Krugman on BitCoin
krugman.blogs.nytimes.com
krugman.blogs.nytimes.com
Spot friggin' on, Mr. Krugman. Bitcoin's supply limiting design has added a psychological dimension that encourages collecting. Perhaps when Bitcoin reaches supply maturity the value will stabilize but for now its value just too unstable to be used as a currency.
I absolutely hate Krugman, but this is Econ 101 and even he gets it right. Bitcoin was a flawed experiment from the start because it has an absolute supply limit. Reaching that limit won't help. It'll make things worse. The money supply needs to expand for healthy economic activity and growth. If it doesn't, weird shit starts to happen.
Here's an example. In a normal economy, the population is constantly expanding. That means you need more $$$ in the system for each new person. If more money doesn't enter the system, the value of money goes up because of increasing demand and you start experiencing deflation.
Deflation is really really bad. Imagine you're a store owner. All of a sudden, people stop buying your stuff. Not because they don't want to, they love your stuff ... they just don't have enough money. So you lower your prices. Things go back to normal. Your own expenses go down as well, after all, everybody experienced deflation.
No big deal, right? This is what happens when a computer scientist creates a currency. Just adjust to the new price level, right? WRONG. It IS a big deal.
Think of the psychological effect of having to CONSTANTLY lower your prices on your goods. At some point, you'll hang yourself. You want to charge more, not less. It is absolutely depressing and has a real effect. Deflation is absolutely horrible.
Rather, it has to do with the fact that constantly down-shifting prices cause people not to buy nearly as often as they would if prices were stable or slightly inflationary. As a result of that, the economy slows down (sometimes dramatically).
A lot of this logic is circular - the value will continue to rise because people will keep investing because the value will keep rising, etc.
Not necessarily.
The prospect that it's not a currency is what makes it attractive to hoarders. Hoarders/investors don't want Bitcoin to be a viable currency; they want it to be an investment commodity. And that's the crucial problem with Bitcoin: its use as a currency, and its use as an investment, are fundamentally at odds with one another. At any given time, it makes sense to be either buying/selling (hoarding) or buying/spending (transacting); at no point in time does it make sense to be doing both.
Transactors essentially believe that the value of Bitcoins will converge around a stable mean, thereby facilitating the currency's use for transactions. Hoarders believe the opposite: that the value will either be totally volatile (with lots of peaks and valleys against which to speculate), or that it will steadily climb.
Finally, we should distinguish between "selling" and "spending." A hoarder who wants out of the market will not spend his hoard; he'll sell it. A transactor also buys and "sells" Bitcoins, but in his case, "selling" involves spending them on goods or services -- not converting them back to dollars. This is a subtle, but crucial distinction. Both users buy into the market, but they exit the market differently and with different outcomes. And both will only be able to exit the market if there's liquidity in the form of willing new buyers or willing acceptors of BTC in exchange for goods and services. Each of those two outlets has a different liquidity dynamic, too.
(Sorry for the tl;dr)
Bitcoin will not be a good investment unless it's a currency. It has no other uses besides as currency. It's not a precious metal with industrial or ornamental uses for example. It's an abstract piece of data that could be useful in trade.
" Both users buy into the market, but they exit the market differently and with different outcomes. And both will only be able to exit the market if there's liquidity in the form of willing new buyers or willing acceptors of BTC in exchange for goods and services. Each of those two outlets has a different liquidity dynamic, too."
An investor who believes bitcoins will drop in value has the option of selling it or trading it for a good/service. Both accomplish the goal of getting out of a depreciating asset.
But if I as an individual consumer feel that bitcoin won't become a currency, why would I even be converting my money into bitcoin in the first place?
“By means of those operations [inflating the coinage], the princes and sovereign states which performed them were enabled, in appearance, to pay their debts and fulfil their engagements with a smaller quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations, therefore, have always proved favourable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity.”
It follows, of course, that deflating the currency is favorable to the creditor and ruinous to the debtor; although I can't find where Smith says that, I think he does. In a sense it's worse: the creditor's losses in inflation are limited to the amount she originally lent.
In other words, deflation makes financing any risky enterprise much harder, so only the mostly highly profitable projects succeed. This makes sense, because in a deflationary environment just holding a pile of cash is a profitable endeavour.
Lots of people that scratch the surface of Austrian Economics immediately start shouting the ills of inflation and such.
Most "hardcore" Austrians I know would like a currency that's supply grew with economic growth. Economy grows by x measure then so does the currency, to keep it stable.
I guess the problem we're having is that the Fed's mandate is to keep unemployment low, not to expand the currency as the population expands.
I really don't understand how a currency supply is supposed to track growth, when one of the means of controlling currency expansion, the discount rate, can actually stimulate growth sometimes, right?
With inflation you get the reverse effect: people are incentivized to take on debt to spend.
Whether or not it's an asset worthy of investing in is a separate question. (I'd argue that it isn't, but that's a separate issue from the characteristics that make it a bad currency).
If you want intrinsic value, you're probably better off investing in good quality rifles.
Though I would suggest that you would have to time your entry into the quality rifle investment market well to avoid getting hit by a speculative markup caused by people's expectations of their future intrinsic value.
But if you're going to use it to generate value, you should buy it as soon as your expectation for the marginal value it will generate is greater than the price of the CPU.
It seems to me the real problem of deflation is that debts get harder to pay off, not that people put off their purchases. But the "deflationary spiral" of delayed purchases is what people keep talking about, and I haven't heard a good reason why the tech industry is uniquely exempt from that.
Also, there are several periods in American history when we had modest deflation and a booming economy. The Roaring Twenties was one. How did that happen?
If computers get cheaper while the average consumer’s disposable income stays constant, then people will just buy fancier computers, or spend less on computers and use their savings to buy more of other things, or be grateful that the cheaper computers make up for rising prices in other things they want (e.g., health care).
If the average price of everything goes down, then the average consumer’s disposable income must eventually decrease; to make up for the lost income, employers will have to either cut wages or lay off workers.
PS: The Roaring Twenties were not always so roaring. There was a depression in 1920–21, and according to the helpful St. Louis Fed graphs, there were two other recessions between 1921 and 1929.
