Bitcoin and positive vs. normative economics
krugman.blogs.nytimes.com
krugman.blogs.nytimes.com
Here's another interesting (though imperfect) way of thinking about bitcoin: it's a decentralized corporation, where bitcoins are ownership shares and the business is money transfer, like a decentralized Western Union. And for further thought, could other types of businesses also be structured in this way?
I don't know how the transition could happen, but at the end, the mining in the network will be done by citizens, bitcoins will be named "bitvotes", and every citizen will mine those bitvotes, or they could be distributed fairy (one bitvote to each citizen). Then, the citizens could vote about anything with those bitvotes, and the bitcoin technology ensures that the voting is provably fair and verification of the correct voting results doesn't require any third party.
But again, this is not my agenda and I don't know if it would be good; I just say that the bitcoin technology invention allows this to happen.
So, you'd be forced to reveal your bitvote address to me under threat of violence. Once you vote, I just check that you voted for me. And if you didn't...
A real cryptographic voting system goes to great lengths to prevent this scenario. In such a system, a voter can prove to himself that his vote counted toward the proper party, but crucially the voter cannot prove such to anyone else. This prevents coercion.
Of course, real cryptographic voting systems have a bunch of other nice properties, but this is a really major one that most people overlook.
Example of a cryptographic voting system: Helios (https://vote.heliosvoting.org/). Also see the tech docs (http://documentation.heliosvoting.org/verification-specs/hel...). Helios is an online system, so it's not ready for prime-time voting --- it would need to be adapted into an in-person scheme, which cryptographers have already created --- but it does demonstrate the concepts involved.
This is an area of active research, BTW.
> your scenario is not observed in the wild, since it is illegal.
I don't mean to be snide, but I've witnessed a great deal of illegal things, so "since it is illegal" is not that convincing.
Even if you discount the threat of violence because of the possibility of police intervention (e.g. you report being threatened), consider the notion of vote buying: a rich person just says they'll pay you lots of money to vote for them. This isn't necessarily something people would want to report, given the possibility of financial benefit, especially if the person is down on their luck.
At any rate, if electoral fraud is something that is "not observed in the wild", people sure do make a big fuss over it (see http://en.wikipedia.org/wiki/Electoral_fraud for some references).
This is actually why Helios voting (which is end-to-end auditable) doesn't prevent coercion either: your voting is done 'at range' (online), so a coercer can just stand over your shoulder. Just about the only surefire way to prevent coercion is to somehow physically give someone security while voting.
Okay, well, anyway, my point still stands; even if coercion is possible in the current-day low-tech system, if we're going to discuss a cryptographic replacement, we might as well restrict ourselves to the baseline "best-studied" ones so far, virtually all of which include coercion-defeating mechanisms.
At a minimum, if a physical presence were the norm with cryptographic voting and there was an option to be absent (like today), then we would be in an identical scenario with regard to coercion while gaining the end-to-end auditability of the cryptographic scheme. It seems like a net positive, although many critics of cryptographic voting see the increase in complexity as unworkable.
You're missing the fact that it's very possible to use coercion to discourage certain groups from voting at all. Just target the groups that are likely to vote for your opponent, and you've essentially used coercion to manipulate the election.
Because people might ultimately think "well my vote probably wouldn't have mattered" when the line is 8 hours long on a Tuesday, but they will definitely care when they get fined $30 - but they're not going to simply argue the fine should go away, because it will be a little reminder of "oh yeah, and you didn't get a say in your government either!"
Australia has mandatory voting as do other countries. We don't have problems with it.
How is this different than what currently happens?
There are records of which polling place a person voted at, and whether they showed up to vote, but (in theory) there's no way to tell which of the thousands of ballots from that polling place match to which individual voter.
(Admittedly over a decade old now)
I think the point is that our current voting systems require a measure of trust, where a blockchain based system could be trustless.
But I probably didn't explain it well enough. I didn't mean that you would vote which politicians will rule, you would vote on concrete decisions state such make. Nowadays, you vote politicians and they make decisions, and with blockchain network, you would directly vote for such decisions, making the politicians an unnecessary layer. ;-)
Votes and "dollars", what ever your concept of dollar is, should never be the same thing.
I'm reminded of an example which I believe was given by some libertarian writer, perhaps David Friedman. One big role of governments and private institutions is the regulation of service industries through testing and licensing. In many places it is illegal to provide legal advice without an official license, often from the government. But all you need is email and public key cryptography to solve that issue. A certain legal expert, known only by his public key, could develop a good reputation for providing good service in some jurisdiction, let's say California. He need not be legally licensed in California or even live in California. You can just email him your question, arrange some electronic payment (okay, Bitcoin could work here), and he can respond with legal advice signed with his private key. Bingo. You know for a fact that you received legal advice from someone with a good reputation for providing legal advice, which is precisely the point of government licensing for lawyers.
EDIT: I mean sure, some people are going to die of contaminated food. But once the trustworthy labs are known, everything will be fine! It's not like companies or people ever change in quality either so it will be good for all time.
You seem to be implying that government regulation prevents any bad incidences from ever occurring, when that is absolutely not the case. Heck, even with government licensing, most people still turn to non-government sources of information (namely reviews from previous customers) to determine which providers to use for things like lawyers and doctors.
The onus, now, is to prove your product is safe. Not that it doesn't contain wall plaster. You have to prove you've taken precautions against deleterious outcomes at the outset.
And that's the problem you're not addressing: how, in providing legal advice, does a new player enter the game? And what do you do if everyone in it is actually really bad at what they do, but see no money in improving it?
You've managed to say "well the system as it is kind of works that way" and so your conclusion is "hey, let's strip away some protections, and definitely stop trying to think ahead about what outcomes we're trying to achieve."
Because you know, what could go wrong? Just hope you're not in the "learner experience" losses I guess. You sign up for unlicensed drug trials right?
Perhaps, but by now it should be apparent that no one can trust regulatory bodies to act in the best interests of the public either.
> And that's the problem you're not addressing: how, in providing legal advice, does a new player enter the game? And what do you do if everyone in it is actually really bad at what they do, but see no money in improving it?
How do things work now, in industries that are less regulated (like babysitting), or even in industries that are highly regulated (like restaurants)? I'm not an entrepreneur or a businessperson, so I don't really know, but I suspect that if I wanted to offer legal advice for a living, I would attempt to get statements from well-regarded individuals or organizations (perhaps experienced lawyers, or law schools) affirming my ability. I would use those statements to advertise my services. This is just a guess, based on what inexperienced lawyers already do in our current system.
> your conclusion is "hey, let's strip away some protections, and definitely stop trying to think ahead about what outcomes we're trying to achieve."
No, my solution is to strip away political authority, and with it the possibility of regulatory capture, a drawback which I think far outweighs the benefits.
> Just hope you're not in the "learner experience" losses I guess.
I've been to several bad restaurants, but my reaction is to give them a poor review rather than to wish for the government to ban them.
> You sign up for unlicensed drug trials right?
I don't sign up for any drug trials, but I might if there was an illegal drug I thought was necessary for my health but which was banned by regulatory agencies. And that has actually happened with the FDA.
- identity ledgers
- credit scores / reputation tracking
- credit & debt creation and trading
- non-bitcoin asset ownership ledgers
- voting systems
- kickstarter
- ebay
It'd actually be possible to build distributed voting systems into this applications, such that changes require majority approval. It's also possible for new decentralized corporations to raise money by "IPO"-ing with a currency (Mastercoin raised ~5 million this way).
If bitcoin fails, the losses of those that went into bitcoin certainly won't be "redistributed", so why should the gains? Not to mention the current monetary system also has huge disparity so it doesn't really seem to be a property exclusive to bitcoin per se.
A system that offers no rewards to early adopters makes no sense because everyone is incentivized to just wait until it proves itself since the gains will be redistributed anyways, so why bother with the risk before it's a sure thing?
Why can't the system exist just based on the incentive of the value that system brings? Why can't that be reward enough? The issue here is allocation of resources - to build and implement this structure and have it being adopted. The reason this is getting exposure is because businesses can make a profit, in a de-centralized Ponzi-scheme like structure - and with it being de-centralized giving it a huge amount of momentum and putting it to a holistic scale, where there can be lots/"unlimited" players perpetuating the system in different ways.
An alternative is the government implementing this system - and then why not the government (society as a whole) make those gains/rewards that occur? And I'd more imagine an international government than individual nations.
What I am trying to contrast it to is how it would look if everyone was already in this system, and then furthermore, if they were all brought into the system at once - having it mirror current resources and ownerships. This isn't easy to conceptualize either, as people's time is a resource - and what's the minimum value of a base unit of time?
Yes, giving reward speeds up how quickly the system will exist or seemingly be adopted by people, though it doesn't mean it's actually implemented in a secure and stable way. Its competitor is essentially money, so people who want to keep the status quo of money in place will be a very strong friction against Bitcoin. When people buy Bitcoin with real money, if they are the last ones, what they get from each Bitcoin will be less than what the early adopters do - which I feel is a very large disincentive for Bitcoin ever being fully adopted by everyone. And if 90% of people are now using Bitcoin for transactions, how much is real money actually worth? Those "late" adopters will not have places to spend that money, fewer and fewer, and so they end up absorbing the downside or rather they end up paying for the upside that current investors / early adopters are gaining. Is this wrong logic? If not, how is this fair? Simply saying "don't be the last!" isn't really an adequate response either. The value of real money won't decrease any time soon, though as a system similar to Bitcoin has higher adoption rate there will become a tipping point where people just won't accept real dollars in exchange for Bitcoin because they won't have as many places to spend it, it won't be as easily "liquidated."
The why is so you can create a system that doesn't punish or put "later adopters" at a disadvantage. If putting $1 in of current money into the system, and then the equivalent of $1 into the system 5 years from now gains you the same value, then that would be fair and balanced. There being a fixed amount of Bitcoin, that isn't structured to be immediately distributed to 100% of existing money, is a problem. It's currently structured to be a land grab, where land is a finite resource.
Perhaps I am missing some foundational understanding of how Bitcoin works and that is skewing my understanding and answers.
The redistribution of wealth is something that we've learned to deal with once already (progressive taxation) so hopefully we can learn how to do it again with cryptocurrencies.
No, that should not make you vastly wealthy...
That is ridiculous. Those people invested early, which drove the price and popularity up, which adds legitimacy and publicity to the system. This is a perfectly fair reward for being on top of technological advances and understanding them enough to want to invest, I see no reason to rescind any of it.
Replacing one system of "I or my ancestors were smart enough to do this a long time ago" with another one does not particularly improve matters.
Nearly all Bitcoin's critics criticize it for being a poor replacement for cash, or for gold, or for some other traditional monetary unit. Automobiles are poor carriages too, and engines are poor horses.
I sympathize with some leftist critiques of deflationary currencies and libertarianism, but since I'm not sure Bitcoin is a currency I am not sure they are applicable. It is true that many bitcoiners have a libertarian/anarchist ideology, but I am not sure that matters much. A thing is what it is. Bitcoin is... whatever it is.
The core developers can commit code and make releases that do whatever they want, but if they e.g. tried to pay all transaction fees to themselves, miners wouldn't install the new version and someone would fork the project.
How much control does any open source developer have over the projects they work on? Linus seems to have pretty tight control over Linux, but if he started messing up, he'd lose his position pretty fast. Likewise, the developers have a lot of control, as long as they are effective and behave well.
If the developers tried to push something through that many miners wouldn't like, I'm confident people would notice and it would cause a large outcry.
> Seemingly innocuous changes can indeed have unforseen consequences.
The core Bitcoin developers seem conservative, reasonable, skilled, and they test things quite heavily. That said, changes are risky, and they've caused problems in the past. Bitcoin is risky!
If a bunch of miners decide to change the protocol but the majority of users stayed on the old protocol then those miners would be mining a worthless (or at least less valuable) fork of the blockchain.
The reference client is just that: a reference client. It is irrelevant how many or how few developers are working on it.
That one word is what set apparently most people to speak of it, and treat it as money.
BC is nothing like Money. BC is a card trading game where the players make the cards, the difficulty to make cards increases , and the value of the cards is decided by the market. It's a fun geek game. Awesome.
BC is everything money as we know it today is not. Money followed value creation (something made, something done).
Bitcoin was created, valued at X, AND THEN looking for value to replace.
We're still in the second tier, which means people are still asking "why should we care?" and vocalizing their fears about something they don't understand. With technology adoption rates increasing over the last year (due to the greater interconnects we have via the Internet) I'd suspect we'll see the start of the third tier in 3-6 months, tops. As fears give way to trust, we'll all settle into a routine with the technology by the end of the year.
Yeah, Bit-distributed-public-ledger doesn't have the same ring, but I feel like there are a million problems that can be solved with this technology that are barely being explored.
Namecoin is one example, a distributed DNS system, but it feels like that's just scratching the surface of problems that require allocating sparse control over many decisionmakers.
I guess a service that provided free names like the one you made there might be an interesting addition.
What's the difference?
People perceive money to be something of intrinsic value (Or that it _should_ be that. Krugman's complaint about arguing normative versus positive is at play here, for sure). People perceive credit as merely a record of a debt.
The gold-standard freaks seem to not understand this non-difference. A large subset of folks who ideologically back Bitcoin also indulge in this fantasy.
What does it mean to be money? I like the definition that money is what we value not for its usefulness in itself - but because we speculate that we'll be able to exchange it for something useful. And bitcoin fits this definition perfectly.
