Krugman's Three Money Pits

http://bitcoinmagazine.com/9227/krugmans-three-money-pits/

by tjaerv • 13 years ago

28 46 13 years ago

isamuel• 13 years ago

Krugman, a week ago:

I have had and am continuing to have a dialogue with smart technologists who are very high on BitCoin — but when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how it’s a terrific medium of exchange.

http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/

This guy:

[I]f bitcoin has an intrinsic value, it is as a medium of transferring value globally with almost no transaction costs, an incredible boon to the citizens of developing countries who work in developed nations and currently pay 10% commissions to send home remittances.

You can't say that the man doesn't know his debate opponents.

oleganza6• 13 years ago

Very few people understand and are not afraid to say where the value comes from. Bitcoin is a collectible. Network does not care how much 1 BTC is worth, the price is determined simply by the amount of people willing to hold a coin or two. Why they want to hold it? They believe there's enough or even increasing amount of other folks sharing the same belief. And if it holds true, then they get awesome payment network which gives them real purchasing power: to spend their money as they please when they want. So the value is essentially based on leap of faith or some sort of a bet. As time goes on and more people get serious about their belief, the stronger the reliability of BTC as a "store of wealth". Like with gold.

See also excellent article by Nick Szabo (who is a candidate for being Satoshi): http://szabo.best.vwh.net/shell.html

pessimizer• 13 years ago

Like with Amway?

gdc• 13 years ago

Bitcoin is a collectible.

So are Beenie Babies.

ScottBurson• 13 years ago

Value based on belief that the value will increase makes the currency extremely volatile. (I am tempted to believe the characterization of Bitcoin as "an infinite bubble generator".)

So I think the question people will come to ask themselves, eventually, is: given that the currency is volatile, what amount of it is worth holding anyway just to save me the inconvenience of buying Bitcoins before I go to spend some? The average answer to that, multiplied by the number of people using Bitcoin at all, will, I think, put a floor under the demand for Bitcoin. I don't think it will be a large number per person: maybe $20 worth. But multiply it by a large number of users, and the total number of Bitcoins sitting in wallets -- which, critically, won't get sold even during downward price swings -- may be quite substantial.

gte910h2• 13 years ago

. Bitcoin is a collectible.

Bitcoin was a money transfer tool to move money out of China

That's a huge reason it spiked, and why it stopped spiking (when they shut that down)http://www.nytimes.com/2013/12/06/business/international/chi...

late2part• 13 years ago

Krugman is a moron. Just ignore him, he'll go away soon.

oleganza6• 13 years ago

Maybe he is, but he correctly points out that "awesome transaction technology" has nothing to do with value of total monetary supply. The tech works equally well when BTC is worth $0.01 as well as $1000.

richcollins• 13 years ago

Only if there is sufficient liquidity at $0.01.

ch00• 13 years ago

I always see at least one ad hominem remark made in any thread that might relate to Krugman. I'm actually curious, as someone who is not embedded in finance or economics, what are people's detractions against this guy (who won a Nobel prize)?

olefoo• 13 years ago

A lot of it has to do with the fact that he is a mainstream economist who pointedly makes fun of the ideas promulgated by the Chicago School, Ayn Rand and the general sort of things you find at mises.org and other right wing watering holes.

I suspect most of his critics are the sort of folks who think that they would be billionaires if only their taxes were low enough and governments weren't so restrictive about things like labor laws and environmental regulations.

oleganza6• 13 years ago

Krugman is known to throw ad hominem remarks himself + when criticizing BTC he openly advocates for government violence as fundamentally good (without mentioning that everyone involved in bitcoin are doing it voluntarily and not dragging others against their will). With that attitude this man deserves to be called names, IMO.

thecage411• 13 years ago

I'd say there are three main reason, in decreasing order of legitimacy: 1) he uses his academic credentials to write a more-or-less partisan column 2) a lot of the time he can't just disagree with someone, he has to call them an idiot and corrupt as well 3) he's a keynesian and hard money supporters are loud on the internet

