

Bitcoin vs. Ben Bernanke - dpanah
http://online.wsj.com/article/SB10001424127887323809304578429142650304564.html?mod=WSJ_Opinion_LEADTop

======
lolcraft
I'll admit that the WSJ here is not as laughably bad as some quotations from
their infamous op-eds had led me to believe. Maybe I was too harsh with them.
They seem to do the balance thing, or more correctly here, the common sense
and economics thing, at least passably well. Either way, there are some real
pieces of work here, misconceptions about economics that were dispelled
before, again and again. You're going to have a laugh, I promise.

Of course, let's start about some inflammatory comments about Mr. Leftwing
Strawman, as per usual: did you know that hyperinflation is inevitable because
ZIMBABWE!?

 _"I'll use a visual aid," says Mr. Andresen. "He opens his wallet and
presents me with a gift: a 10-trillion-dollar bill once issued by the
government of Zimbabwe."_

Deflation is good, because SAVING! (Here the Calvinist roots of old-school
good Flemish capitalism start showing again, with careless disregard to any
theory of supply-demand equilibrium. How do I miss Schumpeter/Marx...)

 _"If prices are falling, he says, it does encourage people to save instead of
spend, because the currency will be worth more later. It encourages people to
lend instead of borrow. [and that's a good thing]"_ (Yeah, because as we know,
in a given economy at a given time there can be more lending than borrowing.
Or that saving > spending doesn't mean a contraction in the economy, by the
magic of _Austerian Economics_. You people...)

A classic: fiat currency is a FAITH! Heathens!

 _"Federal Reserve Bank of Dallas President Richard Fisher calls the U.S.
dollar a 'faith-based currency.'"_

(Not pictured: other things based in "faith", like civil oversight over the
military, the Constitution, the enforcement of laws, the concept of credit
itself, _the currently overpriced exchange value of gold_... basically
anything that isn't enforced by AK-47's, except of course those enforced by
_the promise_ of AK-47's)

 _"[...] what about a digital currency programmed to maintain stable prices,
avoiding mischief by central bankers as well as the possibility of deflation?
He says the engineer in him likes the simplicity of Bitcoin's fixed money
supply."_

Yeah, great engineering dude, let's disregard things like, you know, _minimal
acceptable performance_ for simplicity ;) You know, Unix was simple, but at
least it didn't crash every five minutes. And the Apple II was simple, and it
even had color!

Had many laughs. Would read again.

~~~
Shinkei
Rant much?

I wanted to actually learn something from your post but it reads like a madman
wrote it.

I own exactly zero bitcoins, but following the market since 2011 has proven
that it is getting easier to use and more prevalent. People will be putting
down bitcoin as a serious entity even after PayPal is accepting them.

~~~
parasubvert
Have you atudied economics? The OP reads like someone who has and is utterly
incredulous at the statements being made by Bitcoin's proponents. In fairness,
the gentleman interviewed in this article insisted it was all an experiment.
But the WSJ editorial board has a long time habit of being very non-mainstream
and almost Austrian with its economic views, so this interview was likely
intended to play into a political narrative.

Here is a summary of what he is trying to say:

1\. Bringing up hyperinflation in Zimbabwe is a common tactic of right-
wing/Austrian economists to warn of the evils of government control over
fiscal spending and currency, and that our current course of monetary
expansion means that we in the US too are on the same path.

This ignores of course that (a) Zimbabwe had a civil war at the time and the
government confiscated or destoyed most private productive capacity; (b) we
are in a liquidity trap currently, which in short means that money is nearly
free to borrow at 0% interest. Companies are sitting on piles of cash or
continuing to unwind their debt from the 2008 crisis, therefore we have not
enough people spending. Printing money has had no discernible impact on
inflation over the past 5 years. In fact, we could use a bit right now - to
encourage spending!

2\. The thought that "encouraging saving is good" therefore fixed currency and
deflation is good.

An economy is a closed system - if some are saving, others have to spend to
keep the music going. If we all stop spending, we get into a depression, where
people lose their jobs, and the economy isn't working to its potential - all
because the currency is rising in value.