Let's look at what you find if you were somebody searching up bitcoin for the first time. You would eventually land on http://bitcoin.org/en/. bitcoing.org describes bitcoin as open source P2P Money. It says "Bitcoin is an innovative payment network and a new kind of money". You go on Wikipedia and you get "Bitcoin is a peer-to-peer payment network and digital currency based on an open source[6] protocol, which makes use of a public transaction log".
The creators and early adopters of Bitcoin clearly wanted it to be used as a currency and as money, but it is being done in an unconventional way, to say the least. Unfortunately, none of us seem to understand this so everyone thinks that if it is supposed to be money at its root, it should behave like money does.
Bitcoin is such new and uncharted territory that most of us do not know what to expect. We are all wondering how these virtual coins are able to stand and hold value on the mere fact that people are exchanging them among one another for nothing other than speculating that they will benefit from the exchange in a future exchange (their really is no benefit you feel right away, such as their would be if you bought something with cash, as many places do not accept bitcoin). But at the same time, I feel that when money in the form of paper bills was first introduced, there had bound to be people wondering the same thing. After all, taking a step back, who would consider putting such value to pieces of paper that we do in today's day and age?
At the end of the day, I see what Bitcoin is trying to be and would be real happy to see it get there, but I also see what people think it is, a glorified internet point, their ticket to wealth.
The thing with paper money, at least recently, was that it originally started out as being tied to gold. Instead of having to carry around gold for exchange, you would exchange these pieces of papers which were the equivalent amount in gold. However, once the idea of paper money became so entrenched governments realised they could remove the actual backing without many people saying "Hey wait a minute. These pieces of paper are now worthless."
If people had tried to introduce paper money originally without the gold backing, there's no way it would have caught on in the same way.
Both are still worth something, at the moment, though, which is all you need for an exchange to be possible.
I'm not sure that this is exactly what you mean, but there are many existing and proposed "businesses" (I prefer the term "markets") built on Bitcoin:
That is an incredibly arrogant statement, considering the article is from a Nobel prize winning economist and you did nothing to refute or undermine his actual points or references.
I think a sound economic analysis of the market can be done regardless of the transactional method. sure, it's clever but its a feature of a value store, not actual value
I'm talking about basic micro/macro-economics.
So basically it brings an ability to the middle-class that normally only the top 1% have. We know wealthy people use tax loopholes(and a few of them, laundering) and... why do the states need to monitor financial transactions? Don't tell me because terrorism. I'm sick of that being the reason for everything when we have this kind of nonsense[1] happening.
I translate this to: "Bitcoin is designed to free non-rich people from the restrictions, fees & surveillance placed upon them by the wealthy elite"
I don't know if crypo-currency will succeed long-term, but seeing how hardcore scared/doubtful some people are about it makes me think a nerve has been hit. I just hope that if btc fails, it fails naturally/organically/mathematically on its own... not because someone arbitrarily makes it illegal.
I hate the "terrorism" BS as much as you, but money laundering and large-scale scamming ( https://news.ycombinator.com/item?id=6972139 ) are actual threats.
Yes, banks launder drug money for cartels. Without the state, who would slap their wrists?
Meanwhile, people's lives are ruined for selling or even possessing small amounts of harmless drugs.
http://www.bloomberg.com/news/2013-07-02/hsbc-judge-approves...
but yeah...bitcoin is bad! cuz...bad people!
All federal tax information for employees is self-reported by employers. There isn't a huge monitoring infrastructure in place—just required-by-law reporting of what people get paid. Getting paid with not-dollars doesn't change the system.
Monitoring for taxes comes second.
We don't have any system in place to show military spending breakdowns or get people upset about it or give people who are upset about it a way to influence changes shrinking it in the future.
Just how you do the actual enforcement, that's a different issue, especially if corruption is entrenched already.
The funds from your undeclared income could be going to other people' undeclared incomes.
Bitcoin makes a lot of this even more complex, and as more people start using/trusting it for larger transactions, it'll be quite difficult to know who actually owns what. I might not even need half my loopholes anymore.
1. just like this guy: http://blogs.wsj.com/wealth/2008/05/19/the-homeless-billiona...
My friend, you fall under this critique. While the middle-class can make transactions if it chooses using Bitcoin, it has to deal with its huge volatility - a 'store of value' problem. You cannot have just a 'medium of exchange', like the song "You can't have one, without the other".
Anyway, I think the root of the problem with those mainstream journalists is that they do not distinguish between Bitcoin as an unit of account (like, I have 0.5 BTC, or this item cost 0.1 BTC), and a Bitcoin as a technology (peer-to-peer trustless network with all the wonderful attributes it has). Their mind mangles those two things into one, and they then see Bitcoins as only some virtual numbers, which are moving from one wallet to another. Starting from this perspective, they can't conclude anything useful, and can't see the intrinsic value of Bitcoin the technology.
So what we have is governemnt creating an illusion of unmanaged store of value through financial engineering. It's is somewhat artificial, so I suspect it's not stable either. Consider that financial bubbles are caused by excess of capital relative to production needs, and the glut of capital was accumulated strictly due to people trying to preserve value of their savings. There is a mismatch between amount of value people are trying to preserve and cumulative size of viable investment opportunities.
That is, if people are successfully using a crypto asset for their business, AND they are able to use a power and network infrastructure for this that is difficult enough(not perfect) that government authorities aren't successfully applying their "monopoly on force," then government is now pushed into competition with the crypto-anarchic principles and must find a way to become a "better product," enough so that people will prefer government money over crypto.
How will government come up with a product that is better - in a positive way - than a crypto asset? Government has the authority to issue new centralized currencies. This means that if it truly embraced computing - which it never has to date, having never faced a challenge of that nature - it could program a form of currency that is "smart" and bakes in the policy decisions and taxation currently executed by bureaucracy. It would be made attractive to citizens by building in basic income, as well as the service provisions. The result would be more powerful and more efficient than anything we currently know as government. Cash would still exist as a backup, but the government could discourage its use except in emergency situations.
The central failure of Krugman's understanding of cryptocurrencies is in the value of mining. It's not simply throwing energy away into solving useless math problems; it's spending energy to create infrastructure. That infrastructure is the part that does have intrinsic value, that can be used for something else in the same way gold can be made into useful things. Look at Bitmessage or any of the other projects built on top of Bitcoin. These form the floor Krugman can't seem to find.
My understanding could be wrong, as my understanding of Bitcoin would definitely be at the "noob" level :)
Brinks' entire CIT vehicle business is based upon just a subset of this function, and we can agree their value is not zero.
So as I see it Bitcoin is already obsolete; there are new coins that achieve the transaction capabilities for cheaper - they can be used in more potential applications, thus they're more interesting speculative instruments.
The specific benefit of proof of work mining comes in insuring more people have a chance to enter during initial distribution, but it still massively favors the early entrants and especially the people who have the hardware environment to mine efficiently.
So gold was used extensively 2000-3000 years ago. Exactly what was its intrinsic utility then? Plating astronaut helmets and high-conductivity, corrosion-resistant electronics?
The intrinsic utility of gold was that it was eminently verifable. It's got a characteristic ductility and it was a yellow metal. You could easily verify if it was 100%, 80% etc. In other words, to the ancients, the intrinsic utility of gold was "its trust model". Sound familiar?
You mightn't like my tastes but I don't like your gold necklace either.
Glass is not easy to work into jewelry on its own (or at least wasn't 2000-3000 years ago). Plastic-coated aluminium didn't exist 2000-3000 years ago.
While I don't think this analogy works without flaw, I do think that it draws a powerful connection between something that is widely regarded as a store of wealth, and something that is vying to compete in the same space.
And then, promptly, they also repeatedly ran their economies into the ground by conquering and mining tons more gold, and inflating their currency into worthlessness.
And this happened over and over - the Spanish did it, the Chinese did it, the French did it. Every gold economy before the invention of actual economic thought destroyed itself with gold.
Well, usually, the intrinsic utility of gold and silver was that they could be used as jewelry and/or used as instruments of worship. Most bullion money has evolved from substances considered divine.
Remember the Golden Calf?
As such, to an expert in any one of those fields, it's very hard to digest because looking at it from the perspective of one field might suggest it is doomed for failure. But experts tend to look at things from the perspective of their own expertise.
For laymen who might know a little bit about each of those domains, it feels like "Yeah.. this could work..". A simple analogy might be about how hardcore web developers always feel about PHP. They always say it's a pile of garbage and it's bound to self destruct and swallow the earth in the process. However, PHP trudges on with some very large projects and sites under it's belt.. and novice developers will almost never notice a problem with it. Experts can be wrong.
So yes, bitcoin has it's issues if you analyze each aspect of it. But maybe if you zoom out and take an overview it might start to make sense how all the parts get together and even with flaws with each sub-aspect it just might work.
Wait, I think we are missing his point. Last sentence of the article:
"So let’s talk both about whether BitCoin is a bubble and whether it’s a good thing — in part to make sure that we don’t confuse these questions with each other."
I think this article does not go into the 'will it work?' debate. It alerts us instead to another debate, 'to what degree do we want it?'
It is an addition to what Charlie Stross was saying. He is just adding "guys, why are your comments replying to a different question?"
At least, I think that is the discussion he wants to start. But his talk about the ceiling and floor in value in the middle of the article actually belongs to the OTHER discussion, the one he does not want to start but spends half of the text going into.
It is like trying to talk about empirics to consider for deciding national policy, while everyone is shouting their usual political opinions.
What I think you're saying is that the block chain and it's supporting infrastructure and the functions it enables ( decentralized notary, unrepudiable statements, etc. ) are creating value in the same way that making jewelry from gold creates value. And that's an interesting argument. Much more interesting than a bunch of people ranting incoherently about "fiat".
If I were in search of a dissertation topic as an economist/anthropologist; I would be looking at the current wave of cryptocurrencies as a fascinating natural experiment in the social construction of value.
I don't see how it is not the case that mining Bitcoins is throwing away energy.
If someone had made a crypto currency based on, say, protein folding [1], I could get behind that.
We could just create a crypto currency where we just hand out 100 units to every person. That certainly wouldn't require ASIC farms and such.
[1] Yes, I realize that the whole 'hard to do, easy to verify' bit is not completely obvious in the case of protein folding or SETI signals.
Bitcoin couldn't and wouldn't exist at all without that promise. So a simple system based on allocating 100 coins to everyone just wouldn't do at all.
Not without a trusted central party you couldn't. The work that goes into bitcoin mining is the 'distributed engine' that prevents double spending or forging of bitcoins. Bitcoin mining is not just a way of handing out new coins, its the very engine of the whole system. The only known way to break that engine is to control a bigger engine of the same spec (the >50% attack), and thats looking increasingly unachievable by anyone.
The 'work' is actually the verification of transactions on the blockchain - the reward from mining is just an incentive to do this (mining & verification are tied up in the same process).
The energy expended in mining is necessary to validate transactions in the network.
You might be able to make it more energy efficient but you can't remove the energy expenditure.
Ideally, the BOINC processing would somehow be directly integrating into the mining itself. But again, I don't have any idea how that could actually be done. But it would be nice if that is possible.
Mining is not that valuable, there are other ways to do it that don't waste so much energy.
> It's not simply throwing energy away into solving useless math problems
Yes it is, since there are solutions like proof of stake that solve the same problem using vastly less energy.
But it is also an arms race of energy spent. And the more valuable BTC becomes, the more energy a rational agent will use to mine it. Unlike mining gold, BTC mining does not have a fixed cost.
The complaint Mr Krugman is registering is that Bitcoin's don't even have that. If my car is totaled, I can always sell it for $100 for scrap. There is no bit scrap dealer.
So either you're misunderstanding Krugman's argument or I'm misunderstanding yours. I think you're confusing his normative and positive arguments (which are entirely separate!). You have used an argument against his normative argument ("Bitcoin is evil because it's wasteful.") but then used it to challenge his positive argument ("Bitcoin won't work out because it has no value floor."). That a crypto currency might end up helping society does not make it a good value store. Why would it?
For the time being, let's ignore those and concentrate on the primary purpose of Bitcoin's infrastructure, to facilitate decentralized value transactions between arbitrary parties. It is the infrastructure's fitness for this purpose that I see as giving it its floor; this may seem a slightly circular argument, but by enabling what it does it will always have the value of accomplishing that goal, even if it's trading for vast fractions of a cent (like Dogecoin).
Adding the network effects of its installed base, this probably places its floor somewhere well above Dogecoin's current value, but certainly far below what it's currently trading at. And indeed, it could very well undergo further corrections until it reaches a level of stability appropriate for a value store.
> I have had and am continuing to have a dialogue with smart technologists who are very high on BitCoin — but when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how it’s a terrific medium of exchange. Even if I buy this (which I don’t, entirely), it doesn’t solve my problem. And I haven’t been able to get my correspondents to recognize that these are different questions.
In other words, "to facilitate decentralized value transactions between arbitrary parties" does not actually provide a floor and thus give the coin intrinsic [1] value. Being useful is different from being valuable, at least insomuch as storage is concerned. I think Krugman has this one right.
One point made elsewhere in this discussion is that while Krugman might be right about the floor, he may be wrong about the floor being necessary to make BTC a stable, suitable store of value. Specifically, he might be overestimating the degree to which the dollar has a meaningful price floor, and the degree to which such a floor is actually the reason the dollar is stable and dependable. In other words, perhaps it maintains its value through adequately shared fiction, and perhaps BTC could do that too. I don't really know enough to have a strong opinion on that issue, but I think that's the structure of it. It's also worth pointing out the Krugman has the conventional view here.
