Krugman makes some good points

[bubblesort]

From the economist who wrote half the textbooks we use in the economics department at my university:

http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/

Basically, he says that bitcoin is not really being used as a medium of exchange because it's deflationary.  He has a point.  If you aren't using it to buy goods and services then you are using it as a way to save your money, speculating on it.  Constant deflation stops people from using it as a medium of exchange.

If any currency is deflationary it makes sense to hold as much of that currency as you can for as long as you can because the value will constantly increase.  This discourages spending and encourages saving.  Even if every vendor in the world accepted bitcoin, people still would not spend their bitcoins if they can get around it by using USD or Euros Yen or L$ (Linden Dollars, AKA SecondLife currency) or something else.

On the other end of things, think about the effects on the credit market.  Interest rates take inflation into account, to ensure that the lender makes money after inflation eats some of their investment.  If a currency deflates at 5% per month then it makes sense to only loan to somebody who can make more than 5% per month on your investment (and this is compounded monthly for the life of the loan).  This is because if they don't make more than that then it makes no sense to loan the money out when you can make more money by leaving it in a savings account.  This would make it very difficult to buy houses and cars and start new ventures with credit.

[1714929985]

1714929985

[1714929985]

1714929985

[1714929985]

1714929985

[ElectricMucus]

inb4 shitstorm


also what happend to the "thou shall not talk about deflation - the last word on the forum" sticky?

[Wekkel]

Bitcoin is extremely inflationary right now. Look at how much BTC is created annually. It will become less inflationary over time, but we are not there yet. The fallacy of deflation has been discussed numerous time. Krugman fails to convince me (and many others). On top of that, Krugman has proven to either not to understand economics or talk the official book. Be cautious, do your own thinking.

[Severian]

When using Krugman as a source, recall that Krugman perceives the world as a central banker does, not as a human beings do.

[bb113]

Bitcoin is extremely inflationary right now. Look at how much BTC is created annually. It will become less inflationary over time, but we are not there yet. The fallacy of deflation has been discussed numerous time. Krugman fails to convince me (and many others). On top of that, Krugman has proven to either not to understand economics or talk the official book. Be cautious, do your own thinking.

I would add that bitcoin is the experiment that may prove these theories (People do less x when more y happens p<0.05, n<0.0001% of the population) wrong., so you should be watching even if you think it will fail as a medium of exchange.

[tutkarz]

Hes problem is that he fixed himself on lending and to him it is only viable way. But what if thanks to bitcoin people would not need to lend money anymore? Good for people, bad for banks.

[rpietila]

Total crap. People save on the currency which they believe will retain its value. People spend the currency which is easiest to spend and gives them the best terms. The currency exchange functions to bridge between these, in case they are different. With bitcoin, you are soon approaching the point that it is both the best store of value AND medium of exchange. What will happen to the alternatives, then? Look no further than Cyprus.

[robamichael]

KRUGMAN KNOWS WHATS BEST FOR YOU AND ME!

http://mises.org/daily/6372/Krugmans-Call-for-a-Housing-Bubble

[Richy_T]

From the economist who wrote half the textbooks we use in the economics department at my university:

Might as well have "Chronicles of Narnia" as your history books.

[chriswilmer]

My 2 bitcents on this issue is that even if, for some reason, an inflationary currency was better for society, that doesn't explain why it would be rational for an individual to prefer an inflationary currency. Given the choice between the two, if an individual would prefer to hold onto a deflationary currency, society will just have to adapt.

[lonelyminer (Peter Šurda)]

I addressed the question of deflation with respect to Bitcoin in http://www.economicsofbitcoin.com/2012/12/response-to-philip-pilkington-on.html. The points I made apply to Krugman's argument you reference too, the main error is what I sum up in point one, i.e. the assumption that money is the only liquid asset.

[Gargio]

My 2 bitcents on this issue is that even if, for some reason, an inflationary currency was better for society, that doesn't explain why it would be rational for an individual to prefer an inflationary currency. Given the choice between the two, if an individual would prefer to hold onto a deflationary currency, society will just have to adapt.

that's it!!!!

[bitcoiner32]

Keynesianism is a dying religion, with Krugman as the high priest. Spending driven by currency inflation is not helpful to humans, it results in a bunch of economic "activity" that can only be described as wasteful. Buying unneeded consumer goods from someone so they can turn around and buy unneeded consumer goods from someone else just results in overworked people with decreased real wealth.

Saving is a good thing and is what creates real wealth, ie increases personal productivity per unit of time. A deflationary currency like Bitcoin will help create a society with less economic "activity" in terms of frivolous spending and more real wealth in terms of productive capacity and freedom to spend your time in ways you enjoy.

Austrian economics >>> Keynesian economics  


 

[benjamindees]

Keynesianism is a dying religion...

[Darth Krugman extends hand...]

[cbeast]

Keynesianism is a dying religion, with Krugman as the high priest. Spending driven by currency inflation is not helpful to humans, it results in a bunch of economic "activity" that can only be described as wasteful. Buying unneeded consumer goods from someone so they can turn around and buy unneeded consumer goods from someone else just results in overworked people with decreased real wealth.

Saving is a good thing and is what creates real wealth, ie increases personal productivity per unit of time. A deflationary currency like Bitcoin will help create a society with less economic "activity" in terms of frivolous spending and more real wealth in terms of productive capacity and freedom to spend your time in ways you enjoy.

Austrian economics >>> Keynesian economics  


 

I was going to write just about this exact post when I got a phone call. Why would anyone acquire a currency that is worth less when you want to spend it?

[flyonwall]

While I am not a Krugman fan myself, I think his point here does make sense. If we focus on WHY the Bitcoin economy can fail, the only reason it can fail now, I think, is the hard limit on quantity. I am not a Keynesian either, but the two extremes are equally bad: on one extreme, we have the unlimited quantity of fiat money that can be "printed", on another we have Bitcoin which has a hard limit on quantity.

I believe what is GOOD is to have a pre-determined formula for increasing the quantity, one that depends on the velocity of the currency. I am discussing this matter on another thread: https://bitcointalk.org/index.php?topic=156960.0

[Elwar]

Krugman's solution to stimulating the economy is aliens.

[rpietila]

While I am not a Krugman fan myself, I think his point here does make sense. If we focus on WHY the Bitcoin economy can fail, the only reason it can fail now, I think, is the hard limit on quantity. I am not a Keynesian either, but the two extremes are equally bad: on one extreme, we have the unlimited quantity of fiat money that can be "printed", on another we have Bitcoin which has a hard limit on quantity.

I believe what is GOOD is to have a pre-determined formula for increasing the quantity, one that depends on the velocity of the currency. I am discussing this matter on another thread: https://bitcointalk.org/index.php?topic=156960.0

Your argument sounds compelling at first, but how about if you consider Land. There is a perfectly limited quantity of it for ever increasing number of people. Yet we have managed to value and price it.

[benjamindees]

I believe what is GOOD is to have a pre-determined formula for increasing the quantity

Why?  Increased quantity of money encourages spending.  Forced spending wastes finite resources.  Wasting finite resources makes everyone worse off.

The problem isn't the quantity of money.  The problem (with Bitcoin) is the fact that all the money is front-loaded into the hands of early adopters.  The problem (with other hard currencies) is that the unregulated negative externality of childbirth consolidates money into the hands of a few.

Krugman's solution to stimulating the economy is aliens.

[bubblesort]

I generally don't care much about Austrian economics.  Hayek's praxelology is witch doctor stuff compared to the empiricism of serious, mainstream economics.  Calling me a 'Keynsian' is as crazy as intelligent design believers calling rational people 'Darwinists'.  That might play well with people who already agree with you but it's still just silly political jargon.  I'm a 'Keynseian' as much as believing in gravity makes me a 'Newtonian', LOL.

That doesn't mean I don't find bitcoin interesting or don't see it as a viable investment.  It just means I won't come to that conclusion the same way as other people in this thread, assuming that I do come to that conclusion at all... I'm still new to bitcoin.

I would add that bitcoin is the experiment that may prove these theories (People do less x when more y happens p<0.05, n<0.0001% of the population) wrong., so you should be watching even if you think it will fail as a medium of exchange.

I definitely agree with that.  That's why I'm here.

As far as the value of spending vs saving goes... you know what is valuable?  Stuff.  People do all kinds of useful things to get stuff.  You know what is not valuable?  Savings that just sit there.  If savings just sit around doing nothing for years then it's no good to anybody until you pull it out of savings and spend it on stuff.  Banks invest savings in order to make money, which stimulates the economy because the savings are used for (hopefully) profitable ventures.  Savings is investment when you put your savings in a bank rather than your mattress.  Money has no value on it's own.  It is only valuable when you exchange it for stuff.  Currencies with no velocity are not currency.

As far as 'frivolous' spending goes... spending is not frivolous.  You think the Adam Smith bobble head on my desk is frivolous?  Sure, I don't use it for anything useful.  It just looks nice and it's fun to knock around when I'm daydreaming instead of doing homework, and it makes girls I bring to my dorm room roll their eyes at me, so to me it's of frivolous value.  To the manufacturers, accountants, shippers, truckers and retailers who sold me that bobble head it is not frivolous, though.  That bobble head helps them feed their families.

Hes problem is that he fixed himself on lending and to him it is only viable way. But what if thanks to bitcoin people would not need to lend money anymore? Good for people, bad for banks.

Not lending money would not be a good thing for people or banks.  Look at Zeroday's situation in this other thread.  Zeroday has what I'm assuming is a profitable business, but their assets were destroyed by something outside their control.  Sure, the problem is kind of economic, from a certain perspective it might be, but I think the problem is really that some criminals swooped in and stole Zeroday's money, same as if it was destroyed in a fire, for example.  If BTC doesn't hit $90 US Zeroday could go out of business, costing them and others personally, but also costing their customers and society another profitable company.  If their business model is strong then why not loan Zeroday money to get through this difficult time?  The lender makes money, Zeroday makes money, her customers and society all benefit from her staying in business.  That's good for everybody.

(P.S. - I don't know Zeroday or anybody else on this forum, so I'm not vouching for anybody, and I didn't ask Zeroday if they were ok with me making this note here, so I'm writing this on my own, but...  If you are into investing in members of the BTC community you might want to shoot Zeroday a PM.  I mean, it's Cyprus so it's risky, but if you are into that then this might be an opportunity for you.  The better members of the BTC community do the better BTC will do, right?)

[marcus_of_augustus]

Verbose prose aside ^^^ .. you need to justify your assumptions, Peter Surda has skewered the whole argument with less than a sentence.

Peter Surda:

the assumption that money is the only liquid asset.

Fix this and your other worldly reasoning might be worthwhile or else you are just blowing a whole lot of hot air in forum where people could care less.

[Richy_T]

The problem isn't the quantity of money.  The problem (with Bitcoin) is the fact that all the money is front-loaded into the hands of early adopters.

See, when I see people say that, I have to ask "Where is the problem"? And I have to wonder if it isn't just a manifestation of jealousy. It doesn't actually mean that there's anything wrong or problematic with the bitcoin protocol itself, it's just a "where's mine" response.

As a non-early-adopter myself, I have to admit that I am somewhat envious but I have to give kudos to those with the vision to jump on early.

Personally, I'm less concerned with those that make out like bandits at the beginning compared to those who, with the current monetary systems, continue to make out like bandits ad-infinitum.

[bb113]

If you ask most people what is fair under complicated circumstances they will respond "first come, first serve". Personally I don't like that word "fair", it seems to cause more problems then it ever solves.

[bubblesort]

Verbose prose aside ^^^ .. you need to justify your assumptions, Peter Surda has skewered the whole argument with less than a sentence.

Peter Surda:

the assumption that money is the only liquid asset.

Fix this and your other worldly reasoning might be worthwhile or else you are just blowing a whole lot of hot air in forum where people could care less.

I don't think that argument is relevant.  Surda is basically saying that "yes, this money is horrible at circulating but you can circulate other things instead of money so this money should not be expected to circulate well."

That's like if I walked into a room and saw somebody driving a tiny finishing tack with a sledge hammer and offered them a small finishing tack hammer and they told me "the sledge hammer doesn't drive finishing tacks well but there are other things that do it well so I'm going to keep using the sledge hammer!" and went back to using the sledge hammer to drive the tiny finishing tack.

[Severian]

the empiricism of serious, mainstream economics.

Please. Serious, mainstream economics has given us the Euro and a $600 trillion - $1 quadrillion derivatives market.

In not too long a time, what is now considered serious, mainstream economics will be seen as every bit as superstitious as we see a typical Catholic priest circa 1450 AD.

[benjamindees]

The problem isn't the quantity of money.  The problem (with Bitcoin) is the fact that all the money is front-loaded into the hands of early adopters.

See, when I see people say that, I have to ask "Where is the problem"?

It's a problem for the Bitcoin economy, mostly.  It means that it won't grow past a certain point, because there will be a group of hold-outs who will never sell their (real) assets for Bitcoins.  Conversely, it means there will be a group of Bitcoin early adopters who will hold out and never spend their Bitcoins on real assets.  It limits the adoption of Bitcoin as currency.

I'm not suggesting that there is any better practical solution.  I'm just saying that it's not theoretically optimal.

Every currency has the same problem, to an extent.  And the problem will lessen over time.  But it is one of the major problems with Bitcoin at the moment.

[bitcoiner32]

I generally don't care much about Austrian economics.  Hayek's praxelology is witch doctor stuff compared to the empiricism of serious, mainstream economics.  Calling me a 'Keynsian' is as crazy as intelligent design believers calling rational people 'Darwinists'.  That might play well with people who already agree with you but it's still just silly political jargon.  I'm a 'Keynseian' as much as believing in gravity makes me a 'Newtonian', LOL.

If you're addressing me then I assumed you were just analyzing Krugman's arguments and not necessarily a believer in his overall message. If you do agree with Krugman that probably means that we disagree, but I think its an interesting discussion.

Krugman is a well-known disciple of the keynesian school, so he pretty much thinks more spending and more activity is good, regardless of what the money is being spent on(ie his "aliens" comments, or the broken window fallacy http://www.youtube.com/watch?v=gG3AKoL0vEs ). They've been able to become 'mainstream' largely because their conclusions help support the centralization of power into the hands of government. Nixon's "we are all Keynesians now" was a pretty horrible moment in history, IMO.

As far as frivolous spending, I'm mainly referring to the extra short-term spending that occurs as a result of the incentives of a currency undergoing inflation. I'm sure there will be plenty of people who buy bobble heads with bitcoins but my point is that an inflationary currency encourages people to spend on stuff that they wouldn't normally want or desire, leading to economic "activity" that isn't really beneficial. If people spent less time and money exchanging non-durable consumer goods then they would have more time and money to save and invest in capital like computers and microwaves or researching cures for cancer. It also allows people to better invest in other people's businesses and new ideas with loans from savings.

Whether the currency is inflationary or deflationary the capital available in the economy to create things isn't destroyed, its just deployed differently.  




I googled and found these charts that show the rate of savings in the US started to drop pretty much coinciding with Nixon's closing the gold window in 1971 and the dollar being able to be printed pretty much at will:
http://ablog.typepad.com/keytrendsinglobalisation/2011/01/new-deterioration-in-the-us-savings-rate.html





Another thought, since bitcoin is opensource, would be to create an exact replica of bitcoin but make the total number of bitcoins infinite. This would be like Milton Freidman's money-printing machine. If people preferred a constantly inflating currency they could put their money into that. Its hard to see that gaining acceptance though.

[bb113]

I generally don't care much about Austrian economics.  Hayek's praxelology is witch doctor stuff compared to the empiricism of serious, mainstream economics.  Calling me a 'Keynsian' is as crazy as intelligent design believers calling rational people 'Darwinists'.  That might play well with people who already agree with you but it's still just silly political jargon.  I'm a 'Keynseian' as much as believing in gravity makes me a 'Newtonian', LOL.

Bubblesort I missed this. It was very interesting to me when I discovered the Bayesian approach to statistics and Austrian approach to economics separately, then later found out many people behind both during the 20th century were in the same "clubs". In my opinion modern "empirical" science may be way off track due to ignoring assumptions that are impossible to assess, etc. Empiricism under uncertainty isn't so useful, so the uncertainty gets ignored to get funding/support.

[ErisDiscordia]

oh my god, people are going to save money, it's going to ruin everything!! --> keynesian economics

[Richy_T]

It's a problem for the Bitcoin economy, mostly.  It means that it won't grow past a certain point, because there will be a group of hold-outs who will never sell their (real) assets for Bitcoins.  Conversely, it means there will be a group of Bitcoin early adopters who will hold out and never spend their Bitcoins on real assets.  It limits the adoption of Bitcoin as currency.

Howso?

I just spent a small number of bitcoins this past week. In no way was that influenced by what anyone else was doing. All that matters to me is what I can do with the bitcoins that I am holding.