In short, it is arguable the point of an economic system is to make and
consume goods and services, not sit and watch your bank balance grow due to
the psychological whims of the market.

3\. A currency based in faith is not a dangerous thing - basing currency on
gold is mostly a form of superstition. and it has real drawbacks (see #2).

Lots of things in the world are based on faith in institutions or theorems.
Bitcoin is too - faith in the algorithm, that it works and won't be
compromised. Also (blind) faith that a fixed amount of Bitcoin will not lead
to destabilization.

Now. Does that help? These arguments lead to exasperation because they seem to
happen over and over across decades in slightly different forms.

~~~
thebmax
I really don't get why people who call themselves 'mainstream' economists
can't see or choose not to acknowledge the issues the Austrians bring up. It
strikes me as quite odd. Not everything the Austrian school preaches is
correct, but they do have some valid points that I would expect most smart
people to understand.

To bring up just a few big ones:

Printing money and low interest rate policy of the Fed influences many things
other than the simplistic lower interest rate=more spending=more growth
formula commonly preached.

1) it hurts people with savings. A good example is all the retirees who have
saved their whole life and now can't survive on the 1% returns their savings
are generating. The Fed is supposedly helping people and business who want to
borrow and can do so at low interest rates.. but that does not trickle back to
pensioners who should be earning more on their capital if they were not
competing with the Fed.

2) monetary expansion stimulates the economy unequally across industries and
geographic regions. In the models of the academic economic departments,
monetary expansion may apply equally to an economy as a whole.. In the real
world short run it is a transfer of wealth from one group (wage earners,
people who hold cash or low yield bonds) to another group (banks, government
contractors, rich people with lots of land and stocks). Some people benefit
from low interest rates and new money, but many people are hurt by those same
policies.

There are quite a few other issues that Austrians seems to be correct on, but
these seem to be two of the most obvious to me.

~~~
mikhailfranco
Related to (1), there is the moral hazard of bailing out the extreme risk
takers and profligate borrowers, but punishing the careful savers. It just
encourages future financial gambling (Greenspan/Bernanke put) and Too Big To
Fail mentality.

There is also the loss of true interest rate signals for making investment
decisions, and consequent mal-investment caused by 'desperately seeking
yield'. Economies progress by creative destruction, not protecting sunk costs
in old industries and pandering to vested interests. Just look at Apple -
biggest corporate cash pile in history, biggest bond issue in history -
something is seriously wrong with interest rate signals (over and above the
repatriation issue).

The problem of the boom was over-borrowing to consume. The solution for the
recession is saving to invest i.e. create lending for building of productive
capacity. Printing money to lend to consumers to buy imports does not make the
economy any better, especially when you don't give it to the consumers with
tax reductions (or wage increases from the corporate cash pile), but give it
to the banks and let them inflate financial assets instead - that doesn't even
achieve the dumb thing you were trying to do in the first place!

~~~
parasubvert
I was following you up to the last paragraph. the issue is that bonds and cash
are effectively equivalent now due to low interest and inflation. So we are
suck in a liquidity preference trap. Stocks are showing some signs of
inflation, but bonds surely are not - everyone is holding US treasuries or
cash!

Printing money without associated fiscal stimulus does not help things so long
as people expect inflation to remain low. So QE3 is arguably better than
nothing but probably will be as ineffective as thr previous attempts. OTOH
Japan now is the only country where they are deliberately trying to promote
inflation, so it will be interesting to observe if they can pull it off and
drag themselves out of deflation.

------
PaperclipTaken
There are a few challenges facing Bitcoin, and I think that in the long run
Bitcoin will not be the chosen digital currency of the world.

The first problem is that there is a highly predictable and (at the moment)
constant supply of bitcoins, which means that the value of the coin will
adjust like a commodity as more or less people start to use it. It's like Gold
or Oil in the sense that when people want it, it's worth a lot, and when
people don't want it, it's not as expensive. That chains the value to the
demand, meaning that any time you use bitcoin as a store-of-value, you are
putting yourself at the complete mercy of the market.

Many advocates believe that as the number of people using bitcoin grows the
price will stabilize, but I think that using bitcoin as a store-of-value is
going to end up like using the gold standard, especially because some early
adopters have tens of thousands to even a million (Satoshi is believed to have
a million) bitcoins, and any of them could decide to 'cash out', which would
dramatically change the supply and potentially affect the whole market.

Another problem is that the currency is highly traceable, and while you can do
things to obfuscate your spending habits there are lots of techniques
involving statistical analysis that shed doubt on the effectiveness of
obfuscation. You can take this back to the "I have nothing to hide" argument,
but there are plenty of powerful parties that will be more interested in a
currency that can't be traced (imagine big business or big finance), and an
untraceable currency would certainly be more attractive.

But to me the biggest current problem with bitcoin is the uncertainty. There
are many conflicting schools of thought in economics each with their own
reasons why bitcoin is good or bad. But beyond the basics, macroeconomics
often involves a lot of voodoo, and for any new paradigm there will be major
schools of thought that will believe the new paradigm is bad or unstable in
some way. There is no real way to fight this except to accept that we
ultimately have no idea how new economic paradigms will affect our world, and
that some of the naysayers may be correct and thus caution should be used.

