The Antisocial Network
nytimes.com
nytimes.com
This analogy is so wildy off the mark. In fact, an opposite scenario is more apt; a transfer of bitcoins is like handing someone a bag filled with cash, and then announcing it to everyone else in the world so that we can all agree on who has possesion of what. Only now you have a robot or other faceless surrogate perform the transaction for you, and (ideally) nobody knows which surrogates, or addresses, map to which people. The fact that Krugman's analogy botches the primary mechanism that makes crypto-currency work is disappointing.
Edit: wording.
If Krugman can't even get the basics of Bitcoin right, I'm certainly not going to buy into his view that the ongoing printing/digitising of funny money - $85 billion/month (US) and $76 billion/month (Japan) - is nothing to worry about. When trillions of dollars have effectively appeared out of thin air, the question needs to be addressed, is this responsible monetary policy or is this Mugabenomics?!
Krugman specialty is macro and liquidity traps. Bitcoins are way out of his comfort zone.
Seriously, how long would it have taken him to read up on Bitcoin and learn about the publicly distributed transaction ledger?
> "Unlike credit card transactions, which leave a digital trail, bitcoin transactions are designed to be anonymous and untraceable. When you transfer bitcoins to someone else, it’s as if you handed over a paper bag filled with $100 bills in a dark alley."
I don't think it's too far fetch to imagine that non-techy people would have a hard time grasping the concept.
It does seem a lot easier to make private transactions with bitcoins. But anybody sufficiently motivated can achieve an arbitrary level of privacy with either, right?
It's not widely publicized that it's a distributed transaction ledger that uses proof of work to distribute trust in a mutual distrustful network.
But even if it was ... when I pay you in bitcoins, it's not too far from the situation in his analogy! Sure, the ledger is updated, but no one knows who I am and who you are, so we may as well have been in a dark alley. The analogy breaks down only in that the dollars can be counterfeited or printed by governments, whereas bitcoins cannot (at least, it's not feasible to do so).
But as far as anonymously exchanging money without recourse, it's actually a pretty apt analogy. It's a bit like off-the-record messaging. You can see that a transaction has taken place, you can even see how much money has been transferred, but you don't know who the parties were. (That last part is not strictly true yet.)
Setting aside the near ad-hom based on the fact that people use currency for drugs, he seems to take the idea that bitcoin is anonymous for granted. That means he doesn't understand what he's talking about, and there can't be two ways about it.
Bitcoin can be considered pseudonymous, and in a system where exchanges need to abide by money transmitter laws combined with the fact that every transaction is a matter of public record, the situation is murky at best. And when you actually think about it, if people must identify to exchange bitcoin for other currencies, that might mean a sea change in the transparency of financial transactions.
Krugman, if you read this, think of your goddamn reputation and do some research! There are about a million exciting inferences to be made based on the hard rules of the bitcoin protocol. Start here. http://bitcoin.org/bitcoin.pdf
That the technical details differ is functionally irrelevant since this is what BitCoin people are claiming you can do!
http://www.huffingtonpost.com/2012/06/21/paul-krugman-alien-...
Between this and the misinterpreted claims that Krugman actually called for the Bush administration to initiate a housing bubble are really weak ad hominem attacks.
If you had only two choices, no spending, and spending, then yes, spending is better. But your choices are often between not spending, building a bridge or a school, feeding or educating a kid, or building a bomber. And Krugman's point is that spending on the latter when borrowing is at historical lows is better than austerity.
I find it ironic that a lot of the principle people upset by Krugman's analysis of Bitcoin are Austrian Business Cycle enthusiasts, who often promote the idea that volatile cycles are a creation of the government pumping money and credit, but who don't seem to recognize that a currencyt like Bitcoin has its own volatility that itself could drive crashes from instability.
Here we have the world's greatest scientific laboratory test of libertarian monetary policy, a free market, "cryptoanarchist" currency, and if by running this experiment, we see that the traditional economists, who have been pointing out the flaws of the goldbugs and Austrians for years, have been right all along, will views moderate and accept the data?