When he sticks to economics (his blog has a higher percentage of economic material compared to his column) he is definitely worth reading and shouldn't be dismissed with ad hominem attacks.

logicchains• 13 years ago

"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." - Paul Krugman, 2002

He doesn't always give the best advice...

leot2• 13 years ago

Look, Bitcoin is without a doubt super cool; but to claim that the macroeconomics of it are known to be sound is utter folly. No one knows what would happen in an economy based increasingly around a deflationary currency, and there are lots of hints suggesting the outcome could be pretty grim.

At the very least, it seems like to be a very big (and disruptive) change. Fingers crossed ... !!

spamizbad2• 13 years ago

No one knows what would happen in an economy based increasingly around a deflationary currency,

It's fun to speculate though! My guess: Debt is extremely expensive and investments are more scarce (You have to at least beat the "returns" from deflation). Doesn't sound like a very business-friendly climate but it does reward those who hold on to their bitcoins.

uwe_dushan• 13 years ago

Provided that Bitcoin succeeds (reaches the end of its adoption S-curve), wouldn't the deflation be simply equal to the rate of growth of the gross world product? This is currently around 4% - definitely more expensive than today's 'free' money but not insanely so...

dnautics3• 13 years ago

No one knows what would happen in an economy based increasingly around a deflationary currency, and there are lots of hints suggesting the outcome could be pretty grim.

This is some macroeconomic myth. Most economies ever have been mildly deflationary. It's inflationary economies that have been experiments (in the literal sense) as perpetuated by centralized authorities to silently confiscate wealth from the poor, sometimes for mendacious reasons, sometimes for 'virtuous' ounes... Most of these inflationary regimes have ended rather poorly.

For a more comprehensive perspective, check out "the great wave" by david hackett fisher (author of Paul Revere's ride), has an analytical span of a thousand years and geographically covers cultures all across Europe. An amazing tome, but surprisingly easy to read.

leot2• 13 years ago

"silently confiscate wealth from the poor" ... with inflation? That is certainly counter-intuitive, to say the least.

I'd always thought that the way to keep inflation low was to keep everyone poor, thereby increasing the relative value of work.

aagha• 13 years ago

When it comes to econ-related issues, he's worth reading--at least it's interesting.

For non-econ-related issues, not so much. This quote from 1985:

"The growth of the Internet will slow drastically, as the flaw in 'Metcalfe's law'–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's." [0]

[0] http://www.businessinsider.com/paul-krugman-responds-to-inte...

sigil• 13 years ago

Krugman said that in 1998 [1].

If he'd said that in 1985, we might have forgiven slash continued to listen to the man.

[1] http://web.archive.org/web/19980610100009/www.redherring.com...

hindsightbias• 13 years ago

Number of mainstream commentators opposing the Iraq War: Krugman

shitgoose2• 13 years ago

He should stick to the war issues.

wpietri• 13 years ago

As the person who coded longbets.org, I find this line of argument irritating. If the rule is "never trust anybody who made one prediction that, with hindsight, turns out to be wrong" then you're basically saying, "only trust people too wily to give hard predictions." It encourages the pundit's disease of never saying anything substantive.

Somebody looked at that whole set of predictions: http://marginalrevolution.com/marginalrevolution/2010/12/pau...

It seems a reasonable record for a set of predictions that where "the point was to be fun and provocative", as the article you link explains.

pdeuchler• 13 years ago

You're completely right, but if the question is phrased "should I trust this person on a futuristic prediction concerning matters of complicated technology" and the person has made some pretty silly errors in the past concerning matters of complicated technology then the argument holds a lot more weight.

