Bitcoin Forum

http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/ (http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/)

His reasons for deflation being a problem seem cogent enough.  I'm curious as to what all of you have to say about this.

Deflation is less relevant to us because Bitcoin is not a debt-based system like the US.  The 'credit crunch' of 2008-2009 was the problematic kind of deflation.  Not the appreciating currency of a budding virtual economy.

And... Keynesian economists should be ignored.

Paul Krugman -- Deflation is bad because that makes it hard for central planners to fiddle with the economy and trick people into working more than they need to and dumb irresponsible people who do pointless jobs and borrow money they can't pay back end up being worse off.

Here's a picture of forced monetary inflation:

http://filthyrichbuddha.com/wp-content/uploads/2011/02/carrot1.jpg

I wish there was a likebutton for this!

Paul Krugman doesn't deserve credit. Just for you to have an idea of how bad he is, he still believes in the broken window fallacy, something already demonstrated as false by Bastiat in the 19th century! http://www.youtube.com/watch?v=QG4jhlPLVVs

He has been defied by Robert Murphy to a debate, if he accepts, a charity institution would earn something like $60K, and Krugman hasn't yet accepted. http://www.thepoint.com/campaigns/campaign-0-1240

This. Deflation would be a catastrophe with a debt-base currency... which is a catastrophe to begin with.

Deflation is bad because it makes credits expensive, which discourages people from getting into debts and banks can't profit on them. It's especially dangerous if you combine it with decentralized currency like Bitcoin, because government can't make everyone poor by printing more money and bailout banks at will. As you see, it's very, very bad and for your own good you should stop using this evil cryptocurrency right now.

I for one do think a debt-based currency has its uses. It's very useful in a rapidly growing economy, since it strongly encourages lending and thus makes credit (liquidity) very easily available.

In a steady-state or a contracting economy, I would say a debt-based currency has systemic issues that have never been solved adequately.

In my view the timing of abandoning precious metals as the primary vehicle of trade has not been an accident. Precious metals themselves are very useful as a currency as long as the economy does not grow much more rapidly than the money base grows (via mining). During a period of rapid expansion (which, in turn, has historically stemmed from the increased availability of primary energy in the society), using only precious metals would constrain the availability of liquidity, so people will naturally make various kinds of contracts on paper, backed by the institutional violence of the state where contract laws exist, or straightforward threat of violent action by participants where they do not exist. As the largest bully of the playground the state then obviously wants to issue its own contracts, paper money, and everyone will accept it just because everyone else does.

I think Bitcoin or a similar electronic currency could be beneficial in a contracting economy. We need something else during rapid expansion.

No. Precious metals, especially gold, can be spread pretty damn thin. Precious metals have been historically used as currency because they fit the bill. They are durable, hard to counterfeit/easy to recognize, internationally accepted AND easy to divide into lesser amounts. If the government wanted to support market liquidity by providing smaller units of exchange, they could have simply minted coins with lower gold and silver content.


One of the ideas behind fiat currency is to force the economy into a debt spiral. The fact that your dollars are steadily losing in value forces you to invest it somewhere. This spurs poor investing practices. The pretense that a deflationary currency would halt economic growth is ludicrous. It would limit malinvestment while switching the economy to a savings basis for investment. Only efficient businesses would be able to raise capital through debt, not to mention the superior buying power of the laboring classes.

Krugman deserves his Nobel prize even less than Obama.

Captain Obvious says that deflation is bad for printed currency based on debt.

Thank God for the New York Times or I might never know that.

Absolutely, avoiding malinvestment you help preserve the planet reducing waste of resources and less pollution.

KRUGTARD!

Deflation is very destabilising on a system that can only function, by design, with inflation.  That system is debt based money.

If you generalize that to every money you have made a big mistake... Just because something is bad for one thing, doesn't make it bad for everything.

Deflation is bad when 'every' bit of money needs to be repaid.  Therefore you have a fixed monetary cost (the repayment of the debt), and a increasing real cost.