Also comparing Bitcoin to a mature market is ridiculous. There is so much volatility due to the huge amount of uncertainty surrounding it and the huge potential upside. In 5 or 10 years it's perceived value is unlikely to have much volatility. Once we know what it works well for and what it doesn't work well for, its value will be understood and its purchasing power will be predictable. Prices in BTC will likely fluctuate very little but steadily drop due to deflationary pressures.
The macro economy is a a completely different issue. Deflation or the paradox of thrift can leave everyone worse off in the way way that a trade can be win-win, a non-trade can be lose-lose. The basic criticism of goldbug mentality is that if the money itself becomes a better investment than using the money for transactions, then the social function of the money as a means for trade is devalued. Fewer trades = loss for everyone.
And frankly, you should be spend some of your money supporting the overall system in which your business has thrived, including basic infrastructure, education, and insurance. It is in your own rational self interest to do it, but unfortunately for society as a whole, too few people are able to realize it.
Is your future business really made better off, if we converted everyone into Austrians, and we just left millions of elderly without support, millions of unemployed with no insurance, and millions of kids with no public education? There's no evidence for the libertarian utopian position, and not much evidence we should fear mixed-model economies. Sweden is doing very well with "socialist" tax rates, a debt-to-GDP ratio <30%, average GDP growth >2.5%, not the disaster that the welfare state is supposed to be.
I don't think we need to adopt Sweden's policies to solve our problems, I think we can maintain our dynamic economy without this constant fetishizing over extreme economist policies on both sides. We need tweaks, not revolution.
http://research.stlouisfed.org/fred2/series/BASE
That shows you what actually happened to the money supply. In other words, the central factual claim made by Krugman is false:
The practical misconception here — and it’s a big one — is
the notion that we live in an era of wildly irresponsible
money printing, with runaway inflation just around the
corner. It’s true that the Federal Reserve and other
central banks have greatly expanded their balance sheets —
but they’ve done that explicitly as a temporary measure in
response to economic crisis. I know, government officials
are not to be trusted and all that, but the truth is that
Ben Bernanke’s promises that his actions wouldn’t be
inflationary have been vindicated year after year, while
goldbugs’ dire warnings of inflation keep not coming true.
[0] http://research.stlouisfed.org/fred2/series/BASE
[1] http://research.stlouisfed.org/fred2/graph/?g=8l2
[3] http://www.forbes.com/sites/afontevecchia/2012/12/12/qe4-is-...
Furthermore, one would be hard pressed to claim a rise in food-prices resulted solely from inflation-- given the record droughts in America [1] and record fires in Russia [2] that devastated entire crops last year.
Please, for the sake of good argument, try to be factually correct when trying to claim others aren't.
[1] http://theweek.com/article/index/230673/americas-worst-droug...
1) Fixed the link to include the four year gas chart. Up from $2.03 to $3.57 in four years. Doesn't bode well for your case. Short link due to ampersands:
2) You seem to grant that inflation contributed to the rise in food prices. A one off drought can't explain the persistence of the rise since 2008, or the fact that food inflation caused the riots which led to the Arab Spring in 2011.
http://www.telegraph.co.uk/finance/economics/8492078/How-the...
The first graph illustrates the correlation between the
prices of food and the Fed’s purchase of US Treasuries
(i.e. its quantitative easing programmes). (A widely-
discussed graph illustrating correlation between QE and
broader commodities indices can be seen here.) We see how
the food price index broadly stabilised through late 2009
and early 2010, then rose again from mid-2010 as
quantitative easing was re-started (QE2) following Ben
Bernanke’s Jackson Hole speech of August 27 – with prices
rising of about 40% over an eight month period. Similar
correlations can be observed between Fed purchases and
wider commodities indices, but let’s focus on food for now.
... But the reality is that a rise in commodity prices is
precisely what theory predicts would be a consequence of
QE2, and the data give the same picture – we aren’t
investigating a contentious mystery in the data; we are
seeing precisely what we ought to have expected.
Krugman himself is a knowing accomplice, one who always pulls his punches with respect to the banks:
http://krugman.blogs.nytimes.com/2010/04/12/failure-is-a-fai...