~~~
drcode
> ... you are putting yourself at the complete mercy of the market.

This is the "No one will want bitcoins because everybody's buying them"
argument- I don't see much credibility in it. Also, what is an example of a
commodity that isn't at the mercy of supply and demand?

> Another problem is that the currency is highly traceable ...

I agree with you that that is a major issue, and might hurt the popularity of
bitcoin in the long run. Bitcoin is strange in that it separates the argument
of "I don't want the government to control what I do" and "I don't want the
government to know what I do". I'm not sure how this will play out long term.
(yes, I know there is pseudo-anonymity, but if the tax man comes to you and
asks you "how did you get the money to buy that car?" the block chain makes it
possible to confirm/refute your response.)

> ... and thus caution should be used.

Yeah, I'm tired of folks who think they know with 100% certainty how the
economy works. I have some good guesses that suggest to me bitcoin is going to
do very well, but things could play out any number of ways and I have no clue
whether my guesses are right.

------
StavrosK
Isn't anybody else afraid of the implications of basically the equivalent of
easily trackable cash? The government can easily mandate that each individual
declare their wallets and track every single penny you spend and where you
spent it.

Sounds like a nightmare scenario to me.

~~~
moe
You can easily anonymize your coins, either by tumbling or by using any number
of wallets that are not associated with you.

~~~
StavrosK
Yeah, but that's like saying "you can easily launder your cash by using a
laundering service".

~~~
moe
No. It's not like saying that at all.

All it means is that you can trivially have any number of wallets and it's up
to you how you use them. Same as with cash.

~~~
StavrosK
Except cash isn't trackable. How are you going to do this in a world where
undeclared wallets are illegal?

~~~
Andrew_Quentin
Well, the government could make undeclared cash illegal.

~~~
StavrosK
It might even work, if they had a way to track _all_ your cash. Unfortunately,
unlike with Bitcoin, they don't. This is pretty much what I said in my
original comment?

I don't understand all the apologism, it's pretty clear that governments can
exert an unprecedented amount of control on money with Bitcoin (all your
transactions are public), and no amount of burying our heads in the sand will
change that.

~~~
Andrew_Quentin
But, they don't have a way to track your bitcoins. They can see how much is in
each address, but they do not know whose address it is, etc.

You said the government would need to make all wallets that are not registered
with some central authority illegal. That would be the same as you paying
someone in cash if cash was made illegal. You would be doing something illegal
in both situations. However, what is the government going to do about it if
they do not know who you are?

Not to mention that making cash illegal would be a highly political issue and
quite unpopular due to concerns with privacy, etc. The same would apply if the
government wished to request some centrally controlled management of people's
bitcoin account.