Like you say, there are people with a lot of fiat money in the current system. Sure, I wish I had some more myself but that's not really my biggest concern. What tends to affect me more is those people (often the same people admitedly) that have maneuvered themselves to help themselves to the fruit of my labor either by attaching themselves to it directly via taxation or indirectly via inflation. I don't really hold up much hope of Bitcoin being a solution to taxation but it's great against inflation and I consider that the more insidious problem.

[Severian]

It was very interesting to me when I discovered the Bayesian approach to statistics and Austrian approach to economics separately, then later found out many people behind both during the 20th century were in the same "clubs".

Interesting. Is there a link you can point me to?

Mises's brother Richard also had some influence in probability, which I learned only from reading Rothbard.

[axus]

If all fiat transactions were replaced with Bitcoin right now, think of what a disaster that'd be.

[nwbitcoin]

This is real life verses ideology and it does show one of the problems with bitcoin.

Its not bitcoin, but the attitude of early adopters, which is very similar to some inventors, where they are holding out for a future that never happens, and kills the moment where they could make a difference.

Money is not for saving, its for spending. Having a store of potential spending is not going to help anyone.  However, that isn't a Keynesian idea, its basic economics. What Keynesians do is borrow other people's money to spend, and when they run out of that, then the trouble really starts!

However, saving isn't a bad idea, the problem is actually the same problem that Krugman missed which is that its not the bitcoins which are good for saving, its their relationship with fiat that makes them valuable.

The only element of the original Krugman quote that seriously needs looking at again is the idea of lending not being possible, and with this I think he is wrong.  Mostly because he is not thinking outside the box.  You can lend bitcoins at a very low level of interest, but only if you don't want to work with a different currency as well. 

Borrow 1 BTC, and pay back 1.1BTC can work over any time.

Ironically, while a large number of bitcoiners are ranting for the end of fiat, without the exchange rate, bitcoin would be more useful. 

How we solve that problem is beyond me at this time on a Saturday!

[Richy_T]

I'm a 'Keynseian' as much as believing in gravity makes me a 'Newtonian', LOL.
u are into that then this might be an opportunity for you.  The better members of the BTC community do the better BTC will do, right?)

Can you quack like a duck too?

[johnyj]

Borrow 1 BTC, and pay back 1.1BTC can work over any time.

Where is that 0.1 BTC coming from?

In the fiat world, the way to make this happen is issue more and more money to pay back the previous interest, but in bitcoin world, the total number of money supply is fixed, paying back more than you borrowed simply means that interest must come from someone else's pocket 

[amincd]

And because of that, there has been an incentive to hoard the virtual currency rather than spending it. The actual value of transactions in Bitcoins has fallen rather than rising. In effect, real gross Bitcoin product has fallen sharply.

As of this writing, this is no longer the case. The number of transactions has increased several fold since Krugman wrote the above, and the transaction volume has increased:

http://blockchain.info/charts/estimated-transaction-volume

Despite the value of bitcoins rising rapidly. This means that the actual value of transactions in Bitcoin is increasing at a rapid rate. Real gross Bitcoin product has risen sharply.

[benjamindees]

It's a problem for the Bitcoin economy, mostly.  It means that it won't grow past a certain point, because there will be a group of hold-outs who will never sell their (real) assets for Bitcoins.  Conversely, it means there will be a group of Bitcoin early adopters who will hold out and never spend their Bitcoins on real assets.  It limits the adoption of Bitcoin as currency.

Howso?

I just spent a small number of bitcoins this past week. In no way was that influenced by what anyone else was doing. All that matters to me is what I can do with the bitcoins that I am holding.

Like you say, there are people with a lot of fiat money in the current system. Sure, I wish I had some more myself but that's not really my biggest concern. What tends to affect me more is those people (often the same people admitedly) that have maneuvered themselves to help themselves to the fruit of my labor either by attaching themselves to it directly via taxation or indirectly via inflation. I don't really hold up much hope of Bitcoin being a solution to taxation but it's great against inflation and I consider that the more insidious problem.

Look at it this way:  from the perspective of someone who just learned about Bitcoin and is deciding whether to adopt it right now, all of the coins mined up until now can be viewed as inflation.  If he views that as an acceptable level of inflation in relation to his assets, then he goes ahead and adopts Bitcoin.  If not, if he has substantial assets in relation to the Bitcoin economy, then he would be less likely to adopt Bitcoin as a currency.  So the Bitcoins already mined act as a counter-force to the adoption of Bitcoin.

If those Bitcoins are in the hands of enough people, such that each has approximately the same share of Bitcoins as assets that he contributes to the global economy, then that force is minimal.  But if each person has a share of Bitcoins equivalent to that of a large corporation, or a state or nation or similar, then who wants to join that?  Certainly no large corporation, or state or nation.  That's not a currency; that's a scam.

It's like, you might not care as much about inflation if it were only distributed to people who would never spend it on anything you might buy.  I see that argument often.  "Inflation doesn't matter, because it only goes to banks that only spend it on treasury bonds" or whatever.  Or, conversely, "inflation wouldn't matter if it were distributed via helicopters to the poor who only spend it on essentials."  It's the same argument from different perspectives:  inflation doesn't matter if it is distributed in a reasonable manner.

Well, existing Bitcoins don't matter if they are distributed in a reasonable manner.  Otherwise, they do matter.  And just judging by the fact that half of the Bitcoins have already been mined, and the level of economic activity is still at such a pathetic level, the distribution is far from reasonable.

[minorman]

As I wrote shortly after Krugman's piece came out. The main reason that deflation is not - and won't be - a problem is that bitcoin is not debt-based (interest bearing) - unlike nearly all fiat systems.

See this post for details:
http://seekingalpha.com/instablog/530678-minorman/214527-paul-krugman-s-take-on-bitcoin

[rpietila]

Look at it this way:  from the perspective of someone who just learned about Bitcoin and is deciding whether to adopt it right now, all of the coins mined up until now can be viewed as inflation.  If he views that as an acceptable level of inflation in relation to his assets, then he goes ahead and adopts Bitcoin.  If not, if he has substantial assets in relation to the Bitcoin economy, then he would be less likely to adopt Bitcoin as a currency.  So the Bitcoins already mined act as a counter-force to the adoption of Bitcoin.

Otherwise the post was insightful, thank you, but I believe you had this one backwards.

The number of bitcoins to be mined in the future is the inflation. The number mined so far is the monetary base.

Of course it pisses me that if I buy gold, there is already so much of it, and I can only buy a little and it is expensive and what not. Still, these are the very reasons why I buy gold instead of, say, aluminum, of which only a few days' supply exists and more is constantly mined.

So when I buy into bitcoin, I take confidence of the fact that more than half are already mined, and there will not be excessive inflation in the future. It is another decision whether to "support"/"boycott" bitcoin by buying it or not. I think at the current price levels, it matters little if someone with $1 million in assets decides to "support". It matters absolutely nil if someone "boycotts". We are past that phase now. Only those who have bitcoins have a vote.

[nwbitcoin]

Borrow 1 BTC, and pay back 1.1BTC can work over any time.

Where is that 0.1 BTC coming from?

In the fiat world, the way to make this happen is issue more and more money to pay back the previous interest, but in bitcoin world, the total number of money supply is fixed, paying back more than you borrowed simply means that interest must come from someone else's pocket 

Interest is a perfectly valid way of making money with a currency!
The 0.1btc comes from the person who borrowed it, just like in the old days of banking!

[lonelyminer (Peter Šurda)]

I don't think that argument is relevant.  Surda is basically saying that "yes, this money is horrible at circulating but you can circulate other things instead of money so this money should not be expected to circulate well."

That's like if I walked into a room and saw somebody driving a tiny finishing tack with a sledge hammer and offered them a small finishing tack hammer and they told me "the sledge hammer doesn't drive finishing tacks well but there are other things that do it well so I'm going to keep using the sledge hammer!" and went back to using the sledge hammer to drive the tiny finishing tack.

TLDR; if people do not want to spend, increasing the money supply can trick them into spending but can't "fix the economy".

I think you misinterpreted my argument. My argument is that people's consumption/savings ratio is not determined by the changes in the money supply, but by their time preference, and that people can react differently than described in the keynesian model. At best, the changes in the money supply can distort information about the relationship between scarcity of resources and demand for consumption, and cause people to make decisions that appear are nominally correct but really aren't. In the absence of the distortion (i.e. if the changes in the money supply fail to trick people, there is no insider information and no Cantillon effect), people compensate by postponing consumption using a different liquid asset. This does not require that the choice of the dominant medium of exchange (money) changes. People would still use the inflating money to trade, but will reduce their cash balances in preference to, say, gold. So the price level will rise, but consumption/savings ratio will remain, only the composition of liquid asset holdings will change.

Conversely, if the price level is falling, people will compensate by increasing their cash (and credit holdings in the same unit), and reduce the holding of liquid assets that aren't denominated in the same unit, e.g. commodities such as gold, or foreign currencies. Again, no change in the consumption/savings ratio, just the composition of liquid asset holdings restructures and the price level changes.

People do not magically turn into misers if the price level is decreasing, similarly as there is no reason for people to turn into hedonists if the price level is increasing. Rather, they might be prevented on reacting according to their preferences, for example due to the Cantillon effect, interventionism, externalisation of costs, barriers to entry in capital markets, giving preferential legal treatment to national money such as legal tender laws, capital gains taxes, sales tax on precious metals, and so on.

Please note that I did not actually use Austrian assumptions in my "liquidity portfolio" counterargument (I specifically excluded the information distortion and Cantillon effect). And Krugman wrote papers in the 70s and 80s where he analyses competition of currencies in international trade with respect to liquidity. Let me quote him:

The discussion in this section has concentrated on the medium-of-exchange role of international money in isolation. In fact, there is some interdependence among roles. The links which seem clear are these: if the dollar is a good store of value, the costs of making markets against the dollar are lower, thus encouraging the vehicle role.

The essence of this argument (people choose their liquid asset holding based on the price changes of liquid assets) is exactly the same as mine. Why he forgot about it after 30 years I don't know, you need to ask him.

The other two problems that I describe in my article, confusing capital with information about capital, and conflating changes in the money supply with changes in the price level should also be acceptable to non-Austrians. In particular the argument that credit deflation must end when banks establish 100% reserves is, in my opinion, so blindingly obvious that I'm baffled how people can still argue that a credit deflation "spiral" is even logically possible.

[Prattler]

What that means is that if you measure prices in Bitcoins, they have plunged; the Bitcoin economy has in effect experienced massive deflation.

And because of that, there has been an incentive to hoard the virtual currency rather than spending it.

This is simply not true.

Imagine I want to keep 50% of my savings in USD and 50% in bitcoin. Bitcoin rises in value and suddenly my savings distribution is: 20% USD, 80% bitcoin. Now I want to spend (sell) bitcoin and hoard (buy) USD. If I have the option to pay with BTC or USD, I will pay with BTC. This can only be good for the bitcoin economy.

Saving is so strongly discouraged in the current economy that Krugman wouldn't ever consider this.

[johnyj]

Borrow 1 BTC, and pay back 1.1BTC can work over any time.

Where is that 0.1 BTC coming from?

In the fiat world, the way to make this happen is issue more and more money to pay back the previous interest, but in bitcoin world, the total number of money supply is fixed, paying back more than you borrowed simply means that interest must come from someone else's pocket 

Interest is a perfectly valid way of making money with a currency!
The 0.1btc comes from the person who borrowed it, just like in the old days of banking!

Even in the old days of banking, where money is backed by gold, total amount of gold is not limited, so you can dig out some gold each year to pay the interest

In fiat system, added money supply simply means added debt, and added debt will have to be paid back later, together with their interest, it is a snowball effect

[bubblesort]

I think you misinterpreted my argument.

I agree, and I'm sorry about that.  I didn't misinterpret you on purpose.  I'm not trying to be dense, but I'm still not sure that I understand your argument.  Are you saying that inflation doesn't cause people to save less?  The current situation in US retail banks seems to suggest that people do save less when interest rates are lower than inflation.

The only element of the original Krugman quote that seriously needs looking at again is the idea of lending not being possible, and with this I think he is wrong.  Mostly because he is not thinking outside the box.  You can lend bitcoins at a very low level of interest, but only if you don't want to work with a different currency as well. 

Borrow 1 BTC, and pay back 1.1BTC can work over any time.

Ironically, while a large number of bitcoiners are ranting for the end of fiat, without the exchange rate, bitcoin would be more useful. 

How we solve that problem is beyond me at this time on a Saturday!

I presented that wrong.  Krugman doesn't actually talk about lending in his short essay (it's only a few paragraphs long).  I gave my description of Krugman's argument after I gave the link to it, and threw in the credit part to show the problems I think we might see with deflation.

You are right that the nominal interest rate would be lower for a deflationary currency like BTC, but the real interest rate is what will make things more difficult.  Lets run some numbers to see how a loan would work out:

Alice loans Bob 120 BTC for 1 year at 1% simple interest to purchase a physical capital to build a widgit factory.  That means that payments will be 10.1 BTC per month for 12 months ((120 BTC * 1.01)/12 months).  Widgits currently sell for 0.10 BTC per unit.  Deflation is 5% per month.

In the first month Bob has to sell 101 widgits to make his 10.1 BTC loan payment to Alice.

In the second month deflation effects Bob's business.  Because deflation is at 5%, widgits now sell for 0.095 (0.10 BTC - (0.01 0.05))  If we round up (assume widgits are not divisible), this means that Bob has to sell 107 widgits to make his loan payment.

In each successive month Bob has to sell more widgits to make his loan payment.  This continues along these lines, every month Bob has to sell more and more widgits to make his loan payment, resulting in this table (rounded to 5 decimals):

Month |	Widgit Price |	Widgits Sold
1	0.10 BTC	101
2	0.095 BTC	107
3	0.09025 BTC	110
4	0.08574 BTC	118
5	0.08145 BTC	125
6	0.07738 BTC	131
7	0.07351 BTC	138
8	0.06983 BTC	145
9	0.06634 BTC	153
10	0.06302 BTC	161
11	0.05987 BTC	169
12	0.05688 BTC	178

Bear in mind, this is in addition to the iron law of wages, which drives down prices as more competition enters the market place.  Lets assume that Bob has a monopoly, though, just for the hell of it, and that widgits are in no way necessary to anybody's survival, so he's still a price taker due to the trivial nature of the product.  Lets say his widgits are something stupid like Justin Beiber albums.

If the market for Justin Beiber albums demanded exactly 150 units per month reliably, then the latest Bob could possibly operate is month 8, because even with zero overhead, Bob could not make his loan payments any more (and music fans rejoiced!).  That isn't because there is no demand for Justin Beiber albums and it isn't because Bob is a bad businessman who let his overhead run away on him.  People are willing to buy them, Bob is willing to make them, this transaction just can't take place because the financial system will not support the transactions because deflation killed the real value of Bob's business.

This is just the effect of one very short term loan on a small business.  Imagine a 30 year home mortgage.  Deflation would put everybody underwater almost immediately and keep them there for the life of the loan (assuming there is no insane housing bubble or something).  Deflation effects wages as well, so people would find their nominal income shrinking as time goes on, making it harder for them to make their mortgage payments.  If the bank came in and repossessed a home after a few years they would loose even more money.  It would be an endless cycle of loss for the banks and consumers.

[Puppet]

From the economist who wrote half the textbooks we use in the economics department at my university:

http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/

Basically, he says that bitcoin is not really being used as a medium of exchange because it's deflationary.  He has a point.  If you aren't using it to buy goods and services then you are using it as a way to save your money, speculating on it.  Constant deflation stops people from using it as a medium of exchange.

Its hard to argue against this. A purely deflationary currency provides no incentive for investment or economic activity; it only causes rich people to get richer just from being rich and sit on their money. Its a great system if you have money,  but economically its..  not very smart to put it mildly. 

I think the solution to this problem is -  or could well be  ripple; or something like ripple. It allows the issuing of credit money at a rate that keeps pace with economic growth (or shrinks if the overall economy shrinks). Bitcoin could act as monetary base like gold did for fiat. Although one could question if in the longer run, if such user issued credit money becomes mainstream; if there really is a need for the monetary base in the first place.

[Jutarul]

From the economist who wrote half the textbooks we use in the economics department at my university:

http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/

Basically, he says that bitcoin is not really being used as a medium of exchange because it's deflationary.  He has a point.  If you aren't using it to buy goods and services then you are using it as a way to save your money, speculating on it.  Constant deflation stops people from using it as a medium of exchange.

If any currency is deflationary it makes sense to hold as much of that currency as you can for as long as you can because the value will constantly increase.  This discourages spending and encourages saving.  Even if every vendor in the world accepted bitcoin, people still would not spend their bitcoins if they can get around it by using USD or Euros Yen or L$ (Linden Dollars, AKA SecondLife currency) or something else.