One thing that keeps coming up in comments, both here and
on my column, is the widespread belief that all we need to
do on the banking front is (a) break up the big banks, so
that none of them are too big to fail (b) promise not to
bail out any banks in the future. That way, the claim goes,
bankers will know that they will face dire consequences if
they misbehave, and market discipline will do the rest.
Dream on.
...
But just letting banks fail isn’t going to happen — nor
should it. In practice, talking about doing so is just an
excuse to avoid real reform.
*Price of a barrel of oil is a much more reliable measure because extreme environmental laws really get in the way of building refineries, which are also prone to being shut down, thus consumer gas prices are much more volatile than the price of crude. This reminds me that the price of oil is very strongly influenced by OPEC, so that is actually something I'd avoid looking at when measuring energy prices. Besides, oil is just one component of energy (although, probably the most important and largest one I'll say). Coal is still cheap as ever (discounting environment regulations) and natural gas prices has bottomed out due to fracking.
PS: Link is a little off still (missing ampersand between USA/Average)
Regarding gas prices, Bush's wars drove up the price of oil. And then just when our adventures in Iraq finally came to an end, the money printing began in earnest. Obama hasn't helped by keeping Keystone XL in political limbo, pushing offshore drilling outside the US, generally assaulting the energy sector with regulation, and setting fire to several more countries in the Middle East (Libya, Syria, Tunisia, Egypt, et alia).
If I interpret you correctly, you state that prices would have fallen if the Fed had sat around and done nothing. I believe we may simply disagree on the desirability of this: some may prize debtors, but I value savers. And I thus generally think of falling prices for household goods (the dreaded deflation!) as a good thing. However, the Fed looks at one of its primary duties as propping up the prices of mortgages. The ostensible purpose is to protect "underwater homeowners" who spent beyond their means. The actual purpose is to take toxic waste off the balance sheets of banks and to put this hot potato in the laps of dollar holders (not just taxpayers, but all dollar holders, including the Chinese).
Anyway, we can talk all we want about these macroscopic phenomena, but ultimately what it boils down to is that people want the Fed to "help the poor" and not simply stand there. And the optics look like they are helping the poor by diluting the dollar and thereby inflating away debts (i.e. the inflation which "doesn't exist" will soon be called a feature and indeed set as a goal by the likes of Krugman).
However, the Fed is also inflating away earning power, and the banks are the first recipients of these inflated dollars, thereby profiting the most from said inflation. The result is a policy that actually hurts the poor far more than simple inaction and rewards the very richest - not entrepreneurs or technologists but the banks that receive direct deposits from the Fed for its "purchases" of mortgage-backed securities (meaning $1 purchases of things worth $.01, or $0).
Bitcoin is a strike against the Fed and the banks by the Valley, perhaps a critical blow. It is very surprising to me that pg (or anyone) could think that USG could possibly have released something like Bitcoin, as it strikes at the very core of the US government's power: the ability to print money.
However, a lot of people who still held on to their mortgages do depend on the value of homeprices to stay up, (and the value of a college degree while we're at it since student loans recently overtook creditcard debt).
We're getting way off topic here though. I'll just close out with I think the best solutions are to: 1) Bring back the Glass-Steagall Act and don't allow Investment banks to gamble with consumer money 2) Once (1) is actually in place, then the next time a banking crisis comes around, let all the Investment banks fail and only prop up the ones that actually provide deposits, loans and savings. That will right a terrible wrong done 5 years ago. 3) I came up with this recently after reading Liar's Poker and a followup interview a few years ago of Micheal Lewis and John Merriwether: make all banks private (non-public) corporations again. The only bank that is not fully public is Goldman Sachs (yes, they went public in the 90s, but there are still partners who essentially control it) and is probably part of the reason they do better than everyone else.
And the 2007-2008 world food prices were cause by this, not related to inflation at all: http://en.wikipedia.org/wiki/2007%E2%80%932008_world_food_pr...
I absolutely agree with you on this one though, but that also shows why the current printing of money isn't manifesting itself as hyper-inflation, it's sitting around in bank-deposits, or at the fed itself, doing nothing.
