Krugman makes some good points

[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.