On the other end of things, think about the effects on the credit market.  Interest rates take inflation into account, to ensure that the lender makes money after inflation eats some of their investment.  If a currency deflates at 5% per month then it makes sense to only loan to somebody who can make more than 5% per month on your investment (and this is compounded monthly for the life of the loan).  This is because if they don't make more than that then it makes no sense to loan the money out when you can make more money by leaving it in a savings account.  This would make it very difficult to buy houses and cars and start new ventures with credit.

Krugman fails to acknowledge the fact that money is a substitute for future goods and service, i.e. delayed consumption. A deflationary currency "rewards" those who can delay the consumption to a time significantly in the future. However, what ultimately determines the consumption decision is the need. In an inflationary environment you have an incentive to spend your money on things you don't really need, while in a deflationary environment you spend money preferably only on things you need.

Krugman is trapped in his keynesian assumption of the broken window economy, where spending money on useless stuff increases overall productivity.

[paraipan]

Krugman is an idiot, proof under your nose.


http://pizzaforcoins.com/

https://www.bitcoinstore.com/

https://bitcointalk.org/index.php?topic=155345.0

https://bitcointalk.org/index.php?topic=157809

http://www.libertariannews.org/2011/06/11/the-economics-of-bitcoin-why-mainstream-economist-lie-about-deflation/

[Rodyland]

<snip>deflation is always bad</snip>

I hope I'm not alone in not buying this whole "deflation is bad" argument.  By your logic, Samsung should be broke because the SGS3 that used to retail for $800 is now available for $350.  And by the same logic, I will never buy a computer because in a month's time it will always be cheaper than buying today.

Any business that borrows money to make/sell widgets needs to do price/expense/cash flow management to decide if the venture is profitable and sustainable.  The cash flow implications of falling sale prices over time is no different to falling sales volume over time (ie. saturating the market), or any other rising input cost.

Just because a business agrees to pay back +X% over a 12 month loan when they know the price they can sell their goods at will fall by Y% per month doesn't mean they'll necessarily go broke - and if they do, it's because their outgoings are more than their incomings.  That their outgoings are falling slower than their incomings (due to deflation) doesn't make deflation bad in and of itself.  It just means they didn't do their sums.

If it costs BTCX to make a widget, then you better sell that widget for more than BTCX, inflationary, stable or deflationary environment.  If that means you can't drop the selling price of your widget as much as your competitors, then you don't deserve to be in business any more.

And as for assertions that:

A purely deflationary currency provides no incentive for investment or economic activity

Again, I don't buy it.  Deflation just raises the bar for what is deemed an acceptable return on your funds.  If you can make X% through deflation, then any investment must make >X%.  Some could argue that inflation lowers the bar too far, allowing malinvestment to consume valuable resources that would be better deployed elsewhere.

And for the person who asked

Where is that 0.1 BTC coming from?

The loan and repayment of borrowings are part of the capital stock of the currency (I may be muddling my words here).  Interest payments comes from the flow of money through the system.  The amount of money in the system hasn't changed - what changes is the distribution.

[bitcoiner32]

I think you misinterpreted my argument.

I agree, and I'm sorry about that.  I didn't misinterpret you on purpose.  I'm not trying to be dense, but I'm still not sure that I understand your argument.  Are you saying that inflation doesn't cause people to save less?  The current situation in US retail banks seems to suggest that people do save less when interest rates are lower than inflation.

The only element of the original Krugman quote that seriously needs looking at again is the idea of lending not being possible, and with this I think he is wrong.  Mostly because he is not thinking outside the box.  You can lend bitcoins at a very low level of interest, but only if you don't want to work with a different currency as well. 

Borrow 1 BTC, and pay back 1.1BTC can work over any time.

Ironically, while a large number of bitcoiners are ranting for the end of fiat, without the exchange rate, bitcoin would be more useful. 

How we solve that problem is beyond me at this time on a Saturday!

I presented that wrong.  Krugman doesn't actually talk about lending in his short essay (it's only a few paragraphs long).  I gave my description of Krugman's argument after I gave the link to it, and threw in the credit part to show the problems I think we might see with deflation.

You are right that the nominal interest rate would be lower for a deflationary currency like BTC, but the real interest rate is what will make things more difficult.  Lets run some numbers to see how a loan would work out:

Alice loans Bob 120 BTC for 1 year at 1% simple interest to purchase a physical capital to build a widgit factory.  That means that payments will be 10.1 BTC per month for 12 months ((120 BTC * 1.01)/12 months).  Widgits currently sell for 0.10 BTC per unit.  Deflation is 5% per month.

In the first month Bob has to sell 101 widgits to make his 10.1 BTC loan payment to Alice.

In the second month deflation effects Bob's business.  Because deflation is at 5%, widgits now sell for 0.095 (0.10 BTC - (0.01 0.05))  If we round up (assume widgits are not divisible), this means that Bob has to sell 107 widgits to make his loan payment.

In each successive month Bob has to sell more widgits to make his loan payment.  This continues along these lines, every month Bob has to sell more and more widgits to make his loan payment, resulting in this table (rounded to 5 decimals):

Month |	Widgit Price |	Widgits Sold
1	0.10 BTC	101
2	0.095 BTC	107
3	0.09025 BTC	110
4	0.08574 BTC	118
5	0.08145 BTC	125
6	0.07738 BTC	131
7	0.07351 BTC	138
8	0.06983 BTC	145
9	0.06634 BTC	153
10	0.06302 BTC	161
11	0.05987 BTC	169
12	0.05688 BTC	178

Bear in mind, this is in addition to the iron law of wages, which drives down prices as more competition enters the market place.  Lets assume that Bob has a monopoly, though, just for the hell of it, and that widgits are in no way necessary to anybody's survival, so he's still a price taker due to the trivial nature of the product.  Lets say his widgits are something stupid like Justin Beiber albums.

If the market for Justin Beiber albums demanded exactly 150 units per month reliably, then the latest Bob could possibly operate is month 8, because even with zero overhead, Bob could not make his loan payments any more (and music fans rejoiced!).  That isn't because there is no demand for Justin Beiber albums and it isn't because Bob is a bad businessman who let his overhead run away on him.  People are willing to buy them, Bob is willing to make them, this transaction just can't take place because the financial system will not support the transactions because deflation killed the real value of Bob's business.

This is just the effect of one very short term loan on a small business.  Imagine a 30 year home mortgage.  Deflation would put everybody underwater almost immediately and keep them there for the life of the loan (assuming there is no insane housing bubble or something).  Deflation effects wages as well, so people would find their nominal income shrinking as time goes on, making it harder for them to make their mortgage payments.  If the bank came in and repossessed a home after a few years they would loose even more money.  It would be an endless cycle of loss for the banks and consumers.

I appreciate your work but I could write out this exact same example with inflation at %3 and loans at 8%, or whatever spread you want. All deflation does is change the starting point.
Ex: bank needs a 5% profit margin, deflation is running at -3% so they lend at +2%. Pick any spread you want, the math doesn't change.
Ex: deflation is at -10% and banks need a 7% profit margin on an x years loan, so they loan at -3%.
Ex: inflation is at 7% and banks need a 4% profit margin on an x years loan so they loan at 11%. Etc


Same with home loans,etc...



Inflation in currency encourages people to spend it before it loses value. Deflation encourages savings. Savings is what ultimately makes people more productive and wealthier over the long term. Economic activity for the sake of activity is not a good thing, i.e. war isn't helpful and broken windows dont increase wealth. Inflation leads to chronically overworked people with stagnating or even decreasing real wealth. In other words, pretty much what we have right now with Krugman, Bernanke and the fed.

[barbarousrelic]

If everyone *knows* that the money supply will increase a certain way (at a decreasing rate), then this information will be factored into the price of Bitcoin. It is not a surprise to anyone. If the rate of inflation would cause the price of Bitcoin to increase, it would increase instantly at the beginning, and not gradually over time. Therefore, you can not expect the price of Bitcoin to inevitably increase.

The price of Bitcoin is increasing because it is becoming more popular, not because the number of Bitcoins in existence is increasing at an ever-slowing rate.

[bitcoiner32]

Just found this excellent article on twitter that explains Krugmans errors very clearly:

http://www.libertariannews.org/2011/06/11/the-economics-of-bitcoin-why-mainstream-economist-lie-about-deflation/

"Krugman’s argument that people would be less willing to spend and borrow, and this would lead to unemployment, is as ridiculous as saying that because computers keep getting better and cheaper into the future, people would be less willing to spend money on a computer today because they could simply wait and buy an even better/cheaper computer in the future.  That is obviously not how people think.  People have needs and desires that have to be met, and they will purchase things as soon as their desire for the product is larger than their desire for future earnings on savings."

[Rodyland]

Just found this excellent article on twitter that explains Krugmans errors very clearly:

http://www.libertariannews.org/2011/06/11/the-economics-of-bitcoin-why-mainstream-economist-lie-about-deflation/

"Krugman’s argument that people would be less willing to spend and borrow, and this would lead to unemployment, is as ridiculous as saying that because computers keep getting better and cheaper into the future, people would be less willing to spend money on a computer today because they could simply wait and buy an even better/cheaper computer in the future.  That is obviously not how people think.  People have needs and desires that have to be met, and they will purchase things as soon as their desire for the product is larger than their desire for future earnings on savings."

This.  And as was mentioned here

As I wrote shortly after Krugman's piece came out. The main reason that deflation is not - and won't be - a problem is that bitcoin is not debt-based (interest bearing) - unlike nearly all fiat systems.

See this post for details:
http://seekingalpha.com/instablog/530678-minorman/214527-paul-krugman-s-take-on-bitcoin

It's hard to emphasise this point strongly enough, especially since most people don't get it.  In our world of fiat currency, money is created out of nothing, based on little more than the existence of debt.  And given those conditions, deflation can certainly be a concern.  But under a currency that operates to different rules (eg. physically backed, or fixed supply) the conclusion that deflation is bad is erroneous.

[memvola]

I don't have in depth knowledge about Economics, so I'll try to give practical examples. Please point out where I'm wrong; I'm prepared to do some recommended reading.

Let's assume I'm a Cypriot who lost trust to the banking system and decided to preserve my wealth in Bitcoin. I don't see any reason why I wouldn't spend the BTC for my needs, since I would be doing it if it was sitting as EUR anyway (or not, in the same manner). I always could have stored the value in deflationary vehicles in my control, but I didn't, because it wasn't liquid enough. Well, with Bitcoin, I can both store it in a deflationary vehicle and spend. It's both better than EUR in a bank or gold under my pillow. Granted, my BTC stash will decrease over time, but my overall wealth will still increase. Just as I won't lock my EUR in a good investment while depriving my children of a good education, I won't try to preserve my coin stash at the expense of their benefit.

Another personal example is, a few years ago, I bought land from an old guy. I was pretty sure that it would appreciate in time, and I'm sure he thought the same. He sold it to me anyway, because he wanted to expand his business. If he is successful now, he might have made more money than he lost to appreciation. If he isn't, tough luck; but it is a fact that he made that decision. Since Bitcoin is more liquid, to spend coins to make more coins is an easier decision IMHO.

In turn, all my family combined probably do not hold as much land as our forefathers did. Still, we are much wealthier than they were. Of course, if they did hold the land, it would be worth a lot more than all of ours combined. But at what cost? It's almost impossible to imagine.

All in all, I could understand the argument more easily if there were no deflationary vehicles one can invest in. But there already are. At this point, I'm pretty sure I'm missing something. Instead of investing in gold and keeping some EUR to spend, I can keep it all in Bitcoin. If I chose to invest in something other than gold, then I would do the same with Bitcoin. Should I not?

The only mechanism I can think of is, if investing in deflationary vehicles are made accessible only to a minority of the population. Bitcoin breaks this condition almost perfectly, therefore will result in market failure.

[barbarousrelic]

All the people who say Bitcoin stinks because it must inevitably increase in value - do you think they do the logical thing that their belief points to and put their money in Bitcoin?

[flyhouse]

Keynesianism is a dying religion, with Krugman as the high priest. Spending driven by currency inflation is not helpful to humans, it results in a bunch of economic "activity" that can only be described as wasteful. Buying unneeded consumer goods from someone so they can turn around and buy unneeded consumer goods from someone else just results in overworked people with decreased real wealth.

Saving is a good thing and is what creates real wealth, ie increases personal productivity per unit of time. A deflationary currency like Bitcoin will help create a society with less economic "activity" in terms of frivolous spending and more real wealth in terms of productive capacity and freedom to spend your time in ways you enjoy.

Austrian economics >>> Keynesian economics  


 

I couldn't agree more!

[ErisDiscordia]

A purely deflationary currency provides no incentive for investment or economic activity

I'd like to point out, that this might actually be a positive aspect. Right now the worlds monetary system is geared towards infinite growth. This strikes me as not very smart since last time I checked, we were living on a planet with finite resources. A deflationary (not sure, this technically applies to Bitcoin. Bitcoin does have inflation, but it's small, controlled, predictable and finite) currency might act as a catalyst for change in the way we think about the economy and lead us from a growth oriented to a sustainability oriented model. I don't see it as a threat to general prosperity if people stop spending currency like it's hot potatoes and going into debt in order to fuel consumption - on the contrary. A currency increasing in value over time encourages saving - delayed consumption, as in "lets' not strip the planet bare to the bones right now to have 5 ipads and 4 cars each but let's leave something for later generations". Just my two Satoshis.

[Puppet]

I hope I'm not alone in not buying this whole "deflation is bad" argument.  By your logic, Samsung should be broke because the SGS3 that used to retail for $800 is now available for $350.  And by the same logic, I will never buy a computer because in a month's time it will always be cheaper than buying today.

Thats not currency deflation. Cellphones and computers actually are getting cheaper to produce. Its called an increased productivity and if that is what is causing the price deflation; then there is nothing wrong with that, on the contrary. We had the same during the industrial revolution; we got massive increases in productivity causing price deflation. But also causing more production of actual physical wealth because we produced more goods more efficiently. As a society we actually got richer and the increased purchasing power of our money was just a reflection of that. But you cant reverse that. Making money more scarce doesnt cause an increase in productivity or production, let alone wealth- anymore more than printing more money can make everyone rich.

[lonelyminer (Peter Šurda)]

I agree, and I'm sorry about that.  I didn't misinterpret you on purpose.  I'm not trying to be dense, but I'm still not sure that I understand your argument.

No problem.

Are you saying that inflation doesn't cause people to save less?  The current situation in US retail banks seems to suggest that people do save less when interest rates are lower than inflation.

We need to be careful to differentiate between changes in prices and expectations of these changes. If the expectations are mostly accurate, the direction of the change is irrelevant. The only reason why people might consume more during an inflation is if they are tricked, i.e. if they think the prices will rise slower than they really will.

You are right that the nominal interest rate would be lower for a deflationary currency like BTC, but the real interest rate is what will make things more difficult.

There are several issues here too. First of all, the price of the capital goods is derived from the price of the consumer goods. Unless there is friction in price adjustments then, it's impossible for the unit of account to have a negative nominal interest rate. The real interest rate can't be negative even irrespective of that, as that would mean that people value the same good in the future more than they value it in the present, and that contradicts the axiom of human action.

Of course, a negative nominal interest rate can hypothetically occur with something that is not a unit of account. But this is not as big a problem as mainstream economists assume. I did a simulation and presented the results at the London Bitcoin Conference 2012. In my simulation, a merchant with a 6% real markup and a turnover/stock ratio of 6 was able to have a positive nominal RoI using a deflationary currency that is not unit of account even at a 50% deflation (i.e. the prices in that currency halve within a year). Even income taxes did not revert the positive RoI (of course that depends on the details of the tax rules, but I took those that according to my research should be applied to Bitcoin in Europe).

In fact, because the prices dropped, after a year the simulated merchant would be able to double his stock, i.e. he saved enough capital to be able to expand his business. This is a hint that a deflationary currency edit: falling price level is highly beneficial for consumers, as it increases the amount of goods available to them. And if you don't believe the simulations, just look at consumer electronics.

[rupy]

A purely deflationary currency provides no incentive for investment or economic activity

I'd like to point out, that this might actually be a positive aspect. Right now the worlds monetary system is geared towards infinite growth. This strikes me as not very smart since last time I checked, we were living on a planet with finite resources. A deflationary (not sure, this technically applies to Bitcoin. Bitcoin does have inflation, but it's small, controlled, predictable and finite) currency might act as a catalyst for change in the way we think about the economy and lead us from a growth oriented to a sustainability oriented model. I don't see it as a threat to general prosperity if people stop spending currency like it's hot potatoes and going into debt in order to fuel consumption - on the contrary. A currency increasing in value over time encourages saving - delayed consumption, as in "lets' not strip the planet bare to the bones right now to have 5 ipads and 4 cars each but let's leave something for later generations". Just my two Satoshis.

