
Krugman on BitCoin - mef
http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters
======
snorkel
"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."

Spot friggin' on, Mr. Krugman. Bitcoin's supply limiting design has added a
psychological dimension that encourages collecting. Perhaps when Bitcoin
reaches supply maturity the value will stabilize but for now its value just
too unstable to be used as a currency.

~~~
maratd
> Perhaps when Bitcoin reaches supply maturity the value will stabilize

I absolutely hate Krugman, but this is Econ 101 and even he gets it right.
Bitcoin was a flawed experiment from the start because it has an absolute
supply limit. Reaching that limit won't help. It'll make things worse. The
money supply needs to expand for healthy economic activity and growth. If it
doesn't, weird shit starts to happen.

Here's an example. In a normal economy, the population is constantly
expanding. That means you need more $$$ in the system for each new person. If
more money doesn't enter the system, the value of money goes up because of
increasing demand and you start experiencing deflation.

Deflation is really really bad. Imagine you're a store owner. All of a sudden,
people stop buying your stuff. Not because they don't want to, they love your
stuff ... they just don't have enough money. So you lower your prices. Things
go back to normal. Your own expenses go down as well, after all, everybody
experienced deflation.

No big deal, right? This is what happens when a computer scientist creates a
currency. Just adjust to the new price level, right? WRONG. It IS a big deal.

Think of the psychological effect of having to CONSTANTLY lower your prices on
your goods. At some point, you'll hang yourself. You want to charge more, not
less. It is absolutely depressing and has a real effect. Deflation is
absolutely horrible.

~~~
johnthedebs
The problem isn't the psychological effects of needing to constantly lower
prices – this happens all the time in the tech industry, and everyone in that
industry is doing just fine psychologically.

Rather, it has to do with the fact that constantly down-shifting prices cause
people not to buy nearly as often as they would if prices were stable or
slightly inflationary. As a result of that, the economy slows down (sometimes
dramatically).

~~~
danielsoneg
The other big problem is that debt loads don't drop along with prices - which
effectively makes them rise. Falling prices (which lead to falling wages) +
stable debt loads make it far harder for debtors to pay off their debts, which
puts even further drag on the economy.

~~~
euroclydon
Wow, for all I've read about Austrian Economics, I've never heard that simple
yet devastating argument.

~~~
michaeldhopkins
Just to be clear, it's an argument against fiat currency as deflationary and
inflationary shocks occur in those systems. The effects of deflation and
inflation over time are countered with market-set interest rates -- higher
savings and loan rates in an inflationary period and low-to-negative rates in
a deflationary period. Yes, in a deflationary economy a (for example) -5.00%
interest rate might be fair and would happen were it allowed.

~~~
caf
Why would you ever lend money at a negative interest rate? You can always get
0.00% with virtually no risk just by socking the money away in a secure
location. This is the heart of the problem with deflation (and deflationary
currencies like bitcoin) - there's a 0.00% floor on the time cost of money.

~~~
michaeldhopkins
Yes, you are right of course. The interest rate could not rationally go down
below zero, but there would still be demand for loans during the deflationary
period, so there would be other compensation (like equity in a business) in
exchange for the load so that the risk/return would be proportionate to the
risk-free rate of holding cash.

~~~
caf
There will certainly be demand for loans, but the supply and demand curves for
loans may not intersect anymore, meaning that no loans are made (because given
a deflation rate of 5%, a nominal interest rate of, say, 1.5% (only a very
small premium over the minimum risk-free rate of 0.00%) is still a _real_
interest rate of 6.5%, which may be more than many of the loan customers are
willing to pay.

In other words, deflation makes financing any risky enterprise much harder, so
only the mostly highly profitable projects succeed. This makes sense, because
in a deflationary environment just holding a pile of cash is a profitable
endeavour.

------
alenlpeacock
There's another argument against fixed currencies like bitcoin that should
resonate with the hackernews crowd, and it's this:

A currency with inflationary pressure incentivizes investments into new
enterprises. A currency with deflationary pressure, instead, discourages
investment outside of banking.