Another question to ask of Krugman is why being a store of value is even a goal; what does the "success" in "successful currency" mean? Does it mean that BTC will be the unit of account, with prices and salaries denominated in it? That's certainly the case Krugman is taking on (hence the normative claims about central banks), and the case many here on HN arguing for. Or can it succeed as just a medium of exchange? I can trade my dollars for bitcoins and send them to someone, who will convert them to euros on receipt. Then who cares how much they're worth?
[1] For certain values of "intrinsic". The semantics aren't very clean here.
You're absolutely correct. People forget that bitcoin functioned just fine as a black market currency back before it became a rite of passage to opine on its future. Barring prohibition by governments, the cryptocoin ecosystem is here to stay and will likely continue to grow.
It seems to me that the shared fiction of the dollar is based on the shared fiction of America. The fiction of America creates a real American government that has a strong interest in maintaining the fiction of the dollar.
From what I can tell, Bitcoin does have a similar pair of shared fictions, the idea and the currency. But I'm not seeing the thing that America has between the two fictions: a powerful organization with a strong interest in keeping the money useful as money.
Being a store of value is a goal if you want people to hold a currency. For example, when I was an exchange student in Ecuador long ago, the Ecuadorian sucre was not seen as a good store of value. Better-off people would, as much as possible, not hold sucres; they'd buy dollars. Poorer or less connected people couldn't do that as easily, so they just got screwed. Eventually, the currency collapsed entirely and now they just use the dollar: http://en.wikipedia.org/wiki/Ecuadorian_sucre
I don't think BitCoin can survive purely as a medium of exchange. There's the obvious reason: why pay two sets of transaction costs when you can pay just one? But I think the bigger problem is that there's a period when someone is holding BitCoins. If those are a stable store of value, then you're ok with that. But if not, you're in the land of currency risk, and the only people who like currency risk are currency traders; everybody else hates it.
But to play devil's advocate because it's fun: to the degree to which it is useful to hold onto the currency you also use as a medium of exchange, then perhaps that does provide a value floor. In other words--assuming it is successful as a means of exchange--the fact that you have to pay a transaction cost to get out of a BTC position means you'd rather hold onto BTCs so you can use them later at no penalty. So then they would have intrinsic value, based on your aversion to trading them for something else; anything that makes you want to hold BTC other than their market price counts. The question there because which is the chicken and which the egg: being a successful means of exchange or being a good store of value? And of course, whether that transaction fee provides a meaningful enough floor.
I'm not convinced of that either, and it's especially weird to have the thing enforcing the floor to be falling, but it's fun to think about.
I think that experiment has been done with paper currencies where people stop trusting the backing. It would still have the same cost-to-get-out value (indeed, I'd think that value would go up as the currency fails). I know the Ecuadorian sucre went from something like 500 to the dollar to 25,000 at the end, so it would seem that the cost-to-get-out value is small even with traditional currencies; given BTC's theoretically low transaction costs, I presume it would be even smaller.
If the infrastructure goes on to do great things for society then it has (and has always had) intrinsic value and thus the price of BTC rebounds (or more likely never collapses in the first place).
Of course, you can say the infrastructure makes the coin more useful as a medium of exchange, but that's a totally separate point, as Krugman points out.
My personal view is that none of these things--gold, dollars, or bitcoin--has enough intrinsic value to make a useful value floor, and that as value stores they all just rely on a shared convention. So I'm not sure Krugman is right, and perhaps bitcoins will work out without that floor feature, and perhaps without ever really being used as a store of value. But this argument about infrastructure just doesn't work.
It is both the mining equipment (at any point in time) and the blockchain which make possible the use of BTC as both a storage of value and a medium of exchange. As long as there exists both a globally-distributed secure ledger and a network capable of maintaining it, then the individual accounts within its purview obviously have whatever values it records them as having.
I think there's a basic disconnect here about what we mean by "store of value". The simplest way to put it is that something stores value well if I can buy a predictable amount of stuff with it in the future. That the ledger does a good job of establishing that I have N bitcoins is different from telling me how much those bitcoins are actually worth.
Of course, we can easily imagine scenarios where Bitcoin loses all value but I think a sufficient imagination can produce scenarios for the other stores of value listed on that page as well. So, this is obviously a bit subjective territory (i.e., different people can assign different probabilities to each of the circumstantial propositions) but there is a strong argument from consistency for the designation of Bitcoin as a 'store of value'.
I personally think that mathematically-interesting (and rare) numbers do have an intrinsic value (even if only as a novelty or perhaps antique/collectible).
But I don't see where you've established that Bitcoin has such a floor, as I said above. I don't think we're getting anywhere, though, so I'm going to break off.
I understand that you do not think that those other entities have floors either (and I, having a sufficient imagination, tend to agree with that). However, in that case, the term 'store of value' is non-sensical since, given a sufficient imagination, no entities can ever satisfy the 'floor' requirement.
If the gold price collapses, you can sell it to jewelry and electronics manufacturers at some (low) price point. Gold has a weakness as a store of value because this price point is a lot lower than its market price during good times - and this is why Krugman is also not in favor of it as a store of value.
If the price of the dollar collapses, you can sell it to the Fed (usually indirectly - the Fed sells debt and then sits on the proceeds). This floor is pretty solid, cf. Volcker's recession in the early 1980s.
If the price of Bitcoin collapses, you can't sell the electricity used to produce it onto the grid - that electricity is a sunk cost. So what provides a floor to the Bitcoin price if for whatever reason its value suddenly falls? Probably only its utility as a medium of exchange, which in an era of electronic exchanges lasting fractions of a second probably doesn't provide a huge demand for the stuff.
Gold originally was the only metal colored like that (shiny) so it stood out, coupled with its scarcity it became a status symbol. It was the stuff of royality. It has some properties that make it useful in jewelry but pure gold is actually too soft for jewelry and is used mostly as alloys.
I am not saying gold (like other metals) doesn’t have its industrial applications, it does!
You can not convince me however that gold is inherently a better metal for jewelry than alternatives. It is only there to give jewelry that golden shine, which has been considered a status symbol. Now, if gold somehow became a "cheap" metal I don't think people would be keen on displays of their gold.
I think this is a dubious argument. It describes what happens most of the time, when the value of the dollar fluctuates. But what if the collapse of the dollar is accompanied by a downfall of the Fed? Hyperinflation has happened in many, many countries that used fiat currencies, and even the US has had high inflation:
http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype...
Bitmessage doesn't use the same blockchain as bitcoin. The work of bitcoin miners does nothing at all to help bitmessage.
Only inherited protocol design or reused code can be said to contribute, and that's not relevant to this discussion.
On the positive side, I think Krugman and DeLong are overestimating the strength of the floor for the value of a dollar. Hyperinflation would make it impossible for the Federal Reserve to buy up enough dollars to stabilize the value of the currency. Sure, you can pay taxes with them, but the government collects taxes to buy things, and if people no longer have faith in the dollar, the government won't be able to buy things with those tax dollars. There's no floor on the value of Bitcoin, but there's no floor on the value of the dollar either.
On the normative side, I don't think one's position on the utility of central banking matters when it comes to Bitcoin. If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation. I think central banking is useful, but I don't see a future for it.
Even if this is true, where is the evidence that we're in imminent danger of hyperinflation? Despite mounting public debt, U.S. inflation has remained incredibly low since the start of the financial crisis four years ago, as has the interest rate that must be paid by the government to issue new debt.
From what I can tell, we have on the one side a dollar that has endured as a value store and medium of exchange for hundreds of years, and which has proven remarkably resilient (valuable) by any objective measure throughout the worst economic implosion since the Great Depression (which the dollar also survived). On the other hand we have Bitcoin which is intriguing in many ways but which has demonstrable volatility even just in the short span of its existence. And which, as a feature, is not backed (in the hard economic sense) by any nation or bank. I mean it's cool and all but I see where Krugman is coming from.
If every merchant you patronize today accepted Bitcoin, would you rather have Bitcoin in your bank account or dollars? I'd rather have Bitcoin. They're easier to transfer, they can't be counterfeited, and their supply can't be manipulated.
If every merchant accepts Bitcoin and every consumer agrees with my logic, hyperinflation of the dollar would occur. Coinbase and its 0% transaction fees will lead to rapid adoption of Bitcoin on the merchant side. I'm less confident about the consumer side, but I see that happening as well.
I am also baffled by "they're easier to transfer" than dollars. Yes you can email BTC. But I can literally hand you dollars. No smartphone needed! And large amounts are trivially easier - I squiggle some lines on a piece of paper and hand it to you. Or if you want to stick to smartphones I can pull one out and send you dollars using one of dozens of e-payment platforms.
Interesting thesis though.
Transferring large amounts of dollars takes days. Transferring Bitcoin takes 10 minutes or so.
Transfers are slow because there is little need to transfer large amounts of money quickly, and slower transactions help address issues with fraud. If you are buying a car, or paying for a house there is little need for a fast transactions. So with BTC or USD, transferring large amounts of money will take days.
My debit card/square/venmo might have something to say about that...
You just don't notice it because they pay the miners by printing money. I'll be really interested to see what happens when they stop that and start relying on up front transaction fees to fund the network.
If 90% of the network is powered down to reduce transaction fees, that gives someone the opportunity to buy up 20% of it on the cheap and corrupt the network. Bitcoin has to use as many resources as possible to stay secure.
Right now the mining rewards being minted increase the Bitcoin supply at a rate of 11% per year. If demand for Bitcoin were constant, this would amount to 11% inflation. Demand for Bitcoin is currently increasing, so it is net deflationary, but this only lasts as long as the demand for Bitcoin is growing constantly. If you kept mining rewards high after the demand for Bitcoins had stabilized, you'd have five times the inflation of the dreaded US dollar, as you paid for your infrastructure costs through inflationary taxation.
(Which Benjamin Franklin and I actually like, but that's another issue entirely.)
[1]: http://www.economist.com/blogs/economist-explains/2013/05/ec...
So Bitcoin could be valuable in disrupting payment systems:
Step 1: Bitcoin becomes superior to traditional payment systems.
Step 2: This becomes relevant enough in the large scheme of things
that Bitcoin gets serious adoption outside of speculation.
Step 3: Traditional payment providers up their game.
Step 4: Traditional payment providers win, because their intrinsic costs are lower
(mining is inherently costly and not needed for traditional payment systems).
It's still vulnerable to computational attacks (no matter how impractical they may be) and miner collusion.
There's no need to regulate computing capacity when you have the power to tax enough wealth to ensure that the government always has more computing capacity. It's an arms race without the nuclear winter, and with the side effects of increased pollution and rapidly advancing processing power.
If everyone adopted bitcoin, the velocity of the dollar would approach zero. Which means that inflation would go down, not up.
And yes, I would rather have my [savings] account in a hard, non-inflationary currency. On the other hand, I can only earn interest when someone is willing to take a loan in the currency and pay interest on it. And I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand. So, you're going to have a hard time finding a bank that pays interest on bitcoins. This is why "bad money drives out good", aka Gresham's law.
Assuming the interest rates are the same, I'd agree. Would they be?
I doubt they'd be the same in either nominal or real terms. But that's a side issue.
You could already do what you're talking about with gold. A bank could offer gold savings accounts that pay interest on gold loans. They don't do it. Borrowers are deflation-averse and no one wants to deal with the exchange rate fluctuations.
BTC has some legit uses (like buying unjustly banned consciousness-expanding products over the internets) but the built-in deflationary death spiral in its design pretty much ensures that it will never be a serious full-spectrum parallel currency, much less a replacement for the dollar and euro.
When Bitcoin is the primary currency, there will be interest-bearing Bitcoin deposits.
http://bitcoin.org/en/faq#wont-bitcoin-fall-in-a-deflationar...
Same goes for the borrower and deflation risk.
Edit: I guess if the deflation risk tolerance for the borrower and the inflation risk tolerance for the bank are asymmetrical, then you would just end up with being able to loan one or the other. I suspect, per Slurry's point, that it's BTC that loses here.
Sadly it is not so easy to make money this way, the forward exchange rates will cancel out any gain from the interest earned in the inflationary currency. Otherwise everyone would do this.
You can make money doing this but really you are just taking a bet on exchange rates, you can easily lose money as well if the fx goes the wrong way during your investment period.
There are very few risk free ways to make more money than investing in US Treasuries.
At this point, and in the foreseeable future? Dollars. I'm not sure where people find all this friction relating to using dollars in the real world. I have no problems whatsoever. Besides, it's all virtual currency.
As far as your theory of widespread adoption of bitcoin leading to hyperinflation of the dollar, I'm don't even begin to understand how you see that working.
There's something you're overlooking though: the dollar was backed by gold until 1971, and that's where our problems really started mounting.
There's a somewhat cyclical argument here, as a semi-deflationary (or at least unregulated) currency was already standard for many years, and central banking and regulated currencies grew because that system was unacceptable. So you could say that central banking was a response to problems with Bitcoin-like currencies, and Bitcoin is therefore reactionary. There is little evidence yet that Bitcoin is anything but a reactionary currency, and no evidence that crypto-currencies are in any way "the future" (I believe they will be used in the future, perhaps more than they are used now, just as gold and diamonds are still used in some circles; but I don't see any indication that they are the future).