Everyone has an opinion about BTC's deflationary nature, but few people seem to consider the possibility that BTC might be the first currency that works substantially differently in this regard to all other past currencies.
BTC is the first currency that is infinitely subdivisible. Ostensibly only 21 million BTC will be created, but since it is subdivisible to 8 decimal places, there will be [21 million / .00000001] = 2.1 quadrillion atomic units.
And that is only an artifact of the data structure used to implement it in code, not an inviolable requirement of the protocol. The precision, and hence the quantity of BTC, can be increased in the future if necessary.
This aspect of BTC, along with the fact that is not a debt-backed interest-bearing fiat currency might require a rethinking of the Quantity Theory of Money as it applies to Bitcoin-like currencies.
Additionally, only ~7 million Bitcoins have currently been created, only ~33% of the eventual total. The BTC economy is so new you can't buy much with it besides other currencies, computer parts from Newegg etc., and perhaps illegal drugs. Finally, forks like Solidcoin are appearing based on perceptions of consequential flaws in the BTC technology (absolute dependence on miners to extend the blockchain, etc.).
Imho it's worth withholding judgement for a few years at least and just observing how it develops. It's something potentially new, to which the old rules may not apply.
The ability to subdivide BTC is irrelevant to the question of depreciation. If 1 BTC goes from $10 USD to $20 USD, then 0.5 BTC goes from $5 USD to $10 USD. It doesn't change the money supply any more than slicing up a gold nugget creates more gold. Bitcoin is still inherently deflationary. All subdivision does is avoid imposing a minimum transaction size.
Bitcoin is also unique in that a substantial portion of the total BTC that will ever exist have already been destroyed, as many early adopters abandoned or lost their wallets.
That may be, but the western world is then abnormal. US population is projected to peak at 2030, and a number of countries already have negative population growth. Exponential growth assumptions should not be made for long periods ahead.
http://en.wikipedia.org/wiki/List_of_countries_by_population...
We have never before experienced a reduction in the human population for any extended period of time.
I wouldn't count the US out yet, it can easily augment its population with immigration. So can all the other developed countries.
Anyway, regardless, making a currency with a fixed supply doesn't work under any scenario. With a constant or increasing population, you want to increase the money supply. With a decreasing population, you want to decrease it.
Inflation is by definition a rise in price levels, usually measured by the CPI (whose definition is sometimes subject to debate, but no measure of price levels is perfect; the important thing is to choose one that's reasonable and then stick to it).
Inflation, i.e. a rise in price levels, can then cause an increase of money supply measures, as producing firms take on larger amounts of credit to finance their operations, and this leads to a (rather weak, and only valid over the long run) correlation of inflation and growth of money supply. There are also tertiary effects that can cause both inflation and growth of money supply (such as excessive government deficits). But it's important not to confuse those things.
Various operations by the Treasury and Fed affect the banks. Then you get a shiny new credit card in the mail. I wouldn't call that wealth redistribution.
I don't think we'll reach a peak of technological progress in the 2030s.
Unless, of course, economic stagnation is encouraged by discouraging the inherently risky process of investment by making the average return zero.
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% deflation + 1% interest) non-risk adjusted. You would be happy because there are plenty of people that are willing to lend money to you. Because you have access to lending capital, you hire more decreasing unemployment. You can try to make the case that you wouldn't hire because there would be no demand for your goods, but in practice there are A. Other countries, and B. A precedent that people do continue to buy, even during deflationary pressures.
The reason people buy computers and cars despite the fact that they are becoming better and cheaper as time goes on is that they expect that cars and computers are going to continue to get better and cheaper as time goes on. They know that they will face the same "save or spend" decision 2 year later, and they really do need a computer and a car.
The problem with inflation is that "encouraging spending" practically only happens to the poor or middle lower class. I can afford to research gold, silver, lithium, cesium, grain futures, bitcoins, etc. and protect my assets from long term depreciation, but they can't. So you end up with a class of people that have a negative net worth, that is totally unprepared for long term retirement.
* I know that money velocity starts to make a difference, but it is in effect the same as printing more money.
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.
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.
And in practice, to most rational actors a mild deflation is almost indistinguishable from a mild inflation. It's when either of those swing wildly that we have issues. Bitcoin increased in value 11x in the six months from Sep'10 to Feb'11. That would be a major problem if we were all using bitcoins instead of dollars.
Mild deflation is indistinguishable from mild inflation to a rational investor only where he expects said mild deflation to be temporary, offering him positive average returns on long term investments.
What you want, ideally, is a currency whose value doesn't fluctuate much at all in the short term, and which has a long term trend towards slight inflation.
In a deflationary economy, it becomes a very valid option which will serve to drive down the other two, particularly investment in productive assets
In a deflationary economy, holding cash offers a net return equivalent to the average investment return, without the associated risks or loss of liquidity. Essentially investment would become equivalent to spread betting (the costs of running an investment operation being analogous to the bookmaker's spread which makes it certain the average investment returns a loss); you'd only consider it if you thought you were a lot smarter than the rest of the market.
Given falling prices, it would also be more appealing to delay consumption than it is now, though people would still need and want things.
The economy won't come to a complete standstill - people people would continue to buy what they need and some investors would be tempted to gamble. But it would certainly slow down.
If someone wanted the social trend to be towards historic lifestyles, would deflation accomplish that? It's hard to phrase what I am trying to ask so I hope I am being clear. Imagine that someone wanted everyone to live like the Amish. Would persistent deflation accomplish that? Would persistent deflation produce a world where people spend less of their time feverishly trying to make more money and more of their time enjoying what they already have? Would persistent deflation reduce the rate at which we destroy the environment around us?
If inflationary economic systems reward those with money to leverage into investment returns, do deflationary systems reward those who do not? If inflationary systems encourage people to lend out the product of their labor to others to use to create their own wealth, do deflationary systems discourage this, and if so, would the result be that it would be harder for people who are at an economic disadvantage to better their situation? Conversely, would it be harder for people who are at an economically advantageous position to increase their wealth because investment vehicles are less numerous and more risky?
I get the feeling that some people believe that economic growth is an objectively desirable outcome; but must it always be? I do not know exactly how I feel about it, but I feel that it doesn't seem like it should be the given that others seem to believe that it is.
