Krugman's Baby-Sitting Co-op Explains The Design Flaw At The Heart Of Bitcoin

i think its ironic that you're putting forth the case for unmanaged economies while glossing over the results.

i think most economists (including Krugman) would agree that managing an economy is hard, and that oftentimes, the people in charge don't get it right. but that doesn't mean the alternative is better.

in this specific case (bitcoin), the alternative to managing the money supply centrally is a fixed supply of money. in an environment where the economy (the gross output of the market) is growing, that leads to deflation. krugman points out that deflation slows down economic activity, possibly catastrophically. do you disagree?

The economy is already centrally controlled. A few centuries ago, much of the world, even the outer reaches of Europe, had mostly independent, semi-nomadic people living on it - including the land the USA is on.

Now the vast majority of people are wage slaves for a very tight group of intermarrying heirs - the Waltons, the Koches, the Sauds, the Mars's, the Johnsons, the Newhouses, the Rockefellers etc.

From 1993 to 2008, the US unemployment rate never hit what the current rate is - 7.6% unemployment. Most of those people currently have no control of the economy, or their own lives. The idea that the government's protection of this central racket may lessen is of little concern to most of these unemployed.

See the original Krugman article. It goes further into explaining efforts to try and rectify their economy, as well as a general discussion on the principles involved.

Float compared to what? The price of an hour of babysitting was always 1 because the only thing on the exchange is an hour of babysitting.

I suppose you could argue some hours of babysitting are more valuable than others, and people could negotiate, say, 4 hours for 5 coupons or vice versa. It's not clear this either (a) wasn't already done on some ad hoc basis (I'd imagine if it was agreeable to both parties, it'd probably happen) or (b) would have provided a solution to the liquidity problem, though.

Think about that in somewhat more pragmatic terms. Lets say Alice babysits for Bob for 1 coupon per hour. And hoards coupons. Over time as the supply of coupons becomes more precious she can charge larger and larger 'rates' for her services. Eventually she has all the coupons and nobody else can get any baby sitting.

At which point we discover her maiden name is Bernanke! And she has set herself to be the central bank of babysitting coupons, which she will loan out but only at extortionate rates bwa ha ha ha!

Basically if someone has all the currency then you can't really make a market with it. Even if the prices fluctuate. Long before the market shuts down it becomes very inefficient.

There was only one good, so the price cannot float

It's a good point. Coupons were a pegged currency (with fixed exchange rate to commodity or to other currency). The same wrong assumption that made Bretton Woods failed.

Realistically, Bitcoiners can't even agree to fix unspendable UTXOs. I can't imagine that they would ever agree to devalue their own holdings.

The flaw in the argument is that BitCoin is not (currently) a unit of account (we don't price contracts or goods or services in BTC), and is (nearly) infinitely divisible.

So even if 90% (or 99%) of all BTC is being hoarded, the other 10% (or 1%) can be divided up for use in transactions. That much speculations will cause wild gyrations in value and massive short term volatility, but the people using BTC to transact JUST DON'T CARE.

I really don't care if I'm buying my $1000 flat screen with 1 BTC or 0.0001 BTC. Neither does the merchant. I bought the BTC, sent it to the merchant, and the merchant sold it so quickly that the value didn't change much, and we are happy.

So that's the short term. In the long run, the volatility might decrease as the total market capitalization increases to 10x or 1000x of its current value.

Then we can start to think about using it as a unit of account. If we do, we may enter a deflationary spiral, but by then BTC will already be used in an enormous swath of the economy.

So I interpret Krugman's argument not so much that BTC CAN'T take over the world, but that it SHOULDN'T take over the world. (I'm not sure if I agree. Many economists have been arguing over this point for decades, and I'm not smart enough to sort it all out.)

Krugman is talking about "The Paradox of Savings". Here's F.A Hayek's rebuttal to the argument when it was originally proposed back in the 30s: (http://mises.org/daily/2804) (Sorry if I'm a bit of a broken record on this but it applies too well to bitcoin).

> provide a counterpoint to the deflationary spiral criticism?

Is that the retarded idea that no one will buy anything if prices keep falling? Look no further than computers, cell phones and all manner of electronic gadgets. Their prices keep going down, but everyone keeps buying them.

If you need/want something now, you'll buy it now.

Here's a summary of the article: "The State-Controlled Mainstream Media paints a gloomy picture of a currency that can't be controlled by the State."

EDIT: Perhaps a downvoter might want to point out a flaw in what I said?