Unacceptable to whom?
Historically (you should read http://www.amazon.com/Great-Wave-Revolutions-Rhythm-History-...) inflationary money systems have been the tools of those in power to quietly take from the poor and less powerful. Whether or not the current era of central banking was intended to be that way is a question for conspiracy theorists - but it's very clear that that is exactly what it has become. These inflationary systems were ALWAYS less stable than their preceding deflationary systems, and ALWAYS ended in revolution, or conquering, or plagues, or what not.
Even Keynes knew this to be true:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Consider a poor family spending about 90% of their income on day to day expenses; versus a rich family spending 20% of their income - if there's 10% inflation, the poor family will go from a 10% margin of survival to a 1% margin of survival, which is a 90% reduction of ability to survive or save. Vice the rich family which has only suffered a 2.5% decrease in this margin.
Let's say (and this is atypical, as I said, poor people are usually less in debt than rich people) the poor family is additionally 5% in debt, versus 0% as in the rich case. Do you think it's any consolation that the 5% debt is nominally valued (and therefore decreasing in real terms) in the face of the fact that the family now is spending 104% of their income on day to day expenses? Moreover, the way in which poor people use debt (very short-term loans) typically involves interest rates that are far too high to take advantage of real reduction in value, and are over far to short of a term even if they had reasonable interest rates.
Now obviously these numbers were chosen because they make the calculations easier; but you should consider plugging in values of your own and proving that it is general.
Ultimately, calculations of the alleged losers of moderate positive and predictable inflation are meaningless without taking into account its positive sum effects: when "bury it under the ground" isn't an acceptable investment strategy earning average returns, more real goods and services will be produced.
two, if you think people won't consume if the money is deflationary, you're crazy. The US had net deflation for most of its history (except during wars) from 1600-1910, and certainly there was plenty of growth. Also, analogous to the "why do you ever bother buying computers knowing that they depreciate rapidly".
three. If you think laborers get paid wages that match inflation, you are crazy. In fact, as krugman himself states: http://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hig... " that there’s another case for a higher inflation rate ... It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis."
You cannot simultaneously make the claim that inflation will fix the sticky wages problem and also claim that wages will catch up with inflation.
four. "when "bury it under the ground" isn't an acceptable investment strategy earning average returns, more real goods and services will be produced." in other words, artificially encourage people to spend so as to enrich the already-wealthy. This should give a hint as to where the wealthy actually do store their wealth, and why inflation benefits them while stealing from the poor. Related: Encourage people to artificially spend more money on stuff they don't need without regard to the downstream environmental effects of increased consumption.
And for all but the last 45 years of that 410-year period, the US also had the ability to obtain labor by force and without compensation. And even afterward, for many decades and well beyond the 1910 cutoff, the US had labor arrangements which only were not classified as slavery due to legal hair-splitting over the definition of the term.
Thus, we can just as easily argue that slavery is correlated with economic growth. Or that disregard for the intellectual-property laws of other countries is associated with growth (see the US in the 19th century, China in the 20th and early 21st). Or... well, lots of complicated factors that you seem to want to gloss over to make an argument in favor of one and only one factor.
(and that's without getting into the volatility of gold-backed currency, the boom/bust cycles, the fights over whether to have a single or bimetallic standard, etc. etc.)
I am sympathetic to both claims, given that it's possible that economic growth in the modern era is only made possible by massive credit expansion (voluntary, fractional slavery.
boom/bust cycles are normal, what's so bad about them? If the claim is that people get hurt then the question we have to ask is why aren't we stepping forward to help them? As for single or bimetallic standard, those are of course political issues, I'm not as well versed to the reasons for them but it appears to me to basically be a pre-hashing (if you will) of the same arguments we're having now about inflationary vs. deflationary currency, except with more of granularity concern (not an issue with bitcoins).
Backers of a gold-only standard (mostly in the eastern US) wanted it because their fortunes were already amassed, and denominated in gold or gold-backed currency, and they did not want this diluted by the influx of silver from mines in the western US. Backers of the bimetallic standard had access to silver mines, or to the resulting silver, and wanted the ability to either have silver coined, or to present it and receive in return legal tender (which had been taken away in 1873).
For an edifying take on the populist/bimetallic position, consider reading William Jennings Bryan's "Cross of Gold" speech, which is full of eminently-quotable and still-relevant lines. For example, a rebuttal of what came to be known as the "trickle-down" theory:
Mr. Carlisle said in 1878 that this was a struggle between "the idle holders of idle capital" and "the struggling masses, who produce the wealth and pay the taxes of the country"; and, my friends, the question we are to decide is: Upon which side will the Democratic party fight; upon the side of "the idle holders of idle capital" or upon the side of "the struggling masses"? That is the question which the party must answer first, and then it must be answered by each individual hereafter. The sympathies of the Democratic party, as shown by the platform, are on the side of the struggling masses who have ever been the foundation of the Democratic party. There are two ideas of government. There are those who believe that, if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests upon them.
Hence the argument for "trickle up", effectively, as opposed to "trickle down".
Obviously if I thought wealthy people actually did hoard their wealth in dollars I wouldn't have made the point about inflation inducing people not to hold their wealth in dollars. Wealthy people could, would, and probably should hoard large portions of their wealth in dollars in the absence of inflation though.
I didn't making any points about people not wanting to consume if the money is deflationary, because obviously there are limits to how far one would want to defer consumption. Consumption /= investment. Investment is based around getting returns, and if average return is zero then there's very little incentive to invest instead of hoarding coins for those neither certain of beating the market nor particularly enthralled by taking risks. US prices oscillated wildly between 1600-1910 so it was hardly a sustained deflation in which burying dollars in the ground was the most reliable way of ensuring continued purchasing power in a couple of years time, but it's worth noting that growth was a bit more impressive after 1910...
Three. The whole point of the "sticky wages" argument for inflation - one I didn't actually make - is that as relative prices in an economy shift, the real value of some workers' contribution falls, but they still have bargaining power sufficient to ensure this subset of the labour force doesn't accept wage cuts (they take job losses instead). A corollary of this is that productive workers in growing industries can and do have sufficient power to demand higher annual wage escalators, and inflationary increases to payscales are commonplace in normal economic climates. Nothing about the sticky wages problem implies that wages relative to labour productivity of a segment of the economy can't catch up with inflation, in which case the median worker can ask for and get accept their annual inflationary pay rise. But I haven't mentioned the sticky wages argument. Actually I went out of my way not to mention the sticky wages argument, by giving a theoretical examples where wages were all indexed, and emphasising the importance of inflation in providing investment stimulus was far more significant than its distributional effects.
As for point four, I'm honestly not sure whether you're deliberately misunderstanding me to make a rhetorical attack or genuinely don't understand that "investment strategy" and "encouraging people to ... spend more money on stuff they don't need" are not the same thing, and the poor generally benefit a lot more from the rich investing in job creation than the rich buying nice little cabinets full of gold.
Sounds suspiciously like "trickle down economics". And that's not the appropriate comparison. The appropriate comparison is, do the poor benefit more from the rich "investing in job creation" or by themselves having easy access to a mechanism by which their wages and savings are not eroded (in a compounding fashion) by fiat?
That's not an argument. When rich people (or any people) get wealthier that really does benefit everyone; the problem with classical "trickle down economics" was the idea that this meant it was ok to exempt them from taxes, as if tax money was just wasted.
> And that's not the appropriate comparison. The appropriate comparison is, do the poor benefit more from the rich "investing in job creation" or by themselves having easy access to a mechanism by which their wages and savings are not eroded (in a compounding fashion) by fiat?
Policies that increase the value of cash savings (at least, to the point where it's more profitable than investing in stocks or the like) benefit the rich, and policies that decrease the value of cash savings benefit the poor, because the rich are much more able to save than the poor, and cash really is a zero-sum game. If the dollar ever became deflationary, rich people would sell their stocks and buy up ~all the dollars and capture almost all of the increasing value (businesses would probably stop paying wages out in dollars); meanwhile startups would find it much harder to attract investment, which would be bad for everyone.
You might want to consider what they do hoard their wealth in. It's not currency, and they also don't buy gold - they buy companies, stocks, and bonds.
What do all those things have in common?
I'm sorry, but I need you to connect the dots a bit better if I'm to understand this.
So, 1600-1900 in the US (minus wars which were incredibly inflationary but always temporary in that era) not enough for you?
The counterargument is this: In the era of central banking we have struggled to figure out how to make the economy work with endemic inflation. And it's failing. The two eras where the gap between the rich and the poor widened in a protracted, long-term fashion, have been in the aftermath of FDR's great dollar devaluation and after Nixon closed the gold window. 1972 was the last year the rich-poor gap was closing.
So would another planet colliding into the earth, fortunately we're in danger of neither.
> If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation.
No. Deflation is a part of bitcoin, not of crypto currencies in general. When deflation shows itself to be the problem it likely will be, we'll just switch to a better crypto currency that has predictable inflation built in; they exist already.
Is that like "Real Estate only goes up?" Remember that one from circa 2005?
This problem really does lead to crypto currencies having no floor like Krugman points out. At some point everyone decides what the next hot crypto currency is, and suddenly Bitcoin turns into Friendster and there's a rush for the exits and the price collapses.
It really does seem like cryptocurrency fanboys have bought into a form of "this time its different" because... crypto. And they're ignoring the fact that it is a currency with zero to backstop, and its clearly dependent upon fashion and popularity, since there's a growing marketplace now of competing cryptocurrencies.
This thread has been very useful to convince me that bitcoin is a classic bubble. I have no idea when it'll pop, but it appears almost certain that it will.
No, it's saying that Bitcoin has the feature that people who like Gold like, the supply can't be artificially inflated. That's all. Keynsian's won't like that because that means it's deflationary.
> This problem really does lead to crypto currencies having no floor like Krugman points out.
Krugman is wrong because he doesn't see the inherent value in them yet, and there is value in shopping online without giving the retailer my credit card details and without the retailer being worried about charge backs and banking fees; but he didn't see the value in the Internet either.
Brilliant people are often wrong when stepping outside their domain, and he clearly doesn't yet understand the technological advantages of crypto currencies.
He's right that deflationary currencies won't function well as currencies in the end, which is why Bitcoin could be MySpace and a better designed crypto may ultimately win, but network effects give Bitcoin the chance to fail before someone else can win. However Bitcoin need only become stable enough to be used to move money around and it'll have a ton of value to lots of people whether it's deflationary or not simply to avoid banks, fees, and chargebacks.
You admit that some other crypto currency may win. That means that bitcoin may lose.
Lose.
LOSE
What happens when it LOSES?
Like Krugman points out, there's nothing to backstop it and no floor.
Oh right, but he's just an economist, he doesn't see the "inherent value". He just doesn't understand...
You so easily swap contexts completely between all of this "inherent value" nonsense when you're addressing Krugman, and then a marketplace of cryptocurrencies which clearly is 'libertarian' and is going to have clear winners and losers -- without, obviously, thinking that last word through very clearly.
I'm clearly going to need to load up on popcorn, this is gonna be fun to watch...
Your thinking is very binary. It's possible that another crypto currency becomes the biggest one, that doesn't mean bitcoin loses, it means it's not the reserve currency that it is now. You don't seem to understand that people have different ideas about how a currency should function and each crypto that comes out will attract those that agree with its rules. Bitcoin is designed for Austrian economic fans who think inflation of the money supply is the worst thing ever. They will never abandon it for another crypto, it's already exactly what they want. Keynsian's will eventually move to something that includes built in inflation.
> Like Krugman points out, there's nothing to backstop it and no floor.
Yes there is, it has utility; even if another crypto becomes the more favored currency, Bitcoin will remain the digital gold it is because it's deflationary, easily tradable, and aligns ideologically with how many people think money should work (they're wrong, but that doesn't matter).
> I'm clearly going to need to load up on popcorn, this is gonna be fun to watch...
It's already fun to watch. That neither you or Krugman see inherent value in crypto currencies is something both of you will come around on eventually. He certainly changed his mind about the Internet being no more useful than a fax machine.
Hey, I love Krugman, we agree on much, but on this, he's simply wrong and he's been very wrong very publicly before. Your appeal to his authority is not a valid argument for why Bitcoin is a bubble, if you can't make your own, then move on but don't get snarky with this "he just doesn't understand" b.s. you're slinging; it's unbecoming.
Good luck with that. You've just said something along the lines of, "we'll just have to figure out how to live with terminal cancer."
Now, I'm no economist, but deflation is standardly seen as really, really bad, and for good reason. It's not just 'the opposite of inflation', as you probably know: it's an accelerating, self-intensifying brake on commerce.
How? Ask yourself: why buy today what can be bought tomorrow cheaper?
I know the the correct, rational answer to this question: "I won't buy it today, or ever, because it will always be cheaper the next day." (And then the deflationary spiral begins!)
But if this is really true, why has anyone bought a Playstation 4 or Xbox One? They will undoubtedly be cheaper in two or three or ten years. Well, consumers might be totally irrational; what about firms? Why has any company in history ever bought a computer when the price of computing power has been falling rapidly and (mostly) predictably for fifty years?
I don't think the question "Why buy today what can be bought tomorrow cheaper?" fully explains the behavior of people in the face of increasing purchasing power; there seems to be something else going on. Any thoughts?
The problem is that the economic theories often cited by Bitcoin supporters presume certain fanciful behaviors.