That's not true except in an economy already operating at maximum capacity. The argument for a depreciating currency is that it encourages people to spend or invest it, while if you have an appreciating currency, people just hold onto the bank account numbers instead of generating any economic transactions or activity.
Mind you, there are counterarguments and other problems you get from a depreciating currency, but that's the argument.
And deflation encourages the sellers to sell today.
So, in theory, don't deflation and inflation both encourage economic activity?
Properties that they posses at least in part because of the fact that currency is not a good long-term value storage proposition, and so they are not hoarded.
Yes, currency is used (where available) for transfer of value because it is highly liquid, but I would not say that liquidity alone disqualifies a potential good from consideration as value storage. Quite to the contrary. And since currency circulates rather than being reformed as tissue paper at the end of every transfer, it effectively stores a constant amount of value until such a time as it is retired.
This is not a big deal and people adapt to what provides the maximum real profit. You're only going to get depressed if you're used to the old trend of ever increasing prices.
Exponential growth can never continue forever. We are probably at or near the practical limits to growth on this planet.
I think inflationary currency is an ugly hack to cope with the era of exponential growth.
Why? ... Perhaps your views are different. Can you please point to a few good writers which you like with contrasting views than his.
(Asking a serious question. Since I, for one, like his views a lot)
He has a tendency of twisting basic economic theory to fit his political agenda. It makes me nauseous.
> Can you please point to a few good writers which you like with contrasting views than his.
Just read the Wall Street Journal. They actually specialize in this sort of thing. You'll get a far more accurate picture of what's going on. NYT is good for regional and national news, not for business and economic commentary.
The subtextual motivation for Bitcoin advocacy has always been "it's a speculative asset and I hold a position in it". Everything else is just rhetorical cover.
The unfortunate reality is that even by reasoning through Bitcoin's programmed-in deflation, we're dignifying Bitcoin. Bitcoin itself is a sham. The original paper may have been a good-faith contribution to the state of the art in cryptocurrencies, but the "economy" is a trap; a realistic-looking distributed transaction clearing system built on a deliberately volatile wholly synthetic "asset" that exists for the purpose of creating pump-and-dump scams.
This whole system is morally no different than Zynga tomorrow setting up a system to trade options on Farmville tomatoes.
"Bitcoin is a scam" is simply not enough to explain stuff from the Bitcoin bulletin to open source GPU mining software - hard work by obviously capable people, and not even remotely the most effective way to become rich.
Mind you, I think the "true believers" are incorrect, sometimes naive and occasionally downright stupid; but declaring them "evil" leaves quite a few unanswered questions. [EDIT: Even if the speculators are probably in the majority.]
(Also, I wouldn't be surprised if EVE had a foostone contract future market...)
EDIT: also, there was nothing wrong with the system design. A bit uninspired, maybe; current research involves zero-knowledge exchanges and the like.
Arguing that inflation is good is tantamount to arguing that illiquidity is good. If I were to argue for inflation, I would go with some other angle, like that capital should evaporate after a lifetime.
Please cite a source on this "one rule of money" you're thinking of?
says one of the properties of money is that it has to be a 'store of value'.
Actually, is there an efficient way that physical gold or other precious metals can be intentionally destroyed or put beyond use? Has anyone tried to use this technique to corner a market?
What would happen if Hugo Chávez actually got his hands on 211 tons of actual gold and announced he has verifiably shot half of it into the sun? Presumably, you could make money on such an event through the options market.
So it's a great point that it's comparatively easy to do such a thing with Bitcoin. It's even entirely possible to do it by mistake (i.e. a programming error).
Physicality is a fantastic hedge against loss.
In Goldfinger, the eponymous villain tried to irradiate all the gold in Ft. Knox with a dirty bomb, making it worthless.
I'm also not sure how much Krugman has looked at the price of Bitcoin. Every time I've looked at the price it continues to go down in terms of USD. A couple months ago it was around $16 now its at $7.
I think Bitcoin's real problem is the fact that it's not actually a commodity, because it's price isn't backed by any real goods. In that sense it's more similar to the dollar.
Second, providing interest to those that hold their bit coins in this bank must provide some facility for the bank to be able to give out bit-coins they didn't previously have (fractional reserve banking). Due to the mining nature of bit-coins which is not regulated by the fed but limited to an absolute supply, interest can not always be guaranteed to the holders, and there would be a run on the accounts to pull out.
What you've described is the system we have- BitCoin is an experiment on something different.
Now, I'm not saying anyone should actually try to do these things. In fact I agree that Krugman is missing the whole point of bitcoins to the point where he doesn't even bring up it's semi-anonymous nature. I simply wanted to counter his argument that commodity currency wouldn't allow the economy to grow, but as I said earlier bitcoin isn't a regular commodity. It is a currency whithout intrinsic value.
??? A bank makes money by taking deposits (giving interest) and then lending them out (collecting a higher interest). The reserve percentage is that amount that remains unlent.
Full reserve = no loans = no profits = no bank.
Edit: Yes, you can practice full-reserve with a negative interest rate, which is effectively a safe-deposit box does (they charge a fee for the box).
That is the tl;dr of the wiki link.
The week-to-week reality of Bitcoin is one of wild swings in the "valuation" of the Bitcoin "asset". Describing these swings as "inflationary" and "deflationary" dignifies Bitcoin. Was the collapse of PETS.COM and resulting devaluation of its stock "inflationary"? Was its run-up "deflationary"?
Save your value in assets.
The North American drumbeat urging the sacrifice of security for "the economy" is interesting... reminds me of communism's drive to sacrifice for "the collective".
Even if it should be encouraged, it doesn't matter the logic of it, people won't accept making less and less money over time. Non-fiat currency + population increase makes that inevitable.
It actually is. It you earn $100, by producing $100 worth of goods for the economy, and you don't spend it, you're producing more than you consume. This increases the supply of all goods on the market, decreasing the price, effectively making the entire world richer by that amount. Other people can use that extra money partly to increase their consumption and partly for investment purposes. When you take your $100 out of your pillow and spend it, you're then having the opposite effect. So in the end, you're allowing people to consume more at an earlier time (when you put the money in) and less at a later time (when you're taking it out). This is a very valuable service, as shown by the fact that people are willing to take out loans where they pay money (interest) for the ability to temporally distort their consumption patterns in this way. Some people can even use the temporary possession of additional goods as capital to generate permanent wealth.