 :)

Any money that isn't debt based is immune to the so-called 'problems' of deflation, because as the buying power of the monetary unit increase, everyone who owns the money becomes richer and gains purchasing power, (even if the money is on loan, the person who has claim to the loan has more value).  This means that people who have money are 'encouraged' to spend it, rather than save it for the debt repayments.

Take it from another prospective. In a society that uses debt based money, (aka fiat money), the entire society is in debt to the reserve bank.  If the buying power of the money increased from shortage, the society still needs to pay back it's debt.  Thus reducing the available money supply again.  It is a viscous circle.

It is like holding all the food of the town on ransom, and issuing 100 credits for all of it.  If only one credit gets lost, somebody is going to have to starve, and the 99th credit is going have virtually unlimited value.  But It is worse than that, if somebody  somehow trade to get two credits (eg. a saver), they are holding the food for the last person at ransom and can set any price.

Debit based money is inherently evil, once you understand what it dose... It is a way for setting people against each other economically.

Deflation is good if you have good money.  Inflation is the lesser of two evils if you have evil money to start with.

Krugman's "Nobel" prize isn't even a real Nobel prize.  The Economics prize has NOTHING to do with the organization that awards the other Nobel prizes.  It's awarded by the Central Bank of Sweden.

However, most accounts say that Krugman is actually decent at his specialty area that he won the prize in, but he's just a political hack who either does not understand some of the most basic concepts, or intentionally distorts them for his own benefit.

Seriously? I did not know that! No wonder why such an incompetent "economist" won it then...

haha, the "economy Nobel prize" is given by a central bank.. how ironic...

Wow, I didn't know that either. From the horse's mouth (http://nobelprize.org/nobel_prizes/economics/):


edit... Unless there are some shenanigans happening, it appears that it is as legitimate as the rest of the Nobel prizes (see bold above, also below)

It's presented by the same group.  It has some association, but it's completely separate.  It's like how the Paralympics has a loose affiliation with the Olympics, occur in the same city, but are different awards.

All I'm saying is that according to the Nobel site, that does not seem like the case. Do you have a citation for that claim?

The name for the prize is actually something like "The Swedish Riksbank's economic prize in the memory of Alfred Nobel" roughly translated. The swedish central bank created the prize by donating a bunch of money to the Nobel committee on their 300 years jubilee. I'm not sure on who is actually choosing the winner, but the prize is a disgrace to Nobel's will regardless of who it is.

It looks like the association has gotten tighter over the years.  It does have a separate name compared to the others due to that origin, but it appears you are correct it's under closer control.

Haha...So the Nobel Prize in Economics is the paralympics of the Nobel Prizes. No wonder why a retard like Krugman won. Stiglitz too.

Paralympics, not Special Olympics.  You just angered Mark Zupan.

That would have been off the wall hilarious if the original comparison had been the Special Olympics.  :-)

" and tonight, in what is considered to be the Special Olympics of the Nobel Peace Prize, New York Times writer Paul Krugman wins for his understanding of economics."

He's not retarded, just crippled.

Your rebuttal was interesting until this statement. A lot of people don't really understand Keynes, you can tell who they are by their sneers.

I agree with this. I think the Depression was caused by a booming industrialized world trying desperately to hold onto a gold standard that was no longer fit for purpose. A golden straight-jacket as it were, and deflationary atrophy followed.

That is not to say deflation cannot be a good thing, life has different modes for different times. Ideologues usually fail to grasp the basics of multivalent truth as they tend to preffer a simpler manichean world view.

A lot of people don't understand Marx either.  But it's not a problem because they aren't on the news or in government advising politicians that we should all live in communes.  The problem is that Keynesians who don't understand Keynes have a lot of undue influence these days, since misunderstanding Keynes is an easy way to advocate bloated government in a not-yet-totally-discredited way.

A most agreeable comment.

Krugman et al pick and choose which parts of Keynesian economics they want to follow.  Keynes said that Government spending during a downturn is definitely a good thing, but only if the Government is spending the surpluses that it has built up during the good times. They choose to ignore the second part but still call it Keynesian. A little unfair on the guy.

