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.”
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.
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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