A constant pattern of people saving under their pillow will simply reduce prices by a certain percentage and hold it there. If deflation is small, then this secondary price reduction will be lower than the primary reduction and the economy will remain stable. The problem only arises when deflation becomes too high - then, the secondary reduction becomes greater than the primary reduction, and causes a still greater tertiary reduction, leading to a deflationary spiral (ie. bubble), which screws up the economy until it inevitably pops, but if deflation is within reasonable margins it should not be an issue.
> Even if it should be encouraged, it doesn't matter the logic of it, people won't accept making less and less money over time.
How do we know this? One could imagine a deflationary society where people ask how people could possibly stand their money buying less and less over time.
It's good for the individual if investment opportunities aren't adequately regulated.
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 loses value over time. So the rational thing to do, if you have a lot of excess money, is to find places to put it where it outperforms inflation, where it has a chance of not evaporating over time.
With deflation, money is instead guaranteed to be more valuable tomorrow than it is today. Sure, you could still try to invest some of it to try to outperform the gain you get from deflation, but it would be completely rational to just stick all of it in the bank, and live the good life forever, as your money automatically becomes more money (because its buying power increases), every day.
Why is there so much money managed by VC and Angel funds? While not the only reason, I'd claim it has a lot to do with inflation.
And, of course, I'm making things more b&w than they really are. Both massive inflation and massive deflation are really bad things. Currency that stays largely stable, or that deflates/inflates slowly over time, seems to work out fine.
:)
Significant deflation raises the bar, by putting a floor under the risk free rate of return.
Bitcoin is facilitating transactions. The Bitcoin economy is growing, slowly. There are a lot of people, including funded startups, working on making it useful in more cases. It's far, far too early to say that Bitcoin isn't facilitating enough transactions.
2. Bitcoin hoarding is not due to the fixed total supply, but due to the expectation that the Bitcoin economy will grow. If there was built-in inflation at 3% and the economy was growing at 20%, hoarding would still happen.
3. No matter how much hoarding is happening, there will be some exchange rate from Bitcoins to dollars. The existence of a traded exchange rate is proof that some people think Bitcoins are not undervalued. These people will be willing to spend their Bitcoins.
4. The claim that Bitcoin is worthless because of guaranteed deflation is self-contradicting.
5. Volatility is bad for a currency, but this is an addressable problem. Bitcoin-priced marketplace The Silk Road offers its sellers currency-hedged escrow.
6. Even if it fails as a currency, Bitcoin is interesting and novel as a technological invention. For the essence, see the last paragraph of Hal Finney's insightful email from 2008 (and the surrounding thread): http://www.mail-archive.com/cryptography@metzdowd.com/msg099...
7. Even if Bitcoin is not a useful currency today, not only is it a novel tech invention but it is also a useful medium of exchange (akin to credit cards). You can buy coins temporarily just so you can buy something from Amazon.com and have it shipped to Africa (as one Bitcoin startup does international shipping for many US-only retailers).
8. Bitcoin could be a useful currency someday, but it might take 200 years. What most people don't realize is that all the properties of Bitcoin (such as the maximum supply or its present growth) can be adjusted with a new genesis block at any point (effectively forking the currency). If the majority of the network clients agrees with this fork, Bitcoin continues under the same name. Side note: I remember hearing that Gavin was going to start a non-profit to help guide (read: sort-of regulate) the official Bitcoin fork. Not sure if this happened, I've been out of the loop.
9. There is no way Bitcoin as it is today could reach any kind of significant scale, purely from the perspective of the protocol. Bitcoin was built with the intention of evolving further down the line. This is part of what makes the technology really interesting.
This is so kludgey that I don't see it as a benefit, and IMO touting it as a benefit just makes Bitcoin look worse.
8. all the properties of Bitcoin can be adjusted if the majority of the network clients agrees with this fork
I suspect that there will be many Bitcoin forks, and none of them will take off due to a combination of path dependence (i.e. kooks sticking with "the true Bitcoin") and the paradox of choice.
> This is so kludgey that I don't see it as a benefit, and IMO touting it as a benefit just makes Bitcoin look worse.
It's a benefit if it can easily add anonymity to transactions under existing currency schemes.
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.
Perhaps Econ 101 is escaping me, but the idea of deflation being dangerous is massively overstated. First of all falling prices mean a higher standard of living for everyone in the economy. Second, nobody is going to indefinitely put off purchases due to a decreasing price level. Time is a factor in demand, and you require food today, fuel tomorrow and a new laptop before 2020 would be handy. Even if the price of the 2020 Macbook Pro/Air equivalent has fallen to 100 USD.
Deflation isn't necessarily a problem; but runaway deflation is, and the structure of bitcoin makes deflation a self-perpetuating cycle.
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?
If everything got cheaper every year, then people with money in the bank (or under the mattress) have an incentive to reduce how much money they spend, in general. This would lead to factories reducing their production and laying off employees, giving the remaining employees an even more powerful incentive to hang onto their savings.
Trade imbalances resulting from an economy run on bitcoins would also decimate most domestic production, so sethg's statement is doubly true. It's the same reason you hear members of congress railing against China's currency peg that artificially deflates the yuan; it makes Chinese exports cheaper to the rest of the world.
In that case its value should get higher and exports should decrease, as happened with the Japanese Yen.
The mechanism that the Chinese government uses to keep the Yuan pegged to the USD, is the purchase of U.S. treasuries[2].
Here is some additional info:
http://fpc.state.gov/documents/organization/65773.pdf
http://www.nakedcapitalism.com/2010/03/on-chinas-currency-pe...
--------------------[2] http://www.treasury.gov/press-center/press-releases/Pages/js...
If it's for work and there's some measurable benefit to the latest and greatest (rather than just showing off), that's different. But as a matter of habit, I only build a new PC once every 3 years; for about the same amount of cash, I get a roughly 400% speed boost.
Some things can't really get cheaper every year (without some exogenous shock) -- anything with really high fixed costs of production OR a requirement of some level of quality by purchasers.