For example, in economic-theorist world, a frictionless spherical perfectly-informed perfectly-rational actor does not buy a six-pack of beer. Instead, the actor makes decisions:
* I will buy one beer at this unit price. Will I buy two?
* I will buy two beers at this unit price. Will I buy three?
* I will buy three beers at this unit price. Will I buy four?
* I will buy four beers at this unit price. Will I buy five?
* I will buy five beers at this unit price. Will I buy six?
* I will buy six beers at this unit price. Will I buy seven?
* I will not buy seven beers at this unit price.
* Therefore I will buy six beers.
I've long assumed that all the people who actually make decisions in this way are locked up in the laboratories of mad economists, who observe their behaviors in the way a biologist might observe a terrarium.
* Buy it now for $300 and play it for 10 years
* Buy it in ten years for $30 and play it then
(I have no idea how much an Xbox actually costs.)
So the question is whether that $270 is worth those ten years of playing it. A lot goes into that: what interesting things could I do with $270? How about in 10 years? How much do I want to play the games available for Xbox? Won't all my friends want to come over and play with me? Etc. Buying now might be perfectly rational, depending on your utility function.
"I won't buy it today because it will be cheaper tomorrow" is an argument on the margins. That's why temporary bouts of deflation don't cause everyone to starve to death because they keep putting off buying food.
But those margins do matter a great deal! There's some set of stuff that I really am going to wait on, because I only kinda want them now. There's certainly a discount rate for the Xbox that could cause all but the hardest-core fan to wait. So the deflation spiral doesn't take much to get started.
I'm not saying humans are rational (though I will argue that corporations do better here), only that the Xbox One example doesn't prove they're not, and that it's still consistent with the deflation spiral concept.
You also mention that this limited ability to defer purchases in the face of deflation is what makes short bouts of deflation not catastrophic -- it is somewhat difficult to get the deflationary spiral going if you can't actually wait to purchase things.
Given all this, the interesting question to me is, how much deflation does it take to actually cause a deflationary spiral? The answer is likely complicated, given that it depends on the specific utility functions for each consumer of all the goods and services that they consume.
Empirically, we seem to be able to cope with a decent amount of deflation, at least when it is limited to certain goods, like video game consoles, computing power, other manufactured goods, etc. (In some cases, even over very long timespans.)
One specific observation here is that short-lived deflations may not cause much behavior change because everyone expects them to be short lived. And changing your behavior is hard work, and your standard of living is sticky; you don't adapt right way, even if you're a business. Easier to just ride it out. But as the deflation period drags on, that consumption floor starts to fall (everything here is mutable!) as you get acclimated to the new normal. Since consumer confidence actually lags the other economic metrics a bit, an economy has a bit of time to pop out of deflation before the spiral really sets in. On the other hand, it makes it worse when it does.
It's also important to look at context: in that empirical evidence, we should note that the central banks were fighting deflation as hard as they could withe somewhat limited tools they had, so it isn't a spiral in a vacuum. Even then, Japan lost an entire decade of economic progress to deflation.
On specific items like video games consoles and computing power, I'd guess it's some combination of a) the utility of the items actually being quite compelling at their launch prices and b) a trick of psychology: in 10 years, there will be new, better video games and you'll want those instead, so you don't even really consider buying it later. (b) is irrational, because the console you're buying now is either worth it or not now; you don't actually have to buy it later at all. But it strikes me as very human. I think public has largely just accepted the premise the technology costs a certain amount; it just looks forward to having new features that fall into its locked-in price range.
On the other hand, one way to think about the technology stuff is that perhaps it really has held back a lot of the industry. For example, perhaps the price of the Xbox is artificially low at launch time because otherwise everyone would just wait for it to come down anyway; it's competing with its future self. The thought experiment is to ask how different purchasing decisions would be if an industry-wide announcement came out saying, "Moore's law is over. This is as good as computers get. They're going to cost X and do Y for the foreseeable future." Because I suspect a lot of people do put off technology purchases, waiting for everything to get better and cheaper. The complement of early adoption.
I should caveat that this is basically all speculation on my part; I don't actually know anything about any of this stuff.
I think you haven't really looked into deflation in detail, quite frankly.
For example the German hyperinflation was started by "London ultimatum" that demanded reparations in gold or foreign currency.
1998 - Another "evil" prediction from Mr. Krugman:
---
The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law"--which states that the number of potential connections in a network is proportional to the square of the number of participants--becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.
---
But hey, the future of the dollar might be the same as that of the fax machine ???
Your apparent heuristic of "they said one wrong thing so we can ignore them" is faulty. It just encourages the typical pundit's trick of never saying anything. I'd much rather hear from people who state things clearly and are sometimes wrong.
Ideology is never an accurate or complete description of the world. It is false awareness. What might be true under paradigm A might no longer be true under paradigm B, but at no point will an ideologue change his world-view to fit paradigm B. He will try to cram paradigm B into his ideology in order to preserve his ideology, rather than adjust his ideology to describe paradigm B.
For instance a fiat currency heavily regulated by state monetary policy might have been the best idea in the 20th century, during which for the most part there was no Internet. But in the 21st century, where the Internet enables markets that can function more efficiently, a virtual currency with a self-regulating monetary policy might be a better replacement. The jury is still out on that. BitCoin is an experiment, and that's the best thing about the Internet - it is a laboratory for experiments, where we can try new and different monetary policies really quickly, whereas in the wildly inefficient 20th century we were locked into one monetary policy at a time. We're just figuring out what works the best, but Krugman calling BitCoin "evil" suggests to me that he is afraid of what we might find out.
Then again, it's not a design a flaw - as I once thought - it's a clear choice: Why would anyone would want to own a non-deflationary asset? :-)
So actually, in my view, BTC as a currency is already failed. No one will be eager to buy online (perform an actual exchange) when he can buy the same items using USD, because BTC will possibly have a higher value tomorrow. While the USD almost certainly will not.
Best Regards,
ps. FIAT currency is regulated by the FED and you know who runs the FED. BTC market is run by those who have huge amounts of BTC and you don't have a clue about who they are. Not sure which one is more secure for a society.
But eventually everyone will have heard of BitCoin, and I believe BitCoin's growth will slow down, and its curve will flatten and look more stable. The more people have BitCoin the less small groups of individuals, or even countries, can influence its price.
But look at the growth of vendors who are accepting BitCoin over the same period. For the same reason it doesn't make a whole lot of reason to spend BitCoin during this growth phase, it does make sense to accept BitCoins. And even though most merchants don't wish to speculate with their revenue, even keeping a "float" of currency in BitCoin could be profitable, and so it is reasonable that merchants and vendors might want to accept BitCoin even though not a whole lot people are spending them these days. That can only increase BitCoin's value as a currency in the long run.
If it was unwise or wise to spend something based on its changing value, no matter how slowly, then it would be rational for me to want to spend all my dollars for goods and services today because the dollar value is going down. But the US dollar isn't depreciating at a fast enough rate for it to be rational for me to spend all of my dollars today, right? This is because the currency is inflating at a pretty slow percentage rate. A slow inflation rate is not all that different from a slow deflation rate.
It all depends on what will ultimately be the rate of deflation of BitCoin. If it is sufficiently slow(1% annually, for instance) it will be useful as a currency. If it is all over the place, it won't be.
Perhaps the transaction fees turn out to be lower than those for credit cards, in which case BitCoin maybe becomes an alternative payment network.
This is identical to arguing: Why would anyone buy computers when they are getting cheaper every year. At some point you make a choice where your preference for owning a computer is greater than your preference to save money.
> So actually, in my view, BTC as a currency is already failed. No one will be eager to buy online (perform an actual exchange) when he can buy the same items using USD, because BTC will possibly have a higher value tomorrow. While the USD almost certainly will not.
Gold is deflationary. When gold was the primary currency for the world commerce was very vibrant. Gold not being currency is a fairly recent development. People currently purchase things online with bitcoins when they could use dollars but choose to use bitcoins. I think it's very early to write off bitcoins as a failed currency.
Why would anyone ever cash out of any position with a positive rate of return?
By this logic everyone should stop consuming and put all their money into SPY, or similar market tracking indices. Yet they don't.
If you are an entrepreneur or a company going IPO, the you'd have to offer a better expected return than the currency itself. Your competition for investment dollars would be not only other companies, but cash.
The only way deflation will reduce consumption is if the rate of deflation exceeds all other rates of return. Simple math: I consume if
(value of consumption now) > exp(-(discount rate - rate of return) x time) x (value of consumption in future)
The `rate of return` term is the rate of return on my best investment - this is affected by deflation primarily if the deflationary currency becomes or improves my best investment.
If you plug in some example the numbers, you'll see that the effect this has on consumption is miniscule compared to the effect this has on the allocation of investment. That's because when choosing between investments both sides of the equation have the discount rate, and it cancels.
Atmosx is appealing to newspaper column keynesianism (that vague "I dunno what AD is, but I want more of it" flavor), and doesn't really understand what he is talking about. Do a back of the envelope calculation and you'll see I'm right.
The opportunity cost of doing so is predictable and calculable, and, really, needs only occur when there are better investments available.
Inflation in a currency is a feature, not a bug.
(Express your model in maths as much as possible, for the purpose of clarity.)
Asset[2]: Anything that has value and can be converted to cash.
For the purpose of this or any other discussion I've made this argument, the author of the comment/post clearly confuses the two above stated words or uses them interchangeably.
Currencies, in modern economics, are control by central authorities (FED/EBC/etc) which control their performance and try to adjust them. In their optimal status, when the economy goes well currencies loose value (inflation) by 1-2%. This behavior enhances money exchange and induces a spending behavior which is viewed as good for the economy. You will buy a computer today because your money will not buy the same model/computer tomorrow. When you buy something, you fight unemployment, pay taxes to the state and so on.
The computer you buy can be an asset though. The moment you buy it, starts loosing value. You won't go to the grocery store to exchange the computer for tomatoes. You will need a medium to do that, that medium is money (and that's exactly what BTC claims to be, but up until now it's not). The computer though except from an asset is also an investment. It can help you, generate value either in form of entertainment or money (programmers/designer/etc.) but it's still not money. Sure you can exchange it for something but that's not a straight-forward process as buying beers with a currency.
The next question is: Why I should own a currency? Because the local authority (a government) impose you to use it's currency to pay taxes. Currencies are never adopted, they are always enforced to populations by supreme state governments, as means of exchange. There is no other for anyone wanting to own an inflationary currency, except for that fact that you can't do anything without it. Of course in my example, I take for granted that we're talking about a relatively healthy state. Otherwise, people will prefer a foreign, more stable (less inflationary, or deflationary if possible currency. Note that less inflationary means deflationary for them anyway).
Now, BTC introduces a currency that has some characteristics. One of them is that it's finite[4]. So, deflation is chosen here by design.
Say you have 2 credit cards: 1 from BoA with USD and one issued by a third party linked to your BTC account. You enter in a grocery store and you need to pay, which one you think most people choose? The rational choice is to use the USD because it's an inflationary currency, while BTC is not.
Then, why Satoshi choose to add deflation in BTC: Because otherwise no-one would even care holding any. What kind of value an inflationary digital (non-backed) currency could ever have? None.
Bitcoin is better viewed as Gold in digital form. Say you have 10.000.000.000 USD and you wanna convert that money into some asset. Would you chose a 5 year old asset or a 5.000 old year asset to do that? The rational (obvious) choice is gold. It's 5.000 old and pretty much stable, BTC as long as we know can turn to ~ 0 tomorrow if the big players choose to opt-out or USA/CN/EU/RU decide to ban it.
Why is all this relevant for the purpose of this discussion: Because the commenter (Aqueous iirc) is talking about bitcoin as a currency and not an as an asset.
NOTE: Currency is viewed as assets at FOREX[3] but I'm sure it's not relevant for the purpose of this discussion.
[1] http://en.wikipedia.org/wiki/Currency
[2] http://en.wikipedia.org/wiki/Asset
[3] http://en.wikipedia.org/wiki/Foreign_exchange_market
[4] 20,999,999.9769 BTC. - https://en.bitcoin.it/wiki/FAQ#How_long_will_it_take_to_gene...
It doesn't matter. Say you want to maintain a portfolio of 90% bitcoins, 10% dollars. You have $100 USD and $900 worth of bitcoins. If you use the BoA card, you spend $50. Then you shift $45 from bitcoins to USD and maintain a 10/90 portfolio. If you use the Bitcoin card you instead shift $5 from dollars to bitcoins.
The only reason to choose one over the other is transaction costs. I.e., if it costs you $1 to make this transaction, and you expect a $50 USD deposit in the next month, you'll use USD to avoid the $1 transaction fee. If transaction costs are a % of the transaction size, you'll pay with the BTC card (and pay only x% of $5, rather than x% of $45).
Your post still doesn't explain why a deflationary currency will cause a person to stop consuming. Just as we could hypothesize a BTC backed credit card, we can also hypothesize an SPY backed credit card. The mechanics would basically be identical - at the point of transaction, the card company converts from the buyer's preferred asset to the seller's preferred asset. Both BTC and SPY backed credit cards already exist - it's equivalent to getting a regular USD credit card and selling BTC/SPY whenever you want to make a monthly payment (modulo a couple of extra clicks).
Incidentally, your post completely ignores the reason central banks manipulate currencies. The reason has nothing whatsoever due to the distinctions you make between currencies and assets (which, if I'm understanding correctly, is merely liquidity and the ability to pay taxes in them).