Just because an asset perpetually appreciates does not mean it has a present value of infinity. I hope to write a deeper rebuttal soon in the form of a blog post.

Seems to me it's an argument for the status quo, so if you are say Warren Buffet it is a vary valid concern. If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. That sounds like a pretty awesome situation to be in.

Be wary of financial explanations, because in most cases when a business person or economist says its good, they either mean its good for keeping things stable, its good for the elite, or its good for the average person, all of which might not be you. For example, you might see someone on CNBC saying they need to make sure they don't have a disorderly default, but really if you are in a position to take advantage of that temporary disorderly market you could gain from that.

Thanks for all the replies made in the sibling comments and their descendants.

To me it seems that for the time being (e.g. the next 50? 100? years), as long as we have a currency alternative to bitcoin such as USD, these problems can be avoided by just switching currencies to be able to buy/sell/borrow/invest in, as long as other parties agree to it.

Or am I missing something?

Note the contradiction: It was diagnosed that the recession of recent years was caused by uncontrolled lending which was possible thanks to issuing money by central banks and keeping low interest rates in this way. At the same time bitcoin that is free of this flaw and prevents reckless lending is criticized.

Deflation and hoarding was never a real problem. Baby-Sitting Co-op IS a silly story that does not scale. Gold had similar deflationary property as bitcoin and somehow it was used in trade for ages. Critics miss the point that monetary wealth is useless if you can't spend it, so at some point hoarders will say: enough, it's time to use some life. At the end of the day, money is just numbers with the potential to convert it to comfortable life.

My selfish, self-interested side says: I would wish more hoarders who collect numbers and don't convert it, so they don't use real world resources. They leave more for me!

Is it "inflation" if each new IOU is accompanied by a corresponding unit of production?

I thought not, but I am no expert.

That has nothing to do with whether he is right or wrong about this issue, though.

Funny how the title of the article is "Why most economists' predictions are wrong." I think he's really out of his element, making more technological than a economical prediction.

If/when bitcoins ever become an important currency they will have all the same problems as other currencies, and others unique to being bitcoins. E.g. central banks will try to manipulate them, governments will tax and regulate them, and people will speculate on them.

Being able to subdivide and increase in value are not attributes unique to bitcoins.

Oh, and the article DOES address this exact point.

There won't be a liquidity crisis only if all people dealing with bitcoins will accept to lower their prices in response to the deflation of the currency - this would include workers paid with bitcoin. Not very likely. Would you accept to be paid less and less every year (month, week...)?

The problem is that they increase in value, to a degree that the individually rational choice is not to spend them "now". The babysitting coop coupons were effectively subdividable as well: participants could have taken the initiative to say "I'll provide two hours of babysitting for an hour coupon" or "I'll provide 15 minutes of babysitting for 1/2 an hour coupon". [Edit, for elaboration] That would be rational when the value of babysitting in the further future (e.g. Valentine's day) exceeds the value of babysitting in the nearer future (e.g, Feb. 11).

Subdiving does not increase the overall supply of Bitcoin though. There would be no way in the future to obtain Bitcoin, except by taking it from someone else. Or someone else's hoard, as the case may be. (This is at least briefly touched on in the article)

This is also covered in the book "Debt: The First 5000 Years", when gold-standard and silver-standard monarchies had real problems keeping money in circulation due to the effects of merchants' savings and overall finite supply mixed with the large demand for coin in the Orient.

It has nothing to do with "comfortable folks producing for the government" and everything to do with coordinating production and consumption. If everyone produces for 20 years and accumulates money, and there is no inflation for 20 years, and then they all try to retire and spend it, but there is no one to produce, since everyone wants to retire, you get hyperinflation chasing the small amount of available goods. Alternatively you inflate the currency for 20 years, to encourage people to consume their savings as a sustainable pace.

Remember: if you spend your inflationary money NOW on durable goods (canned food, wood, whatever), then you can trade those goods for inflated currency later, and not lose any value.

But, if you don't spend your money (maybe because there is nothing on the market worth buying), then inflation is the natural correction to bring the money supply into balance with the goods supply.

Here the problem is that bitcoins are illiquid: you can't spend them freely on most goods and services, and you can't get a consistent exchange rate into a liquid currency, and the supply problem means that hoarding is sensible... right up until the crash.

Of course a coupon is a currency. What do you thing a currency is? It's a store of value.

> they centralize the danger to a single, publicly controlled entity.

Come to think of it, we should centralize the backbone for the internet in the white house basement, so that we "centralize the danger to a single, publicly controlled entity."