Questions For Krugman On His Latest Bitcoin Screed

Leave it to Paul Krugman to make the claim that a massive increase in a money’s value leads to hoarding, deflation, and depression.

Krugman is a Keynesian economist who believes in a centrally planned monetary system in order to facilitate massive government interventions in the market place.  He was educated at MIT and won the Nobel Prize in economics for his work on international trade.  He is also a complete lunatic.

In his latest New York Times column, Krugman states:

The dollar value of [Bitcoin] 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.

So let us walk through Krugman’s logic.  He’s claiming it is a good investment, while at the same time claiming it is a horrible currency.  Does that make any logical sense to anyone other than Paul Krugman?  Consider the price history of gold – it has risen 200% over the last 5 years.  Does anyone think the people who are holding gold are complaining?  In fact, central banks are busying buying up gold like there is no tomorrow.  Given gold’s meteoric rise in prices, would any rational person want fiat money in exchange for goods and services over a redeemable gold backed currency?

If there were no fiat currency laws and taxes did not have to be paid in dollars, does Krugman honestly think people would choose to accept depreciating dollars instead of Bitcoins or gold in exchange for products that they have labored to produce?  Bitcoins and gold do not require guns to make them money.  That fact alone should tell you something about which type of currency the markets prefer.  Krugman is essentially arguing that the markets are simply too dumb to know what the best medium of exchange is.  Yet he, in his infinite wisdom, knows what is best for us.  Of course, his solution involves weapons.

Consider the Orwellian logic required to make this statement, ” 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.”

So Paul, who makes up an economy?   – could it possibly be composed of people who are holding money?

So, if the people who are holding money are getting richer, shouldn’t the “economy” be richer?

The reality is that a stable money supply leads to a zero-sum game.  Certain members of the economy who hold money are experiencing an increase in purchasing power, while certain members of the economy who are spending money are also benefiting because they get the value of the goods purchased.  Consider that if the money supply is held constant, yet the productivity of the economy expands, the value of money will INCREASE.  That is to say, less money will buy more goods.  Clearly this is the ideal situation for consumers.

This occurs because, as we all know, the forces of supply and demand dictate prices.  If we hold the money supply constant, and then increase the amount of goods in the economy, there will be the same number of dollars chasing more goods.  Thus, the value of money will increase leading to lower prices (deflation).

Keynesians basically argue that if government prints money, that new money will then increase the production of goods more than if the money supply had been held constant.  But clearly this is illogical!  Producers inherently try to maximize output and price levels to return the greatest profit.  Pouring new money into an economy does not generate more demand for products than already exists within the public consciousness.  New money can only alter the structure of production, it can not magically create the available resources to expand production.

Further, if the government prints up money, clearly the government must spend it into the economy for it to have any effect.  Consider the effect on steel prices for automakers if the government spends billions of printed dollars on building an aircraft carrier.  Will this lead to a better outcome for consumers of automobiles?  Wouldn’t the price of steel go up for automakers in proportion to the amount that was diverted into the production of the carrier?  Wouldn’t this lead to higher prices for consumers of automobiles (inflation)?

But further, if maximizing employment is the goal of the Keynesians, when the government spends that money into the economy, is it not going to distort the labor market?  Consider again if the government builds its carrier with printed money, would it not cause more automobile plant workers to become unemployed?  If we know the carrier will raise the price of a car by hogging steel, then we know that the number of cars consumers will buy is going to be reduced.  Hence, if there is a reduction in number of cars purchased by the public, some car makers are going to be laid off.  It is impossible for the printing of money to effectively raise employment rates without causing damage to the already existing economy.  All the printing of money does is shift around already existing employment.

It should be blatantly obvious to everyone that printing money can not magically make more resources spring into existence!  The economy is finite in the amount of resources it can produce and in the amount of resources that are available for production.  The only thing printing money can do is redistribute already existing resources!

Further, has Krugman bothered to look at any current economic statistics lately?  If printing money leads to an increase in the amount of goods an economy produces (and thus, increased real wealth for consumers), how is it possible that we are experiencing an increase in poverty when the Fed has printed up trillions of dollars?  Shouldn’t the economy be on fire right now?  Shouldn’t poverty be wiped out already?  Shouldn’t we see an explosion of jobs taking place?  Shouldn’t the nation as a whole be richer if Krugman’s logic was valid?

Presently the US government is spending at the same ratio of the economy as it did during the height of World War II. US government spending is presently responsible for 4 out of every 10 dollars spent in the US today.  By Krugman’s logic, we should all be living in mansions sipping on fine wine and cheese by now.

I seriously have to question how anyone can take this guy seriously.  Why does the New York Times still keep this guy on its payroll?

For a more thorough explanation of why deflation is good, see this article.

 

  • http://twitter.com/BitcoinTraining BitcoinTraining.com

    Great job Michael!

