

Krugman on Bitcoin's problems with deflation (2011) - codex
http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/

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nhashem
The whole point of having a country with a central bank that can print money
at will (fiat currency), is to have full control over inflation/deflation.
When the increase/decrease of the monetary supply is controlled by outside
factors, whether it's tied to shiny yellow rocks, or computed bits, or another
country's currency, then you run into problems like this:

\- Bank runs. It's standard practice that banks will loan out more money than
they have in deposits, because it's unlikely that all their loans will go bad
at once, and/or it's unlikely that all their deposits will want their money
back at once (this is known as fractional reserve banking[0]). But if your
currency is anchored to something fixed, this can happen. FDIC insurance is
guaranteed in the US because even in some absurd financial economic meltdown
scenario, Ben Bernanke can print out USDs to make every depositor whole, if
necessary. The only "cost" to that kind of "bailout" is the potential
inflation. But you can't do this as a government if your monetary supply is
limited because it's fixed to something you can't directly control. The
government can borrow money and then make depositors whole, but those that you
borrow money from may impose conditions, and those conditions may exacerbate
the problem you're trying to solve. See: Cyprus[1].

\- The deflation-debt spiral[2]. Yes, inflation "punishes savings," but
deflation punishes debt. Generally, debt becomes a big problem in recessions.
If you owe $20,000 on your car, and you get a 20% wage cut because your
company can only sell goods at 20% of the price they were previously able to,
your debt does not go down to $16,000. It's still $20,000. So more of your
income will go to paying off debt, which means less of it will go to
discretionary spending, which means even more economic slowdown, which means
more deflation, which means more wage cuts, which means debt becomes an even
bigger burden, etc.

The only real danger to a fiat currency is whether your government's central
bank will be so irresponsible with the money supply that inflation spirals out
of control. If you're a resident of a third-world country like Zimbabwe[3],
transacting in bitcoins will be great because you'll happily trade potential
deflationary pain for not being at the whim of a dictator that will print
money to increase inflation to one thousand trillion bazillion percent. But if
you're the resident of a first-world country which has a responsible central
bank, then increasing the monetary supply to fight off deflation is a very
good thing.

[0] <http://en.wikipedia.org/wiki/Fractional_reserve_banking>

[1] [http://www.theatlantic.com/business/archive/2013/03/why-
the-...](http://www.theatlantic.com/business/archive/2013/03/why-the-euro-is-
doomed-in-4-steps/274470/)

[2] <http://en.wikipedia.org/wiki/Debt_deflation>

[3] <http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe>

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gavinlynch
>> "The whole point of having a country with a central bank that can print
money at will (fiat currency), is to have full control over
inflation/deflation."

This exact idea is at the heart of George Soros' description and prescription
for the Euro financial crisis, whereby individual Euro members do not control
the European Central Banks and cannot control their own situation to their
likings: [http://www.spiegel.de/international/europe/george-soros-
on-t...](http://www.spiegel.de/international/europe/george-soros-on-the-euro-
crisis-germany-must-lead-or-leave-a-855270.html)

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codex
TL;DR Bitcoin mimicks the gold standard, so you'll see the problems with the
gold standard play out all over again.

~~~
msandford
If by the gold standard you mean the one that millions of people all over the
world voluntarily chose over the course of thousands of years? Well, at least
until it was co-opted by fiat currencies in many countries. I'd rather have
the problems that come with a free currency than those that come with a fiat
one.

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JPKab
Can you eat gold? No. Can you make anything useful with it, other than some
component in electronics? No. Gold was only valuable because it didn't
corrode, and was scarce in the ancient world, therefore making it an ideal
medium of exchange in an environment of weak central governments and zero
ability to stop counterfeiters.

If a zombie apocalypse happened today, and somebody tried to buy food or
weapons from me with gold, I'd tell them off. Gold has ZERO inherent value.
When you understand that the purpose of a currency is simply to facilitate
exchange of goods and services as efficiently as possible, you reach a
conclusion that a gold standard is stupid, because it prevents governments
from increasing quantity in times where hoarding is occurring.

~~~
msandford
Can you eat dollars? Can you make anything useful with them, other than small
fires or cocaine straws? If there was a zombie apocalypse today and somebody
tried to buy food or weapons from me with dollars, I'd tell them off. Dollars
have ZERO inherent value.