Here's why. With a slight inflation, money slowly loses value. Even if you put
it in the bank and earn interest, it loses value over time. So the rational
thing to do, if you have a lot of excess money, is to find places to put it
where it outperforms inflation, where it has a chance of not evaporating over
time.

With deflation, money is instead guaranteed to be more valuable tomorrow than
it is today. Sure, you could still try to invest some of it to try to
outperform the gain you get from deflation, but it would be completely
rational to just stick _all_ of it in the bank, and live the good life
forever, as your money automatically becomes more money (because its buying
power increases), every day.

Why is there so much money managed by VC and Angel funds? While not the only
reason, I'd claim it has a lot to do with inflation.

And, of course, I'm making things more b&w than they really are. Both massive
inflation and massive deflation are really bad things. Currency that stays
largely stable, or that deflates/inflates slowly over time, seems to work out
fine.

~~~
BarkMore
A counter-argument is that people invest in new enterprises even when the
banking real interest rate is positive.

~~~
sneak
To paraphrase jwz (like that's never been done before), "When the rebuttal to
your argument is 'The Industrial Revolution', generally that means that you've
lost the argument."

:)

~~~
BarkMore
My snark decoder is broken. Please explain the parent comment.

------
bdr
1\. _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._

Bitcoin _is_ facilitating transactions. The Bitcoin economy is growing,
slowly. There are a lot of people, including funded startups, working on
making it useful in more cases. It's far, far too early to say that Bitcoin
isn't facilitating enough transactions.

2\. Bitcoin hoarding is not due to the fixed total supply, but due to the
expectation that the Bitcoin economy will grow. If there was built-in
inflation at 3% and the economy was growing at 20%, hoarding would still
happen.

3\. No matter how much hoarding is happening, there will be some exchange rate
from Bitcoins to dollars. The existence of a traded exchange rate is proof
that some people think Bitcoins are not undervalued. These people will be
willing to spend their Bitcoins.

4\. The claim that Bitcoin is worthless because of guaranteed deflation is
self-contradicting.

5\. Volatility is bad for a currency, but this is an addressable problem.
Bitcoin-priced marketplace The Silk Road offers its sellers currency-hedged
escrow.

6\. Even if it fails as a currency, Bitcoin is interesting and novel as a
technological invention. For the essence, see the last paragraph of Hal
Finney's insightful email from 2008 (and the surrounding thread):
[http://www.mail-
archive.com/cryptography@metzdowd.com/msg099...](http://www.mail-
archive.com/cryptography@metzdowd.com/msg09996.html)

~~~
shazow
Agreed. Couple more points that may not be obvious:

7\. Even if Bitcoin is not a useful currency today, not only is it a novel
tech invention but it is also a useful medium of exchange (akin to credit
cards). You can buy coins temporarily just so you can buy something from
Amazon.com and have it shipped to Africa (as one Bitcoin startup does
international shipping for many US-only retailers).

8\. Bitcoin could be a useful currency someday, but it might take 200 years.
What most people don't realize is that all the properties of Bitcoin (such as
the maximum supply or its present growth) can be adjusted with a new genesis
block at any point (effectively forking the currency). If the majority of the
network clients agrees with this fork, Bitcoin continues under the same name.
Side note: I remember hearing that Gavin was going to start a non-profit to
help guide (read: sort-of regulate) the official Bitcoin fork. Not sure if
this happened, I've been out of the loop.

9\. There is no way Bitcoin as it is today could reach any kind of significant
scale, purely from the perspective of the protocol. Bitcoin was built with the
intention of evolving further down the line. This is part of what makes the
technology really interesting.

~~~
wmf
_7\. You can buy coins temporarily just so you can buy something..._

This is so kludgey that I don't see it as a benefit, and IMO touting it as a
benefit just makes Bitcoin look worse.

 _8\. all the properties of Bitcoin can be adjusted if the majority of the
network clients agrees with this fork_

I suspect that there will be many Bitcoin forks, and none of them will take
off due to a combination of path dependence (i.e. kooks sticking with "the
true Bitcoin") and the paradox of choice.