Structural deflation has existed for much of the U.S economic history,and certainly I have seen 20 years of it in Japan. There is nothing wrong with deflation per se, it just favors savers rather than borrowers. It also lowers the velocity of money. Governments like the U.S govt want inflation so that they can borrow massively and pay it off in a devalued currency.

The problem it will have in Bitcoin is that it causes hoarding.

Good evening, everyone, a genuine constructivist here.
In my eyes, this debate is misleading, in fact occurs in the first place due to a lack of reflectivism on the liberal paradigm both Krugman and you implicitly employ.
What the proponents of deflation do not consider and the apologists of inflation may have stopped to point out is that the basic issue at hand is not financial regulation, prudent economic policy or the liberal axiom of constant growth in the first place, but the very same problem most other fields in social science face: (constructed) moral hazard in an anarchic international system.
Hence, inflation will always exist - whether you think it's good or not - as long as there are countries with autonomous monetary and fiscal policy that do not only trade with each other (liberal view), but actually try to gain an edge over each other by seeking rents on costs of other economies (realist view). This trend has become well apparent in the era of European absolutism and the collapse of the gold standard in the last century is a paragon of reminding us that free trade is just as much an illusion as free markets or communist economies alike.

In short, instead of discussing what impact inflation and deflation have on a domestic economy, we should become aware that this is no policy governments could deliberately decide about but the domestic impact of anarchic competition of rent-seeking economic systems in times of globalisation.

In this view, the Bitcoin economy may well face pressure to initiate policies towards inflation if the founders (or a yet to form powerful organisation) comes to face pressure from specific interest groups to develop an edge over other currencies. The simplest scenario would be the good suppliers (which grant value to the currency in the first place) would pick up other, cheaper electronic currencies and force Bitcoin to devalue.

How would they do so? In order for the block subsidy to stay 50 BTC forever (the simplest way of making Bitcoin permanently inflationary), a majority of users must adopt the client with the updated rules. There's easy way for a single or small group of individuals to change the rules at their discretion. In the future, this might be possible with the prevalence of headers only or even thinner client software, but I believe such drastic unilateral changes can be guarded against.

Guarded by whom and what measures?
My point is that you are debating on whether inflation is worth for quick boosts of ailing economies or whether it undermines long-term growth prospect without including the larger context of a world economy with many different policy-makers and their instruments. You do not have any level-playing field and Bitcoin users may well not have the field (mostly) for themselves. Competition does not only affect the players' strategies but the rules of the (policy-ruled) system as well.

I assume this question is hypothetical, because Bitcoin will never be in deflation. It's programmed to continually increase in an asymptotic pattern. Unless someone destroys a vast amount of Bitcoins by dropping their wallet file in the ocean, Bitcoins will increase in quantity each day.

No decrease in the money supply = no deflation. And people saving or "hoarding" as some like to call it does not reduce the money supply, the money is still available to the market it's merely a question of at what interest rate holders of the money will be willing to part with it. The price of money changes, but it isn't "deflating."

Our society has been trained that deflation=prices falling, but that is confusing a cause and a symptom. One symptom of a decrease in money supply is falling prices, but that does not mean falling prices = deflation.

And yes we can thank Krugman for perpetuating such absurd notion... for goodness sake I read one of his pieces arguing against the privatization of airports because planes would be crashing into each other without Government oversight. The man is a fool with a very loud microphone.

It's deflationary if the rate of currency increase is less than the rate of increase in productivity which makes use of that currency.

That's basically why bitcoin is in a deflationary period now. There are millions of libertarians in the world, plus non-libertarians who consider libertarian money to be just as green and will happily relieve them of some of it if they are so eager to do so. Bitcoin has barely reached 1% of its potential market.

Anyone can modify the code, but no one has the guaranty that the user base will update to their modified code. And what concurrence does Bitcoin have? A rule cannot exist without force to apply it. Policy makers hold that authority over their respective currency and economy because they have the full force of their government to back their decisions. Bitcoin is impervious to these forces, so how are they to be considered exactly?


That pattern is finite. At 21 million coins, no more minting.

That's what asymptotic means... the increase decreases over time down to zero.

Slight nuance. Asymptotic means tends towards the asymptote. It doesn't mean it will achieve asymptote value.