For example, it takes a ton of land to grow corn. As the population grows, the demand for and value of land will rise. That means that for the farmer to keep growing corn on his land, instead of selling it or using it in a new profitable venture, the corn needs to be producing a higher level of income for him than it had previously when land was cheaper.
Similarly - grass fed beef is not going to get cheaper. In addition to land requirements, there is the quality requirement also. If someone demands higher quality food, higher standards need to be followed, higher quality inputs need to be used, and a third party needs to ensure that those requirements are being followed.
(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).
It also helps that constant development and improvements keeps the decline in pricing small. An iPod today, while much more impressive, I believe still has a similar price to 10 years ago.
But, the reason that's not exactly a fair comparison is that the currency itself (in this case, USD) was not deflating. Ergo, my "hoarding" was actually putting it into something with a better return for the time being, which was available because the currency was stable. If the best return I could get was holding on to my money (instead of putting it in some sort of investment vehicle), then that would be deflation.
But you could have kept waiting and prices would have kept falling. Eventually you spent your money anyway. This seems to indicate that it wasn't the situation of falling prices that prevented you from buying a TV, since that never changed, but some external factor.
"But, the reason that's not exactly a fair comparison is that the currency itself (in this case, USD) was not deflating. Ergo, my "hoarding" was actually putting it into something with a better return for the time being, which was available because the currency was stable. If the best return I could get was holding on to my money (instead of putting it in some sort of investment vehicle), then that would be deflation."
The currency was deflating relative to TVs. Holding cash does provide a better return than holding a TV. The value of a TV depreciates much faster than cash. That's the point--why would anyone ever buy a TV when if they just held onto their money for a month they could always get a better TV for the same amount? Since TV prices are always falling, this question reduces to: why would anyone ever buy a TV? The answer is pretty simple--people want TVs. At some point if they want one, they're just going to buy one regardless of what the prices are doing, just like you did. So where's the problem?
Prices don't fall linearly, in many cases, but hit a floor representing the cost of manufacturing and distribution. Then, different brands have different price decay curves. Finally, the price decay of a given good has to be offset against the buyer's utility function. In practice, I don't sit there and calculate everything out; I start with a budget and a list of manufacturers I prefer, and then look for the best products that fit within those constraints.
In countries that have hyperinflation, you see extreme cases of this: middle-class consumers spend their paychecks as soon as the money is deposited, because they’d rather have anything on hand than cash in the bank.
It is however pretty easy to see why inflation is good for people in power, in particular governments; it's a hidden tax. And yes it does encourage people to spend, in fact it encourages people to borrow and then spend. Even borrow so much that it crashes the system.
So as far as I'm concerned the fixed money supply is about the only good property of Bitcoin. Other than that it's a ponzi scheme and it's a lot more cumbersome than electronically traded gold.
Unsustainable debt is an orthogonal issue. We've encouraged unsustainable debt not by allowing our currency to inflate, but by failing to regulate lenders and by offering them incentives to ignore risk management.
Again, though: this "is a little inflation good, and is a little deflation bad?" thing is a fake controversy that dignifies Bitcoin. Bitcoin isn't a currency; it's a gambling game powered by a distributed transaction system that may or may not on any day function well enough for two parties to exchange dollars for off-label hosting services without either one losing their shirt.
If you look at people's behavior with a commodity like gasoline, you'll see similar behavior. When prices go up, people will "top off" their cars more frequently. When prices are falling, people tend to go further between fill-ups.
So how much would computers have to fall in price every year before people stopped buying them?
When Nehalem processors came out, the economics shifted, and there was a financial case for retiring devices at 24-36 months and consolidating them into virtual machine clusters.
Without that consolidation opportunity, we probably would have extended the lifecycle of our server longer to preserve cash in 2009.
It can cause hoarding. It's not a given. But it can get into a downward spiral.
Does this cause people to hold onto their money instead of buying computers, tvs, and iphones? Of course not.
Are you sure? No one would argue that all people would stop buying all consumer electronics, the question is: what would sales be like with stable prices? I don't know how to answer it but I don't know how you can say for sure that sales are not lower than they would be with stable prices. Or rather, I am sure it is possible to construct models to try to understand the relation but I am doubtful that you have done so or have a particular model in mind. Please correct me if I am wrong.
The difference with a stable currency supply is savers and fixed income earners wouldn't have their purchasing power sucked away from them year after year--on the contrary, they'd become continually wealthier as the economy grows around them.
Generally inflation is priced into interest rates. If you look at countries with much higher inflation they tend to have much higher basic interest rates.
Krugman's arguments in the post are pretty brief, he's just stating his opinion and not conducting a thorough examination. Likewise, I don't find your arguments very persuasive but that doesn't mean that you are wrong and he is right.
What about "investors" instead of "consumers"? Right now an investor simply makes a choice between losing money by sitting on it (through increased supply ... printing money leads to inflation) or investing. If the money supply were fixed would that not make it more attractive to investors to sit on assets?
The point of an economy is not to spend money, it's to create more wealth for more people by allocating resources efficiently. If someone "hoards" money, and prices are stable, that person is effectively staying out of the resource-allocation business. It doesn't mean that there are fewer resources to allocate, it just means that other people are doing the allocating (even though those people collectively have less money because of "hoarders", prices are lower because of them, too).
You can make an argument that everyone needs to take part in efficiently allocating resources, and that makes a lot of sense. But to say that buying a bunch of consumer junk is a good way to do that is ridiculous (and bad for the environment).
A middle ground is to buy the things you need, a few things you want, and make conservative investments. That allows most individuals to mostly stay out of the resource allocation business, but still enjoy the benefits.
If you are on top, you wouldn't want to make extra effort to stay there!
Currently, you can invest your money elsewhere at the opportunity cost of foregoing the utility of whatever gadget it is that you want to buy until the utility of said gadget is worth to you what its price is.
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 transaction volume, a price index, number of users, and the current money supply.
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.
Like IP, anonymity can be emulated through routing mechanisms. Basically laundering your packets and coins. Tor, the state of the art in this kind of anonymity, is not without faults. And there isn't really an equivalent to Tor for BitCoins that I know about.