  • Just applying logic

    Oh my goodness you’re so smart. 
    By your own logic, shouldn’t we have seen massive inflation by now because the Fed has “printed” so much more money?  Oh wait.
    You say an economy is made by people holding money.  Ok, what happens if everyone decided to hoard the cash.  Right, nothing happens in the economy.  You no longer have an economy. 
    You forget how Say’s Law breaks down:  When there is deflation, and expected deflation, then consumers are incentivized to stop purchasing, and instead hoard their cash.  So consequently producers produce less because they have fewer customers and sell less.  The whole economy slows down.  People lose their jobs.  This is good for whom?  For those who have all the money.  Except that without a vibrant economy even the rich lose.  They have less to choose from, less quantity, less variety.  But I’m sure they’re happy counting their cash.

    • http://twitter.com/AminCad AminCad

      “You say an economy is made by people holding money.  Ok, what happens if everyone decided to hoard the cash.  Right, nothing happens in the economy.  You no longer have an economy. ”

      No prices come down. As long as less than 100% of money is hoarded, then there is money, and the goods produced will be reach a clearing price and be sold. The price of sale will be determined by the supply of goods relative to the amount of money people make available to spend, but at some point, a price will be reached.

      A contraction in the money supply has no effect on the amount of goods produced, only on the price of goods.

    • http://www.facebook.com/people/Pravin-Varma/774306564 Pravin Varma

      nonsense.all that money printing HAS caused inflation -it just happens to be in the emerging economies.why would anyone spend in the US when consumers here are laboring under a big debt burden -when money printing comes up against debt deleveraging, it seeks avenues where it can actually see ROI  ie emerging markets where debt is low and demand for consumption is still high. have you visited any emerging market nation in the last 3 years? inflation is thru the roof. the US dollar being the reserve currency(ofcourse aided by the emerging market central banks slavish  misguided love for the USD) literally override the local central banks in asia.

      prices of TVs and computers keep crashing year after year.such a massive deflation does not prevent further investment nor immediate consumption.how does the Say’s law magically resurrect in this case?d-uh.have you heard of anyone hoarding cash because the iphone will be cheaper after 5 years?the US had the most dynamic and vibrant growth of over 4% in real terms from 1880s to 1914 -while dropping prices -DEFLATING -over 50%.there is no correlation between deflation and growth.

    • Anonymous

      Instead theorizing about the economy or what other people might do in an expected deflationary economy, ask yourself what YOU would do if YOU expected your money to continually increase in value aka deflation?
      Would you cancel your cable subscription?
      Would you quit picking up a coffee at Starbucks every morning?
      Would you quit filling your car with gas?
      Would quit paying your mortgage or rent?
      Would you never buy a new TV or computer?
      Would you never get a new iPhone?
      Would you buy less groceries?
      Would you never go out with friends or to a movie or take a vacation? Afterall, all of these things would be cheaper in the future, why ‘waste’ your money now? Would YOU become a cash hoarder? If YOU answered ‘no’ to most of the questions above why would the economy grind to a halt?

      People DON’T want MONEY!
      People want the THINGS money can buy!

      Money is just a middleman, it is not wealth. Produced goods and services are wealth. This is what people value.

      People will always and continually want stuff and will be willing to spend their money on it.

      If a government continually debases the currency then people can buy LESS for their dollar, how is that good?

    • http://www.libertariannews.org/ Michael Suede

      So you’re saying people will stop buying food, clothing, medical care, housing, gas, etc.. etc.. etc.. because money is gaining in value?

      That’s the most retarded argument I’ve ever heard.

      Yes, CONSUMPTION will slow but PRODUCTION will increase.  This will continue until a market equilibrium is reached.  SAVINGS means capital investment is occurring.  Capital investment is necessary before production can be expanded.  

  • Jaundicedeye

    Dude, you. are. an. idjiyot.

  • Orthzar

    “Why does the New York Times still keep this guy on its payroll?”

    I was unaware that Ben Bernanke worked outside of the Fed.

  • Bobolozo

    Deflation is a disaster for the average person.

    The average person has little money, but lots of debt.  This is necessary, because nobody is realistically going to save enough money to buy a house or even a car typically.  So you’ve got your student loan debt, and your car debt, and your enormous house debt, but that’s ok in our current system because your income is going up all the time and the value of the debt is going down.  Your house goes up in value,  your income goes up, your debt payment stays the same.

    In a deflationary system, your house goes DOWN in value every year, your income goes DOWN, while your mortgage stays the same.  If you still own that house 10 or 15 years later, your mortgage payments will effectively have doubled.  And I think we’ve all experienced enough of what happens when housing prices continuously drop to realize what effect this has on homeowners.

    Deflation would be great for someone who had no debt, but large amounts of cash.  Some wealthy millionaire or billionaire perhaps. 