~~~
StavrosK
Sure, but in the bitcoin case, you'd require both parties' wallets to be
unregistered. It would require a legal and an illegal network of wallets
(since the government can't track the illegal ones), but whenever a
transaction was made where one of the two parties was an illegal wallet, the
legal party would be on the hook for it (as it would be transacting with an
illegal wallet).

------
jrochkind1
_It's almost time for Mr. Andresen to get back to work. He shares some useful
advice about Bitcoin: "I tell people it's still an experiment and only invest
time or money you could afford to lose." If only investors could as easily
follow that advice with fiat currencies._

------
Symmetry
Decent enough article, but whenever talking about Bitcoins I find it helpful
to separate the various roles that money performs. That is, Bitcoin is an
awesome medium of exchange, a risky store of value, and a horrible medium of
account. Just use it for what it's good for and everything's fine.

<http://en.wikipedia.org/wiki/Medium_of_exchange>

<http://en.wikipedia.org/wiki/Store_of_value>

<http://en.wikipedia.org/wiki/Unit_of_account>

~~~
eric_bullington
I actually think it's a mediocre medium of exchange, due to the fact that
transactions are not immediate, but rather can take as long as an hour or more
for a reasonable level of confidence in the integrity of a transaction. There
are competing cryptocurrencies being developed now that are much better media
of exchange since transactions are both secure and immediate.

I think Bitcoin's real promise is as a store of value. Yes, it's extremely
volatile now, and people are getting used to the fact that if you lose your
Bitcoins, they're gone for good. But compare Bitcoins to cash (tends to lose
its value over time) and gold (expensive to store, hard to exchange). It's
also incredibly easy to exchange Bitcoins for other digital currencies, like
the ones I refer to above.

I think that once Bitcoin reaches a large market cap, like the size of gold,
it will be much less volatile, and less risky. At that point, all the
advantages above will become apparent. So Bitcoin's future may well be as a
digital reserve currency.

~~~
Retric
Your assuming it makes it that far, I still think Bitcoins will be dead within
50 years and a far more useful cripto currency will take it's place.

~~~
eric_bullington
Perhaps, but historically, once a currency gains a foothold it is usually
extremely durable.

I think it's far more likely that a successful new cryptocurrency will
integrate Bitcoin into its design, thereby increasing the utility of both
currencies (this is what Ripple is aiming toward, for example).

But this is uncharted territory, so who knows?

~~~
Retric
Lot's of currency's have died in my lifetime, consider just what the
introduction of the euro did. But also a lot of things like game near
currency's like bitcoin have also gone the way of the dodo. Limiting things to
just national currency's and going back say 500 years you find well over 90%
of all currency's that existed back then or where introduced in the meantime
have died.

------
irickt
The biggest risk to Bitcoin is that it will become the Myspace of currencies
as its many future competitors come along.

~~~
drcode
Yeah, I'm worried what happens if one of the big three (Apple/Amazon/Google)
builds a bitcoin variant pegged to a baseline dollar price, which also has a
large marketing budget.

------
joelberman
Every article I read about Bitcoin has a picture of a metal bitcoin in it. I
guess that is to make sure very few people get the point of what bitcoin is.

~~~
derefr
They need a picture of _something_. The articles are laid out such that
there's a hole labelled "insert illustration-team piece, falling back to
relevant stock-image" on them before they ever get written.