Related, I know BitCoin can be run over Tor, but this is not the same as a Tor for BitCoin. This merely protects against traffic analysis to tie your BitCoin account to your IP address.
Tor for BitCoin might look more like a network of wallets that simulated a perfectly noisy economy. If A wanted to pay B, A's coins would go everywhere to B, C, D, E, F and so on. Over time coins would pass in and out of people's wallets until at some point the right number would stick to B's wallet equal to the number A sent. Hopefully, the ones that stick to B's wallet will be a mix of ones that A actually sent and other coins being anonymized by the network.
There are obvious flaws in this design. But hopefully it helps illustrate why BitCoin isn't anonymous and the difficulty of making it anonymous.
I expect the actual appeal is that the value is these attributes in common with the fact that it is virtualized -- i.e. the value resides in data rather than in a physical object such as dollar bills or gold. With data, you don't have something tangible that you have to smuggle across a border in person, you just store it safe somewhere and retrieve it over a secure computer connection wherever you need it.
Or alternatively, you could use bitcoins to purchase something else virtual anonymously. (If you use it to purchase something physical, than there is an audit trail attached to the transference of the physical goods that defeats some if not all of the value of the anonymity.)
Perhaps this makes bitcoins especially useful for some scenarios, but overall I haven't yet seen any use cases that lead me to believe that this is a breakthrough of any particular kind.
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.
This is where I think Bitcoin fails as a currency. While some people invest in currencies, the point of currencies is to allow goods and services to flow through the economy. Currency is and should not be primarily an investment vehicle.
Often in those situations, cigarettes come into the economy as a ration (or a purchase limit) that people get whether or not they are smokers, and the economy revolves around getting this commodity that everyone gets to the minority that need it. Pretty quickly, you end up with non-smokers trading cigarettes with each other, because you can always get whatever you want through paying a smoker in cigarettes.
Bitcoin could benefit from that if it encouraged a very large drug market, because people need their drugs. If an easy, comfortable bitcoin drug market could get a lot of volume, it would become a lot easier to buy a cup of coffee or a car with it, and the prices would rise and fall based on the relationship of the ease of purchasing drugs with bitcoin vs. the ease of purchasing drugs in dollars. Maybe money laundering could keep bitcoin stable, too. In any case, to be successful, IMO bitcoin will have to be driven by something other than belief in bitcoin.
The use of the USD? It can be used to pay US taxes.
You could say a commodity is like a currency many people can produce.
Considering how commodities are often produced, the term "Bitcoin mining" is shockingly apt.
See http://www.npr.org/blogs/money/2011/08/19/139791374/the-frid... and http://www.npr.org/blogs/money/2011/09/06/140211340/swiss-to...
cube13's characterization is a simplification, but I think it still captures their intended uses. Bitcoin's deflation, and the Swiss franc's high value compared to other currencies, harm their ability to act as they were intended to. Right now, I agree with Duffy's original point, which is that bitcoin is more of a commodity than a currency.
A square is a rectangle, but not all rectangles are squares.
Scott is on the right path -- there's some sort of threshold where a substance is more valued as a transaction medium than for its intrinsic value.
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.
By that logic the best money will be hot potatoes.
Still I doubt that cans of mackerel have no other use than monetary in prisons. Not many McDonalds around, beside if those were never consumed their supply would be grow continually which will to "mack" inflation.
P.S. Have you missed the point about the hot?
Coincidentally, with the market looking like it does, at an individual level it's absolutely the right thing to do to hold them, or at best to slowly diversify out, while still not using it for much purchasing. As long as it seems like the right move to hoard them, and their transactional use is a tiny fraction of the amount hoarded, they're not going to be a successful currency as he defines "successful". Closer to a ponzi scheme and/or asset bubble IMO.
By the way, "hoarder" is a loaded term. One man's "hoarder" is another man's "saver". Without people who save, there's no way people can borrow, and so on.
By the way, you seem misinformed about the way people are mining bitcoins. Nowadays it's done mostly by professionals running rigs with tons of GPUs, not by individuals who put an extra graphic card on their gaming PCs.
Also the deflation effect should only be this great in the early years of the currency. Once it becomes a solid popular currency (like say the euro or the dollar), and it has reached its maximum of 21 million bitcoins, the deflation should be a lot smaller and insignificant to people who would want to "invest" in keeping bitcoins to themselves, because there won't be an avalanche of people wanting bitcoins anymore, so the value of the currency won't surge so much from that point forward. The currency would become more stable and with a more steady growth as it also becomes affected by the law of big numbers.
Nope, it was overborrowing. One of the reasons that the economy is sluggish is that consumers are underspending.
>> it has reached its maximum of 21 million bitcoins, the deflation should be a lot smaller
That's when deflation in bitcoins will get worse, because while wealth will increase, the amount of currency in circulation will not.
So yes, a lot of that overborrowing was for investment.
All of which is beside the point, unlike banking transactions each bitcoin computer needs to be connected to the internet so you can't create a truly secure network. If the average American had 10+$ in bitcoins on their computer a significant number of them would get hacked on a regular basis and simply lose all that money. Which means for the average consumer they need to deposit that money into some sort of bank and there is no FDIC for bitcoins so when that bank is hacked all that 'money' goes up in smoke. I think we may end up with a pure digital currency sometime soon but bitcoin’s don’t really work (yet). If you want secure anonymous transactions we already have cash and several digital equivalents based on cash, but if you want stability commodity bubbles demonstrate that finite quantities does prevent bubbles and their associated crashes.
As it happens I consider the need for a private third-party money transferring organization to be one of the larger failures of North American consumer banking systems, but I digress. It's slowly improving in Canada, I can now do inter-bank digital transfers between my accounts without shelling out $50 for a wire. Maybe in another decade or two we'll get to SEPA level.
What you're talking about are securities[2]. There is a distinct difference. Bitcoins are ostensibly a security masquerading as a currency.
Thought experiment:
Say our money supply is fixed (10 million dollars), and there are 1 million people in our economy. Everyone averages out to holding about 10 dollars. Everyone goes on a massive baby-making spree, and in 10 years, there are still 10 million dollars, but 2 million people in the economy. Average wealth is $5 per person. Either prices dropped (unlikely, demand has doubled in this ideal world), or everyone is averaging to be poorer.