    • http://www.libertariannews.org/ Michael Suede

      Perhaps a debt based economy isn’t the proper way to run a society  *shock*

      Of course, people would know that money would gain in value over time, so just as we do today for inflation, the interest rates would be adjusted to account for the gain in the value of money over time.

      And no, assets like a home would not go down in real value over time any more than they do now.  As money becomes more valuable, your home would obviously be worth less in nominal terms, but it would maintain its value in real terms.

      • Bobolozo

        The real value of homes wouldn’t go down in a deflationary system, but the nominal value would.  You buy a home for $200,000, with a $160,000 mortgage, and your income is $50,000 a year.  In a deflationary economy, some years later you might find that your house was now worth $100,000, your income was now $25,000 a year… but your mortgage payments were still the same!  And depending on how severe the deflation was, you might owe well over $100,000 on that $100,000 home.

        One problem with deflation is that interest rates can only fall so far, they can’t go negative.  With 10% inflation, you might get a mortgage for 13%.  With 3% inflation, you might get a mortgage for 6%.  With -10% inflation, you can’t get a mortage rate of -7%, it can never go below 0.  In fact, your mortage rate will never likely go below 3% or so, no matter how severe the deflation is, because the lender has to worry about you defaulting on your mortgage.  And since the lender knows the price of your house will be dropping and your salary will be dropping, they will most definitely need to charge you enough interest to make up for the serious risk of you defaulting.

        Loans of any sort no longer function properly in a deflationary economy.

        • http://www.libertariannews.org/ Michael Suede

          “Loans of any sort no longer function properly in a deflationary economy.”

          Deflation is self-limiting.  If lending came to a halt, clearly this would halt productive growth, and clearly this would drive effective rates back up.

          Historically we know lending operated just fine under a gold standard.  There is no reason to think deflation would make lending impossible under a bitcoin standard.

        • Stephan

          What about a contract with some fixed mortgage rate – say 3% -, but applied after decreasing the remaining debt by the deflation rate? So
          – the debt would always reflect the real value of the money at time being spent, and
          – the bank would get their profit as it is in an inflationary system (where mortgage rate is a few percents above inflation).

    • Nicolas Azor

      I am an average person and I have no debt.  I just rent the place where I live and I have no car.

  • Bitman

    Keynesian economics is all about money circulation ! Is a simple concept. That’s how its measured. Economic growth = money spent (economic 101). Based on this concept (model) Krugman is right.

    Your argument that Keynesian economics is basically printing money is not right. Thats half truth. The printing of money (aka expansion of credit) is done to support the growing economy. There is also the contraction of credit (to “unprint” money) to defuse economic bubble. The “printing” side always gets the blame because that’s where it lead to a crisis, not because the model is wrong but mostly due to abuse by affected substantial stakeholders of the economic sectors. NOBODY praises the “un-printing” side of the money system because we don’t experience any “crisis”.

    I can go on to talk about about investment (a form of spending in productive capacity) and job creation. But I think its quite pointless here.Now apply that to Bitcoin. Bitcoin’s economy is now (basically) concentrated in the financial sector (meaning exchanges). That’s where the Bitcoin money is spent. Unless and until its used in other sectors of the real economy, Bitcoin is Not going anywhere. Of course time will tell.

    • http://www.libertariannews.org/ Michael Suede

      “Your argument that Keynesian economics is basically printing money is not right. Thats half truth. The printing of money (aka expansion of credit) is done to support the growing economy. There is also the contraction of credit (to “unprint” money) to defuse economic bubble. The “printing” side always gets the blame because that’s where it lead to a crisis, not because the model is wrong but mostly due to abuse by affected substantial stakeholders of the economic sectors. NOBODY praises the “un-printing” side of the money system because we don’t experience any “crisis”.”

      This isn’t quite right either.  Granted I am simplifying my arguments, but Keynesian’s use the excuse of maximizing employment to argue in favor of artificial credit expansion.  They see unemployed people and think that expanding credit can somehow put these people to work without disrupting the existing economy.  Obviously this is impossible.

      But Keynesians also argue strenuously against allowing any deflation to EVER occur.  This is because even a tiny amount of deflation could cause their ponzi scheme to unwind through cascading defaults.  This is why bank bailouts were favored by Keynesian economists.  They simply can not allow it to happen.  The entire monetary system could unwind into oblivion.

      http://www.debtonation.org/2009/02/a-debt-deflationary-spiral/

    • Anonymous

      Economic growth = money spent.
      Ta da! It’s that simple!

      If you want to get the economy as a whole to spend more then there must be more to spend (I think I’m getting the hang of this). If there must be more money to spend then more money will have to be created.

      Typically money creation is through the banks or from the government borrowing money and never paying back the debt. But why bother with banks? There is no guarantee the banks will actually lend the money out. So why not go directly to the consumer? Afterall, if demand is lacking why not get the money to the people you will go out and spend it?!

