Krugman On Bitcoin and the Gold Standard 601
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."
STOP (Score:1, Insightful)
You are making bitcoin into something important and noteworthy and it is not.
No wonder taco left.
Keynesian? (Score:2, Insightful)
Re:STOP (Score:4, Insightful)
I'm pretty sure taco wasn't editing the New York Times.
Re:Bitcoin (Score:4, Insightful)
Re:Keynesian? (Score:1, Insightful)
Terrible summary, decent blog post (Score:5, Insightful)
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.
The main problem: Greed (Score:4, Insightful)
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.
Re:Keynesian? (Score:5, Insightful)
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:Krugman is not an economist. (Score:2, Insightful)
I never said money is investment. You seem to misunderstand me completely.
Money is savings, it's not an investment. Real money is gold, it's not an investment. It is NOT an investment. Investment is a business. Business that makes money. Be it your own business or somebody else's business that you invest in.
Money is store of value, medium of exchange and unit of account. USD doesn't work as a store of value, here is the proof:
sugar [indexmundi.com] Dec 2003: 20.40 cents/pound, Apr 2011: 36.97 cents/pound, price up by over 81%
Beef [indexmundi.com] Dec 2003: 105.40 cents/pound, Apr 2011: 193.00 cents/pound, price up by over 83%
Barley [indexmundi.com] Dec 2003: 100.77 USD/Metric Ton, Apr 2011: 208.70 USD/Metric Ton, price up by over 107%
Rice [indexmundi.com] Dec 2003: 197.00 USD/Metric Ton, Apr 2011: 500.57 USD/Metric Ton, price up by over 154%
Cocoa Beans [indexmundi.com] Dec 2003: 1,646.58 USD/Metric Ton, Apr 2011: 3,113.52 USD/Metric Ton, price up by over 89%
Tea [indexmundi.com] Dec 2003: 205.22 cents/KG, Apr 2011: 325.33 cents/KG, price up by over 58%
Rubber [indexmundi.com] Dec 2003: 57.31cents/pound, Apr 2011: 265.49cents/pound, price up by over 363%
Corn [indexmundi.com] Dec 2003: 111.98 USD/Metric Ton, Apr 2011: 318.45 USD/Metric Ton, price up by over 184%
Bananas [indexmundi.com] Dec 2003: 371.43 USD/Metric Ton, Apr 2011: 1,013.47 USD/Metric Ton, price up by over 172%
Propane [indexmundi.com] Dec 2003: 0.63 USD/Gallon, Apr 2011: 1.45 USD/Gallon, price up by over 130%
Wheat [indexmundi.com] Dec 2003: 165.57 USD/Metric Ton, Apr 2011: 336.30 USD/Metric Ton, price up by over 103%
Oranges [indexmundi.com] Dec 2003: 583.00 USD/Metric Ton, Apr 2011: 881.00 USD/Metric Ton, price up by over 51%
Salmon [indexmundi.com] Dec 2003: 3.12 USD/Kg, Apr 2011: 7.86 USD/Kg, price up by over 151%
Chicken [indexmundi.com] Dec 2003: 68.98 cents/pound, Apr 2011: 86.42 cents/pound, price up by over 25%
Pork [indexmundi.com] Dec 2003: 48.68 cents/pound, Apr 2011: 92.06 cents/pound, price up by over 89%
Silver [indexmundi.com] Dec 2003: 565.33 cents/Troy ounce, Apr 2011: 4,279.79 cents/Troy ounce, price up by over 657%
Alluminum [indexmundi.com] Dec 2003: 1,557.78 USD/Metric Ton, Apr 2011: 2,667.44 USD/Metric Ton, price up by over 71%
Uranium [indexmundi.com] Dec 2003: 13.35 USD/pound, Apr 2011: 57.84 USD/pound, price up by over 333%
Iron Ore [indexmundi.com] Dec 2003: 13.82 cents/dry Metric Ton, Apr 2011L: 179.26 cents/dry Metric Ton, price up by over 1197% (yeah, almost 1200%)
Gasoline [indexmundi.com] Dec 2003
Re:Bitcoin (Score:5, Insightful)
. I don't have electricity costs as I take it from the hallway
There ain't no free lunch. Either you're still paying for that electricity indirectly, or someone else is bearing that cost. If the latter - which seems to be more likely - then it's about as moral as tapping that electricity and reselling it directly, then pocketing the profit.
Just because something is provided to you "for free" (really, at the expense of your community) doesn't mean that you should feel free to abuse it for your own sake.
Re:Keynesian? (Score:5, Insightful)
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.
