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.

[1713962565]

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[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?)