Exactly! In an expanding world (resources and people) infinite value helps you exploit nature and grow population as fast as possible. But now finite is on the table, and decreasing population. Only gold and bitcoins work in that environment.

[hashman]

What that means is that if you measure prices in Bitcoins, they have plunged; the Bitcoin economy has in effect experienced massive deflation.

And because of that, there has been an incentive to hoard the virtual currency rather than spending it.

This is simply not true.

Imagine I want to keep 50% of my savings in USD and 50% in bitcoin. Bitcoin rises in value and suddenly my savings distribution is: 20% USD, 80% bitcoin. Now I want to spend (sell) bitcoin and hoard (buy) USD. If I have the option to pay with BTC or USD, I will pay with BTC. This can only be good for the bitcoin economy.

Saving is so strongly discouraged in the current economy that Krugman wouldn't ever consider this.

+1  

Yeah, your coin is now worth a whole lot more goods than when you traded for it.  And people think this will discourage spending your coin?  That's like saying that lower prices discourages shoppers.

[🏰 TradeFortress 🏰]

You are hungry. A hamburger costs 3.89 mBTC. What do you do?

> Wait four months when deflation reduces the price to 3.88 mBTC
> Buy the hamburger now and not worry about small amounts of deflation.

But people will pay via fiat! Or that only applies to necessities!

You want this shiny new game that's released. It costs $60

> Wait six months before it costs $30
> Enjoy the game now and pay $60

We can see a "deflationary environment" in League of Legends. Champions costs more the first week that it is released (or something, I don't care, I'm using it as an example). People still pay for it because they want it now and slow but predictable deflation won't significantly impact spending.

[Puppet]

A purely deflationary currency provides no incentive for investment or economic activity

I'd like to point out, that this might actually be a positive aspect. Right now the worlds monetary system is geared towards infinite growth. This strikes me as not very smart since last time I checked, we were living on a planet with finite resources

There is certainly something to be said to create a more sustainable society, but I dont think the way to get there is by causing massive unemployment and killing the economy.  Sure, doing so  will preserve some resources for a bit longer, just like for instance the killing of 5 billion people would,  but surely there are better ways to achieve that? A deflationary currency doesnt discriminate between resource intensive economic activity and eco friendly one, it will affect either in the same way. So if your claim is that it will decrease economic activity and therefore is desirable, then I think thats a silly proposition. You might as well argue for mass killings, war or famine

[memvola]

A purely deflationary currency provides no incentive for investment or economic activity

I'd like to point out, that this might actually be a positive aspect. Right now the worlds monetary system is geared towards infinite growth. This strikes me as not very smart since last time I checked, we were living on a planet with finite resources

There is certainly something to be said to create a more sustainable society, but I dont think the way to get there is by causing massive unemployment and killing the economy.  Sure, doing so  will preserve some resources for a bit longer, just like for instance the killing of 5 billion people would,  but surely there are better ways to achieve that? A deflationary currency doesnt discriminate between resource intensive economic activity and eco friendly one, it will affect either in the same way. So if your claim is that it will decrease economic activity and therefore is desirable, then I think thats a silly proposition. You might as well argue for mass killings, war or famine

Your premise is, providing incentive for economic activity is the duty of a currency alone. If the currency doesn't motivate economic activity, all markets grind to a halt. This is very hard to argue for, especially with practical examples. Also, I want to repeat my question: If that is so, why didn't all markets grind to a halt till now because of gold?

[Puppet]

Your premise is, providing incentive for economic activity is the duty of a currency alone

Where did I say or imply that?
I am saying it actually creates a major economic disincentive and results in the transfer of wealth from economic activity to economic inactivity. The ones creating the goods and services end up making richer  the ones doing nothing. I cant see how thats a good thing, unless you happen to be on the receiving end of this scheme.

[yordan]

I agree that Krugman is a complete and total idiot and/or a fraud and that Bitcoin has little to fear from deflation.  The infinite divisibility helps to mitigate the upper limit of bit coins which will really never actually be reached but will just become smaller and smaller - the pay out gets halved over and over till infinity right?

Anyway if it stops or just becomes very small no matter.

One thing I disagree with though is the guy that said if deflation is -8% and people want a 5% return they'll just loan at -3% - this is impossible.  Interest must be positive otherwise why would someone make a loan which involves so element of risk to earn less than sitting and doing nothing which involves no risk?  I believe in this environment interest would need to be positive but it could be very slow.  If Bitcoins are forever becoming more valuable then very low rates of interest could pay off big.

Either way I think it's a totally false statement promoted by the powers that be that have something to gain by the status that deflation is so disastrous. 

[memvola]

Your premise is, providing incentive for economic activity is the duty of a currency alone

Where did I say or imply that?
I am saying it actually creates a major economic disincentive and results in the transfer of wealth from economic activity to economic inactivity. The ones creating the goods and services end up making richer  the ones doing nothing. I cant see how thats a good thing, unless you happen to be on the receiving end of this scheme.

Correct me if I'm wrong, but "doing nothing" means not participating in the allocation of productive force. The claim that it is harmful seems to imply that inflation provides the only incentive for economic activity.

The ones creating goods and services are trying to make those who save give up their savings. That's the game. If you can resist that, you deserve to get richer. I think the only proof we need to understand that this works is the fact that this is already the case. That was the intention of my follow-up question.

[Puppet]

Correct me if I'm wrong, but "doing nothing" means not participating in the allocation of productive force. The claim that it is harmful seems to imply that inflation provides the only incentive for economic activity.

Its harmful because it actually increases in value, not just because its idle. Someone has to produce the goods and services that are represented by this increase, and the benefactor is the one that just happens to have money.

The ones creating goods and services are trying to make those who save give up their savings. That's the game. If you can resist that, you deserve to get richer.

Think about it. lets say your currency appreciates by 10% per year and you can live a luxury life spending only 5% of your savings. Whats happening? You get richer every day by doing absolutely nothing. You could end up owning the world,  but you say you deserve it? How? Wealth doesnt create itself, someone is making that happen and not getting the fruits of his labour. In the end everything will be owned by precious few and we wont have an economy anymore, just slavery.

I think the only proof we need to understand that this works is the fact that this is already the case.

No its not. You cant get  richer today without taking risks and participating in the economy. Your money is worth less every year, if you dont do anything to maintain its value your fortune will dwindle rather than grow.

[mai77]

Krugman is a goddamn fool

[memvola]

You get richer every day by doing absolutely nothing. You could end up owning the world,  but you say you deserve it? How? Wealth doesnt create itself, someone is making that happen and not getting the fruits of his labour. In the end everything will be owned by precious few and we wont have an economy anymore, just slavery.

You must be using "doing nothing" in a different sense now, because if things do move the way you say, that means economic activity and redistribution of wealth. You know, to own something, you need to buy it first.

To be clear though, I said they "deserve" it in order to describe how the world works, not as an ethical statement.

I think the only proof we need to understand that this works is the fact that this is already the case.

No its not. You cant get  richer today without taking risks and participating in the economy. Your money is worth less every year, if you dont do anything to maintain its value your fortune will dwindle rather than grow.

What are you talking about? My money isn't worth less every year, because I invest in immovables like every other sane person. Actually land is more valuable to me than a house, so no incentive for economic activity there...

By the way, what is the difference between me getting paid in gold and paid in USD, as long as I can freely exchange USD<->Gold? Absolutely nothing, am I right? It seems to me that we are already living in your dystopia. What am I missing?

The way you put it, the only thing holding the economy together must be friction.

[Anon136]

there is some truth to this but i would argue that more savings and less spending isnt necessarily a bad thing.

also you can look at it this way, bitcoin is a lot like gold in this respect when gold was the widely accepted medium of exchange. Yet the modern abundance of capitalism still arose out of this system. Which meant that many people chose to invest in capital instead of gold. Sure having a gold standard may have dissuaded some people from consumption, but it did not prevent people from investing in capital and capital investment is the real source of societal wealth.

[Puppet]

What are you talking about? My money isn't worth less every year, because I invest in immovables like every other sane person. Actually land is more valuable to me than a house, so no incentive for economic activity there...

By the way, what is the difference between me getting paid in gold and paid in USD, as long as I can freely exchange USD<->Gold? Absolutely nothing, am I right? It seems to me that we are already living in your dystopia. What am I missing?

The way you put it, the only thing holding the economy together must be friction

Do you really not see the difference?
Your land is only becoming more valuable because you express its value in an inflationary currency.  Try expressing its value in bitcoin for a laugh.
The actual purchasing power that the land you own represents isnt going up significantly every year unless you made an above average clever investment.  You and future generations cant live of the value of your land for the rest of your lives and accumulate more wealth in the process, not without taking economic risks. At best it preserves your wealth.

The same goes for gold btw,  an ounce of gold buys you a lot less labor today than it did 50 years ago. It also buys you roughly as much bread as it did 2000 years ago (despite massive productivity increases in farming and baking which ought to reduce its real price). Unlike a deflationary currency, buying gold or land doesnt make one get eternally richer, its only a way to preserve wealth.

[MoonShadow]

What are you talking about? My money isn't worth less every year, because I invest in immovables like every other sane person. Actually land is more valuable to me than a house, so no incentive for economic activity there...

By the way, what is the difference between me getting paid in gold and paid in USD, as long as I can freely exchange USD<->Gold? Absolutely nothing, am I right? It seems to me that we are already living in your dystopia. What am I missing?

The way you put it, the only thing holding the economy together must be friction

Do you really not see the difference?
Your land is only becoming more valuable because you express its value in an inflationary currency.  Try expressing its value in bitcoin for a laugh.
The actual purchasing power that the land you own represents isnt going up significantly every year unless you made an above average clever investment.  You and future generations cant live of the value of your land for the rest of your lives and accumulate more wealth in the process, not without taking economic risks. At best it preserves your wealth.

The same goes for gold btw,  an ounce of gold buys you a lot less labor today than it did 50 years ago. It also buys you roughly as much bread as it did 2000 years ago (despite massive productivity increases in farming and baking which ought to reduce its real price). Unlike a deflationary currency, buying gold or land doesnt make one get eternally richer, its only a way to preserve wealth.

While this is generally true, land values do tend to rise over time simply because the population increases and thus there are more people competing for a finite resource.  It's a value change that can only be measured accurately over decades, however.

[mai77]

Krugman does not have the foggiest idea what he is talking about. Krugman is a bloody fool.

[MoonShadow]

Krugman does not have the foggiest idea what he is talking about. Krugman is a bloody fool.

Krugman knows exactly what he is doing.  It's in his own interest to make the arguments that he does, in the forums that he does so.  At least, he believes that it's in his own interest.  To some degree, he may have even convinced himself that he's generally correct.  It's very difficult to convince anyone to understand the truth when their income requires that they don't understand.

That said, Krugman is no fool.  Krugman is a con-artist performing a long con on half of America.

[Puppet]

While this is generally true, land values do tend to rise over time simply because the population increases and thus there are more people competing for a finite resource.  It's a value change that can only be measured accurately over decades, however.

Indeed; although there is a historic  counter argument to my point. Not so long ago land was such an important economic asset and it was concentrated in so few hands that those who owned any could easily live off their ownership for generations and even accumulate more wealth in the process, while everyone else was doing the actual labor.  It was called the feudalism. And that is precisely what a deflationary currency would result in.

[memvola]

Your land is only becoming more valuable because you express its value in an inflationary currency.  Try expressing its value in bitcoin for a laugh.

Now you are being ridiculous. Land doesn't and can't stagnate in value, it's a scarce resource. It fits ideally to your model. When economies develop, land owners get rich by doing absolutely nothing. This is more true than it was a thousand years ago.

Furthermore, no one, including Kurgman, is arguing about Bitcoin doubling in value every week. At best, it will be like gold when it's established.

The actual purchasing power that the land you own represents isnt going up significantly every year unless you made an above average clever investment.

Nope, it does, on average, because there is economic development and there is population growth. I'm not a clever investor, I just buy up land whenever I think the area needs more development. It never fails.

You and future generations cant live of the value of your land for the rest of your lives and accumulate more wealth in the process, not without taking economic risks.

Just like Bitcoin you mean?

At best it preserves your wealth.

You need to find land in a fundamentally barren place in order to meet that criterion.

The same goes for gold btw,  an ounce of gold buys you a lot less labor today than it did 50 years ago. It also buys you roughly as much bread as it did 2000 years ago (despite massive productivity increases in farming and baking which ought to reduce its real price). Unlike a deflationary currency, buying gold or land doesnt make one get eternally richer, its only a way to preserve wealth.

So, your claim is Bitcoin is more deflationary than gold? How and why?

[MoonShadow]

While this is generally true, land values do tend to rise over time simply because the population increases and thus there are more people competing for a finite resource.  It's a value change that can only be measured accurately over decades, however.

Indeed; although there is a historic  counter argument to my point. Not so long ago land was such an important economic asset and it was concentrated in so few hands that those who owned any could easily live off their ownership for generations and even accumulate more wealth in the process, while everyone else was doing the actual labor.  It was called the feudalism. And that is precisely what a deflationary currency would result in.

That is a nonsense comment.  First off, feudal lordships were functionally mini-governments, and thus the quality of life varied significantly; and the only practical difference today is that your lord is an elected political class and your lands are much larger.  The government still takes a portion of your earnings regardless of whether or not they let you think that you own the means of production or not.  The perception of practical differences are a matter of technicalogical progress and educational propaganda.

Second, the currency unit has little to do with this.  The rise of nation states (as opposed to fuedal lordships) occurred during a time period that there was literally no alternative to gold, silver, copper and barter.

[johnyj]

I hope I'm not alone in not buying this whole "deflation is bad" argument.  By your logic, Samsung should be broke because the SGS3 that used to retail for $800 is now available for $350.  And by the same logic, I will never buy a computer because in a month's time it will always be cheaper than buying today.

Thats not currency deflation. Cellphones and computers actually are getting cheaper to produce. Its called an increased productivity and if that is what is causing the price deflation; then there is nothing wrong with that, on the contrary. We had the same during the industrial revolution; we got massive increases in productivity causing price deflation. But also causing more production of actual physical wealth because we produced more goods more efficiently. As a society we actually got richer and the increased purchasing power of our money was just a reflection of that. But you cant reverse that. Making money more scarce doesnt cause an increase in productivity or production, let alone wealth- anymore more than printing more money can make everyone rich.

Do you really want to hold 10 cars in your home because they are physical goods? Or you prefer to hold $200,000 in your bank account?

The biggest demand in the world is money. Modern economic school always try to twist the people's mind to deny their nature understanding of money, tell them that eventually it is the consumption matters. Even Ben has this false illusion. That is totally wrong, money means a store of value and spending power, the flexibility of usage and transfer, security, many things you name it, it is the ultimate form of wealth after thousands of years test. Just look at california gold rush, because gold was found, cities were built, industries were established, the economy center of US shifted towards the west coast

But unfortunately in today's inflationary monetary system, the value of money is decreasing constantly, so people do not have a good medium for saving

And even worse, those money are all debt based, that dwarfs all those concerns about deflation/inflation etc... A money can be deflative or inflative, but it should not be debt based (you must work to generate that money), it is this simple fact that Krugman don't get it

[Puppet]

Now you are being ridiculous. Land doesn't and can't stagnate in value, it's a scarce resource. It fits ideally to your model. When economies develop, land owners get rich by doing absolutely nothing. This is more true than it was a thousand years ago.

Buying land is an investment and like any other investment it can turn out good or bad. If you think it consistently gains value then you are misguided or you havent gone through a severe recession yet. Check out land prices in greece or spain, and if that doesnt look bad enough, adjust for inflation.  LIke any other investment Im aware off, its true value (purchase power) is linked to the overall economy and in the long run isnt going to outperform it.

But even if land were the only risk free investment in the world that was guaranteed to increase its inflation adjusted purchasing power over time, it would do little to refute my argument because land isnt our currency. Our wages are not paid in acres, food prices arent set in it, loans are not made in it and its not what drives our economies primarily. I can do business without owning any land, I cant to business without having any money.

Furthermore, no one, including Kurgman, is arguing about Bitcoin doubling in value every week. At best, it will be like gold when it's established.

And when would you consider it established? If bitcoin were to become the default world currency, its actual purchasing power would go up along with the world economy because each bitcoin would represent 1/21000000th of it.  So it would go up year after year unless you foresee a future with permanent recession (which is actually more unlikely in this scenario).  You cant have it both ways. You cant have economic growth and stable value if the amount of money is unable to adjust to the economy the way credit money can.

As for gold; I already pointed out its not deflationary.  We mine over $100B dollar worth of the stuff per year or roughly 1-2% of reserves.
Thats hardly less inflationary than fiat money.

As for the gold standard, the huge difference there is that even under the gold standard, money was credit money and its supply could vary along with the economy even if we didnt mine a single ounce of gold. Something bitcoins can not (ripple could however).

So, your claim is Bitcoin is more deflationary than gold? How and why?

