's economics for you...)

        Oil doesn't have a very well defined intrinsic value, because it is easily produced (the *current* scarcity is artificial based on production quotas), it has no permanence (its usefulness is based on consuming it), and its physical qualities/usefulness are not inherently valuable (there are alternatives, and if we don't start using them we're screwed).

        Basically, the WHOLE POINT of a good monetary "standard" is that it is supposed to be STABLE and allow growth. Gold is not really the most stable standard because of all the speculation and inability of governments to control that - which is why we abandoned the gold standard. Its scarcity basically rewards saving and punishes debt (ie. tends to be deflationary), which means it's horrible for risk (think: the entire US tech industry). And it's not great for economic growth because the money supply is limited by mining gold.

        Given all that, oil would be HUGELY worse for that stability....

  • by imsabbel (611519) on Thursday September 08, 2011 @06:40PM (#37346148)

    While bitcoin is quite interesting from a cryptography point of view, it totally fails to address human nature.

    In particular, GREED.

    2 years ago it was trivially easy to mine 100s of bitcoins. Hell, you could by 1000 for less than a happy meal. Now people sit on those coins, hoping that bitcoin will become a mainstream currency, in which case the value of a bitcoin would need to rise by many orders of magnitudes. If it reached a capitalization compareable to the USD, that bigmac would become equivalent of $25M.

    And there are people around with a much much larger fraction of possible bitcoins than there were ever for any real currency. And the deflationary nature of it will mean that the value of those horders (and thus their economical power) WILL have to grow in case of a success of bitcoin.

  • is the digital implementation of the 1800 con with the same name.

  • At the current difficulty (you know what that means if you mine bitcoins) and the current rates of kW-hours in the US, it would take about $0.35 of electricity to generate $0.02 of bitcoins. The cost of power if the main cost of generating. There has been a steady decline in the exchange rate of bitcoins in the past month and at the same time a steady decline in the difficulty. These two are supposed to be inversely proportional. The only conclusion I reached was that the proportion of bitcoins generate
  • Fundementally flawed (Score:3, Interesting)

    by gatkinso (15975) on Thursday September 08, 2011 @07:21PM (#37346598)

    Bitcoin is the equivalent of a nations currency that has been printed by individuals by permission.

    This fact alone is its undoing.

    Your GPU's do not constitute value. Nobody will accept the fact that you are a bitcoin millionaire simply because you let a few unused computers run for a few months.

  • by jcr (53032) <jcr@NoSPaM.mac.com> on Thursday September 08, 2011 @09:57PM (#37347588) Journal

    Krugman once again demonstrates the Keynesian confusion about the role of savings in the economy. A miser is a good neighbor: instead of consuming all that he could consume in exchange for his production, he holds onto his money, thus making everyone else's money buy more in the market. The profligate spender who consumes all he earns, and the borrows more and consumes all of that (like the federal government) is the one to despise.

    -jcr

The trouble with the rat-race is that even if you win, you're still a rat. -- Lily Tomlin

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