To my mind that thought experiment demonstrates the need for the supply of money to keep pace with population growth.
I might be wrong, I am not an economics student, and there might be angles I've missed.
What will hapen is that if the population doubles, then the 5$ will also double. Laws of demand and supply.
Inflation creates an incentive to invest. Fine. But why should the level of inflation and thus the risk profile for investors be determined by a single authority? Why not multiple competing currencies whose rates float against each other? Let the market figure out an optimal rate of inflation. The wild guesses and uncertainty of the Fed resetting the rate is surely inferior.
In exchange for that, you now have to carry n different currencies to make sure you can buy gas at a Shell station and an Arco; small retailers go out of business because they can't afford the overhead of combating so many varieties of counterfeiting--which, while still technically illegal, is much harder to prosecute--medium sized retailers go out of business because of the accounting overhead of setting appropriate prices when several currencies could be undergoing hyper(in|de)flation at any time.
I'm not sure that's a good trade.
How many pre-1965 US Quarters and Dimes do you run into during daily commerce? Answer: Very few, since they are hoarded by collectors for their silver value.
That bitcoin adoption has grown significantly does not necessarily mean it will remain as a viable currency in the future.
Money and monetary systems are human creations, not laws of nature.
Hence, Economics: the dismal science.
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.
Bitcoin isn't susceptible to hoarding because, unlike gold, it has no intrinsic value. An alternative explanation for the rise in value: the Bitcoin ecosystem is under heavy development. The value of Bitcoins is possibly soaring in anticipation of this infrastructure i.e. its utility as a currency.
I wouldn't rely on Krugman's blog for serious analysis.
Also, I suspect few people realize that they should not hold on to their normal money because governments will continually seek to devalue it (that seems to be the takeaway from the article, that that is the normal procedure for "normal" currencies). Their spending habits are probably more governed by their prospects to earn money in the future, or their savings, rather than a look at the value of their money.
The graph on bitcoinmarket certainly shows this. If I wanted to buy a motorcycle in bitcoins in 2010 I would have needed several thousand. Now I only need a few hundred. Which means that I would have been stupid to spend my bitcoins last year. If deflation continues and bitcoins continue to be worth more and more, then the rational thing to do is never spend my bitcoins at all. And most economic theory says that the more people spend money the healthier the economy becomes so Krugman is arguing that bitcoins are an unhealthy direction for the economy to head in.
Doesn't that seem like a bizarre theory since the economy is in shambles and debt-financed spending seems to be getting higher and higher (consumer/credit card debt, etc.)
I thought people were supposed to be encouraged to save, pensions, 401k and Roth IRAs, etc. Is overall economic health inversely related to individual economic health?
Money works when it is exchanged for goods and services.
When money stops moving, the economy "stops". There isn't any exchange going on (or there's far less than before). Economic activity slows, employment slows, etc.
Credit and leverage, done right, allow more work from a given initial money supply (technically, credit increases the money supply), but this is predicated on the borrower repaying the initial investment. Done wrong, credit is extended for activities which don't allow repayment, and not only can't the the interest be paid, but the initial principle is lost -- and the money supply contracts.
Money is not wealth (value imbued in goods/services), but it can be (with a stable currency) a measure of wealth.
If the amount of money in circulation is decreasing (or the real wealth of an economy is increasing relative to a fixed money supply, say, with a gold/silver standard), then the value of a given denomination of coinage increases. Hoarding coin/currency/money becomes a wealth-accruing activity, while facilitating economic activity (by spending money) largely loses wealth. Hence the problem with a highly deflationary currency.
Economic theory says you want a currency whose value tends to be stable, or slightly inflationary, with time, in order to encourage spending rather than saving.
Note that none of this addresses the underlying physical economy, resource limitations/depletion, or other criticisms of traditional orthodox economics (most of which are highly valid -- we live on a planet of limited resources and good planets are both hard to find and the commute is a real drag).
Regarding your comments on savings: yes, there is a well-known "savings paradox" where individual incentives to save are opposed to the overall economic goals of growth. This is one of many such individual/group paradoxes, and is one of the principle reasons for laws (legal, moral, or otherwise). The 1971 book The Logic of Collective Action by Mancur Olson is one of the better illuminations of the concept: http://economics.about.com/cs/macroeconomics/a/logic_of_acti...
There are numerous other conflicts and paradoxes within economic theory and reality. Free markets, where they exist, work quite well. They're rather more rare, I'm coming to believe, than is frequently thought, and many forces work to limit them (political, plutocratic, monopolistic, and others).
It's not like exchange particles, where lower densities leads to lower transfer of force. Any quantity of money, as long as it is divisible, can attain a sufficient value to be useful as a store of value. A medium of exchange merely needs to be a store of value.
Because of the lack of dependence of the value of the total money supply on its total quantity, nominal spending declining due to deflation does not reduce real spending and the market is always able to sell of the merchandise on the shelves, with the value of currency adjusting to what is needed to serve the role of store of value in exchange.
What deflation does do is discourage lending. This is a legitimate economic problem, but it's not that pronounced. The Bitcoin economy would have 3% deflation a year if the world adopted it. This is not drastic and would still allow significant lending.
Other than Mancur Olsen, some of the more interesting reading I've found includes George Akerlof ("The Market for Lemons"), Garrett Hardin ("Lifeboat Ethics", "Tragedy of the Commons", and several books of essays), Neal Stephenson's Baroque Cycle (a cunningly disguised treatise on the emergence of stock corporations, banking, and modern finance and capital), Niall Fergusson's The Ascent of Money (a less cunningly disguised version of same), and The Ordinary Business of Life which is dry as dust but still a wonderful exposition of 3000 years of economic thought.
A book I've just heard of but haven't read is David Graeber's Debt: The First 5,000 Years. He's a radical anthropologist, but has some really keen insights and views on the formation of credit and money (guess which came first).
Money is a temporary store of value. Imagine a world without it. How would commerce work? Via direct barter. Direct barter is inefficient, because you may have to engage in an entire chain of transactions in order to get the one good you are trying to obtain. That's money's purpose -- to make this more efficient.