If we were debating pure macro economics, even just pure economics, I might give Krugman's opinions a lot more weight but he's repeatedly proven to not only generate controversy for page views, but also to make off the cuff predictions about things he doesn't know about (while still throwing his full academic weight behind said predictions).

mynameishere• 13 years ago

Krugman criticizes bitcoin because it has no utility while consuming resources. As a counter-argument, they bring up Krugman's habit of flying on airplanes. Okay, so that argument proves one thing only: You have no real counter-argument. Just admit it.

Back when I used to trade stocks, I discovered an unnerving psychological problem with it: No matter the news related to the respective company, having $100,000 riding on it makes you a cheerleader. I was holding Merck when the Vioxx scandal came out, and I somehow tried to justify that to myself--no matter how many people it killed. I think this phenomenon is common. Okay, so you own worthless hash strings, and because you paid real money for them, you're their cheerleader.

When you sell, you'll be their detractor. That always happens, too.

RickHull• 13 years ago

Krugman criticizes bitcoin because it has no utility while consuming resources.

Does he? Aren't you completely ignoring the utility of the payment network?

timr• 13 years ago

What "payment network"? In its current state, Bitcoin is practically illiquid -- almost nobody takes it for payment, and it's extremely difficult to exchange for other currencies.

Worst of all, the volatility of the Bitcoin market make it a bad place to store wealth. Without the guarantee of price stability, you have to be extremely risk-tolerant to trade in the stuff at any volume.

dnautics3• 13 years ago

Nonsense, I sold my bit coin and kept true to my belief in its long term viability. I'm about to buy back in so its bad for me to root for it but here I am.

Also I have no love for big pharma (don't believe me, check out my profile) but what Merck did with Vioxx was 100% correct. It voluntarily recalled it ahead of the fda as soon as the risk became statistically significant in the trial set, which if you understand statistics, overestimates risk (because if you dont wait till the predetermined experimental end you selectively trap upwards random walks).

jhdkjqhkjqhwk• 13 years ago

NSA-approved cryptographic algorithms

this was written in 2014 without a trace of irony.

nickbauman• 13 years ago

The article fails on the basic premise that government activity in the economy is self-evidentially "bad" and non-government activity in the economy is self-evidentially "good". Government activity versus private activity is no more or less bad than the other.

Take Denmark. Something like 55% of the population works for the government. Yet nobody would compare that country to, say, Russia. Or Egypt. Or Syria. The article is just pure ideology on its face. Which is to say, it's all about people wishing to fit reality into their own bias, not examine reality to form a testable hypotheses.

valar_m• 13 years ago

Actually, if you read the article, the author conveniently lays out the premise in the second paragraph:

For its users, money has three classic functions: a medium of exchange, a unit of account, and a store of value. For its government producers, money has three other functions: a source of seignorage, a means of taxation, and a lever of macroeconomic influence. Theses various purposes can sometimes conflict, so tension arises when a monetary innovation appears that better serves some stakeholders than others.

Your statement that the article is about "people wishing to fit reality into their own bias" is quite ironic given the fact that your summary is not at all consistent with the actual premise of the article -- that Krugman's interests are not well served by Bitcoin, and that he's responding accordingly.

shitgoose2• 13 years ago

They also all speak Danish in Denmark. Clearly, speaking Danish is good for economy. Unlike some sorry languages like Russian or Arabic.

On the other hand in Switzerland only 9% work for the government. What language they speak? I am confused...

Tloewald• 13 years ago

Appealing to "NSA-approved cryptography" in the concluding paragraph is more than a trifle strange. One of the big problems with bitcoin, in my opinion, is that for all we know it's a honey trap created by an intelligence organization.

simplulo• 13 years ago

Because the point of the article is not to convince bitcoin advocates but to point out Krugman's intellectual contortions and dishonesty, when bitcoin possesses features that should appeal to him. The NSA has to walk a tightrope, because they want US government and other security-related communications to remain secure. They cannot recommend flawed encryption to their own. I have heard no mentions of SHA-256 being flawed, and the bitcoin software is open source, an unlikely honey trap. Use your own judgment.

Krugman's Three Money Pits

Related Stories