~~~
thesteamboat
>> 7\. You can buy coins temporarily just so you can buy something...

> This is so kludgey that I don't see it as a benefit, and IMO touting it as a
> benefit just makes Bitcoin look worse.

It's a benefit if it can easily add anonymity to transactions under existing
currency schemes.

------
nazgulnarsil
_"So how’s it going? The dollar value of that gold has fluctuated sharply, but
overall it has soared. So buying into gold 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 gold.

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
gold, they have plunged; the gold economy has in effect experienced massive
deflation.

And because of that, there has been an incentive to hoard the gold rather than
spending it."_

I'm willing to stomach lots of negatives to take away the government's power
to inflate to pay for war. Historically inflation has always been for war.

~~~
halad
Exactly! You can substitute Bitcoins in that text for gold, Swiss Franc or
even Brazilian Real. What a ridiculous pseudo-criticism by Krugman.

Perhaps Econ 101 is escaping me, but the idea of deflation being dangerous is
massively overstated. First of all falling prices mean a higher standard of
living for everyone in the economy. Second, nobody is going to indefinitely
put off purchases due to a decreasing price level. Time is a factor in demand,
and you require food today, fuel tomorrow and a new laptop before 2020 would
be handy. Even if the price of the 2020 Macbook Pro/Air equivalent has fallen
to 100 USD.

------
danenania
He's just begging the question. That a fixed currency supply creates deflation
is not a new insight. The idea that this causes 'hoarding' is highly
questionable. Prices in consumer electronics fall significantly every year.
Does this cause people to hold onto their money instead of buying computers,
tvs, and iphones? Of course not. Why would other types of goods be any
different? People still need what they need and want what they want and are
going to buy those things regardless of what relative prices will be in the
future. The difference with a stable currency supply is savers and fixed
income earners wouldn't have their purchasing power sucked away from them year
after year--on the contrary, they'd become continually wealthier as the
economy grows around them.

~~~
sirclueless
Fair enough, but I think most economists would agree that we shouldn't be
trying to make savers and fixed-income earners wealthy in the first place. We
should make it economically advantageous for the people with money saved up to
invest it into the economy.

~~~
jeffdavis
I've always been suspicious of this "spending is better than saving" mantra.
I'm sure it's better in some situations, but I don't think it's better in
general.

The point of an economy is not to spend money, it's to create more wealth for
more people by allocating resources efficiently. If someone "hoards" money,
and prices are stable, that person is effectively staying out of the resource-
allocation business. It doesn't mean that there are fewer resources to
allocate, it just means that _other people_ are doing the allocating (even
though those people collectively have less money because of "hoarders", prices
are lower because of them, too).

You can make an argument that everyone needs to take part in efficiently
allocating resources, and that makes a lot of sense. But to say that buying a
bunch of consumer junk is a good way to do that is ridiculous (and bad for the
environment).

A middle ground is to buy the things you need, a few things you want, and make
conservative investments. That allows most individuals to mostly stay out of
the resource allocation business, but still enjoy the benefits.

~~~
danenania
In fact it's not a question of being in the game or out of the game, just a
question of time preference. The sole purpose of accumulating money is to
eventually spend it. Maybe it will be spent tomorrow, maybe by future
generations, but it will eventually contribute to the economy and allocation
of resources on whatever schedule and for whatever purpose the owners of the
money deem best given their unique situations. The argument in support of
inflation is that it's somehow preferable, in the vast general case, for
people to spend their money sooner rather than later, and worth using force to
accomplish this. It's as presumptuous and arrogant as it is arbitrary, an
essentially totalitarian position.

------
kbob
The next hacker currency should keep Bitcoin's strengths, i.e.,
decentralization and anonymity, and lose its weakness, the fixed supply.