What Krugman is saying, and I think it's hard to dispute, is that a currency that incentivizes hoarding rather than transfer of temporary value is an extremely inefficient one, in terms of economic activity. And free markets hate inefficiency, right?
http://krugman.blogs.nytimes.com/2009/07/07/the-paradox-of-t...
The counterintuitive thing is that you would think that all savings flow back into the economy as investment so demand will always equals supply. This is an axiomatic assumption of classical economics (the idea is known as Say's Law) and is what people generally believed before Keynes basically demolished it.
Keynes' General Theory was revolutionary because it attacked the foundations of the classical economics which were still taught but which clearly failed to describe the real world. His book outlined a number of reasons why economies don't stay in equilibrium: expectation changes, wage stickiness, the "animal spirits" of investors, etc.. You can take or leave his individual points (people have tried regressing them out), but at the end of the day he was a voice in the wilderness telling the world that deflation was bad at a time when conservative economists were advocating deflation as the solution (!!!). Secretary of the Treasury Andrew Mellon at the time was even saying the same sort of thing we hear from Austrians and Ron Paul today, that the solution to the Great Depression required the government to "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate [and] purge the rottenness out of the system."
This was actually monetary policy after 1928 and it only made things worse, tanking the economy and ultimately sparking a series of bank crises in 1931. Yet there is no explanation for how things could have gone so badly according to the classical economic theories which predate Keynes. Keynes' core insight was showing on a theoretical basis how economies can fall into suboptimal equilibria ("liquidity traps") characterized by high unemployment and deflation and fail to recover on their own. By the time Friedman made the remark that "we are all Keynesians now," he was pointing out that even Keynes' critics accepted his points as true by the 1970s, a time when the academic debate had shifted to whether fiscal policy (government spending) or monetary policy (interest rate manipulation) made for better policy.
> Keynes promotes printing of money and lots of government spending
This is the sort of thing you hear from people who haven't read him - Keynes did not champion indebtedness. The closest you will get is an allegory he presents in the General Theory of having the government bury money in mineshafts so the unemployed can dig them up.
Republicans trumpet this example as absurd because they think Keynes is telling us to pay people to dig holes. In fact, Keynes knew the example was absurd and was using it to parody his critics. Replace the moneybags with gold and you have exactly what happens to deflationary economies on the gold standard: as the value of gold rises in relation to the currency, the economy devotes more resources to digging up gold until the money supply expands enough that deflation stops. It is not hard to see from this example that embracing deflation is about as silly paying someone to dig holes in the ground, and actually much worse given the enormous social costs of mass unemployment you have to suffer in the meantime.
Investment is a good thing to have, too:
GDP = Consumption + Gross Investment + Government Spending + Trade Surplus/Deficit
Paying back of credit card debt (at least principal) doesn't fall into this equation. The interest falls into the Consumption category (paying for a service). That's why consumer debt adversely hurts GDP when out of control.
This is a major hole in my current understanding of economic theory. My gut reaction tells me that being in debt should be bad but if you think about it, it's really a good place to be. If the general monetary supply is inflationary, then money you owe is gradually losing value. Which is an excellent proposal for those in debt: do nothing and wait, and you will owe less material value. So when you say that "future money is not going towards goods and services" I am at least a little OK with that, because future money isn't worth as much as money today, in actual fact.
I agree with his assessment (bitcoin would be a disaster as a national currency), but don't think this is a problem since it is valuable as an asset store and transfer mechanism, and seems to be holding value.
Genius.
For bonus points, read the actual book. Informed discussions are always more interesting.
I know that winning the Nobel Prize is not the end of the world and that there are often political motives behind these prizes (Obama anyone?), but between believing a guy who won a Nobel Prize in economics vs. believing a random guy on HN with no real argument, the choice is easy (to me at least).
To the best of my knowledge, Krugman rarely (if ever) hurls ad-hominems: he always tries to explain why he strongly disagrees with conservatives, tea party, or Obama. The adjective he uses for them almost always fit his explanations.
Hayek also won the Nobel Prize and would undoubtedly disagree with almost everything Krugman believes.
He won for "pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena" - http://www.nobelprize.org/nobel_prizes/economics/laureates/1...
I don't believe the gold standard is a good for our mandated monetary system, but I also don't believe forced currency monopolies and gold confiscation should exist in a "free" country - http://en.wikipedia.org/wiki/Executive_Order_6102
> Imagine, if you will, someone who read only the Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis?
Biased or unbiased doesn't matter. The truth is biased. If the WSJ or Krugman says the passage of X bill will destroy Thailand's exports, and Thailand's exports rise, that's a failure. If the WSJ or Krugman say that Thailand is a beautiful country, that's irrelevant to the question.
Can you or Frum point out specific examples that might make one conclude that one op-ed page was more reliable than the other?
BTW, truth is not biased. 2 + 2 = 4 is not biased. Only people can be biased. Using throw away cliches like that doesn't get us anywhere.
Truth is biased; it will ignore every argument you make that contradicts what it knows to be true. 2 + 2 = 4 is irredeemably biased against 2 + 2 = 5. Disturbingly partisan.
Bias has to do with how we perceive the world. To say that data has a bias comes from a unique perception of fairness, not the data itself. To exclude relevant data to make a point, which these op-ed pages are notorious for, is a form of bias. More definitions here: http://www.merriam-webster.com/dictionary/bias
In this case, an appeal to authority is a perfectly valid way of asserting that a certain conclusion is more probable than the other.
In any case, if the underlying argument is valid it really doesn't matter who is making it, right? An appeal to authority is really just a shortcut to avoid the full argument but it only works if the full argument (with no appeal to authority) can be made.
Certain circles of people do view him as an authority, but many others do not. There is no consensus as to Krugman's expertise and so relying on his authority (as opposed to his particular argument on a particular issue) is dubious.
Economics is a difficult field in which to find concensus on many issues and so an appeal to authority in this area should automatically raise eyebrows.
At that time:
$10 -> B10 -> 1 widget
Now move forward to a 10x increase in Bitcoin:
$10 -> B1 -> 1 widget
So the price of widgets went from B10 to B1. Deflation.
Meanwhile, MtGoX currently shows 7.00.