Re:Bitcoin (Score:4, Insightful)
Re:STOP (Score:3, Insightful)
Just as soon as Nobel Peace Prize winner Barack Obama stops all the wars. Hint--if you're left of center, you tend to win prizes from left of center organizations.
Re:History also shows Keynesian policies can fail (Score:3, Insightful)
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.
Re:Krugman is not an economist. (Score:4, Insightful)
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 Bitcoin.
- that's the problem. The entire fiscal policy of USA destroys the value of savings by inflation and this is what destroys the economy. [slashdot.org]
Spending money is literally what drives the economy. Saving money in a bank does make it available for other people to borrow so that they may spend it. The "redistribution of wealth" is the benefit here, though, not the saving itself.
Bear in mind that dollar prices have been relatively stable over the past few years â" yes, some deflation in 2008-2009,
- RELATIVE TO WHAT, YOU DUMBO? Relative to other flawed currencies? :) Well, not to Swiss Franc. Not to Canadian dollar. Not to NZ dollar. Not to Australian Dollar.
Relative to the purchasing power of the dollar a few years ago. A Big Mac, or a loaf of bread, or a new car costs about as many USD today as it did a few years ago. The dollar is stable. A Big Mac costs a wildly different number of BitCoins today than it did a month ago. The BitCoin is unstable.
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 Bitcoins, they have plunged; the Bitcoin economy has in effect experienced massive deflation.
- GOOD. Good for those who hold Bitcoins. Bad for those who hold dollars.
Good for those who hold Bitcoins without spending them. Bad for those who spent them. Pretty soon, people will realize that it makes more sense to hold onto Bitcoins than spend them, so no one will spend Bitcoins - they'll hoard them, and spend, say, Dollars instead. This weakens the Bitcoin economy, because no one is spending Bitcoins.
And because of that, there has been an incentive to hoard the virtual currency rather than spending it. The actual value of transactions in Bitcoins has fallen rather than rising. In effect, real gross Bitcoin product has fallen sharply.
- This Keynesian wants you to be poor, do you understand that?
He wants you to pay 3.50USD for your gas, and BTW, he doesn't think it's high enough. They have a target to make it much higher. But he doesn't want you to pay 10 cents for that gallon.
Absolutely. He wants you to have to pay $15 per gallon in 50 years. He also wants minimum wage to be $45 in 50 years. He wants inflation - the purchasing power of $1 to decrease - and for people to have more dollars. This is good for the economy, because it means that spending money is more sensible than hoarding it. This means that people have to keep on working to get more money, and more economic product is produced.
Re:Keynesian? (Score:4, Insightful)
I like how you write devalue the currency like it's nothing. You do understand that by devaluing the currency you destroy the life savings of the elderly and people on fixed income. You basically rob all of the people that lived within their means and saved their whole life to bail out those that borrowed to the hilt and lived like there is no tomorrow.
And we never recovered from the great depression until after WWII and we cut government spending WAY down and fired millions of soldiers. WWII only got us out of the depression if you think the way to get rid of unemployment is to ship millions of unemployed people overseas. Look how people actually lived during WWII. It was terrible with rationing and cost controls on all sorts of products.
Re:Bitcoin (Score:2, Insightful)
I once bought an item on eBay and the buyer sent me the wrong product. The listing clearly said it was for an audio CD and I got a key chain instead. When I filed a dispute with PayPal, they didn't do anything because there was a tracking number.
So yeah, sending an empty box just for the tracking number will probably get the disputes closed (fraudulent or not).
Re:Keynesian? (Score:4, Insightful)
Because all the other major industrial powers had been crushed in the war, giving US-based industries an unparalleled opportunity for expansion and near complete control of global markets.
Also, social spending soared after World War II. There was less wealth going to war, and more to infrastructure improvements and individual consumption. That's the opposite of austerity.
Re:History also shows Keynesian policies can fail (Score:4, Insightful)
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.
Re:Hoarding's the point. (Score:3, Insightful)
You have a very bad understanding of the purpose of currency.
Currency does not exist solely as a store of wealth, that is only one purpose, and not even the most important one.
The most important purpose of currency is in providing liquidity to allow for greater freedom in making economic transactions.
False. The reduction of currency in circulation due to hoarding also inhibits production, as producers realize that holding on to cash is better than producing goods. This leads to a deflationary spiral, with disastrous results. We've been through this. It sucked. It's the primary reason we have managed currencies.
Re:Keynesian? (Score:4, Insightful)
You do understand that on the planet Earth, if you actually do this, you will indeed come out from the hole by continually digging?
No, no you will not. What will happen is that eventually you will dig deep enough to reach molten rock and you will die from the heat.
Re:Keynesian? (Score:1, Insightful)