Is anyone working (in public) on the problem of designing a currency that
adjusts its supply algorithmically based on appropriate metrics? Sort of a
Greenspan-o-matic?

I've thought about this for all of 90 seconds, and it seems like the metric
might be some combination of transaction volume, a price index, number of
users, and the current money supply.

~~~
sneak
Most people who use bitcoin don't believe that the fixed supply is a weakness.
A lot of us are vastly frustrated at the previous lack of an easy-to-tranact-
in pseudonymous INflation-proof currency. The others that were in common use
(eGold, Liberty Reserve, and Pecunix) have all become relatively unsafe
recently due to their centralized natures.

That said, there are bitcoin-network forks out there that remove the maximum
cap on new coins, if I recall correctly. You are welcome to go and use one of
those if you choose.

~~~
kbob
How would I find one of the forks?

~~~
sneak
<https://bitcointalk.org/index.php?topic=7500.0>

------
martythemaniak
What I find far more interesting about BTC is its decentralized and (mostly)
anonymous nature, rather than arguments about fixed money supply.

~~~
ansy
BitCoin is no more anonymous than your IP address. As soon as your BitCoin
address can be tied to your identity, such as by trading through a major
exchange, your transactions might as well have your name on them.

Like IP, anonymity can be emulated through routing mechanisms. Basically
laundering your packets and coins. Tor, the state of the art in this kind of
anonymity, is not without faults. And there isn't really an equivalent to Tor
for BitCoins that I know about.

Related, I know BitCoin can be run over Tor, but this is not the same as a Tor
for BitCoin. This merely protects against traffic analysis to tie your BitCoin
account to your IP address.

Tor for BitCoin might look more like a network of wallets that simulated a
perfectly noisy economy. If A wanted to pay B, A's coins would go everywhere
to B, C, D, E, F and so on. Over time coins would pass in and out of people's
wallets until at some point the right number would stick to B's wallet equal
to the number A sent. Hopefully, the ones that stick to B's wallet will be a
mix of ones that A actually sent and other coins being anonymized by the
network.

There are obvious flaws in this design. But hopefully it helps illustrate why
BitCoin isn't anonymous and the difficulty of making it anonymous.

------
wgx
tl;dr: The soaring value of bitcoin forces those holding currency to hoard it.
The Bitcoin economy has, in effect, experienced massive deflation.

~~~
endersshadow
He also touches on a great point:

 _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._

This is where I think Bitcoin fails as a currency. While some people invest in
currencies, the point of currencies is to allow goods and services to flow
through the economy. Currency is and should not be primarily an investment
vehicle.

~~~
hexis
Currencies are goods like any other goods and the people who own them have
divergent purposes. When Krugman writes "we want [a monetary system] to
facilitate transactions and make the economy as a whole rich", he's assuming a
lot. Obviously, some of the people who own bitcoins right now are not
interested in facilitating financial transactions to the detriment of their
net worth. So, for people who want that facilitation, bitcoin isn't getting
the job done, but the people who are using bitcoin as an investment are
getting just what they want. Those two conditions could flip fairly quickly
down the line, but that's how these things go. But for Krugman to just assume
that only one of these is an acceptable condition just begs the question.

~~~
endersshadow
Currencies are not goods and should not be thought of as goods. They are
mediums of exchange[1]. They may be backed by goods (such as gold), but
currency itself should have no inherent value (otherwise, it's a terrible
medium of exchange).

What you're talking about are securities[2]. There is a distinct difference.
Bitcoins are ostensibly a security masquerading as a currency.

[1] <http://en.wikipedia.org/wiki/Currency>

[2] <http://en.wikipedia.org/wiki/Security_(finance)>

~~~
hexis
No, I think I am correct. Currency exchange rates are prices and in that sense
a currency is a good. The typical use of a currency is as a medium of
exchange, but people use goods for different reasons. That was my point
originally.

------
pnathan
One thing that might be interesting to consider is wealth distribution over
population growth.