Of course it is, or at least will be in a decade or two. But more important is that its infinitely more deflationary than even credit money under a gold standard.

[Richy_T]

Money, when it comes to it, is just accounting. What it needs to function correctly, amongst other things, is to be predictable to a reasonable degree and to be a secure store of value. Bitcoin has problems with the former but the government has blown the latter out of the water. The deflationary spiral is an argument used by those who wish to help themselves to the fruit of your labor.

[Technomage]

As far as the value of spending vs saving goes... you know what is valuable?  Stuff.  People do all kinds of useful things to get stuff.  You know what is not valuable?  Savings that just sit there.  If savings just sit around doing nothing for years then it's no good to anybody until you pull it out of savings and spend it on stuff.  Banks invest savings in order to make money, which stimulates the economy because the savings are used for (hopefully) profitable ventures.  Savings is investment when you put your savings in a bank rather than your mattress.  Money has no value on it's own.  It is only valuable when you exchange it for stuff.  Currencies with no velocity are not currency.

Learn about time preference. It's one of the most important and relevant concepts in the Austrian theory. There is no such thing as money that just sits there forever. Saving money means having a low time preference for current consumption, which means delaying the consumption for future needs. For situations where the time preference for consumption has increased. Therefore saving, or "hoarding" as some idiots call it, is not putting money away for good. It's saving money for future consumption.

It's total and absolute folly to have a monetary system where consumption is artificially incentivized. That is wrong on many levels.

[Richy_T]

It's total and absolute folly to have a monetary system where consumption is artificially incentivized. That is wrong on many levels.

1984 and Brave New World. Two of the most prophetic books ever written.

[memvola]

Buying land is an investment and like any other investment it can turn out good or bad.

Almost exactly like Bitcoin...

But even if land were the only risk free investment in the world that was guaranteed to increase its inflation adjusted purchasing power over time, it would do little to refute my argument because land isnt our currency. Our wages are not paid in acres, food prices arent set in it, loans are not made in it and its not what drives our economies primarily. I can do business without owning any land, I cant to business without having any money.

... minus the fact that it isn't as liquid. By your description, both should correlate well with economic growth in the long run. So I guess the difference still boils down to Bitcoin being accessible to everyone, which was my point. I will need to think more about how this fundamental changes things.

You cant have economic growth and stable value if the amount of money is unable to adjust to the economy the way credit money can.

Sure, I wasn't going for stable value. My question is, why being able to invest in another scarce resource does not result in stagnation?

Your answer seems to be:

• Land isn't as liquid
• Gold isn't as scarce

[Puppet]

Buying land is an investment and like any other investment it can turn out good or bad.

Almost exactly like Bitcoin...

If you look at it as an investment today, yeah maybe; though much, much higher risk and potential reward. Land is probably about as stable as an investment as you can get while bitcoin is on the other end of the scale.

But thats not my point. I dont have a problem with a risky or potentially lucrative investment; Im saying you cant use it as a universal currency to replace credit money.  No one is making that claim for land or gold either.
It just wont work if its value keeps going up. Among all other problems inherent to a deflationary currency,  no one will be able to afford a loan and no one will be willing to give one. 

Sure, I wasn't going for stable value. My question is, why being able to invest in another scarce resource does not result in stagnation?

Your answer seems to be:

    Land isn't as liquid
    Gold isn't as scarce

YOu seem to look at money purely as an investment. To me its prime function is facilitating commerce and enabling economic prosperity.
Bitcoin might be suitable for the former; its far less so for the latter. 
Pretty much like gold and land.

[Puppet]

It's total and absolute folly to have a monetary system where consumption is artificially incentivized. That is wrong on many levels.

I wouldnt say consumption is incentivized; after all you can just as well invest your money if you dont want to spend it.
All that is desincentivized is hoarding of money; I see nothing wrong with that; quite on the contrary if you agree the prime purpose of money is making commerce easier.

[Prattler]

It's total and absolute folly to have a monetary system where consumption is artificially incentivized. That is wrong on many levels.

I wouldnt say consumption is incentivized; after all you can just as well invest your money if you dont want to spend it.
All that is desincentivized is hoarding of saving money; I see nothing wrong with that; quite on the contrary if you agree the prime purpose of money is making commerce easier.

I see that as a bad thing.

[MoonShadow]

Buying land is an investment and like any other investment it can turn out good or bad.

Almost exactly like Bitcoin...

If you look at it as an investment today, yeah maybe; though much, much higher risk and potential reward. Land is probably about as stable as an investment as you can get while bitcoin is on the other end of the scale.

But thats not my point. I dont have a problem with a risky or potentially lucrative investment; Im saying you cant use it as a universal currency to replace credit money.  No one is making that claim for land or gold either.
It just wont work if its value keeps going up. Among all other problems inherent to a deflationary currency,  no one will be able to afford a loan and no one will be willing to give one. 

This is not a problem inherent to deflationary currencies.  It's also true within inflationary currency systems when the inflation rate is too high.  That's the real issue; not that Bitcoin is deflationary (it's not really, and won't be until at least 2100), the problem is that the rate of change of the exchange value is too high for such long term contracts to be sensible.  The current and past instablility is a consequence of Bitcoin's adoption rate, not any particular flaw in the system, and certainly not Bitcoin's "deflationary" nature.  It's simply not a mature economic system, yet.

[Puppet]

It's total and absolute folly to have a monetary system where consumption is artificially incentivized. That is wrong on many levels.

I wouldnt say consumption is incentivized; after all you can just as well invest your money if you dont want to spend it.
All that is desincentivized is hoarding of saving money; I see nothing wrong with that; quite on the contrary if you agree the prime purpose of money is making commerce easier.

I see that as a bad thing.

Why? Why is it good to keep your savings in something which prime function is allowing commerce? Its better to have that money available for commerce than idling under your mattress.
Just put your savings in to something thats more suitable for it than credit money: Its not like you dont have a million things to choose from.

[Puppet]

This is not a problem inherent to deflationary currencies.  It's also true within inflationary currency systems when the inflation rate is too high. 

So we agree deflation and hyperinflation are both bad
At least with hyperinflation you could compensate with higher interest rates. If interest rates are higher than the inflation rate, I dont see why I wouldnt lend.

That's the real issue; not that Bitcoin is deflationary (it's not really, and won't be until at least 2100),

Currently its actually incredibly deflationary if you define deflation as price deflation. If you are only referring to the increase of money supply, then it wont take nearly that long for the supply rate to be exceeded by the economic growth rate. If you only look at the bitcoin economy thats obviously already the case and thats only going to get worse if you have any confidence in bitcoins adoption.

the problem is that the rate of change of the exchange value is too high for such long term contracts to be sensible.  The current and past instablility is a consequence of Bitcoin's adoption rate, not any particular flaw in the system, and certainly not Bitcoin's "deflationary" nature.  It's simply not a mature economic system, yet.

Volatility is another problem which does hinder its adoption but it has nothing to do with inflation or deflation: If bitcoin reward halving protocol were devised differently so it would perpetually grow by 1 or 2% per year you would still have that. I do agree volatility is mostly because its so new and its unavoidable; but its not the fundamental problem I see with it.

[Richy_T]

If you look at it as an investment today, yeah maybe; though much, much higher risk and potential reward. Land is probably about as stable as an investment as you can get while bitcoin is on the other end of the scale.

Land is actually a pretty shitty investment as, like with so much else, the government feel free to help itself to your wealth if you own any (unless you are rich enough to be able to indulge in tax dodges).

That land prices have risen reasonably in recent history is just one of those things and the link between this and the paragraph above may not be entirely unrelated to the government created housing bubble.

[MoonShadow]

It's total and absolute folly to have a monetary system where consumption is artificially incentivized. That is wrong on many levels.

I wouldnt say consumption is incentivized; after all you can just as well invest your money if you dont want to spend it.
All that is desincentivized is hoarding of saving money; I see nothing wrong with that; quite on the contrary if you agree the prime purpose of money is making commerce easier.

I see that as a bad thing.

Why? Why is it good to keep your savings in something which prime function is allowing commerce? Its better to have that money available for commerce than idling under your mattress.

Better for whom?  It's not better for everyone.  The owner of the currency should be able to choose the best method of saving.  If your method really is better, others will follow.

[Puppet]

If you look at it as an investment today, yeah maybe; though much, much higher risk and potential reward. Land is probably about as stable as an investment as you can get while bitcoin is on the other end of the scale.

Land is actually a pretty shitty investment as, like with so much else, the government feel free to help itself to your wealth if you own any (unless you are rich enough to be able to indulge in tax dodges).

That land prices have risen reasonably in recent history is just one of those things and the link between this and the paragraph above may not be entirely unrelated to the government created housing bubble.

A government can create the legal basis to tax anything they like; including the gold in your safety deposit box or bitcoins.
So I guess your point is that investing in land is a poor way to evade taxes,  legally or illegally?
Sure,  bitcoin does look better in that regard.
Still I wouldnt worry an investment in land would lose 50% or 90% of its value in a short term.  Something I cant say of bitcoin or many other investments.

[Puppet]

Better for whom?  It's not better for everyone.  The owner of the currency should be able to choose the best method of saving.  If your method really is better, others will follow.

For society at large.
And as the owner of the currency you are completely free to choose your method. BUt you seem to want the government to guarantee the return of your "investment" when you decide to keep it in fiat? Why? They arent promising you that, in fact they will pretty much guarantee you take a small haircut each and every year. Still, its your choice.

[MoonShadow]

This is not a problem inherent to deflationary currencies.  It's also true within inflationary currency systems when the inflation rate is too high. 

So we agree deflation and hyperinflation are both bad

We can agree that both high rates of deflation and high rates of inflation increase the risk of long term contracts.  What is "bad" is a realtive perspective, in the context of economics.  Again, bad for whom?

At least with hyperinflation you could compensate with higher interest rates. If interest rates are higher than the inflation rate, I dont see why I wouldnt lend.

Risk.  You're forgetting about risk.  That's why you shouldn't lend, if inflation is high.  It also matters why inflation is high.  High interest rates are often a reflection of a high systemic risk.  Often, not always.

That's the real issue; not that Bitcoin is deflationary (it's not really, and won't be until at least 2100),

Currently its actually incredibly deflationary if you define deflation as price deflation.

I don't, and no economist worth listening to does either.  Inflation and deflation are best defined as the two most likely consequences of expansion and contraction of the monetary base, relative to the size of the economy that it represents, repectively.  Thus, Bitcoin is only deflationary in the contest that the rate of growth among the market exceeds the growth of the monetary base.

 If you are only referring to the increase of money supply, then it wont take nearly that long for the supply rate to be exceeded by the economic growth rate. If you only look at the bitcoin economy thats obviously already the case and thats only going to get worse if you have any confidence in bitcoins adoption.

Again, worse for whom?  There are alwasy two parties to every trade, buck.

the problem is that the rate of change of the exchange value is too high for such long term contracts to be sensible.  The current and past instablility is a consequence of Bitcoin's adoption rate, not any particular flaw in the system, and certainly not Bitcoin's "deflationary" nature.  It's simply not a mature economic system, yet.

Volatility is another problem which does hinder its adoption but it has nothing to do with inflation or deflation: If bitcoin reward halving protocol were devised differently so it would perpetually grow by 1 or 2% per year you would still have that. I do agree volatility is mostly because its so new and its unavoidable; but its not the fundamental problem I see with it.

The voltility, relative to the exchange rate, will mute significantly as the economy grows.  The exchange rates of small nations' fiat currencies are (almost) always more volitile than the exchange rate between major nations such as teh US and the Euro.  And if the exchange rate of bitcoins continue to rise, it's a sign of economic growth; so if the volitility and deflationary nature does result in some breaking of that growth, so what?  That too will self-correct as the economy matures.  There is no such tihing as a deflationary spiral.  It's only an economic theory that has no real world examples.

[Puppet]

Currently its actually incredibly deflationary if you define deflation as price deflation.

I don't, and no economist worth listening to does either.  Inflation and deflation are best defined as the two most likely consequences of expansion and contraction of the monetary base, relative to the size of the economy that it represents, repectively.

Actually my university text book defines deflation as a general decline in prices; as do most places  I can find online:     

In economics, deflation is a decrease in the general price level of goods and services.
http://en.wikipedia.org/wiki/Deflation

Definition of 'Deflation'
A general decline in prices, often caused by a reduction in the supply of money or credit
http://www.investopedia.com/terms/d/deflation.asp

"What Is Deflation?"
Answer: The standard deflation definition is when asset and consumer prices continue to fall.
http://useconomy.about.com/od/pricing/f/Deflation.htm

So yes; the bitcoin economy is very much deflationary right now and will likely remain so for the foreseeable future.  

Again, worse for whom?  There are alwasy two parties to every trade, buck.

reread the phrase; I said deflation will get worse. Im not sure who you want me to attribute that to.

There is no such tihing as a deflationary spiral.  It's only an economic theory that has no real world examples.

I guess those are all made up then:
http://en.wikipedia.org/wiki/Deflationary_spiral#Historical_examples

That said, what counter examples would you give of prosperous societies with permanent deflation?

[Razick]

Krugman is a fool. Your university really uses textbooks from Krugman? Wow...

[MoonShadow]

Better for whom?  It's not better for everyone.  The owner of the currency should be able to choose the best method of saving.  If your method really is better, others will follow.

For society at large.

It's not better, nor worse, for society at large.  That's actually impossible.  The "market cap" of an economy is simply a reflection of the total wealth of that economy.  It doesn't matter so much who happens to possess that wealth, from an economic perspective.  Central bankers inflating a fiat currency is a hidden tax upon the entire currency userbase, as it transfers purchasing power from those who earn and save in a currency to those who create and have first access to that currency.  Said another way, every person who earns a paycheck is taxed in order to support the central banking system itself.  Since most central banks in our modern world are arms of governments, it's those governments that benefit from such inflationary policies at the expense of pretty much everyone else in the country.  However, governments are part of sociey, as it's usually defined, so such transfers are akin to removing water from one end of a pool and pouring into the other end.  Sure, you've moved some molecules around, but you have no hope of affecting the water level.

Furthermore, one would have to define "society" in the context of economics, otherwise you're just advocating a political perspective with broken math.

And as the owner of the currency you are completely free to choose your method.

Not till now, but that's exactly why Bitcoin exists, to present a real alternative.

BUt you seem to want the government to guarantee the return of your "investment" when you decide to keep it in fiat? Why?

Where did you get that idea?  I'd just prefer that governments not make those choices for me, nor limit my choices.  They limit my choices all the time.

They arent promising you that, in fact they will pretty much guarantee you take a small haircut each and every year. Still, its your choice.

And it's your choice also, now that Bitcoin exists.  I suggest that you choose to invest elsewhere.  Bitcoin is, after all, a very risky investment for which you seem to have zero faith.  Why are you here?  Do you want us to convince you of your errors, or are you trying to convince us of ours?  In the case of the former, all the benefit is your own; in the case of the latter, your task is futile.

[Richy_T]

A government can create the legal basis to tax anything they like; including the gold in your safety deposit box or bitcoins.

Yes, the point is kinda that they shouldn't.

So I guess your point is that investing in land is a poor way to evade taxes,  legally or illegally?
Sure,  bitcoin does look better in that regard.
Still I wouldnt worry an investment in land would lose 50% or 90% of its value in a short term.  Something I cant say of bitcoin or many other investments.

Worse. Land could gain a lot of value in the short term. If you didn't want to sell it, you may suddenly have no choice as land is taxed on assessed value.

[MoonShadow]

There is no such tihing as a deflationary spiral.  It's only an economic theory that has no real world examples.

I guess those are all made up then:
http://en.wikipedia.org/wiki/Deflationary_spiral#Historical_examples

The only "example" I can find there is a reference to the Great Depression, which is only considered an example of a deflationary spiral because there exist no better examples.  The Great Depression was cause by a number of events in concert, most of which are actually bad political and international trade policies.  The example of the Panic of 1920, and the fact that it's nearly identical to the first two years of the Great Depression, is evidence enough that a deflationary spiral is, at most, a minor contributing factor to the depth of the Great Depression.  I say that it's a false theory.

That said, what counter examples would you give of prosperous societies with permanent deflation?

Easy peasy, since I get to choose the time frames.  Any society that has ever existed upon a gold standard, prior to that same society's move towards currency debasement.  You're getting your cause and effect wrong, The Roman Empire didn't collapse because they used a deflationary currency (gold, silver, salt, nails) they debased that same deflationary currency because they were in the process of multi-generational collapse.  Money is simply a tool.

[Puppet]

It's not better, nor worse, for society at large.  That's actually impossible.  The "market cap" of an economy is simply a reflection of the total wealth of that economy.  It doesn't matter so much who happens to possess that wealth, from an economic perspective.