      The Federal Reserve can legally create money by crediting accounts electronically. If you wanted to jump-start, jolt, prime-the-pump of the economy, why not have the Fed directly electronically credit people’s bank accounts? This could be done progressively: if you make less that $20,000 a year you would get $2000 a month added to your account. If you made more you would get less added to your account. People making more than $100,000 per year would get nothing.

      Would this not be a more equitable and prosperous society? Most people would have more money. Isnt that a good thing? It’s technically possible. It’s politically possible; who wouldn’t vote for free money?! Surely the economy would boom! How could it NOT work?! Has Krugman ever proposed or advocated such an elegant solution? Surely, he must approve.

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  • Dancupid

    I use bitcoin to trade currency on multiple exchanges – that’s not hording it. I have multiple off shore savings accounts in multiple currencies. I can move stored value around the world at will with no fees. That’s the value of bitcoin.

    • Paqogomez

      That does nothing for the bitcoin economy however.  The Keynesian point is that if you spend a bitcoin and then that person spends that same bitcoin that generates 2 bitcoins of value for the economy.  Purchasing goods and services makes the economy flourish, not pulling the money out of economy into dollars.

  • Jim

    “Why would any producer of goods not be trying to produce as much as he possibly could already?”

    Maybe because they can’t sell it?

    Seriously, you are an idiot.

    • http://www.libertariannews.org/ Michael Suede

      If he can’t sell it, then by definition, he is producing as much as he can given the market conditions.

      Producers will generally try to maximize profit.

      http://en.wikipedia.org/wiki/Profit_maximization

  • Nameless coward

    Loans will always work. Interest rates are obviously based on expectations of market/value development, and can be negative if there is reliable deflation. The change in value per “coin” (unit of currency) is just a number exercise, economies are smart and flexible enough to deal with that as long as it doesn’t go up and down wildly. Participants in the real world adapt to conditions and mechanics of the same. Coincidentally, the mechanics of an economy with fixed money supply should be simpler and more predictable than one in which supply can be controlled at whim. Granted though, holders of large wallets in such an economy would gain increasing power to manipulate the market as their wallet value grows, but that’s not unlike regular investment or accounts with interest.

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  • Jason Calley

    “Presently the US government is spending at the same ratio of the economy
    as it did during the height of World War II. US government spending is presently responsible for 4 out of every 10 dollars spent in the US today.”

    Exactly! And the result is the same for the consumer. Most people understand that the time of WWII was a time of relatively full employment, but they forget that it was also a time of decreased standard of living. During the war, consumers were restricted in their consumption by various rationing programs. This also had the valued effect of making citizens feel that they personally were  sacrificing — and thus were active players — in the war effort. Today we have a similar lowering of consumption because of the rising costs of such goods as food, clothing, fuel and energy. The only psychological benefit of this is that now consumers become increasingly aware of how they have been cheated by a rigged system.

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  • Davinci Jeremie

    Do you need to ask this question?
    “I seriously have to question how anyone can take this guy seriously.  Why does the New York Times still keep this guy on its payroll?”

    Have you not read your history?

    The bankers have purchased the media long long time ago and wrote about it.   And remind me who gets to create money out of nothing and charge interest on it?

    If you ask me con men need a good PR campaign to con the public so that’s why they keep krugman employed.

    In life people always ask the wrong questions and in this article you asked many wrong ones.  The real questions to ask the one that raised my eyebrow and made me have to read it again was…

    Did Paul Krugman really mention bticoin? Why?

  • Dimetrodon

    Personally I don’t understand what makes Bitcoin money. It is not tangable in and of itself (like raw gold silver or copper and local paper currencies like Ithica Hours, BerkSHARES or Potomacs) nor is it backed by anything tangable (like e.gold internet credits used to be before the US Government did the stopped it or private gold, silver or copper certificates would be). To me Bitcoins just seem to be more of a money made out of NOTHING than even FRNs are.

    • http://www.libertariannews.org/ Michael Suede

      Bitcoins are money because the market says they have value.

      Because bitcoins have all the features of a money (divisible, fungible, scarce, recognizable), and because people are willing to trade goods and services for them, they are a money.

  • http://www.facebook.com/profile.php?id=1269707584 Rebecca Snyder Baird

    Bcanuck –

    Congratulations!  You are close to understanding MMT.  For more education,, go to http://www.moslereconomics.com.  

    Start with the “Required Readings”, and ask about anything you don’t understand – people are happy to answer.

  • allocater

    If you have a thing that everybody wants to take, but nobody wants to give, it is a bad currency (deflation)
    If you have a thing that everybody wants to give, but nobody want to take, it is a bad currency (inflation)

    A good currency must cause 50% of the people to want to give and 50% of the people to want to take.

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