Using the loose definition of inflation as "too much money chasing too few goods", the extra money that is flying around isn't chasing any goods, so it's not a problem for now, which is not to say it won't be a problem later, say in a year or two.
As seen here: http://research.stlouisfed.org/fredgraph.png?g=hxg
There is no conspiracy.. MIT's billion prices index matches CPI almost verbatim. (http://bpp.mit.edu/usa/)
Having held interest rates at 0.5% or less, for 18 years now (since 1995) they are also going to conjure up $76 Billion/month of funny money to buy government bonds, on a mission to double the monetary base by $1.4 Trillion within 2 years.
Nobody really knows what the consequences are going to be, but I think one thing is certain: ordinary people are going to find it hard to accept so-called 'austerity measures' and reduced living standards when they pick up a newspaper and read about central bankers creating money out of thin air.
[1] http://au.news.yahoo.com/thewest/business/a/-/world/16670172...
There are very good reasons most economists DO NOT include commodities like oil and food in inflation indicators: they're highly volatile, as you point out. And they tend not to be correlated to other inflationary indicators. Just look at the Gold crash the past two days, and oil crash today.
Please explain what economic model you use to indicate your preferred economic policy? Krugman uses standard IS-LM, which has been vindicated time and time again during this crises.
The thing I never liked about bitcoin was the whole let's prevent inflation by not allowing the 'printing' of money bit that are baked into how the bitcoin supply expands. I don't see any reason to expound on that other than to make a political, rather strongly libertarian-leaning, statement.
If only the value of BTC would settle down a bit, it would make a great way to facilitate micro-transactions.
EDIT: I just looked and Dwolla is US only.
The point of the article was not to inform, but to denigrate Bitcoin (and Gold) in the reader's mind. Both Bitcoin and Gold are a means to measuring the value of paper money over time, as well as a potential store of value. Krugman is not going to write anything in support of Bitcoin because he likes the status quo and doesn't want things to change.
http://techcrunch.com/2013/04/13/the-cost-of-a-bitcoin/
back of the envelope calculation: $2B market cap in its heyday a few months ago, and the $150k x 365 = $57M a year in "fees" which is about 2.8% of the entire bitcoin economy
remember, the banks also spend the fees back into the economy, such as paying their employees :)
The idea of treating electricity and clean water (among a whole host of other resources) as abundant as the air we breathe is one worth pursuing.
Sure, resources being as abundant as the air we breathe is an idea worth pursuing. Unfortunately it smacks into reality where resources are limited, are being converted into unusable forms at increasing rates and many if not most of the critical ones are peaking or have peaked in terms of production rates.
Still... I long for Iain M. Banks Culture too... sadly I just don't think it's going to happen.
The internet and sites like Khan Academy are the first great steps in making education abundant for instance.
Electricity is another resource that within the next decade anybody can have in abundance. Well, anybody with a roof onto which a solar panel can be placed that is.
Little by little it is happening.
"Resources" is a conveniently vague word which could mean almost anything that people happen to think they need at any given point. Are horses and buggies a resource? Because if so, we're running pretty low. If not, though, we're probably good. If software is the "resource," I could probably make 300 million copies in my apartment.
Most of the "resource" problems in the world are actually governance problems. For example, if the government is too corrupt and/or unstable to set up desalination plants, then there is a critical water shortage. On a pure physics basis, we have enough energy for hundreds of thousands of years. There's a reason why the northeast US is sometimes called the "Saudi Arabia of coal."
The whole Limits to Growth thing from the 1970s should be thoroughly discredited by now. They picked a particularly bad time to come up with it, too, right before the Green Revolution and a prolonged slump in commodity and energy prices...
Then there's topsoil. That's a resource, and in much of the midwest we're down to barely the amount needed for plants to root.
Potable water is a resource. The state of many of our aquifers is precarious.
Your statement that begins "on a pure physics basis..." bears little resemblance to any known facts about our current energy position. I'm a physicist by training, fwiw.
If you are going to predict doom and gloom, you could at least give me a plausible scenario, like a supervirus or nuclear war. Running out of energy is just not going to happen any time soon.