I never said will stop consuming. It will consume less. It makes sense, a consumer will spend whatever has bigger Y% of having LESS value in X time, not more!
Secondly: Have you tried buying/selling bitcoins? If you use a bank it's a pretty straight forward process but has huge costs.
Thirdly: Do you buy products using bitcoin? Do you think that people uses bitcoin to buy products online? Because all the transactions I'm aware off are either illegal (hard to track) or perceive bitcoin as an asset.
Central manipulate currencies in order to adjust the economy of a certain group, which is under their authority, as far as I know.
The distinction I make between currencies and assets come from ~ 300 BC (at least, probably way back) and I don't understand why even is a topic of discussion. BitCoin is treated by 99% of it's users as an ASSET not as a CURRENCY. No one is buying services in Bitcoin, if does not want to hide. Isn't it weird that while Silk Road used BTC as it's main currency, Amazon, eBay, Apple and every other big player, doesn't even care? You think it's out of spike or anything?
I'm not making any assumptions here, I'm stating facts. It's you who are suddenly re-writing 2000 years of economic history by assuming that buying with Gold (bitcoin) is the same as buying with FIAT.
I strongly suggest you go read an economics textbook that actually does the math. Working the models will help you avoid arguing with yourself about definitions (a pointless exercise even if you had a partner http://lesswrong.com/lw/np/disputing_definitions/ ).
> Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
However, the analysis fails again because he wants to decouple bitcoin's role as a store of value from it being a medium of exchange. To which I would like to ask: What's the point of a store of value if ultimately it cannot be exchanged for something else ?
That's like saying that the energy inside an atom's nucleus has no value. (prior to the discovery of controlled nuclear fission) Of course it had value but we couldn't use it without accessing it and tapping into it somehow.
Bitcoin's value is closely coupled with its utility as a medium of exchange, which is based solely off some pretty excellent technology and principles.
Now, don't get me wrong, I don't think its current value in terms of USD/Euros/etc. is necessarily linked well to it's current utility. However, there is value in being able to transfer something (a bitcoin or parts of it..) that no one else can transfer to someone across the world securely and almost instantly with little to no centralized control.
This ability is what places a floor on its value, whatever that hypothetical floor may be.
This is what excites the 'technical people' he mentions in his article. I don't expect non-technical people to 'get it' immediately, but people will get it, eventually. No one understood why email was important in the beginning either.
The market price of bitcoin is determined by the number of bitcoin holders who think they will go down in value; as coins gradually transfer to the hands of people who believe they hold long term promise, the market price of 'loose change' available for transfer will rise; that rise in price will actually _increase_ the use of btc as a transfer mechanism because it will attract more people seeing BTC as a store of value, which increases the store of bitcoins held for long term positions and thus the market price of BTC, etc. The increase of its usage as a medium of transfer ALSO increases the market price of BTC; that interplay between new value-minded long term investors and new users of btc as a transfer mechanism is what has been pushing the price up continually. the entrance and exit of speculators in the market is a short term distraction that has the benefit of spreading awareness but the drawback of adding to conception as a bubble.
after about the 6th or 7th one of these 'boom and bust' cycles that triples/quadruples the market price, people will stop seeing this as a 'maybe' thing, and my guess is that will drive a massive one-time spike in the value.
This sounds backwards to me. If I think the value will increase, I'm not going to transfer them to you at today's price. So this will decrease the amount of transactions, making it less and less useful as a transfer mechanism. Which is exactly what people say is the problem with deflationary currencies.
If you do spend dollars, you don't lose anything by converting them to bitcoins just before spending them.
those 'unproductive' people holding incredibly valuable bitcoins will enable bitcoin to work as a dirt cheap payment processing system.
One can also turn this point around: what requires the store of value to be the same thing as the medium of exchange? The store of value must be convertible into the medium of exchange, but that doesn't mean they have to be the same thing. Yet Krugman blithely assumes that they must be: "To be successful, money must be both a medium of exchange and a reasonably stable store of value." He doesn't even consider the possibility of, for example, an economy based on Bitcoin as a medium of exchange and, say, gold as a store of value. For that matter, he doesn't even bother to mention that very few people actually use dollars as a store of value: people don't keep their retirement funds in cash under the mattress.
Individual people, perhaps not. But the US dollar is the most widely-held reserve currency in the world, followed by the Euro. Wikipedia states that approximately 2/3 of reserve currency holdings are dollars.
It's true that there aren't many ways to exchange Bitcoin for actual goods or services or non-monetary financial instruments right now, but that's not due to any inherent inferiority of Bitcoin: it's due to the fact that governments and central banks have a huge incentive to either outlaw exchanges of Bitcoin for goods, services, or financial instruments like stocks, or at least impose artificial costs on such transactions that are high enough to discourage most people from making them. In other words, Bitcoin is not competing on a level playing field with other forms of money.
Personally I'd see "governments have a huge incentive to outlaw it" as a pretty major inherent inferiority in something purporting to be currency too...
The same applies to any type of money. Google "hyperinflation".
Also, how much of an effect this is depends on how long people expect to hold money in between transactions; see below.
they will require you to pay x% more in Bitcoin (at current exchange rates) where x is a premium to account for the expected loss in value over the period they expect to hold the Bitcoins, plus a margin for risk.
People do the same thing with dollars and other currencies based on the rate of inflation they expect, i.e., the rate at which they expect dollars to lose their value.
Also note that qualifier: "over the period they expect to hold the Bitcoins". In other words, people need enough cash to cover current expenses for some period of time; but that amount can be pretty small compared to their total wealth, and it gets smaller as technology advances and economies evolve. People used to get paid quarterly, so they needed enough cash for a full quarter's expenses. Then the payment cycle became monthly, and now many people get paid biweekly or even weekly, so they need to hold less cash to cover expenses. (More precisely, they need to hold less as a fraction of their total wealth.)
I'd see "governments have a huge incentive to outlaw it" as a pretty major inherent inferiority
It's "inherent" only in the sense that we're not likely to get rid of governments any time soon. Is that a problem with Bitcoin, or a problem with governments?
It's very simple: Suppose you used Bitcoins only to facilitate transactions. You'd identify some good/service you want to purchase, buy the appropriate amount of Bitcoin on the open market. You then transfer them to the merchant who then sells the Bitcoin in his or her local currency. In order for that to work, the value of Bitcoin must be relatively stable over the timescale of the transaction. If ratio of Bitcoin to USD (for example) goes up a few percent over a period of ten minutes, then you're either giving the merchant a "tip" or he is giving you a discount. Either way, both you and he don't really know the cost of the good you are purchasing until sometime after the transaction.
More relevantly, if Bitcoin were to catch on, people would probably keep some assets in the form of Bitcoin so that they don't need to pay Bitcoint <-> USD transaction fees on every purchase. People will not do that if the value of a Bitcoin often changes radically between paychecks. Frankly, I can't see Bitcoin being used by "normal" people until the value is relatively stable (say, in most months the Bitcoin-USD exchange rate varies by less than 10% over the course of most 30-day periods) for this very reason. Unfortunately, the 21 million coin limit will prevent this from ever happening.
There seem to be a large number of people who operate under the misapprehension that "Inflation Bad -> Deflation Good." Inflation is bad, but deflation can be just as destructive to an economy, and having the ability to conduct transactions in a femtoSatoshi does nothing to fix that.
I have no problem with paying taxes and obeying almost all laws in a democratic country, and I am persuaded that inflation in sensible times and amounts is a good thing for the world. The paranoia and anti-society feelings that run so high in the bitcoin community actually put me off it. (Although I also dislike the fact that the Credit Card companies have the power to extract rent from nearly all transactions in the economy too - the fact that the price is the same regardless of whether the merchant is paying a fee or not means that cash transactions are subsidising credit cards).
But I don't think bitcoin has much chance of becoming a state currency, and I think it would go horribly if it did, so most of that anti-state rhetoric is irrelevant.
However, up until now, neither the government, nor the banks nor the credit card companies have provided me with an easy, cheap and safe way to make tiny transactions with my friends (and untrusted acquaintances) across the world.
Bitcoin is currently useful. I can take a picture of a QR code with my phone or fill in a simple form on a web page and safely transfer tiny sums of money with no or minimal fee reasonably quickly anywhere in the world. That is wonderful and creates a floor on the value of bitcoin, until better options are available.
Anyone who really doesn't want to see bitcoin succeeed (and that goes for Stross and Krugman) should make it a priority to work on making sure that dollars and pounds and euro balances are just as convenient, cheap and safe as bitcoin balances.
2) similar to the author's point that advocates can't tell the difference between "store" and "medium" of value, I can't tell you the number of arguments I've gotten in with people who equate a "store of value" to be the same thing as the "increase in value"
3) It's a 1% wet dream. Make money, potentially hidden income, avoid taxation? No money paid into the welfare state? WIN!
I'm not saying bitcoin replaces all those things (it certainly doesn't), but it aims to.
Right now one of the main metrics people use when evaluating the profitability mining hardware is Ghash/Watt, so the market is naturally incentivizing low OpEx and therefore less power usage (per transaction processed not the nominal amount of power used).
Also, it's actually more efficient to have a smaller number of machines running at full utilization 24x7 than the typical massive datacenter that averages around 20-30% utilization [0]. That's because modern servers consume nearly as much power at 20-30% utilization as they do at 100%.
[0] - http://bnrg.eecs.berkeley.edu/~randy/Courses/CS294.F09/whare... (page 55)
There will always be central banking infrastructure controlled by billionaires who are more socially important than you. We can't just "go decentralized." An average person is too busy to even remember their password to gmail is "password456" and not "password123."
On top of that, you have to consider that those systems offer much more value than just a barebones ledger as the core of Bitcoin does. If you add in all those companies building stuff on top of Bitcoin, the comparison starts to become less favorable.
[0] Purely monetary terms are obviously different. The vendors of those systems inflate prices ridiculously because they can - banks have traditionally not been under much pressure to operate efficiently in this arena.
From a logical standpoint, "so does X" (e.g gold mining) very much does eradicate this as an argument against BitCoin, unless there is some Y which has less carbon footprint than either. If there is not, then the carbon footprint it's an necessary evil, and a constant through all similar systems.
And an even better question would also ask, "What's the carbon footprint of not having a government creating more money?"
Since miners will eventually only be able to compete based cost of their electricity mining will be driven to places with extremely cheap electricity. I don't know if that will always correlate with "clean" energy, but it seems like it would. For example, the recently announced Bitcoin mining operation in Iceland, where cheap geothermal and hydroelectric electricity and plenty of cold air for cooling is available: http://dealbook.nytimes.com/2013/12/23/morning-agenda-the-bi...
If the heat from mining can be reclaimed for other purposes (heating homes, etc), then the effective carbon footprint is reduced even further.
It will hopefully make clear that your argument is flawed.
The downside of discretionless rules-based central banking is it makes learning, and thus evolving, very expensive, requiring a rerooting of the currency and thus monetary system. This is why developed countries do better with discretionary central banks - their economies are too complicated for any known rules systems to work reliably and their central banks trusted enough not to be stupid.
I love the future Bitcoin portends - a world of competing and overlapping rules-based and discretionary monetary systems. I am fairly confident, however, that Bitcoin is not competitive for that world. Still, it's a great introduction and has its social value as a stepping stone.
Perhaps the most important lesson in the history of money is that the amount of money needs to flexibly adjust to economic circumstances.
The existing fiat system achieves this, because banks create and destroy money in a decentralized, market-controlled fashion by giving out loans and having them paid back. When a firm invests using bank loans, then the money supply and economic activity increase in lock-step. The result is an economy that was so stable in historical comparison that many economists declared the "macro problem" to be solved (the so-called "Great Moderation"; obviously, 2007 showed that they were hilariously wrong).
Metal standards do not achieve this, and they fail in two ways: The economy can grow faster than the supply of metal; that's the more usual failure mode. But the supply of metal can also grow faster than the economy, which is just as bad (i.e., Spain and the in-flux of metal from America).
Bitcoin can only fail in one of these modes, but since that's the more usual failure mode anyway, it's just as bad as a metal standard.
So that belongs to the normative discussion that Krugman talks about: An economy based on Bitcoin as money is going to suffer through the same problems (gratuitous recessions and mass unemployment) that economies based on metal standards used to suffer from [0]. We already know that, so let's just not go there.
[0] Similarly, economies based on the Euro suffer the same problem via the exact same mechanisms, as do economies where politicians implement unnecessary austerity.
Most people confuse currencies with assets, storage-medium with exchange, etc. While at the same they are just hoarding.
I think that BTC will stick around because it has some unique qualities that are requested by the market such as partial anonymity, speed and size (a USB can contain whatever amount of USD).
But it has some serious flaws and as a currency is clearly failed. It is a libertarian's dream, but I don't think that the US or DE or RU government can't monitor whoever moves money in and out of the BTC blockchain.
There was a ton of, "What do you mean I can't do this", and "What do you mean this takes longer than five seconds.. four DAYS?!", and "they're closed? So I can't? What? You're joking with me, right?"
I understand that dealing with money is incredibly hard due to regulation, but I would like something to use as a medium of exchange which doesn't leave me constantly infuriated.
Krugman is clearly an intelligent man, but in his public writing he has a habit of declaring things he doesn't like as "evil."
Given we know he's not stupid, I assume it's to increase the attention he receives. Based on the re-shares from my left-of-center friends, it tends to work.
See also Business Insider's recent turnaround and subsequent breathless tabloid-style coverage of cryptocurrency news.