Thought experiment:

Say our money supply is fixed (10 million dollars), and there are 1 million
people in our economy. Everyone averages out to holding about 10 dollars.
Everyone goes on a massive baby-making spree, and in 10 years, there are still
10 million dollars, but 2 million people in the economy. Average wealth is $5
per person. Either prices dropped (unlikely, demand has doubled in this ideal
world), or everyone is averaging to be poorer.

To my mind that thought experiment demonstrates the need for the supply of
money to keep pace with population growth.

I might be wrong, I am not an economics student, and there might be angles
I've missed.

~~~
daedhel
But the absolute variation of the value the 5$ represent is based on systems
that can't exist with a limited total amount of money.

What will hapen is that if the population doubles, then the 5$ will also
double. Laws of demand and supply.

------
nazgulnarsil
Pro-inflationists a simple question for you.

Inflation creates an incentive to invest. Fine. But why should the level of
inflation and thus the risk profile for investors be determined by a single
authority? Why not multiple competing currencies whose rates float against
each other? Let the market figure out an optimal rate of inflation. The wild
guesses and uncertainty of the Fed resetting the rate is surely inferior.

~~~
pessimizer
The world already works like that. You can buy money from countries other than
the US, you know.

~~~
nazgulnarsil
Legal tender laws should be abolished is the thrust.

~~~
khafra
What's the advantage you get from even more currencies that you don't get from
today's basket of international currencies? The only one I see is that, if you
build a big enough reputation to issue your own currency, you get to collect
seignorage.

In exchange for that, you now have to carry _n_ different currencies to make
sure you can buy gas at a Shell station _and_ an Arco; small retailers go out
of business because they can't afford the overhead of combating so many
varieties of counterfeiting--which, while still technically illegal, is much
harder to prosecute--medium sized retailers go out of business because of the
accounting overhead of setting appropriate prices when several currencies
could be undergoing hyper(in|de)flation at any time.

I'm not sure that's a good trade.

------
kokey
I don't get the problem with hoarding. Most people don't hoard gold, property
or tech stocks during times when the price looks like it's increasing
constantly. There is a point where it makes sense to sell some after it has
made some gains. In reality, unless buyers make a massive mistake in the
valuation of BitCoins, the current gains in BitCoins value should taper off at
some point.

~~~
Duff
What's the basis for that statement?

How many pre-1965 US Quarters and Dimes do you run into during daily commerce?
Answer: Very few, since they are hoarded by collectors for their silver value.

------
Astrohacker
Krugman prefers the dollar, which has a supply that is constantly inflated by
the central bank. But if the dollar is so good, why do people have to be
forced to use it? (You have to pay your taxes in dollars, and you have to
accept payments for debt in the form of dollars.) And how come bitcoin
adoption has radically grown even though no one is forced to use it?

~~~
scott_s
The dollar is so good _because_ people are forced to use it. It's the currency
of the land, which is enforced by the government. Hence, people use it.

That bitcoin adoption has grown significantly does not necessarily mean it
will remain as a viable currency in the future.

------
arvinds
He should have added a link to this alltime classic - a good macroeconomics,
deflation 101 tutorial: <http://www.slate.com/id/1937/>

~~~
jtolle
I was going to mention that article too. It's a great explanation.

Money and monetary systems are human creations, not laws of nature.

~~~
arvinds
Yeah - it always amuses me to read these long detailed arguments on these
threads from people who seem to not have understood basic macroeconomics.

~~~
scrollbar
Econ isn't a science. There are schools of economic thought that completely
contradict "basic economics" taught in schools today, and you can't possibly
prove that one or the other method is correct.

Hence, Economics: the dismal science.

~~~
arvinds
I have to disagree here. Yes there are schools of thought, but questions like
"how does a market work?", "what causes deflation?" are pretty well studied
and agreed upon. This is one of those very basic settled questions with a very
clear accessible explanation.