If you wanted to stretch your horizons beyond the 1940s (hard, I know)... you could predict that soon enough we'll be able to synthesize oil using yeast and some energy input.
There are ways to replenish topsoil. Or even not to use it at all. Look up hydroponics-- another not-particularly-new technology.
People are pretty good at dealing with gradual change, especially when there are huge economic incentives to do so.
bitcoins are the ultimate fiat currency, with a value conjured out of thin air, paper currencies have value because they’re backed by the power of the state
Dollars and yuan are fiat currency. What difference does it make that bitcoin holders aren't back by a state? Is anything going to change if countries convert their reserves to bitcoin? How many bitcoins does the US own?
This seems like an argument that will evaporate given enough time.
If history is any guide, they'll want the ability to dictate Cyprus's internal policies. That's usually the international response to default, rather than demands for gold.
Concrete power, rather than weak symbolic representation of power.
Let me know when some country starts to accept bitcoins for tax purposes.
I'm still not sure whether to buy this argument, given that history has more than a few examples of state currencies crashing like there was no bottom, too.
State currencies usually crash when the State isn't doing to well, (not infrequently as a result of losing a major war.)
Which is actually consistent with Krugman's point.
Ultimately, value of any good used as currency (and, really, pretty much any good at all) comes from two sources: (1) what is it good for without trading it (use-value), and (2) what do I expect I will be able to trade it to others for in the future (trade value). Pure currencies, like common fiat currencies and bitcoin, tend to have no (or virtually no) use value -- sure, you can use pennies to weight something down, or burn banknotes for heat, but that's most irrelevant. Their value is all trade value. Having a government that you expect to have to deal with that expects payment in dollars (or pounds, or what-have-you) for fines, fees, taxes, etc., and which denominates damage awards in civil cases in the same currency, and makes tendering that currency a legal attempt to pay a debt which is given weight in court (what "legal tender" means), provides a baseline demand. Of course, when that State becomes weaker, the support its backing gives currency becomes weaker.
Translation: "Our fiat currency hasn't failed this time... yet. Ipso facto, it will never fail. Anyway, it's not worthwhile to try to forsee future problems until they actually happen."
I'm not a fan of CNBC, but every once in a while they say something decent. http://www.cnbc.com/id/48349503 “'Every single fiat currency in history has collapsed, this time will be no different.'”
I'm not predicting the demise of any major currency. However, I can't say I don't have my concerns about current practices, and history does not bode well.
I read (wish I could link to give credit to the commenter) a nice analogy today - of BitCoin being the Napster of the space, innovator but not the ultimate winner.
Krugman's point as to its necessity is valid, however I still see it as likely that we'll end up with a currency of consensus, which has exchange value because a critical mass of people believe in its value and are prepared to act on that for a sustained period of time.
EDIT: Not to mention that apparently we can't trust the government, but we can definitely trust a giant profit-motivated non-democratic entity to manage our currency?
No wonder he doesn't get Bitcoin at all.
It's going to happen with the dollar too. Everything is going to keep going fairly OK, even though we all know it shouldn't, until the day it doesn't.
Just because it hasn't crashed yet doesn't mean it isn't capable of or likely to do so.
1. You don't need faith in math. That's the point.
2. Just because it's based on math doesn't mean it can't all come crashing down.
3. If you think you can invest money in math, please contact me privately about some exciting differential equations you may be interested in.
Just reading about "complicated math problems" make my brain hurt. There is nothing complicating in a hash function except designing it properly.
While there are valid attacks on bitcoin he is not making them.
I recently did a little reading into the mechanisms behind bitcoin, and am intrigued. I was skeptical but certainly understand the merit now, though I don't understand enough details (especially the transaction-fee-only endgame) to rule out vulnerabilities. However, it does seem clear that the miners actually perform a valuable service of ensuring the integrity of the bitcoin system. So, for Krugman to say that the bitcoins are created out of thin air is disingenuous, if not surprising.
However, looking pass his technological misunderstanding, he does raise some good points about why bitcoin can not be the idealistic currency people want it to be.