When you understand that the purposes (PLURAL) for a currency are (according
to wikipedia and many other places) a medium of exchange; a unit of account; a
store of value; you'll reach the conclusion that the dollar standard is stupid
because it cannot be a store of value so long as there is a printing press.
<http://en.wikipedia.org/wiki/Money>

~~~
msbarnett
> Can you eat dollars? Can you make anything useful with them, other than
> small fires or cocaine straws? If there was a zombie apocalypse today and
> somebody tried to buy food or weapons from me with dollars, I'd tell them
> off. Dollars have ZERO inherent value.

Yes, precisely. Gold is just another kind of 'fiat' currency. You're catching
on.

Given the choice between two kinds of arbitrary, intrinsically valueless
currency, I'll take the one whose supply we have far more control over.

~~~
throwaway420
> Given the choice between two kinds of arbitrary, intrinsically valueless
> currency, I'll take the one whose supply we have far more control over.

* Who is this "we" you are referring to? You seem to be implying that the people have some control over the currency when the reality is that the Federal Reserve and in fact all centralized currencies are incredibly corrupt and machined and manipulated for very powerful people. When interest rates are manipulated or certain banks get access to loans and getting money and bailouts through these central banks, that's so obviously not for the people. Gold can't be manipulated in this way, but paper can. That's why the government loves its paper. It can pay for wars and anything it wants through inflation instead of raising taxes. But the end result of wealth getting sucked out of peoples' hands is the same.

* For the record, everything is intrinsically and inherently valueless. You can't use a microscope to examine any type of object and find a tiny particle called "value". All value people place on everything in an economy is subjective in nature, whether its gold or paper or corn or milk or iron or wood. Your argument here for gold being valueless doesn't make a point because that's inherent in anything and everything.

* That being said, gold has successfully been used as a currency throughout the planet's history. It was accepted worldwide with no barriers to its ability to trade throughout countries.

* The argument that people make against gold being suitable as a currency because of its lack of stability compared to paper is unbelievably laughable. What type of event is more likely: gold somehow losing its application in all kinds of industries/mass quantities of gold being suddenly discovered that alters its fundamental market value (events never before seen in human history) or somehow corrupt politicians and powerful people that manage these paper currencies manipulating the currency for their own benefit?

* That being said, regarding this larger argument about Bitcoin, these coins lack any practical value as far as I can see outside of perhaps anonymity. I say perhaps because Bitcoin isn't actually an anonymous currency, but all transactions can ultimately be traced in some fashion. So it remains to be seen if this will work as a currency long-term.

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msandford
Deflationary, sure. But where are the problems? More people are CHOOSING to
conduct transactions in bitcoin. If we can tolerate 2-8% inflation yearly
surely we could tolerate that much deflation.

~~~
JPKab
Deflation will pretty much guarantee that Bitcoin will never replace a "real"
currency.

It prevents a key economic activity: borrowing money. I'll let you put
together why deflation kills incentives to loan money, hence making it
impossible for people to borrow.

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stretchwithme
Nonsense. You can simply state that can simply agree to pay back an amount of
bitcoin equivalent to a certain amount of gold, the most stable commodity
there is. Or dollars. Or bread sticks. Or anything else you prefer.

~~~
JPKab
What you are describing is a currency peg. This is what the Silk Road does
with the black market items people buy on there with bitcoins. This is an
acknowledgement by the Silk Road of bitcoins being a great medium of exchange
due to the difficulty of tracing them, but a horrible holder of value due to
their volatility.

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chrisdevereux
Someone who knows more about this stuff than me: would it be possible to
create a crypto-currency that avoids the problems existing currencies have
with (inf|def)lation?

I'm thinking of a system like bitcoin that also acts like a central banker in
regulating the money supply, perhaps by linking the availability of new coins
to the current supply/demand.

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danielweber
Yes, and from what I understand some people have made Bitcoin competitors that
tend to grow.

They haven't taken off, because 1) we already have a crypto-currency, and 2)
they don't have the "get rich quick with this new currency" because they
aren't deflationary so they don't attract the speculators.

Some people will say "we need the speculators in order to start the market,"
but the speculators have ruined the ability to use Bitcoin as a currency. Just
because the light is better over there instead of here where you lost your
keys doesn't mean you should look over there.

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RandyH
Is there any way to measure the "Gross Bitcoin Product"? Krugman mentions that
as of that writing (2011) the GBP was falling. Is that still the case?

~~~
peterjancelis
<http://blockchain.info/charts>