Distribution of wealth actually matters very, very much.
But thats not the point Im making, as it isnt about wealth; its about availability of credit.  You (usually) dont get significantly more or less wealthy if you invest your credit money for instance in the stock market. But what you do achieve is making credit (ie money) available for businesses and generally thats a good thing for the economy. If everyone would hide their fiat under their pillow you would have a problem. Thats why I say the small disincentive inherent to inflationary  credit money is actually a  good property for the economy at large.

 Central bankers inflating a fiat currency is a hidden tax upon the entire currency userbase, as it transfers purchasing power from those who earn and save in a currency to those who create and have first access to that currency.

Sure; but you dont have to save in  fiat currency: buy gold; buy stock; buy bitcoins; buy land, start a business. Credit money isnt meant to be the best possible preservation of wealth and that its not  is therefore not in the least a problem. Its by design.  The most important goal of a monetary system is not to preserve my wealth,  it has to do enable our economy.  And thats what credit money is much better suited for than bitcoins.

Not till now, but that's exactly why Bitcoin exists, to present a real alternative.

Before bitcoin,  you truly found nothing to invest your money in?

And it's your choice also, now that Bitcoin exists.  I suggest that you choose to invest elsewhere.  Bitcoin is, after all, a very risky investment for which you seem to have zero faith.  Why are you here?  Do you want us to convince you of your errors, or are you trying to convince us of ours?  In the case of the former, all the benefit is your own; in the case of the latter, your task is futile.

You are completely misreading me. Im neither risk averse nor anti bitcoin; I just acknowledge what bitcoin is and what it isnt: A viable universal alternative to credit money; it is not: Something like ripple OTOH perhaps might be one day.

[Puppet]

Easy peasy, since I get to choose the time frames.  Any society that has ever existed upon a gold standard, prior to that same society's move towards currency debasement.  You're getting your cause and effect wrong, The Roman Empire didn't collapse because they used a deflationary currency (gold, silver, salt, nails) they debased that same deflationary currency because they were in the process of multi-generational collapse. 

So predictable: the infamous libertarian rewriting of roman history. Here is some the other side of roman coin:
http://socialdemocracy21stcentury.blogspot.be/2011/06/debt-deflationary-crisis-in-late-roman.html

Money is simply a tool.

There is no arguing that: It just seems you want our society to use a tool that works for you; I will buy such tools myself and prefer society uses a tool that works for society.

[Richy_T]

But what you do achieve is making credit (ie money) available for businesses and generally thats a good thing for the economy.

It might be, it might not. If it's a poor investment, you have people and resources being soaked up doing something when they might otherwise be more gainfully employed. It might have been better for people to hold on to their money until a better opportunity comes along. But if you do that in the current environment, you're losing value. So spend, spend spend and hope you don't get caught holding the bag (Hint: you will because when it all goes South, the government will take even more of your money to bail the big boys out).

I can't believe anyone can honestly look around at what we're in now and think the status quo is a good idea.

[MoonShadow]

It's not better, nor worse, for society at large.  That's actually impossible.  The "market cap" of an economy is simply a reflection of the total wealth of that economy.  It doesn't matter so much who happens to possess that wealth, from an economic perspective.

Distribution of wealth actually matters very, very much.

Politcally and socially, sure.  Economicly or mathmaticly, not so much.

But thats not the point Im making, as it isnt about wealth; its about availability of credit.  You (usually) dont get significantly more or less wealthy if you invest your credit money for instance in the stock market. But what you do achieve is making credit (ie money) available for businesses and generally thats a good thing for the economy. If everyone would hide their fiat under their pillow you would have a problem. Thats why I say the small disincentive inherent to inflationary  credit money is actually a  good property for the economy at large.

You're missing the point.  Credit availability is a problem for whom?  I'm not trying to be a jerk, I'm trying to be a better economics professor than you apparently have been exposed to thus far.  The classic method involves asking questions of the student, in order to lead them to a deeper understanding of the topic.  Economics is more than mathmatics or statistics, it's people, so both the who and why does matter.

 Central bankers inflating a fiat currency is a hidden tax upon the entire currency userbase, as it transfers purchasing power from those who earn and save in a currency to those who create and have first access to that currency.

Sure; but you dont have to save in  fiat currency: buy gold; buy stock; buy bitcoins; buy land, start a business.

Yes, you do.  To some limited degree and term, you must.  We all must, as there is simply no way to avoid it.  We can deliberately choose to limit that kind of exposure, but it's impossible to completely avoid it. And do you know who can least avoid it?  The poor.

 Credit money isnt meant to be the best possible preservation of wealth and that its not  is therefore not in the least a problem. Its by design.  The most important goal of a monetary system is not to preserve my wealth,  it has to do enable our economy.  And thats what credit money is much better suited for than bitcoins.

This reminds me of a quote...

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

-― Friedrich von Hayek

Just because that was the idea, son, don't mean that is what actually happens.  I question whether or not that was the true design, or simply propaganda to cover the scam, anyway.

Not till now, but that's exactly why Bitcoin exists, to present a real alternative.

Before bitcoin,  you truly found nothing to invest your money in?

Before Bitcoin, there was nothing truly detatched from fiat currency systems to invest into.  You betray your own though processes; as investing into regulated industries is investing into areas wherein the government has deliberately limited your choices, and then taxes you upon any successes that result despite them.  Even investing in gold is taxed here in the US; both up front (sales tax) and on the back end (capital gains tax).  The best way that I've found to invest without taxation is to use a Health Savings Account, but governments limit my choices there in other ways, and there is zero chance of fiscal privacy regarding one of those accounts.  There is also zero chance of investing in anything not dollar denominated.  It's acctually illegal to invest such funds into physical gold, for example.  An ETF, sure; but not actual coins.

And it's your choice also, now that Bitcoin exists.  I suggest that you choose to invest elsewhere.  Bitcoin is, after all, a very risky investment for which you seem to have zero faith.  Why are you here?  Do you want us to convince you of your errors, or are you trying to convince us of ours?  In the case of the former, all the benefit is your own; in the case of the latter, your task is futile.

You are completely misreading me. Im neither risk averse nor anti bitcoin; I just acknowledge what bitcoin is and what it isnt: A viable universal alternative to credit money; it is not: Something like ripple OTOH perhaps might be one day.

You say that it's not a viable alternative to credit based fiat.  Okay, that's your opinion.  What is it good for then?  Again, why are you here?  Are you trying to convince us, or yourself?

Think, young man, think.

[Puppet]

I would appreciate a little less presumptiveness (if not even condescension). Its been almost 20 years since anyone called me a young man: I also dont feel like I somehow have to justify my motivation for posting here; nor do I see you as my professor.

I will respond to the other points when I have time.

[MoonShadow]

Easy peasy, since I get to choose the time frames.  Any society that has ever existed upon a gold standard, prior to that same society's move towards currency debasement.  You're getting your cause and effect wrong, The Roman Empire didn't collapse because they used a deflationary currency (gold, silver, salt, nails) they debased that same deflationary currency because they were in the process of multi-generational collapse. 

So predictable: the infamous libertarian rewriting of roman history. Here is some the other side of roman coin:
http://socialdemocracy21stcentury.blogspot.be/2011/06/debt-deflationary-crisis-in-late-roman.html

I stopped right here....

" but they never mention the rather important point that deflation and debt deflation were clearly factors in the economic and social turmoil that saw the fall of the Roman Republic in the first century BC and its replacement with the despotic Roman empire (for a timeline of Roman Republican history, see below)."

Because this is a strawman setup.  Of course "debt deflation" (as it's commonly defined, usually by Kenyesians) had significant effects upon the course of the breakdown.  That's freely acknowledged by most Austrians.  What your lot seems to misunderstand is the praxelogical effects of debt itself that leads to these ends.  It's not the debt deflation that is the root of the problem, it's the debt fueled boom that proceeded it.  The debt deflationary period is called a "correction" for good reasons.

Money is simply a tool.

There is no arguing that: It just seems you want our society to use a tool that works for you; I will buy such tools myself and prefer society uses a tool that works for society.

Go right ahead.  If you honestly beleive that money is a tool intended to "work for society" then there is nothing that I can do to change your mind.  Nor would I care to try, you're as free to be wrong as the next guy.  And yes, I want a tool that works for me, for I am the only person that I can trust to best handle my tools.  The prisoner's delima doesn't apply to free market trades in the absense of third party coersion, so in a free society wherein the vast majority of economic interactions occur in the absence of such coersion, it's literally impossible for the collection of individual interactions (presumedly favorable to both sides of the trade) to be a net negative for society.

Think, young man, think.  Think for yourself, not just how your professor expects you to react.

[MoonShadow]

I would appreciate a little less presumptiveness (if not even condescension). Its been almost 20 years since anyone called me a young man: I also dont feel like I somehow have to justify my motivation for posting here; nor do I see you as my professor.

I will respond to the other points when I have time.

I'm sorry, I assumed since you still had an economics textbook to refer to, that you were a student.  Learning that you are at least 40, and posses an economics textbook (presumedly from 20 years ago?) completely alters my mental image.  In my defense, most of the economicly uneducated in this forum are young and impressionable.

You're probably just too old to change your mind.

[Richy_T]

Go right ahead.  If you honestly beleive that money is a tool intended to "work for society" then there is nothing that I can do to change your mind.  Nor would I care to try, you're as free to be wrong as the next guy.  And yes, I want a tool that works for me, for I am the only person that I can trust to best handle my tools.  The prisoner's delima doesn't apply to free market trades in the absense of third party coersion, so in a free society wherein the vast majority of economic interactions occur in the absence of such coersion, it's literally impossible for the collection of individual interactions (presumedly favorable to both sides of the trade) to be a net negative for society.

Think, young man, think.  Think for yourself, not just how your professor expects you to react.

I feel that there are also several assumptions at work here. That government is synonymous with society (implicit in the idea that a currency needs to be controlled to be beneficial to society) and that the government would act in the interest of that society in its actions (likewise).

I see, as I suspect Moonshadow does, that money is a tool that is used by individuals and that the actions of those individuals sums to the interactions of society. The extraction of "the needs of society" as something to be sheparded is simply collectivism and us used as a pretext so subsume the needs and rights of the individual.

[MoonShadow]

Go right ahead.  If you honestly beleive that money is a tool intended to "work for society" then there is nothing that I can do to change your mind.  Nor would I care to try, you're as free to be wrong as the next guy.  And yes, I want a tool that works for me, for I am the only person that I can trust to best handle my tools.  The prisoner's delima doesn't apply to free market trades in the absense of third party coersion, so in a free society wherein the vast majority of economic interactions occur in the absence of such coersion, it's literally impossible for the collection of individual interactions (presumedly favorable to both sides of the trade) to be a net negative for society.

Think, young man, think.  Think for yourself, not just how your professor expects you to react.

I feel that there are also several assumptions at work here. That government is synonymous with society (implicit in the idea that a currency needs to be controlled to be beneficial to society) and that the government would act in the interest of that society in its actions (likewise).

I see, as I suspect Moonshadow does, that money is a tool that is used by individuals and that the actions of those individuals sums to the interactions of society. The extraction of "the needs of society" as something to be sheparded is simply collectivism and is used as a pretext so subsume the needs and rights of the individual.

The part I highlighted is absolutely correct; the latter part is probably also correct, but is irrelevent to the core issue.  The specualtion about the reasons why are simply value judgements.  Political perspectives infecting the conversation again.  Again, it's not that I'm disagreeing with your speculations; just that they aren't really material to whether or not money "works for society" or not.  Unless, of course, one considers collectivism to "work" for society, so perhaps I just contradicted myself.

[mai77]

KRUGMAN IS A FUCKING JEWISH TROLL .


OK ? 

[Razick]

free market trades in the absence of third party coercion, so in a free society wherein the vast majority of economic interactions occur in the absence of such coercion, it's literally impossible for the collection of individual interactions (presumably favorable to both sides of the trade) to be a net negative for society.

Very good way of putting it! When a transaction is made in a free market it is generally because both parties want what they are receiving more than what they are losing. This means that, unless they made a poor decision, they both leave, in effect, wealthier, than they came.

[MoonShadow]

KRUGMAN IS A FUCKING JEWISH TROLL .


OK ? 

Krugman is Jewish?

[paraipan]

KRUGMAN IS A FUCKING JEWISH TROLL .


OK ?  

Krugman is Jewish?

Yes lol, from '53

http://en.wikipedia.org/wiki/Paul_Krugman

Krugman is the son of David and Anita Krugman and the grandson of Jewish immigrants from Brest-Litovsk

[MoonShadow]

KRUGMAN IS A FUCKING JEWISH TROLL .


OK ?  

Krugman is Jewish?

Yes lol, from '53

http://en.wikipedia.org/wiki/Paul_Krugman

Krugman is the son of David and Anita Krugman and the grandson of Jewish immigrants from Brest-Litovsk

Honestly, I really didn't care.  Such a revelation neither harms nor improves my personal opinons of him.  And since I'm ethnicly part-Jewish, I've grown accustomed to disagreeing with the liberal wing of my greater relations anyway.

I'm also ethinicly part-"native American", and the Office of Indian Affairs can stick it up their arse, too.

[johnyj]

Why? Why is it good to keep your savings in something which prime function is allowing commerce? Its better to have that money available for commerce than idling under your mattress.
Just put your savings in to something thats more suitable for it than credit money: Its not like you dont have a million things to choose from.

Make perfect sense, that is why we should spend fiat and save in bitcoin, you really don't want the same currency works both as a medium of saving and a medium of transaction

You want the medium of saving to be deflative to hold their value, and you want the medium of transaction to be inflative to stimulate spending and improve liquidity, a currency can not be both deflative and inflative at the same time

[mai77]

AND HE'S GOT NO CLUE

WHAT HE'S TALKIN' BOUT. 

LIL WONDER.

economists know stuff about models.
usually - as in the case of fucken Krugman - they have no clue about the economy. 


Max Keiser - on the opposite - does ! 

[Severian]

KRUGMAN IS A FUCKING JEWISH TROLL .

Speaking as a Jew, the fact that he's Jewish isn't the problem. It's the fact that he's a fucking idiot.

We can't help what people we were born to but we do have some choice in whether or not to be a fucking idiot.

[MoonShadow]

KRUGMAN IS A FUCKING JEWISH TROLL .

Speaking as a Jew, the fact that he's Jewish isn't the problem. It's the fact that he's a fucking idiot.

We can't help what people we were born to but we do have some choice in whether or not to be a fucking idiot.

Amen.  Stupidity should be more painful.

[jbreher]

It just seems you want our society to use a tool that works for you;

Close. I want society to allow me to use a tool that works for me. As, indeed, I suspect does everyOtherFrickinBody.

You can tilt at your 'what's good for society' windmills all you want. The market is made by multitudinous individual actors, each endeavoring to maximize their benefit.

You want to sell some monetary scheme that doesn't work for the individual? You're not selling anything that society (merely a large collection of those samesaid individuals) wants.

[Puppet]

It just seems you want our society to use a tool that works for you;

Close. I want society to allow me to use a tool that works for me. As, indeed, I suspect does everyOtherFrickinBody.

You can tilt at your 'what's good for society' windmills all you want. The market is made by multitudinous individual actors, each endeavoring to maximize their benefit.

You want to sell some monetary scheme that doesn't work for the individual? You're not selling anything that society (merely a large collection of those samesaid individuals) wants.

There is always a conflict between interests of the individual and society. I dont like paying taxes any more than anyone else, but that doesnt mean a society with no taxes is actually feasible or desirable.
Secondly;  the tool that works for you doesnt work for a business that needs credit to invest. It doesnt work for the majority of people wanting to start a business, buy a house, or even a car. So you are a tiny minority.

Let me repeat; I have nothing against bitcoin. Its a great concept, a powerful tool and potentially a lucrative investment; bitcoin is possibly an alternative to gold but anyone who thinks it can actually replace credit money is seriously misguided. You cant have a flourishing  economy without credit and you cant have credit with a hugely deflationary currency. Ripple might fit the bill and could potentially be a more credible alternative to fiat, even if bitcoin is used as its monetary base, like gold used to be our base under the gold standard, but then the obvious question becomes why in the long run you would need that monetary base to begin with.

[Severian]

Stupidity should be more painful.

It's certainly painful to witness.

[Severian]

You cant have a flourishing  economy without credit

Is this beat into people during their training at the Keynesian Academy for the Performing Arts? I hear it frequently enough that it sounds like a political slogan.

[memvola]

Im saying you cant use it as a universal currency to replace credit money.

Does it have to replace credit money? If what you have been saying is true, it should cause economic collapse without even having to compete with credit money as currency, its mere existence should be enough. However your debate with MoonShadow seem to indicate otherwise.

(Sorry if I'm making an odd statement, isolating the problem helps me understand the argument better.)

My question is, why being able to invest in another scarce resource does not result in stagnation?

