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.