------
r4vik
He's totally overlooked one aspect of bitcoin, it doesn't matter if it's
deflationary if all I'm using it for is selling drugs and converting bitcoins
into cash straight away or using it as an intermediary step in sending large
amounts currency around the world anonymously. Who cares if it doesn't work
great as a currency (if you believe deflation is a bad thing), it still has a
lot of utility.

------
sneak
He seems to overlook that bitcoins have been worth steadily less and less the
last few months, losing some 50% of their value in 60-90 days.

Also: The bitcoin transaction volume has been steadily increasing since its
introduction.

This article would carry a lot more weight if it had accurate facts.

------
tequilarection
"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.
([http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-
dip...](http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html))

------
mathmate
The problem is about finite amount of BitCoins. What happen if you introduce a
new coin, SubBitCoin, such that a BitCoin is ten SubBitCoins (the quantity of
coins is increased ten fold) and you must pay something for the change.
Increasing the cost of changing the coin and introducing in the future a
different ratio: A BitCoin is only 9 SubBitCoins eliminate the problem.

------
jerrya
Hmm, I am curious how this link was accepted, when I have the exact same link
in my submission from 16 hours ago. I thought the submission mechanism
elimated duplicates.

<http://news.ycombinator.com/item?id=2968548>

------
iradik
Theory of money and credit by ludwig von mises:
<http://mises.org/books/Theory_Money_Credit/Contents.aspx> (free HTML or pdf)

------
bradharper
He couldn't care less about Bitcoin. What he does care about though is the
chatter amongst non-Keynesian economists about the need for an objective
currency, i.e., a gold standard - a force that would utterly devastate his
precious welfare state. Accordingly, an opportunity to ridicule Bitcoin is a
perfect segue to take sneaky, conniving, collectivist jabs at gold.

------
monochromatic
Krugman is focusing on the _least important_ aspect of bitcoins, supply.

------
shivak
His description of Bitcoin is technically incorrect. As described in the
original Bitcoin paper, workers are not necessarily "miners" and may be funded
by transaction fees.

Bitcoin isn't susceptible to hoarding because, unlike gold, it has no
intrinsic value. An alternative explanation for the rise in value: the Bitcoin
ecosystem is under heavy development. The value of Bitcoins is possibly
soaring in anticipation of this infrastructure i.e. its utility as a currency.

I wouldn't rely on Krugman's blog for serious analysis.

~~~
Robin_Message
The monetary value of gold is in excess of its intrinsic value — exactly like
Bitcoin. It's only a question of degree. And "shiny things" as a motivation
for mining explains gold _and_ Bitcoins.

~~~
shivak
Yes, but the reason _why_ is not exactly the same. That point is lost on
Krugman, who equates gold and Bitcoin on that basis.

------
Tichy
It seems a bit premature to judge that way. For example now that the exchange
rate is slowly falling, more people might be considering to part ways with
their BTC. So things might eventually settle down. It is still very early
days.

Also, I suspect few people realize that they should not hold on to their
normal money because governments will continually seek to devalue it (that
seems to be the takeaway from the article, that that is the normal procedure
for "normal" currencies). Their spending habits are probably more governed by
their prospects to earn money in the future, or their savings, rather than a
look at the value of their money.

~~~
Tichy
Why the downvotes? Because it is about BitCoin.

------
userulluipeste
Had read it. It's not serious at all. The arguments there are out of touch
with reality. For example: "What that means is that if you measure prices in
Bitcoins, they have plunged; the Bitcoin economy has in effect experienced
massive deflation." For this argument alone, one may look at
<https://www.bitcoinmarket.com> and see exactly what kind of person Krugman
is.

~~~
sirclueless
You basically interpreted this backwards. When Krugman says that the bitcoin
economy has experienced deflation, he means that a bitcoin is worth more now
than it was in the past.