Your answer seems to be:

    Land isn't as liquid
    Gold isn't as scarce

YOu seem to look at money purely as an investment. To me its prime function is facilitating commerce and enabling economic prosperity.
Bitcoin might be suitable for the former; its far less so for the latter. 
Pretty much like gold and land.

No, I'm just perfectly convinced that the deflationary aspect will not hinder its usage in commerce. The claimed harmful effects of deflation seem to focus on the investment aspect.

It seems to me that, if the assumption is true, no one will make an investment if it likely will not outperform the economy. The problem I'm having with this is that it should already be the case. I guess we both exhausted our arguments about this, so time will tell...

[Puppet]

Does it have to replace credit money?

In my opinion; of course not. Although credit money and bitcoins are not necessarily antagonistic, as ripple demonstrates.

If what you have been saying is true, it should cause economic collapse without even having to compete with credit money as currency, its mere existence should be enough.

no, why?
Its deflationary nature  is only a problem for bitcoin to become a mainstream currency, or it could be a problem for the economy if it somehow were forced on us. But the mere existence of something that can store wealth and cant scale with the economy is no threat to the economy. For argument sake; there is only a limited number of Rembrandt paintings; that may make it a worthwhile investment; but I dont see why that would wreck our economy. Then again  no one claims we could use rembrandt paintings to replace credit money, and if we were to try it anyway, I think we can agree it wouldnt end well.

No, I'm just perfectly convinced that the deflationary aspect will not hinder its usage in commerce. The claimed harmful effects of deflation seem to focus on the investment aspect.

Its rather the opposite.

[Puppet]

BTW, its perhaps appropriate to remind you all that credit money isnt a government invention. It was created by the free market in response to a demand for credit when gold was our monetary base and there wasnt enough to finance our economic growth. It wouldnt be different with bitcoins if it were to become as popular as  gold once was,  there would always be demand for credit that bitcoin by itself could not satisfy. So someone is going to create credit money based on it, pretty much like ripple is trying now.  Which in the longer run will again beg the question why there is a need for the monetary base to begin with; particularly if its peer 2 peer issued credit.

[memvola]

If what you have been saying is true, it should cause economic collapse without even having to compete with credit money as currency, its mere existence should be enough.

no, why?

Because you can always buy Bitcoin instead? Isn't that the whole idea?

No, I'm just perfectly convinced that the deflationary aspect will not hinder its usage in commerce. The claimed harmful effects of deflation seem to focus on the investment aspect.

Its rather the opposite.

As long as I can exchange currencies freely, I don't see the difference between owning coins or dollars. No rational person would convert their coins to dollars in order to lose the incentive to save. And if you were willing to spend your dollars, you must be willing to spend the coin equivalent. If Bitcoin does indeed hinder your willingness, it doesn't make any sense to be more willing to spend your already existing dollars, since you can exchange them for bitcoins instead. Does it make sense?

[Lethn]

You cant have a flourishing  economy without credit

Is this beat into people during their training at the Keynesian Academy for the Performing Arts? I hear it frequently enough that it sounds like a political slogan.

Yup, what people like this don't realise if you have a deflationary currency then everything becomes so cheap you don't even need credit.

[Richy_T]

There is always a conflict between interests of the individual and society.

Not always. Not even most of the time, I'd submit.

Edit: rest of message deleted as I realized I had misinterpreted some of what you're saying.

I guess my response is that if Bitcoin is better for the individual, then that is what individuals will select. If you're suggesting (and I don't think you are) that the government should outlaw Bitcoin "for the good of society", that's a different issue.

[rpietila]

If what you have been saying is true, it should cause economic collapse without even having to compete with credit money as currency, its mere existence should be enough.

no, why?

Because you can always buy Bitcoin instead? Isn't that the whole idea?

No, I'm just perfectly convinced that the deflationary aspect will not hinder its usage in commerce. The claimed harmful effects of deflation seem to focus on the investment aspect.

Its rather the opposite.

As long as I can exchange currencies freely, I don't see the difference between owning coins or dollars. No rational person would convert their coins to dollars in order to lose the incentive to save. And if you were willing to spend your dollars, you must be willing to spend the coin equivalent. If Bitcoin does indeed hinder your willingness, it doesn't make any sense to be more willing to spend your already existing dollars, since you can exchange them for bitcoins instead. Does it make sense?

Sane and rational people are investing everything they can afford to lose in bitcoin right now.

[johnyj]

There was a rumor a couple of weeks ago saying Krugman filed for chapter 13 bankcruptcy protection,http://dailycurrant.com/2013/03/06/paul-krugman-declares-personal-bankruptcy/

Maybe there were some facts behind it 

[Puppet]

If what you have been saying is true, it should cause economic collapse without even having to compete with credit money as currency, its mere existence should be enough.

no, why?

Because you can always buy Bitcoin instead? Isn't that the whole idea?

Like you can buy rembrandts or gold. Or land.

As long as I can exchange currencies freely, I don't see the difference between owning coins or dollars. No rational person would convert their coins to dollars in order to lose the incentive to save. And if you were willing to spend your dollars, you must be willing to spend the coin equivalent. If Bitcoin does indeed hinder your willingness, it doesn't make any sense to be more willing to spend your already existing dollars, since you can exchange them for bitcoins instead. Does it make sense?

I see what you are saying; but it applies to any store of wealth. Credit money is universally accepted and easily obtainable, also -and crucially- as, well,  credit. With pure bitcoins; thats just not going to happen.

Take the example of that Canadian selling his house for bitcoins. Made a nice news story, but think it through. Most people borrow for their first house. Are they going to be borrowing 2K bitcoins? Not bloody likely. So their debt and the price of the house will still be in credit money, no matter if the transaction happens in BTC. And to service their debt they will need to obtain credit money and so nothing really changes. Some people will invest in BTC like others invest in gold or land; they might even do some transactions in it but its not going to be replacing credit money as long people and business need credit which is forever. Its going to be replacing other stores of wealth.

[Puppet]

I guess my response is that if Bitcoin is better for the individual, then that is what individuals will select.

Better for what? Its certainly not better for any individual or any business needing credit, and that is mostly everyone. Commerce without affordable credit just isnt going to work. Again, there is a reason we invented credit money countless centuries ago - when we already had gold. What makes you think today we could do without ?

[Richy_T]

I guess my response is that if Bitcoin is better for the individual, then that is what individuals will select.

Better for what? Its certainly not better for any individual or any business needing credit, and that is mostly everyone. Commerce without affordable credit just isnt going to work. Again, there is a reason we invented credit money countless centuries ago - when we already had gold. What makes you think today we could do without ?

Most individuals do not *need* credit. In the medium to long term, it is a net drain on their income and their ability to improve their future. It bonds them to jobs they don't want and saddles them with depreciating assets. They do it because running the presses all day forces interest rates low, discouraging saving and incentivizing non-advantageous spending.

I would suggest that it's also not always wise for businesses either. I'm not up for going into the full arguments and it's not always the case but there are some other perverse incentives at play there also.

[Puppet]

How many people do you know  that purchased their first house from savings alone? Started a business without needing some financing? I dont think I know anyone.  And trade is all about credit.  Just look what happens when credit contracts even a tiny bit like now. And you think we could pretty much eliminate it and still have a thriving economy? Common, gimme a break. Unless you want to rely on hand to hand  bartering pretty much any business  transaction involves the creation of debt. Thinking you can do without sounds almost as naive as someone who thinks we can print money to make everyone rich. We cant all be rich and we cant all be net savers all the time.

[Richy_T]

How many people do you know  that purchased their first house from savings alone? Started a business without needing some financing? I dont think I know anyone.  And trade is all about credit.  Just look what happens when credit contracts even a tiny bit like now. And you think we could pretty much eliminate it and still have a thriving economy? Common, gimme a break. Unless you want to rely on hand to hand  bartering pretty much any business  transaction involves the creation of debt. Thinking you can do without sounds almost as naive as someone who thinks we can print money to make everyone rich. We cant all be rich and we cant all be net savers all the time.

How many people do you know that *needed* to purchase a house when starting out? No one renting? Oh wait, no, they have to buy a house. It's the American dream! Wait, isn't that how we got in the mess?

[rpietila]

How many people do you know  that purchased their first house from savings alone? Started a business without needing some financing? I dont think I know anyone.  And trade is all about credit.  Just look what happens when credit contracts even a tiny bit like now. And you think we could pretty much eliminate it and still have a thriving economy? Common, gimme a break. Unless you want to rely on hand to hand  bartering pretty much any business  transaction involves the creation of debt. Thinking you can do without sounds almost as naive as someone who thinks we can print money to make everyone rich. We cant all be rich and we cant all be net savers all the time.

I have not yet purchased my first house. Also started my current business in 2003 without outside financing. I have to admit that the first company of mine back in 2001 had external stock and bond financing, and also underwent liquidation 2 years after I was ousted. That was the biggest single reason for my no-credit stance, which has worked incredibly well ever since thank you.

All trade also is not about credit, it is about discounting.

Excerpt: "Thus the discount rate is determined by the condition of the consumer goods market, and not by the availability of savings. It reflects the propensity to consume (with apologies to Keynes). There is no loan involved in discounting, so the rate of interest is irrelevant. Tradesmen processing semi-finished goods hardly ever pay cash for supplies to their suppliers. The prices they are quoted are not cash prices. They are “90 days net”. The credit is part of the deal: you need not even ask for it. On the rare occasion when you don’t need the credit you pre-pay your bill, having applied the discount to its face value." (emphasis original)

Strictly, Professor Fekete is saying that credit is vital, but it need not involve anyone lending. And this is the way how the world worked during its so far most glorious years between 1871-1913.

[Puppet]

How many people do you know that *needed* to purchase a house when starting out? No one renting? Oh wait, no, they have to buy a house. It's the American dream! Wait, isn't that how we got in the mess?

Strictly speaking one doesnt even need to rent a house. Once upon a time we were happy to live in caves too.

Thing is, you think we can turn the financial clock back to the dark ages or even the ancient egyptians and have a thriving economy based on a fixed supply currency without facing the same problems they did (and reinventing similar solutions).

I respectfully disagree.

[johnyj]

I can only think of two occasions that you need credit money to invest:
1. you are in a war with another country, if you do not produce weapons fast enough, you will lose the war
2. you are extremely shortage on everything after a war that you need to reach a certain living standard quickly

But today is totally another picture: People take out a huge loan to buy a house, and that loan locked in their future income for 20 - 30 years. Due to this loan, banks become rich and start to spend big, economy get boosted. And after they finished their spending, economy start to shrink back, now even those people's future income for 20-30 years are threatened due to less consumption

If every investment is backed by enough saving, there won't be such problem. Housing is just like any other financial gamble game using high leverage. Many people are doing margin trading for house, that kind of risk is just too absurd, but thanks to credit money, every one can bet their life and play it

[Puppet]

If every investment is backed by enough saving, there won't be such problem.

One persons debt is another persons money aka saving.  And vice versa.
You just reinvented the basic idea behind credit money. If you werent almost 5000 years late; Id nominate you for a Nobel prize

Im not saying there is nothing wrong with our current financial system; but the basic principles behind it are pretty damn sound. I would expect nothing else after 5000 years of experimentation and (r)evolution. Bitcoin OTOH is technically new and a revolutionary system; but as a financial system its no different than those millenia old systems from which we have long evolved - for good reason.

[MoonShadow]

Puppet, credit systems within bitcoin will develop when the market is right for them.  To some degree, they already exist, but are very personal and unsecured.  I've done several myself.  As you already noted, Ripple is a decentralized consumer credit system.

You promised to respond to my arguments yesterday.  Did you not have a rational response?

[rpietila]

You promised to respond to my arguments yesterday.  Did you not have a rational response?

+1

And take the time to read and respond to my post also. After all I majored in Economics, which you apparently didn't.

[Puppet]

Puppet, credit systems within bitcoin will develop when the market is right for them.  To some degree, they already exist, but are very personal and unsecured.  I've done several myself.  As you already noted, Ripple is a decentralized consumer credit system.

Ive mentioned ripple countless times in this very thread as a far more credible alternative concept for current fiat money than bitcoin. But like I also mentioned countless times; once you accept ripple or something like ripple as a mainstream currency, whats the point of having bitcoin (or something else) as its monetary base? We got rid of the gold standard  without too much problem; and thats despite it being a centralized government monopoly with potentially perverse incentives: Ripple is p2p credit, once it achieves enough trust and adoption Im not sure I see the need to base it on bitcoin.. or anything at all.

You promised to respond to my arguments yesterday.  Did you not have a rational response?

No; I did the very thing you said I couldnt: I changed my mind
(about replying to you):

Maybe I will change it again tomorrow.

[Severian]

This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences.

I just realized you have a Quigley quote in your sig. Thumbs up!

[johnyj]

If every investment is backed by enough saving, there won't be such problem.

One persons debt is another persons money aka saving.  And vice versa.
You just reinvented the basic idea behind credit money. If you werent almost 5000 years late; Id nominate you for a Nobel prize

Im not saying there is nothing wrong with our current financial system; but the basic principles behind it are pretty damn sound. I would expect nothing else after 5000 years of experimentation and (r)evolution. Bitcoin OTOH is technically new and a revolutionary system; but as a financial system its no different than those millenia old systems from which we have long evolved - for good reason.

Seems you still don't get this: Only in a debt based monetary system, one person's saving is another person's debt. In a honest money (for example gold) system, EVERYONE can have saving without debt (despite the fact that banks always cheat with FRB)

Even the Nobel prize winner Krugman don't get it, I doubt how much that price worth  

Maybe you know that price is set by Swedish Riksbanken, if Nobel knows such a price was invented by banks, he will be ashamed  

[paraipan]

@Puppet you don't deserve your gov shill salary, you're doing an awful job.

Ripple "far more credible"? Bitcoin similar to fiat?

And the biggest... "we got rid of the gold standard without too much problem". Do yourself a favor and take some history lessons.

http://en.wikipedia.org/wiki/Gold_standard

http://www.econlib.org/library/Enc/GoldStandard.html

http://www.npr.org/blogs/money/2011/04/27/135604828/why-we-left-the-gold-standard

[MoonShadow]

Puppet, credit systems within bitcoin will develop when the market is right for them.  To some degree, they already exist, but are very personal and unsecured.  I've done several myself.  As you already noted, Ripple is a decentralized consumer credit system.

Ive mentioned ripple countless times in this very thread as a far more credible alternative concept for current fiat money than bitcoin. But like I also mentioned countless times; once you accept ripple or something like ripple as a mainstream currency, whats the point of having bitcoin (or something else) as its monetary base? We got rid of the gold standard  without too much problem; and thats despite it being a centralized government monopoly with potentially perverse incentives: Ripple is p2p credit, once it achieves enough trust and adoption Im not sure I see the need to base it on bitcoin.. or anything at all.

Ripple is p2p credit, yes.  Ripple is not a currency, however.  The distinction is not trivial.  Credit does not equal currency, and serves a different function.  Bitcoin can exist independently of Ripple, and Ripple can exist independently of Bitcoin; but Ripple cannot exist independently of an established common currency base.

You promised to respond to my arguments yesterday.  Did you not have a rational response?

No; I did the very thing you said I couldnt: I changed my mind
(about replying to you):

Maybe I will change it again tomorrow.

I didn't say that you couldn't change your mind.  It does tell me more about you, however.

[Richy_T]

How many people do you know that *needed* to purchase a house when starting out? No one renting? Oh wait, no, they have to buy a house. It's the American dream! Wait, isn't that how we got in the mess?

Strictly speaking one doesnt even need to rent a house. Once upon a time we were happy to live in caves too.

This is true. Even if you don't want to go quite that far, once upon a time, most people would be content to live with their parents until they were married. And even then, many would continue to live until they could afford a house. Of course, housing now is much more expensive than housing was back then. Now, why was that, again?

Thing is, you think we can turn the financial clock back to the dark ages or even the ancient egyptians and have a thriving economy based on a fixed supply currency without facing the same problems they did (and reinventing similar solutions).

I respectfully disagree.

And I respectfully disagree with your assessment that it is turning the clock back. Rather it is moving the clock forward, as it does from time to time, to individuals being more in control of their own destiny rather than it being decided by central powers.

To pop back to the business side of things, why can't people start a business from their savings? Oh, that's right, their savings have been stolen. lolgovt.

[Puppet]

Ripple is p2p credit, yes.  Ripple is not a currency, however.  The distinction is not trivial.  Credit does not equal currency, and serves a different function.  Bitcoin can exist independently of Ripple, and Ripple can exist independently of Bitcoin; but Ripple cannot exist independently of an established common currency base.

Eventually I dont see why not. Our current fiat system doesnt have a monetary base either: Its debt money where the debt is expressed in that same currency and nothing else. Of course you will need a base initially, like we needed a gold standard to build trust and help assessing value. But it in the long run it serves no purpose; particularly not in a p2p system. Proponents of a return to the gold standard want it so governments have a limit on how much money they can print; but if everyone issues his own credit and is liable for that credit, whats the rational for a monetary base? Perhaps there is one; but I dont quite see it.