He is right about one thing tho. Bitcoin IS a bubble. But that is not a pejorative. Any good that becomes money will have a price that is far higher than is warranted by its use demand. It doesn't matter whether the floor price is 10% of the monetary premium, 1% or 0%. The monetary premium is based not on the good's use value, but its serviceability as money. I.e., is it fungible, divisible, transportable, verifiable etc. And along all these attributes bitcoin shines - even more than gold.
The best explanation of this so-called "bubble theory of money" is proffered by Moldbug. To wit:
http://unqualified-reservations.blogspot.com/2011/04/on-mone...
and
http://unqualified-reservations.blogspot.com/2013/04/bitcoin...
One quote in the article caught my eye:
> BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions.
Fun thought exercise: replace "BitCoin" with "cash." Businesses across the country choose to have a cash-only policy (or destroy receipts, avoid use of electronic records, and so on) to avoid paying taxes and having their transactions monitored. That's not to say this is wise or ethical behavior, but it certainly happens, even without cryptocurrency. So why do critics describe BTC as a libertarian threat and in-person cash transfers as normal?
I don't know how closely he's been paying attention to the rest of the news on how the government has been reacting to things on the Internet it can't control, like encrypted communications, but the government isn't taking the "acceptance" route, it's going the North Korea route. If he wrote a "PGP is evil" article about how it destroys the ability of the State to keep tabs on pedophiles and terrorists and tax cheaters, it would be derided here with a lot more force.
How can Bitcoin, a technology, that has shown so much promise, in many other ways besides being "money" (which some still disagree it is), be "evil"?
Also, as someone else has mentioned, he says FIAT money is backed by men with fun, and Bitcoin by "nothing" (another point where he shows just how little he understands technology in general), yet Bitcoin is the "evil" one?
Yes, a textbook example of the Dunning-Krugman effect. He doesn't know what he doesn't know, and he's OK with that, because hey, Nobel Prize.
Most of us don't think about owning gold in terms of how readily we can make pretty things out of it, or dollars in terms of how easily we can pay our taxes. We hold onto them because both have a reliable history of being easily traded for other goods and services. Ease of exchange trumps inherent value as soon as a currency's users regard it as stable, and Bitcoin hopes to be there in a few decades (presumably starting with the sort of people who follow interesting tech developments, rather than those who care about inherent value).
As a side note, the headline is ridiculous linkbait and someone really ought to change it. Krugman spends most of the article explicitly stating that he doesn't want to muddy the discussion of how well BTC will actually work with normative/political arguments (i.e. the word "evil"). I can't help but feel like someone other than the author titled this article.
If I click through to an article called "Bitcoin is Evil", maybe I actually want to read about how a Bitcoin-dominated world is going to making exploiting the poor trivially easy. I'm not convinced yet, but it's a plausible (if normative) argument someone could make, so there's no sense in making a joke out of it. Especially if - like Krugman - you already support redistributionist taxation and the welfare state.
Judging by the clichés you use, exploiting the poor is probably a good thing in your Libertarian utopia.
In my experience, strong libertarians prefer to avoid even mentioning that the poor exist.
But since many others do, then it is. It is not the speaker which decides whether insult was intended, but the listener.
Can we talk about the merits of the policy now?
But sure, talk about the policy, though I didn't disagree with anything you said policy related.
In a nutshell, if you say "redistribution", you must have some baseline in mind. Many people are fooled into accepting an "everyday libertarian" distribution of resources as a baseline, but this is both philosophically problematic and politically foolish if you are not a libertarian yourself.
Taxes are part of the distributive system of society, as are other parts of the legal code such as patents and copyright law. There is no reason to label one part of the law "redistributive" while you call other parts merely "distributive".
Matt Bruenig makes the argument better than I could, e.g. http://mattbruenig.com/2012/09/20/there-is-no-such-thing-as-... or http://mattbruenig.com/2013/11/14/one-last-note-on-redistrib...
No, no, he is NOT correct on that. Bitcoin's inherent value is in the Bitcoin technology. Inherent value of USD is that government declared it has value (by fiat). You can actually create "pretty things" with bitcoin technology, the same way you can create pretty things with gold - those are just other things.
Nobody believes the Bitcoin protocol itself is beautiful in the same sense as gold, although I do know a few computer scientists who might find it intriguing. I suppose you could make the case that the ability to make anonymous transfers has some inherent value - but even that depends on how well BTC is adopted as a medium of exchange.
1) Can you produce my signature on said document that certified this contract?
2) Let's assume I choose to expatriate because I no longer wish to pay taxes and support this country's views. Why, then, might I owe a large "exit tax" upon leaving when I've already paid capital gains tax, income tax, sales tax...
Wait, what? Definition of fiat currency is the one that has no intrinsic value.
USD's intrinsic value is the paper and the metal used to manufacture it.
If we imagine a scenario, where a majority of businesses will accept bitcoins, and people will be able to buy bitcoins and use either dollars or btc for payments, and both methods will be legal, we will see that dollar doesn't have any more "intrinsic value" (whatever that means) as bitcoin. It will be just two competing payment systems with different attributes.
It seems that as far as alternative currencies are concerned, altcoins have a better chance of being spread. What's to prevent Amazon from coming up with AmazonCoin, pre-mining an entire AmazonCoin set for themselves, and then offer this altcoin with a liquidity guarantee on largest retail site. Nothing to prevent them from accepting BTC, but I think any US retailer would be prone to quickly trade in BTC for USD after the transaction is completed, as there's volatility risk, and payments to merchants and the tax man are due in USD anyways.
Fiat literally means "it shall be"; in terms of fiat money this refers to government's declaration that something is legal tender. The US declares that the dollar is to be used as money - that makes the USD fiat money.
Enough people use the term to refer to money which has no "intrinsic value" that the term now means both things. Personally I think that's nonsensical – if the US declared that gold coins are to replace the USD as legal tender, then those gold coins would be fiat money, regardless of any intrinsic value gold might have. But you can't argue against language evolution; "fiat money" has two different and unrelated definitions now, and we need to repeatedly have arguments ending in both sides being correct and nothing of value being concluded.
This discussion must now, as is tradition, be followed up by a discussion of what intrinsic value means and whether it exists. So go on, discuss.
Editorials/opinion pieces, the editors typically put there stamp there.
Krugman was a proponent of mass inflation, aka. helicopters of money, as a solution to the credit crisis. Bitcoin makes it basically impossible to manipulate the money supply the way the Fed has done to navigate the 2008 crisis.
Krugman sees Bitcoin as a threat to the central banks ability to stabilize the economy.
It isn't a "threat" so much as just foolish.
Doesn't he get that point wrong (like many others)? The mining rate, and eventually the limit of 21 million bitcons places a limit on the supply of bitcoins, not on their value. If bitcoin is successful, it will only keep getting more and more valuable. Its hard to estimate how much, but the total market capitalization will probably that of a commodity like silver, or that of a nation state's currency.
Also, I think bitcoin is not really supposed to be a store of value. Its main purpose is to pseudonymously buy and sell stuff (drugs, cough, cough). It's good enough if it can hold its value for a few hours - if someone builds a nice way to deposit dollars or euros, convert them, and immediately pay with the bitcoins, milliseconds would even suffice. In a market with such a high turnaround, of course, the value represented in bitcoin at a given time will be lower than for e.g. silver or gold, which are supposed to store value for a longer time (and also have applications as a material).
Finally, I don't think bitcoin can replace "real" money. It might have worked a few decades ago when there was a kind of self-carrying growing economy. The only way todays econonmy is still running is because of massive state intervention, which is impossible if bitcoin in the main currency. I mean, we gave up the Bretton Woods system and the gold dollar for a reason...
If you can get the majority of users to agree to a change in the rules, then they will fork off the block chain in a direction that follows those new rules. Of course, you will have some percentage of users who like the old rules, and could theoretically continue on the old block chain.
One rule change, for example, is to have miners vote on the reward for new blocks found. Then, every so often take the medium or a random vote and award that amount for new blocks mined. This would allow miners to regulate the amount of new coin being mined, which could level off the exchange rates between bitcoin and the world currencies.
The truth is that bitcoins derive most of their value from being a great medium of exchange and enabling things (smart contracts are ahead) that otherwise wouldn't be possible. Things like making no recourse payments online for the first time ever.
Bank of America did an analysis on the value of bitcoin and concluded that one of the components is the payment network. If PayPal's market cap is billions, why not bitcoin?
So I see this as giving a "floor" to the value of bitcoin via demand the same way as the US government's demand for dollars from its citizens (or the controversial petrodllar warfare theory and other shenanigans) boosts demand for the dollar. There is definitely a lot of demand boost in that.
And for now there is alsothe speculative bubbl. I don't know what the value of bitcoins should be, but it's certainly not zero - there will be demand for it by chinese millionaires trying to get their $ out of the country and bypass currency controls, and other things like that. And if the market cap is high enough, moving a few million dollars in bitcoins at a time won't move the market. Demand drives the price up.
That's your floor price. It's 0.
It's true that dollars are more liquid. Does that mean you wouldn't accept a ton of free stuff if you couldny trade it for dollars but only other services?
That's the point - it's not free. You don't need a currency for "free". You need a currency for things which have value.
I don't believe that BitCoin is a reliable store of value like the dollar is not a reliable store of value. I went to the US after a year to visit family(I live in Europe) and was surprised how much prices had gone up. Probably you don't see that when it is incremental, but you get to see after some time out.
The same happens with civil liberties. US was one of the countries with higher freedom in the world, but the tendency is so bad, compared to countries that were really bad in the past, but the tendency is so good.
Paper money, or digital money by the way is a medium of exchange. And there lies their utility as Mr Krugman knows..
I am biased about Mr Krugman, for me he is a puppet of central banks that create money and compete against bitcoin. He was awarded the Nobel Memorial price paid by a central bank and he owes his position from defending Wall Street against Main Street.
Regarding the Charles Stross article, someone else had written a very good counter-piece just the other day:
http://www.ofnumbers.com/2013/12/18/charles-stross-takes-on-...
"Underpinning the value of gold is that if all else fails you can use it to make pretty things."
This is a very weak and in fact invalid argument. I can't believe Krugman is quoting this! "If all else fail" then gold would lose 90%+ of its value overnight. Look: roughly 45% of the world's gold production is used for financial speculation, 45% for jewelry, and 10% for industrial purposes [1]. In other words, 90% of gold buyers are buying mostly because they believe gold will preserve its value. And "if all else fail" (if speculators exit the gold market), prices will drop, and jewelry buyers will redirect their desire to other precious metals [2], leaving only industrial demand as buyers. Suddenly the world would be producing 10 times more gold than the demand, leaving the prices depressed.
And again, Krugman completely misses the point of Bitcoin having value not as a currency, but as a payment processing platform. Overstock CEO Byrne said it beautifully:
*"You’re getting rid of the interchange fees. We’re paying credit card companies around 2%. For a company whose margin is 1%, picking up 2% on that is quite attractive." [3]
[1] http://www.gold.org/investment/statistics/demand_and_supply_...
[2] For the same reason people prefer expensive diamond over cheap cubic zirconia, even though both are practically indistinguishable to the naked eye. Yes they CZ is less hard, but most jewelry buyers don't care about hardness. They buy diamonds because they are expensive, that is all.
[3] http://www.coindesk.com/overstock-unveils-more-details-bitco...
[4] http://www.washingtonpost.com/blogs/the-switch/wp/2013/12/23...
Gold isn't used in jewelry because it's expensive. It's used because it's pretty, it's soft and workable, and it doesn't tarnish. And it's gentler to your skin; my sister's ears are too sensitive to wear cheap nickel earrings.
Now, I agree with you that the statement you quote from Krugman is invalid. But there's no reason to go around interpreting him as saying something wildly different than what he said. Gold bars are a store of value. Jewelry is not.
In other words, Krugman's argument is circular (gold has value because it has value).
What I mean by "hard" in this context is that its supply is constrained. If you look a fiat currency it can (and is) produced in whatever volume necessary by the central bank, in order to avoid a fall in prices. Gold has a similar (but distributed) mechanism: when the gold price goes up people mine more gold, increasing the money supply.
Note that that property of gold works even if it's the primary medium of exchange: if there is too much deflation then an ounce of gold will buy you more goods and services, making it more worthwhile to mine it - which in turn increases the money supply and acts as a counterforce to price deflation.
But this is obviously a flaw in the design of Bitcoin, not in crypto currencies generally. It should be possible to create one with potentially infinite supply, but where the cost of mining a coin remains relatively stable over time. Such a crypto currency would be usable as a store of value and as a (primary) medium of exchange.
I'd love to see that "infinite supply crypto coin", but unfortunately I'm much less optimistic that it would become as popular as Bitcoin. It wouldn't be usable as an investment/speculation vehicle, and that's probably the main use of Bitcoin right now.
Those in Krugman and Stross's "libertarianism is evil" camp should take heart that some people out there think Bitcoin is a huge win for developing economies, and will cause only incremental disruption for places like the EU or US.
For the rich countries: Governments have many tools in their belt before they just lie down and accept, say, universal tax fraud, or the end of monetary policy. People interested in tax policy (sometimes very) slowly come up with good ideas to reduce fraud, like putting down the SSN of all claimed dependents (which made a lot of children disappear one year, but jumped revenues), or double reporting of W-2s. They likely wouldn't just roll over if we moved to BTC.