The graph on bitcoinmarket certainly shows this. If I wanted to buy a
motorcycle in bitcoins in 2010 I would have needed several thousand. Now I
only need a few hundred. Which means that I would have been stupid to spend my
bitcoins last year. If deflation continues and bitcoins continue to be worth
more and more, then the rational thing to do is never spend my bitcoins at
all. And most economic theory says that the more people spend money the
healthier the economy becomes so Krugman is arguing that bitcoins are an
unhealthy direction for the economy to head in.

~~~
narkee
>And most economic theory says that the more people spend money the healthier
the economy becomes

Doesn't that seem like a bizarre theory since the economy is in shambles and
debt-financed spending seems to be getting higher and higher (consumer/credit
card debt, etc.)

I thought people were supposed to be encouraged to save, pensions, 401k and
Roth IRAs, etc. Is overall economic health inversely related to individual
economic health?

~~~
dredmorbius
Money is a wealth transfer medium. If you're familiar with physics, think of
exchange particles associated with forces. In biology, it's similar to blood.
I'm not sure a transportation analog works but it might (I need to think about
that).

Money works when it is exchanged for goods and services.

When money stops moving, the economy "stops". There isn't any exchange going
on (or there's far less than before). Economic activity slows, employment
slows, etc.

Credit and leverage, done right, allow more work from a given initial money
supply (technically, credit increases the money supply), but this is
predicated on the borrower repaying the initial investment. Done wrong, credit
is extended for activities which don't allow repayment, and not only can't the
the interest be paid, but the initial principle is lost -- and the money
supply contracts.

Money is _not_ wealth (value imbued in goods/services), but it can be (with a
stable currency) a _measure_ of wealth.

If the amount of money in circulation is decreasing (or the real wealth of an
economy is increasing relative to a fixed money supply, say, with a
gold/silver standard), then the _value_ of a given denomination of coinage
increases. Hoarding coin/currency/money becomes a wealth-accruing activity,
while facilitating economic activity (by spending money) largely _loses_
wealth. Hence the problem with a highly deflationary currency.

Economic theory says you want a currency whose value tends to be stable, or
slightly inflationary, with time, in order to encourage spending rather than
saving.

Note that none of this addresses the underlying physical economy, resource
limitations/depletion, or other criticisms of traditional orthodox economics
(most of which are highly valid -- we live on a planet of limited resources
and good planets are both hard to find and the commute is a real drag).

Regarding your comments on savings: yes, there is a well-known "savings
paradox" where individual incentives to save are opposed to the overall
economic goals of growth. This is one of many such individual/group paradoxes,
and is one of the principle reasons for laws (legal, moral, or otherwise). The
1971 book _The Logic of Collective Action_ by Mancur Olson is one of the
better illuminations of the concept:
[http://economics.about.com/cs/macroeconomics/a/logic_of_acti...](http://economics.about.com/cs/macroeconomics/a/logic_of_action.htm)

There are numerous other conflicts and paradoxes within economic theory and
reality. Free markets, where they exist, work quite well. They're rather more
rare, I'm coming to believe, than is frequently thought, and many forces work
to limit them (political, plutocratic, monopolistic, and others).

~~~
narkee
Really informative, thanks!

~~~
dredmorbius
You're welcome. I'm not going to claim great insight (yet), I'm still
stumbling through this stuff myself (and have been for 25 years).

Other than Mancur Olsen, some of the more interesting reading I've found
includes George Akerlof ("The Market for Lemons"), Garrett Hardin ("Lifeboat
Ethics", "Tragedy of the Commons", and several books of essays), Neal
Stephenson's _Baroque Cycle_ (a cunningly disguised treatise on the emergence
of stock corporations, banking, and modern finance and capital), Niall
Fergusson's _The Ascent of Money_ (a less cunningly disguised version of
same), and _The Ordinary Business of Life_ which is dry as dust but still a
wonderful exposition of 3000 years of economic thought.

A book I've just heard of but haven't read is David Graeber's _Debt: The First
5,000 Years_. He's a radical anthropologist, but has some really keen insights
and views on the formation of credit and money (guess which came first).

