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Author Topic: Krugman makes some good points  (Read 6962 times)
marcus_of_augustus
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March 23, 2013, 11:52:10 PM
 #21

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

Peter Surda:

Quote
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.

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March 23, 2013, 11:52:51 PM
 #22

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.


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March 24, 2013, 12:04:27 AM
 #23

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.
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March 24, 2013, 12:20:51 AM
 #24

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

Peter Surda:

Quote
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.

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March 24, 2013, 12:29:11 AM
 #25

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.
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March 24, 2013, 12:31:13 AM
 #26

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.

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March 24, 2013, 12:42:46 AM
 #27

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.
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March 24, 2013, 12:51:35 AM
 #28


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.
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March 24, 2013, 01:26:25 AM
 #29

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

It's all bullshit. But bullshit makes the flowers grow and that's beautiful.
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March 24, 2013, 01:28:38 AM
 #30

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.

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March 24, 2013, 01:37:07 AM
 #31

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.
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March 24, 2013, 01:40:09 AM
 #32

If all fiat transactions were replaced with Bitcoin right now, think of what a disaster that'd be.
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March 24, 2013, 02:00:49 AM
 #33

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!


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March 24, 2013, 02:55:49 AM
 #34

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?

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March 24, 2013, 03:03:31 AM
 #35


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  Wink

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March 24, 2013, 05:47:11 AM
 #36

Quote from: Krugman
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.
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March 24, 2013, 07:53:13 AM
 #37

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.

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March 24, 2013, 11:35:47 AM
 #38

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

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March 24, 2013, 11:55:31 AM
 #39

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.
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March 24, 2013, 11:57:31 AM
 #40


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  Wink

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!

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