Anyway, this thread was about Krugman; my point is and always has been that krugman is correct in his criticism of bitcoin as an alternative to fiat credit money. I doubt he has heard of ripple though; would be interesting to hear his opinion on that.

[MoonShadow]

Ripple is p2p credit, yes.  Ripple is not a currency, however.  The distinction is not trivial.  Credit does not equal currency, and serves a different function.  Bitcoin can exist independently of Ripple, and Ripple can exist independently of Bitcoin; but Ripple cannot exist independently of an established common currency base.

Eventually I dont see why not. Our current fiat system doesnt have a monetary base either: Its debt money where the debt is expressed in that same currency and nothing else. Of course you will need a base initially, like we needed a gold standard to build trust and help assessing value. But it in the long run it serves no purpose; particularly not in a p2p system. Proponents of a return to the gold standard want it so governments have a limit on how much money they can print; but if everyone issues his own credit and is liable for that credit, whats the rational for a monetary base? Perhaps there is one; but I dont quite see it.

Yes, there is a rational; and yes, you don't see it.  It's not even that you don't quite see it, you're not even within a line of sight yet.

A monetary base forms the frame of reference for value calculations.  In this sense, the monetary base must be knowable, and it also must be difficult (if not impossible) for the common user to create new currency.  For Ripple, a peg to the US $ would work fine, as it has for Paypal.  But without a currency base to use as a common frame of reference, Ripple users would be able to create debt based currency as easily as is done in a LETS and would remain as local for the same reasons.

Anyway, this thread was about Krugman; my point is and always has been that krugman is correct in his criticism of bitcoin as an alternative to fiat credit money. I doubt he has heard of ripple though; would be interesting to hear his opinion on that.

Krugman hasn't been correct on any topic since he's been at the NYT's.  I'm somewhat certain that he lives in opposite world, and you might be his neighbor.

Wait a minute...

You own an old copy of an economics textbook, over fourty years old, Krugman fan...

Do you live in NYC?  Your choice of username makes mroe sense now.

[Richy_T]

Ah, if we want to take it back to the original point, Bubblesort summarized as "Basically, he says that bitcoin is not really being used as a medium of exchange because it's deflationary."

Which is quite clearly nonsense. First of all, Bitcoin is currently inflationary in terms of the supply. Secondly, it may not be being used because the value is rising but this is due to speculation rather than any deflationary aspect to the supply. Now, you can argue that this rise in relative value is equivalent to or even actually deflation but that is still different than saying that it is not being used as a medium of exchange because it is deflationary. I believe it is hard to argue against the reason that it is not being used as a medium of exchange is that it is young and lacks critical mass and critical infrastructure.

Personally, I spent several BTC last week and am looking to spend a couple this week (plural of anectode is not data, of course).

[paraipan]

...
Do you live in NYC?  Your choice of username makes mroe sense now.

I'l be damned! Krugman's sockie right under our nose... I love Internet

[Puppet]

Yes, there is a rational; and yes, you don't see it.  It's not even that you don't quite see it, you're not even within a line of sight yet.

A monetary base forms the frame of reference for value calculations.  In this sense, the monetary base must be knowable, and it also must be difficult (if not impossible) for the common user to create new currency.  For Ripple, a peg to the US $ would work fine, as it has for Paypal.  But without a currency base to use as a common frame of reference, Ripple users would be able to create debt based currency as easily as is done in a LETS and would remain as local for the same reasons.

So whats the dollar pegged to?   Exactly; nothing. It floats freely and you've not give me half an argument why a p2p credit money system could not float freely.

Anyway; dont bother replying if you cant  do it without ad hominems or ad ad pseudonyms.

[MoonShadow]

Yes, there is a rational; and yes, you don't see it.  It's not even that you don't quite see it, you're not even within a line of sight yet.

A monetary base forms the frame of reference for value calculations.  In this sense, the monetary base must be knowable, and it also must be difficult (if not impossible) for the common user to create new currency.  For Ripple, a peg to the US $ would work fine, as it has for Paypal.  But without a currency base to use as a common frame of reference, Ripple users would be able to create debt based currency as easily as is done in a LETS and would remain as local for the same reasons.

So whats the dollar pegged to?   Exactly; nothing. It floats freely and you've not give me half an argument why a p2p credit money system could not float freely.

The dollar is, already, and established frame of reference.  It doesn't need to be backed now, because it once was backed by gold.  It's the Regression Theorem.  A p2p credit system needs a currency as a frame of reference because it doesn't have a history of use as a medium of exchange, and it's total base would be both largely unknowable and subject to extreme flexibility.  I've already given you the tools you need to understand, but you don't even know which end is the handle.  Bitcoin has both a history as a unit of exchange and it's base is both perfectly knowable at any given moment and it's future base is highly predictable; two attributes that are significantly better as a currency than both the US $ and gold.

Anyway; dont bother replying if you cant  do it without ad hominems or ad ad pseudonyms.

I don't suffer fools easily, at least not for long.  You do know who you're talking too right?

[Richy_T]

I don't suffer fools easily, at least not for long.  You do know who you're talking too right?

Cat Stevens?

[MoonShadow]

I don't suffer fools easily, at least not for long.  You do know who you're talking too right?

Cat Stevens?

It's Yusuf Islam to you, infidel!

[notig]

"Constant deflation stops people from using it as a medium of exchange."

I don't think there is such a thing as constant deflation. Definitely not in regard to bitcoin.

[MoonShadow]

"Constant deflation stops people from using it as a medium of exchange."

I don't think there is such a thing as constant deflation. Definitely not in regard to bitcoin.

It's also provablely false that Bitcoin isn't being used as a medium of exchange, so where does Krugman file that inconvient little fact?

[memvola]

If what you have been saying is true, it should cause economic collapse without even having to compete with credit money as currency, its mere existence should be enough.

no, why?

Because you can always buy Bitcoin instead? Isn't that the whole idea?

Like you can buy rembrandts or gold. Or land.

Exactly!!!

As long as I can exchange currencies freely, I don't see the difference between owning coins or dollars. No rational person would convert their coins to dollars in order to lose the incentive to save. And if you were willing to spend your dollars, you must be willing to spend the coin equivalent. If Bitcoin does indeed hinder your willingness, it doesn't make any sense to be more willing to spend your already existing dollars, since you can exchange them for bitcoins instead. Does it make sense?

I see what you are saying; but it applies to any store of wealth. Credit money is universally accepted and easily obtainable, also -and crucially- as, well,  credit. With pure bitcoins; thats just not going to happen.

Take the example of that Canadian selling his house for bitcoins. Made a nice news story, but think it through. Most people borrow for their first house. Are they going to be borrowing 2K bitcoins? Not bloody likely. So their debt and the price of the house will still be in credit money, no matter if the transaction happens in BTC. And to service their debt they will need to obtain credit money and so nothing really changes. Some people will invest in BTC like others invest in gold or land; they might even do some transactions in it but its not going to be replacing credit money as long people and business need credit which is forever. Its going to be replacing other stores of wealth.

I don't think this answers the question, rather shifts it. You didn't explain why the bank is giving out the loan instead if keeping it as bitcoins.

On one hand, you are saying that since Bitcoin is deflationary, people will not invest with it, which will result in economic collapse. On the other hand, you acknowledge that people, given the chance, will invest in other things than Bitcoin. Both of these can not be true.

[gradient vector]

From the economist who wrote half the textbooks we use in the economics department at my university:

http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/

Basically, he says that bitcoin is not really being used as a medium of exchange because it's deflationary.  He has a point.  If you aren't using it to buy goods and services then you are using it as a way to save your money, speculating on it.  Constant deflation stops people from using it as a medium of exchange.

If any currency is deflationary it makes sense to hold as much of that currency as you can for as long as you can because the value will constantly increase.  This discourages spending and encourages saving.  Even if every vendor in the world accepted bitcoin, people still would not spend their bitcoins if they can get around it by using USD or Euros Yen or L$ (Linden Dollars, AKA SecondLife currency) or something else.

On the other end of things, think about the effects on the credit market.  Interest rates take inflation into account, to ensure that the lender makes money after inflation eats some of their investment.  If a currency deflates at 5% per month then it makes sense to only loan to somebody who can make more than 5% per month on your investment (and this is compounded monthly for the life of the loan).  This is because if they don't make more than that then it makes no sense to loan the money out when you can make more money by leaving it in a savings account.  This would make it very difficult to buy houses and cars and start new ventures with credit.

The problem with Krugman's argument is that it assumes all alternative forms of money are equals(accept for one, Bitcoin, which is deflationary).In a sense they are because they all can be used as a form of payment but bitcoin is different because of its intrinsic features (irreversible payments, anonymity, infinite divisibility). Bitcoin will be used in ways other alternatives simply cant which will maintain its function as a medium of exchange.

[losangeles]

I can only think of two occasions that you need credit money to invest:
1. you are in a war with another country, if you do not produce weapons fast enough, you will lose the war
2. you are extremely shortage on everything after a war that you need to reach a certain living standard quickly

Isn't this basically what life is?

It's not better, nor worse, for society at large.  That's actually impossible.  The "market cap" of an economy is simply a reflection of the total wealth of that economy.  It doesn't matter so much who happens to possess that wealth, from an economic perspective.

Distribution of wealth actually matters very, very much.

Politcally and socially, sure.  Economicly or mathmaticly, not so much.

But thats not the point Im making, as it isnt about wealth; its about availability of credit.  You (usually) dont get significantly more or less wealthy if you invest your credit money for instance in the stock market. But what you do achieve is making credit (ie money) available for businesses and generally thats a good thing for the economy. If everyone would hide their fiat under their pillow you would have a problem. Thats why I say the small disincentive inherent to inflationary  credit money is actually a  good property for the economy at large.

You're missing the point.  Credit availability is a problem for whom?  I'm not trying to be a jerk, I'm trying to be a better economics professor than you apparently have been exposed to thus far.  The classic method involves asking questions of the student, in order to lead them to a deeper understanding of the topic.  Economics is more than mathmatics or statistics, it's people, so both the who and why does matter.

Moon I'm having trouble understanding your two statements in relation to each other.  They seem to be contradictory.  In your eagerness to teach, you may have been a bit unclear.  The way I see it, economics is both social and mathematical science, and from that perspective, the distribution of wealth matters very much.  I agree with you that the who and the why does matter.

Learn about time preference. It's one of the most important and relevant concepts in the Austrian theory. There is no such thing as money that just sits there forever. Saving money means having a low time preference for current consumption, which means delaying the consumption for future needs. For situations where the time preference for consumption has increased. Therefore saving, or "hoarding" as some idiots call it, is not putting money away for good. It's saving money for future consumption.

If you have so much money that you could indulge all of your present wants and needs and still have money left over, then effectively, wouldn't the remainder "just sit there forever?"  Is it really worth entertaining the notion that the money will enter the economy in 100 years so it's still productive?  What about 200 years? A billion years?  It sounds ludicrous but if you had a certain quantity of money that you didn't need to spend, and it continued to appreciate just by your holding onto it, then wouldn't you just hold it, and if so, how is that productive?

The actual purchasing power that the land you own represents isnt going up significantly every year unless you made an above average clever investment.

Nope, it does, on average, because there is economic development and there is population growth. I'm not a clever investor, I just buy up land whenever I think the area needs more development. It never fails.

That's fine for you, and it proves the point that by holding onto your asset you're reaping the gains of others' labors.  People developing the land around yours is causing it to go up in value.  Your owning the land hasn't contributed much or anything, but it's increased in value.  Obviously everyone can't use the same strategy or no development would occur.

Think about it. lets say your currency appreciates by 10% per year and you can live a luxury life spending only 5% of your savings. Whats happening? You get richer every day by doing absolutely nothing.

Basically.

[rpietila]

Learn about time preference. It's one of the most important and relevant concepts in the Austrian theory. There is no such thing as money that just sits there forever. Saving money means having a low time preference for current consumption, which means delaying the consumption for future needs. For situations where the time preference for consumption has increased. Therefore saving, or "hoarding" as some idiots call it, is not putting money away for good. It's saving money for future consumption.

If you have so much money that you could indulge all of your present wants and needs and still have money left over, then effectively, wouldn't the remainder "just sit there forever?"  Is it really worth entertaining the notion that the money will enter the economy in 100 years so it's still productive?  What about 200 years? A billion years?  It sounds ludicrous but if you had a certain quantity of money that you didn't need to spend, and it continued to appreciate just by your holding onto it, then wouldn't you just hold it, and if so, how is that productive?

It is productive in that it keeps the economy solid and honest.

For example, it can be used to steer the interest rates. If the rate of interest rises high enough, the owner of the megastash can start lending them out to the market. This gives the new entrepreneurs more cheap loan-capital that would not be there otherwise. This facilitates growth of the real economy. Also the contrary is true - if the owner has already maxed out lending, and the rates keep on going down, he can smell rotten and decide to withdraw his lending from the market, and put it in a cold wallet instead. (The "rotten" he smells, might be for example fractional reserve lending that feeds the market with illusion that credit is available although in fact it isn't). This way he cools down the bubblish economy.

If you consider what is happening in the fiat world, we are in the very final stage of the credit bubble illusion. The interest rates are the lowest in world history, still nobody wants to borrow (I mean nobody with the actual ability to pay back the loan). Only governments and individuals who are broke, do borrow these days. Wealthy people and productive businesses either avoid borrowing like a plague, or are disqualified.

I own more income generating businesses, gold, silver, 500 euro notes, and bitcoins than most of you. I asked for a 7-year loan to buy a EUR 420k house, I would have put EUR 120k down and the rest in monthly installments that were within my family's monthly net income. The bank did not even bother answering me! Also my friends report about similar things.

So I smell rotten here. I won't keep my money in the bank earning exactly 0.0% interest if they are not doing what they should, loaning it out to the most creditworthy borrowers imaginable. If they keep on buying treasury bonds instead, it tells in plain letters about their appetite for ponzi and scorn for the productive economy.

Buying bitcoins now, for some it is a way to riches. For others, it is the ultimate manifestation of distrust in the banks.

[bb113]

I have seen a lot of behaviour amongst bitcoin users indicating that a deflationary currency incites at least a subset of people to try even harder to get more of it. Other people will become wealthy and then bored and look to invest in projects that they think are for the common good (people are not economic robots). Some will just hoard I suppose. The whole argument for inflation seems very suspect to me, which is what drew me to this project.

[benjamindees]

BTW, its perhaps appropriate to remind you all that credit money isnt a government invention. It was created by the free market in response to a demand for credit when gold was our monetary base and there wasnt enough to finance our economic growth.

You're referring to the oil boom.  Some of us tend to think that wasn't such an "economic" thing to do -- consuming the largest energy resource mankind has ever discovered within a few generations, exploding the human population, and ignoring any environmental effects it may have had.  Either way, I have a feeling the question will be answered definitively within most of our lifetimes.

[MoonShadow]

It's not better, nor worse, for society at large.  That's actually impossible.  The "market cap" of an economy is simply a reflection of the total wealth of that economy.  It doesn't matter so much who happens to possess that wealth, from an economic perspective.

Distribution of wealth actually matters very, very much.

Politcally and socially, sure.  Economicly or mathmaticly, not so much.

But thats not the point Im making, as it isnt about wealth; its about availability of credit.  You (usually) dont get significantly more or less wealthy if you invest your credit money for instance in the stock market. But what you do achieve is making credit (ie money) available for businesses and generally thats a good thing for the economy. If everyone would hide their fiat under their pillow you would have a problem. Thats why I say the small disincentive inherent to inflationary  credit money is actually a  good property for the economy at large.

You're missing the point.  Credit availability is a problem for whom?  I'm not trying to be a jerk, I'm trying to be a better economics professor than you apparently have been exposed to thus far.  The classic method involves asking questions of the student, in order to lead them to a deeper understanding of the topic.  Economics is more than mathmatics or statistics, it's people, so both the who and why does matter.

Moon I'm having trouble understanding your two statements in relation to each other.  They seem to be contradictory.  In your eagerness to teach, you may have been a bit unclear.  The way I see it, economics is both social and mathematical science, and from that perspective, the distribution of wealth matters very much.  I agree with you that the who and the why does matter.

.

That quote is taken out of the context of an ongoing conversation.  The basic point is that, while economics can't practically be separated from the social aspect (a core premise of Praxeology, BTW), a great many modern 'economists' (Krugman being one example) will in one article discuss the mathmatics as if the social context of such events doesn't matter while in another article discuss their political ideology as the 'logical' outspring of rational economic thoughts & theories.  It does matter how wealth is distributed across society; to every ideology, but it doesn't matter to most Macroeconomic theories commonly preached by higher academia.  The mathmatics becomes an abstraction, and the social context is lost in the numbers.