Suggest what else it could be for a Bitcoin article. Perhaps a visualization
of a block-chain? A hash with a lot of zeroes in it? Satoshi walking away from
his computer with a wheelbarrow of money?

~~~
Falkon1313
Perhaps an illustration of a transaction occurring simply, directly, rapidly,
and with a tiny fee compared to one requiring trips to the bank at both ends,
forms to fill out, taking several days, passing through several intermediary
financial organizations, and costing several expensive fees along the way.
Cruft-free transactions are one of primary distinguishing characteristics of
Bitcoin, right?

But then when addressing the negatives, follow that up with an illustration of
the current process to obtain Bitcoins.

------
hexonexxon
Bitcoin transactions are visible/traceable, but doesn't mean you can match txn
to identities.

If there is one address in the middle of you paying somebody, and that address
was generated either offline or through Tor, there's no way to prove you own
that address unless somebody can extract the private keys from your seized
hardware and match it up to the public address.

Transactions don't prove anything, anyways. If you sell on localbitcoins or
IRC, you have no idea that the anon guy who showed up to buy them with
untraceable cash isn't directly 3rd party funding his Silk Rd account. If you
look at the blockchain it would appear I paid into SR directly however I sold
coins to some random guy I'll never see again, who's contact info I also don't
have. Since I sell under my countries $10k cash transaction limit I don't need
to take ID or retain contact info. Tracing that transaction proves nothing.

I also can't recall any of the major bitcoin heists being recovered. Only one
exchange (mtgox) has a history of holding transactions for ID if they appear
to be stolen coins, and they've only done it twice: first time was cleared up
with ID, second time they're still holding the coins (bitcoinica/linode
theft). Every other bitcoin heist you've heard of through the years the trace
leads to nowhere.

------
aakilfernandes
Interesting point:

"And for those who wish to avoid both inflation and deflation, what about a
digital currency programmed to maintain stable prices, avoiding mischief by
central bankers as well as the possibility of deflation?"

My gut is that this is not possible. Enforcing stable prices requires constant
data about price levels, and with decentralized markets there doesn't seem to
be an accurate way to get that data.

~~~
skylan_q
Historically speaking, the free market will gravitate to a currency that has a
stable price and appreciates at least a little bit over time. No one wants to
hold a depreciating currency. We use that fact to drive people to spend by
driving interest rates down. Hence the lack of savings and the high levels of
consumer spending.

~~~
nhaehnle
The "historically" is a bit misplaced. Historically speaking, people almost
universally ended up using whichever currency was used for taxation and in use
by other significant institutions for practical purposes. Inflation basically
never had anything to do with that.

Rich people might have been able to use other things as a store of value
though, but things can only become lasting stores of value if they start out
having _some_ initial use.

------
bayesianhorse
Can we please stop talking about Bitcoin replacing the Dollar? Bitcoin isn't
suited for local transactions or for contracts on a large scale. That might
change, but the value of the bitcoin protocol is in other applications.

------
em70
I have yet to see it being pointed out that none of the encryption in use for
these cryptocurrencies will necessarily remain extremely hard to break for
long. A good question is: what if bitcoin or something alike does effectively
gain traction and one day a math breakthrough (or a computational tech one)
make the crypto weak? How much wealth will be destroyed then? Who would you
turn to for help? Our system is not perfect, but taking central banks out of
the loop is not a way to improve it. It would be much more useful to find ways
to push down financial transaction and currency exchange costs.

~~~
nijk
Stealing is wealth transfer, not wealth destruction.

And it wouldn't be anonymous, so it could be investigated and relatiated.

The same argument applies to bank robberies.

~~~
em70
The destruction would be by the lack of trust. Since there is nothing but
supply and demand considerations keeping bitcoin's value high, guess what
would happen if demand were to vanish

------
wfunction
_The terrifying part of his job is that almost all of the current Bitcoin
services now use the same software, so that "any change to the core code has
potentially disastrous impact. If everybody rolls out a new version and
there's some problem with it, the whole Bitcoin payment network could grind to
a halt."_

This is the part that has always scared me.

~~~
nijk
This already happened in he 0.8 fork

~~~
wfunction
I know, but it's not going to be as easy to fix if it happens on a massive
scale, i.e. when everyone's using it.

~~~
drcode
If the core bitcoin team tells miners their mining is going to be ignored if
it isn't part of a specific fork because of some credible reason, the miners
will follow, no matter how many of them there are.

~~~
brazzy
As I understand it, the core bitcoin team (as well as all bitcoin users) can
do absolutely nothing if the majority of the miners ignore their request, as
long as THEY agree on a fork to work on.

~~~
drcode
Right, I'm saying the miners won't ignore the request, if there's a legit
reason.