For the poor countries: A better medium of exchange, allowing cheaper remittances, easier cross border trade, or a relatively more reliable store of value than local currency is an enormous win.
There are lots of options going forward. Bitcoin could be a passing fad. Bitcoin could liberate the economically oppressed while providing little more than a nice toy for those in wealthy countries. Bitcoin could destroy monetary policy and lead to barricades of wealth while destroying the capacity of governments to benefit their most vulnerable citizens.
But it's not safe to make moral approbations based on picking one of these uncertain results and assuming it is inevitable (especially, IMHO, by picking the most outlandish of the three).
My expanded thoughts can be read here: https://medium.com/technology-meets-policy/fd097809f88f
Either way, he's not to be trusted.
>> BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions
So? Damaging States' ability to forcefully confiscate everyone's wealth is a distinctly good thing, here in the real world.
Iran comes to mind as a merchant who could make a similar commitment to a cryptocurrency. What if you could suddenly buy oil at BTC X per barrel? This could establish enough of a link between BTC and a high-volume commodity that it could create some stable value, and might appeal ideologically to a class of economic actors that are already somewhat motivated to avoid trade in dollars and euros.
Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
Where's the floor on the value of the dollar?
(a similar point is often raised against gold, in that a post-economic-apocalypse world would not immediately have the infrastructure to verify claims like "this is one ounce of pure gold", meaning gold's utility as a medium of exchange would not be as high as suspected by people who buy it to hedge against such apocalypses)
The idea that holding Bitcoin is a better idea than holding dollars is spreading. The more it spreads, the higher the value of Bitcoin will be, and the lower the value of the dollar will be. Eventually, we will hit a tipping point. That's the crisis. That's the hyperinflation.
"you see this nobel prize? yeah bitch. I AM the muthafuckin' economy. Now worship this bitcoin opinion piece that highlights my lack of technological understanding. I am your God."
I'll ignore the moralistic Stross material, both because that is wise and because Krugman takes pains to emphasize the positive nature of his argument. The tentpole of that is that there is no theoretical floor for the exchange value of BTC. This is roughly true, but I don't think it entails the disastrous consequences that excite so many BTC antagonists.
Even if it's difficult to imagine hyperinflation of USD (although I'm not quite so confident as Krugman in the Fed's dollar sink policy: if this is not a new policy why didn't it work in the 1970s; if it is new why shouldn't we expect it to change?) we've seen hyperinflation of many other currencies, a number of which were held by more investors than currently hold BTC. If such hyperinflation was disastrous, then it was mostly for those who held the affected currency, and mostly in proportion to their holdings. No tinpot dictator has decreed the use of BTC; if you think they're overvalued then just sell them.
Of course if there is eventually a giant terminal sell-off of BTC for reasons, investors might just choose some other set of cryptocoins, some of which might have an appropriately theoretical floor. Would Krugman care to opine on the positive fate of those theoretically worthier assets?
What does that sound like? Maybe an earlier top post on HN http://blog.oleganza.com/post/71410377996/crypto-anarchy-doe...
By approximate scroll down length on mobile, the ratio of content that isnt a quote, to that which is, seems to be approximately 7:5 . (not taking into account the fact the quoted text takes less horizontal space, but I did overestimate the new text length in a few small ways as well, so I hope that this ratio is at least approximately accurate)
Essentially the article states a difference between "positive economics" (what is), and "nomfyvhbxgv economics" (what should be). The author claims that their political opponents tend to get the two confused (and that despite what people criticizing the article might think, that his political allies tend not to make the same mistake)
They then go on to say that the other article suggests that bitcoin was created as a weapon, connecting to the "what should be" part of economics, quote the other article, and repeat from the other article the part about a "gold fetish".
I personally believe that it didn't add a whole lot to what was already in the other article, though I admit I should probably reread the guidelines for comments and submissions. I intend to do that, and then possibly modify this post that I am now making.
Now if I could find one of my economist colleagues to actually get him to read it... :-)
And you are going to have to live with it, the same way the people who created Bitcoin will have to live with interventionist policies.
One of the most interesting social & tech experiments since the Internet itself. We are witnessing a revolution.
The number of nodes in the Bitcoin network makes it the most secure system of its kind. If it were used as currency, you could say technically that it was one of the most (if not the most) counterfeit-secure currencies in the world.
If it were used as a medium of exchange, due to network effects alone it would be extremely valuable.
I appreciate Krugman's raising the discourse even slightly above the level of "evil hackers." I don't think he realizes that the Bitcoin movement transcends politics and economics. With Bitcoin (as technology) you can actually even create a system that Krugman himself would like to use.
I had not heard thing. Buy dollars back with what?
Some reasonable people disagree with this assumption.
If you can prove that a certain technology can not or will not be used for good, then that raises different questions.
Sure, you can come up with complex, hypothetical scenarios where it has value, but fundamentally it has but one purpose, which is to murder millions of people.
In most moral systems, murder of one person is immoral, never mind millions.
That said I also don't see that there is any reason that the value couldn't drop to zero or near zero. Maybe the next crypto currency could be called BitTulip.
The fact that the blockchain serves as a tool for global distributed consensus. There's unlimited number of applications that can take advantage of that, irrespective of actual price of Bitcoin as a currency.
Statists gonna hate bitcoin, no matter what.
In particular, I think a mixed economy half run by the state, half free markets works pretty well.
There is no contradiction between Bitcoin and the existence of a state. There are lots of ways of regulating and taxing. Sure, Bitcoin might change the details of them - that's just growing pains.
e.g. I would make it compulsory for any company granted limited liability to register the public keys of all Bitcoin wallets it has the private keys of with the tax office.
Or, if necessary later because that's too hard to track, tax either land or carbon emissions directly (rather than income or exchange of goods).
But this 'floor' only accounts for, say, 3% of the price of gold. Whatever makes the remaining 97% a reliable store of value could also provide Bitcoin with 100% of its store of value.
A similar point comes from Tim Harford's fascinating description of the currency used on the Pacific island of Yap:
------------------------
Oddly enough, there is a near real-world equivalent to the Ningi, the triangular rubber coin larger than Mars dreamed up by the humorist Douglas Adams. It can be found on the island of Yap, in Micronesia in the West Pacific. Their coins, the rai, are stone wheels with a hole in the middle. Some are fairly portable a handspan or less across, and the weight of a couple of bags of sugar. But the most valued stones are far bigger - one British sailor wrote in the late nineteenth century of a stone wheel that was four and a half tons in weight and over nine feet in diameter. In other words, it was almost completely immovable.
Yap’s stone money used to be a serious business. The stones were quarried and carved on the island of Palau, 250 miles away One Victorian naturalist witnessed four hundred men from Yap, a tenth of the adult male population, at work in the quarries of Palau. Getting the stones from Palau to Yap on a little bamboo boat was a difficult and sometimes lethal affair - some of them weighed as much as two cars. (And rai were especially valuable if someone had died on the expedition to fetch them.) The biggest stones might have been used for major transactions such as buying land or wives; more modestly sized stones - a couple of feet across - were exchangeable for a pig. Even then, it would have been a lot easier to move the pig than to move the stone.
All this meant that for purely practical reasons, the Yap islanders had to develop an important monetary innovation: they divorced ownership of the stone from physical control of the object. If you wanted to buy my pig, that transaction would be publicly witnessed: I’d give you the pig and in exchange, you’d transfer ownership of one of your stones - the one leaning against the tree, second on the left behind your hut. Now everybody would know that that particular stone was Tim’s stone. You and I wouldn’t have to go to the trouble of actually moving the thing. One day, a crew from the quarries were bringing a new large stone from Palau when they ran into a storm not far from the coast of Yap. The stone sank while the men swam to shore to tell the tale of their lucky escape and their loss. But of course, if the stone propped up outside your hut doesn’t need to move around to change ownership, why should the stone at the bottom of the sea be any different? This giant stone on the seabed had an owner - the chief who had sponsored the expedition to get it. And now his ownership could be transferred to another rich islander, and then to another, just as with any other stone. It was perfectly good money, even though it was out of sight and out of reach.
------------------------
From "The Undercover Economist Strikes Back" by Tim Harford: http://www.amazon.com/Undercover-Economist-Strikes-Back-Ruin...
Is this really why gold has value? Are you kidding me?
Also, his point about BitCoin enthusiasts being unable to distinguish between what makes a good currency and what pushes their ideological buttons may apply to you.
The Econ "Nobel" is a little more rationally awarded than the Nobel Peace Prize, but neither is the same as Physics/Chem/Medicine.
I think it's fine to judge Krugman's political arguments on political merits; there isn't "nobel-caliber" economics behind them. They're usually about things which economics doesn't even address.
Neither did Krugman.
To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why BitCoin should be a stable store of value.
And then says he hasn't been able to get an answer to this question, that the BitCoin enthusiasts he's talked to have mostly avoided trying to answer the question, and that he has reason to suspect that BitCoin gets promoted not because it is useful as a currency but because it pushes the right ideological buttons for some people.
And, one must admit, it is a perfectly legitimate question to ask when considering something's usefulness as a currency.
What I'd actually be interested in reading is a proposal from Krugman (or someone else) for a hashcash/cryptocoin/digital money scheme that addresses their concerns.
It would be hugely more interesting to hear economists discuss how new technology can advance antiquated, federated payment networks rather than pointing out well-known flaws in a very immature technology (that I'm still not entirely convinced they understand, technologically speaking).
So maybe BitCoin isn't money? We already have something that is a reasonably stable store of value but is not a medium of exchange (gold), so why can't we have something that is a medium of exchange but not a reasonably stable store of value?
His argument seems to be that if you want something to be genuinely useful as money, it has to do both reliably, and BitCoin only seems able to do one.
A trait gold shares with bitcoin. The volatility makes it terrible as a currency, not to mention the expected rise in value. That makes BTC even worse as a currency - there is no sane reason to spend bitcoin if you believe in the concept.
When, in fact, it lends support to his argument.
I'm not sure what technologists he's been speaking with, but I think the distinction between value store and payment network is abundantly clear to most people even peripherally involved with Bitcoin. I think the view of most competent technologists is that Bitcoin is a promising technology, with somewhat unproven utility.
First of all, Physics and Economics are two different things.
Physics tends to be about facts, Economics is more about opinions, views and theories. It's not because we're not Nobel Prize winners that we shouldn't disagree with the author, and I'm sure there are many well-known economists out there who won't agree with him.
>> Also, his point about BitCoin enthusiasts being unable to distinguish between what makes a good currency and what pushes their ideological buttons may apply to you.
Bitcoin enthusiasts are not the only users of Bitcoin. I use Bitcoin and it's for no ideological reason. It's helping me better than any other payment system right now and that's all I care about.
There are plenty of economists who don't agree with Krugman. But they would disagree for actual reasons instead of "OH NOES THE WORD LIBERAL APPEARS IN THIS COLUMN".
Edit: also, Austrian economics is like pseudoscience, it isn't representative of real economics
Edit: what are the priors you are speaking of.
When was the last time you saw a Keynesian taking Hayek's work on business cycle theory seriously? (For which, in part, he won the Nobel prize for!)
Ironically, to more directly address your point, Hayek had this to say in his Nobel Prize acceptance speech:[1]
In his speech at the 1974 Nobel Prize banquet Friedrich Hayek
stated that had he been consulted on the establishment of a
Nobel Prize in economics, he would "have decidedly advised
against it" primarily because "the Nobel Prize confers
on an individual an authority which in economics no man ought to
possess.... This does not matter in the natural sciences. Here
the influence exercised by an individual is chiefly an influence
on his fellow experts; and they will soon cut him down to size
if he exceeds his competence. But the influence of the economist
that mainly matters is an influence over laymen: politicians,
journalists, civil servants and the public generally."
[1] - http://en.wikipedia.org/wiki/Nobel_prize_economics#Controver...
This is the type of claim that is fairly dangerous. It is perhaps vitally important to understand WHAT Krugman won the Nobel Prize for, and that was due to his contributions to New Trade Theory. Additionally, his work on NTT (superceded by NNTT I should add) was long, LONG ago, and he has since turned into a political pundit/shill.
Compare it to his polar opposite, say, Hayek, who won it for his general contributions to the field due to libertarian/market anarchist theories. Yet Hayek is widely seen as a crock of shit while Krugman isn't, mostly because he writes for the NYT.
As opposed to economists who conceal their political viewpoints to cover the fact that their supposedly scientific economic conclusions are intended to push a given agenda.
One of the best ways to fight your own political biases in areas where you want to try and be more objective is to be incredibly up front about them. That way, people can say, "I think you are indulging your bias in specific manner X." I wish you would do that (be specific about any complaint) instead of dismissing Krugman simply for being honest and up front.
(Also, this implication that moderates tend to be more reasonable is erroneous. Oftentimes the correct answer starts out as marginal aka "extreme" until it is slowly validated moves the whole discourse and moderate is redefined to where one extreme used to be. And oftentimes people are moderates out of ignorance; when you begin examining any given issue and have little knowledge it is natural to stake out a "on the one hand, on the other hand" position until you learn more. Then you cease to be a reasonable moderate, at precisely the moment your knowledge becomes formidable. But I am rambling and need to go outside now :)
But you're getting it backwards - I was unclear. You don't have to be a moderate to consider both sides, but if you consider both sides in my experience you tend to come out more moderate than if you didn't.
This is his column: http://www.nytimes.com/2013/12/23/opinion/krugman-bits-and-b...