Bitcoin Rally Produces an Inane Comment By Paul Krugman

Via Paul Krugman's fawning echo chamber over at 'Businessinsider' we have become aware that he has recently seen fit to comment on Bitcoin. Krugman's comment consists essentially of the Keynesian nostrum according to which A) currency becoming more valuable is 'bad' and B) 'hoarding' of money is generally 'bad'.

Here is an excerpt from Krugman's Bitcoin epiphany:


So how’s it going? The dollar value of that cybercurrency has fluctuated sharply, but overall it has soared. So buying into Bitcoin has, at least so far, been a good investment.


But does that make the experiment a success? Um, no. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin.


Bear in mind that dollar prices have been relatively stable over the past few years – yes, some deflation in 2008-2009, then some inflation as commodity prices rebounded, but overall consumer prices are only slightly higher than they were three years ago. 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. The actual value of transactions in Bitcoins has fallen rather than rising. In effect, real gross Bitcoin product has fallen sharply.


So to the extent that the experiment tells us anything about monetary regimes, it reinforces the case against anything like a new gold standard – because it shows just how vulnerable such a standard would be to money-hoarding, deflation, and depression.”


 



(emphasis added)

Our first reaction to such abject nonsense would be: apparently Krugman has never bought a computer or a cell phone in his life. According to the theory he espouses above, almost no-one has. After all, there has been a huge 'deflation' in the prices of these things. As we have pointed out recently, in the mid 1980s one could buy a 'super-computer' featuring a 105 MHZ CPU and 128 MB of RAM for $16 million in 1980 money (roughly a cool $53 million in today's money). The 1.2 gb hard drive that came with it, big as a wardrobe, set you back another $270,000 ($885,000 in today's money). Such a device, if you could still buy it, would probably cost $15 today, plus the cost of the housing and the power supply, which would likely exceed the cost of the electronic components markedly.

According to Krugman's theory, the best that could have happened to the economy would have been if such a computer really did set you back by $53 million today. People would positively fall over themselves buying it!

So much for Keynes beliefs on 'deflation' and Krugman's regurgitation of same.

If he makes a point of economic theory, then he is either elucidating a general economic law, or he isn't. There cannot be a 'different set of economic laws for the computer and telecommunications industries', which is why our example thoroughly disproves every word he says above. 

Not surprisingly, the period in US history during which real economic growth was by far the fastest ever and reflected positively on the largest possible number of people was actually a period throughout which the general price level tended to mildly decline. Gold was indeed still money at the time and there was no Federal Reserve yet. This economically blissful period has apparently been edited out of Krugman's personal version of economic history.

In an unhampered free market economy (we can safely assume that such an economy would employ sound money), 'hoarding' could actually never become a problem. People are not interested in holding X amount of money per se, but money representing a certain amount of purchasing power. If gold were used as money and a handful of pathological misers were 'hoarding' it, then the market would quickly adjust the purchasing power of the remaining gold supply, so that it could perform the same functions as before. Money is the only good in the economy that confers no benefit whatsoever to society if its supply increases.

 


 

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Bitcoin's wild rally continues … click for better resolution.

 


 

Similarly, the fact that Krugman thinks that the rising exchange value of Bitcoin means that henceforth no-one will actually use it for buying things indicates that the man is utterly naïve and unworldly. Imagine you had bought a few Bitcoins when they were still a lot cheaper. Why would you not spend some of them now that they are buying so much more? The idea simply makes no sense whatsoever. We actually tend to believe that some Bitcoin holders are probably a bit nervous about the rapid ascent of the currency's value and will therefore be inclined to spend some of it while the getting is good.

Also, imagine the hypothetical extreme situation that Bitcoin were the only form of money in existence. Does Krugman really believe that people would stop consuming just because the value of the currency has increased a lot lately? What would people eat? How would they pay for shelter? Would they all forego the new iPhone when it comes to market? By posing such simple common sense questions it should become immediately obvious how bizarre Krugman's claims are. The man is simply full of it and the same goes for his amen corner at Businessinsider and elsewhere, where these absurdities are presented as though they were holy economic writ.

 

Tom Woods Interviews a Bitcoin Expert

There are valid doubts as to whether a money that does not have an embodiment in the physical sense such as is the case with gold would really be considered viable in an unhampered free economy. There can however be no doubt whatsoever that Bitcoin fills a growing need in today's statist fiat money world with its central banking socialism and its steadily growing loss of financial privacy. While we still suspect that governments may try to stomp on the currency by making it illegal one day, the fact is that it can actually not be controlled by governments or anyone else. Indeed, it probably cannot really be prohibited out of existence; although it would theoretically be possible to criminalize its users under some pretext, it would still be impossible to track them.

For those of our readers who want to learn more, below is a very interesting interview with Bitcoin expert Erik Voorhees, conducted by Thomas Woods. One   perfectly logical and valid point made by Mr. Voorhees  is that part of Bitcoin's attraction is its utter lack of counterparty risk – something that cannot even be guaranteed by electronic gold depositories. For instance, the government came down like a ton of bricks on e-gold, which was accused of letting its service be used for money laundering purposes (we are not sure what happened to the gold holdings of legitimate customers there, but it is a good bet that it was a big headache to get one's money back). It should be noted though in this context that a number of similar services like e.g. Gold Money have been very careful to be 100% compliant with the relevant regulations. However, these very regulations obviously mean that financial privacy is lost a priori.

