People who knock a deflationary monetary standard out-of-hand often do so because they're considering the effects of deflation from the reference-point of a typically inflationary world; ie, the one we've all spent our entire lives in. It's understandable that that's the reference point. And in that framework, yeah, deflation sucks and induces hoarding because you know that the deflationary times are likely to be rather limited, thus you can wait-it-out to maximize the value of your cash with respect to the long-term inflationary status-quo.
But in a world where the money-supply dynamics are known with full certainty, and where no one can manipulate it, you start to internalize that reference frame. I'm not going to delay my spending now just because the currency is deflationary because I *know* that the situation is never going to change. The currency is not going to experience gyrations that make it more or less optimal to hold cash at one time versus another. Thus, I can just focus on my own utility curve and spend/save according to that.
Topic: Paul Krugman comments on bitcoin. Fantastic blog! (Read 2986 times)
I disagree with the conclusion but the argument is well presented and I don't think unfair.
Bitcoin is indeed deflationary, but this does not hurt spending at all. Spending is determined by supply of goods and services produced. Deflation simply changes the value of the currency, thus reducing the nominal amount spent while keep real spending constant.
What deflation does hurt is lending, as the rate of return has to exceed the deflation rate to make financing through borrowing profitable.
There's no way around this as an un-backed non-fiat currency like Bitcoin has to be limited in supply to have any value at all. It's its scarcity that creates demand for it, and makes it useful as a store of value.
Gresham's Law only applies when two unequal currencies have to be accepted as equal in value by fiat. It doesn't apply in a free market.
The number of people who could make use of a cash-like digital currency is significant.
Bitcoin is indeed deflationary, but this does not hurt spending at all. Spending is determined by supply of goods and services produced. Deflation simply changes the value of the currency, thus reducing the nominal amount spent while keep real spending constant.
What deflation does hurt is lending, as the rate of return has to exceed the deflation rate to make financing through borrowing profitable.
There's no way around this as an un-backed non-fiat currency like Bitcoin has to be limited in supply to have any value at all. It's its scarcity that creates demand for it, and makes it useful as a store of value.
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Ultimately, the permanent deflation of BTC makes it a currency that no one wants to spend (Gresham's Law and all...)
Gresham's Law only applies when two unequal currencies have to be accepted as equal in value by fiat. It doesn't apply in a free market.
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Most of the new adoption currently is faith-based, but the deflationary trend of BTC will eventually drive the weak of faith out of the market and leave only those people who get real value from the cash-like (or gold coin-like) features of BTC transactions."
The number of people who could make use of a cash-like digital currency is significant.
My favorite comment to the article:
"Dr. Krugman, you show supreme restraint.
Bitcoin is an outgrowth of the Anarcho-Libertarian "Cipherpunk" movement of the early 90's, a movement which is in part responsible for the strange popularity of Ron Paul online. As such, the design of Bitcoin is an expression of a mindset that is very digital and lacking in nuance or complexity. It's not just a new variation on the gold standard, it is *more* deflationary: there is a fixed supply of Bitcoin for all time, it gets harder to 'mine' the Bitcoin magic numbers over time, and when people lose existing Bitcoin (e.g. to computer failures without backups) they are irretrievably lost forever. It's like a gold standard but with a known fixed end to mining and an accidental sort of alchemy that randomly makes gold vanish.
Bitcoin isn't just "hard" money, it is money that gets gradually harder over time. A hypothetical BTC economy would operate in a permanent enforced deflation. The more BTC are used, the more the currency deflates. The math of the "mining" algorithm assures that the as-yet-unowned BTC "money" can only be created by an increasing investment of real(ish) work. For now, there are true believers still buying a lot of electrical power to run BTC mining farms, but at some point that will become a clearly losing proposition to an ever-increasing degree that will drive them out. Ultimately, the permanent deflation of BTC makes it a currency that no one wants to spend (Gresham's Law and all...) but which is attractive as a purely online currency that can be very hard to trace.
I'm no economist, but it seems to me that this makes BTC a doomed experiment that can't ever become a significant currency and which is destined to fail in a spectacular way. Most of the new adoption currently is faith-based, but the deflationary trend of BTC will eventually drive the weak of faith out of the market and leave only those people who get real value from the cash-like (or gold coin-like) features of BTC transactions."
"Dr. Krugman, you show supreme restraint.
Bitcoin is an outgrowth of the Anarcho-Libertarian "Cipherpunk" movement of the early 90's, a movement which is in part responsible for the strange popularity of Ron Paul online. As such, the design of Bitcoin is an expression of a mindset that is very digital and lacking in nuance or complexity. It's not just a new variation on the gold standard, it is *more* deflationary: there is a fixed supply of Bitcoin for all time, it gets harder to 'mine' the Bitcoin magic numbers over time, and when people lose existing Bitcoin (e.g. to computer failures without backups) they are irretrievably lost forever. It's like a gold standard but with a known fixed end to mining and an accidental sort of alchemy that randomly makes gold vanish.
Bitcoin isn't just "hard" money, it is money that gets gradually harder over time. A hypothetical BTC economy would operate in a permanent enforced deflation. The more BTC are used, the more the currency deflates. The math of the "mining" algorithm assures that the as-yet-unowned BTC "money" can only be created by an increasing investment of real(ish) work. For now, there are true believers still buying a lot of electrical power to run BTC mining farms, but at some point that will become a clearly losing proposition to an ever-increasing degree that will drive them out. Ultimately, the permanent deflation of BTC makes it a currency that no one wants to spend (Gresham's Law and all...) but which is attractive as a purely online currency that can be very hard to trace.
I'm no economist, but it seems to me that this makes BTC a doomed experiment that can't ever become a significant currency and which is destined to fail in a spectacular way. Most of the new adoption currently is faith-based, but the deflationary trend of BTC will eventually drive the weak of faith out of the market and leave only those people who get real value from the cash-like (or gold coin-like) features of BTC transactions."
That blog entry only says "Deflation leads to Money Hoarding", in slightly more sentences. A topic that has been discussed over and over again in this forum for months and years.
http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/
A man after my own heart. And he's right.
A man after my own heart. And he's right.
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