The standard argument against the legitimate wish for financial privacy is that 'if one has nothing to hide one doesn't need it' – which is of course the standard argument dished up every time governments are increasing their spying on the citizenry.  Allegedly it is all for our own good, but it should be blindingly obvious that it is ultimately paving the way for tyranny. It is therefore difficult not to like Bitcoin. The biggest risk to it would probably be a breakdown of the internet infrastructure, but that would be a risk to more than  just Bitcoin, as Mr. Voorhees helpfully points out.


 


 

Thomas Woods talks Bitcoin with Erik Voorhees


 




 
 

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8 Responses to “More on Bitcoin”

  • timlucas:

    I have a small objection to bitcoins. I do not understand the necessity to create any new ones. The system allows the gradual expansion of the money supply as computing power is applied to ‘mine’ new coins. Systemically, isn’t this an unecessary waste? If one of the crucial requirements of money is its scarcity, then removing the ability to make more altogether would be a virtue, rather than a problem, and avoid numerous people wasting energy producing new coins.

    The effect of removing the ability to ‘mine’ would be greater deflation i.e. cheaper goods for everyone Mr Krugman and would avoid employing people, equipment, energy in fairly useless tasks. This said, there is a cap at about double the current number of bitcoins, so given the recent price moves, I suspect that they’ll all be produced up to this cap fairly soon now!

    Does anyone know if the ‘mining’ of the coins provides another useful service in the architecture, which would therefore be curtailed at the point at which the cap is reached?

    • mc:

      Yes, ‘mining’ of bitcoins performs other valuable services. “Mining” is really a cryptographic brute-force solve/validate of the math underlying the BitCoin algorithm, and those that mine also help keep the chain of transactions valid. Each transaction is signed with cryptography of sender and receiver, and these signings are validated by other network nodes, which would then mutually validate any newly created coins.

      The creation rate is strictly limited so that no many how many people ‘mine’ BTC, only a certain number can be created in any time period. At this time, it is similar to gold in that that stock is large compared to new production. The ability to make new coins decreases over time until an actual hard limit is reached, and thus the incentive for mining would go decrease/go away. The though is that at this time in the future, the size of the network and incentives for maintaining that web of trust will be great enough for the users to continue based on the utility of the currency, as opposed to this current system where your computing put to work for the network rewards you with some slight benefit.

  • worldend666:

    It’s hard to see what is driving this Bitcoin rally. After all it has appreciated 2500% and there is a decent alternative in gold. Why would anyone risk their nuts buying this hot potato at this point in the game?

    I can only assume it’s one of these 3 alternatives:

    1) People who cannot get their hands on gold who still have some money but worry about losing electronic digits at the bank (Cyprus? Argentina?)

    2) People with huge income who don’t want to bank it and don’t want to store it in cash (Drugs/arms dealers).

    3) The Fed buying massive amounts with the intention of crashing it to teach individuals who don’t trust dollars a lesson.

    Any other ideas?

  • SavvyGuy:

    Excellent piece!

    I totally agree with the one statement above that sums up the fallacy of modern monetary planning: “Money is the only good in the economy that confers no benefit whatsoever to society if its supply increases”.

    Unfortunately, we’re all stuck in fiat monetary regimes worldwide, and a sudden outbreak of monetary wisdom is unlikely to strike anywhere in the near future.

  • rodney:

    A good article. Nonetheless, I notice a tendency to often use the term “central banking socialism”. May I note that this is contradictory; what central banks do is more aptly described as “reverse socialism”: a transfer of wealth from the poor to the rich.

  • Seems Krugman has something against people keeping their own property, like any good fascist. As far as the computer example, it would be perfect for Krugman money, from extremely valuable to the point almost no one would even want it today.

  • Keith Weiner:

    Great Piece Pater!

    What Krugman and Keynes miss about hoarding is that there is a difference between hoarding a consumable good like food and hoarding a monetary good. In the case of food, very low stocks are kept. Food is produced in the quantity which is consumed. If all of a sudden some people begin hoarding it, others will starve.

    In the case of the monetary good, hoarding does not cause starvation nor deprivation of any other good such as heating oil, clothing, etc. It causes the interest rate to rise. The monetary good exists in huge quantities if one measures total stocks to flows (inventories divided by annual production). The arbitrage between hoarding and saving (i.e. lending at interest) sets the floor under the interest rate.

    What would Krugman’s answer be? How does he think the interest rate should be set? By wise and powerful central planners…

  • Kreditanstalt:

    Hoarding a problem? Rubbish…

    People only “hoard” stuff – whether it be money (purchasing power) or goods – if they feel that the stuff might become more expensive in the future. In other words, a good in the hand today is at a premium to a possible one in the future. Backwardation!

    If the purchasing power of new money – to be acquired in the future – is expected to be lower than the dollar you have in hand NOW, you hoard dollars. Or gold. Or bitcoins.

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