Paul Krugman Blog- Bitcoin is Evil

[n2doc]

It’s always important, and always hard, to distinguish positive economics — how things work — from normative economics — how things should be. Indeed, on many of the macro issues I’ve written about it has been obvious that large numbers of economists can’t bring themselves to make that distinction; they dislike activist government on political grounds, and this leads them to make really bad arguments about why fiscal stimulus can’t work and monetary stimulus will be disastrous. I don’t, by the way, think that this effect is symmetric: although people like Robert Lucas were quick to accuse people like Christy Romer of fabricating macro arguments to support a big-government agenda, this didn’t actually happen.

But I come now to talk not about macro but about money — specifically, about Bitcoin and all that.

So far almost all of the Bitcoin discussion has been positive economics — can this actually work? And I have to say that I’m still deeply unconvinced. To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why BitCoin should be a stable store of value. Brad DeLong puts it clearly:

Underpinning the value of gold is that if all else fails you can use it to make pretty things. Underpinning the value of the dollar is a combination of (a) the fact that you can use them to pay your taxes to the U.S. government, and (b) that the Federal Reserve is a potential dollar sink and has promised to buy them back and extinguish them if their real value starts to sink at (much) more than 2%/year (yes, I know).

Placing a ceiling on the value of gold is mining technology, and the prospect that if its price gets out of whack for long on the upside a great deal more of it will be created. Placing a ceiling on the value of the dollar is the Federal Reserve’s role as actual dollar source, and its commitment not to allow deflation to happen.

Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?

more

http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/?_r=0

[madrchsod]

1. i`m buying tulip bulbs....

i`ve heard they are the wave of the future!

[Drew Richards]

3. No no...stockpile HEIRLOOM seeds...they will be priceless in the coming zombie apocalypse.

[pscot]

4. The smart money is in ammo

Demand is vast and growing.

[Prophet 451]

9. Do arrows count?

In the event of societal collapse, I'm counting on my ability to fletch arrows and brew beer, cider and applejack to keep me alive.

[JHB]

12. If you can make them count, they count...

...though it does require some practice.

[Enthusiast]

16. That is amazing.

[Herself]

18. when ever we have a dem president the NRA scares the price of ammo up

At the rate we are going with the tea party and CINO's bigotry based legislation, we will end up with more dem's in office and ammo will be short supply, and high priced.

[madrchsod]

6. i`m not sure if i can afford them now...

they are dam expensive.

[rhett o rick]

7. I heard the word was "plastics". nm

[Xipe Totec]

2. With bitcoins, this image comes to mind...

[pscot]

5. That image was in the copy i had when I was about 10

I believe I may read it again.

[Jester Messiah]

8. Interesting. Normally I'm all about Krugman, but I'm not getting it this time.

How can a medium of exchange be evil, or for that matter, morally good? I'm inclined to take him at his word, but I don't get the arguments he's laying down.

[DanTex]

10. "Evil" of course is provocative hyperbole.

What he means is that if bitcoin became the main currency used in global economic transactions that would be a bad thing. Why? First, since the quantity is limited, it would be deflationary, and lead to the same kinds of problems as with the gold standards. And since it is difficult to trace, it would facilitate illegal commerce in things like child pornography, human trafficking, etc. In fact, the main people who are currently actually using bitcoins as a currency (as opposed to a speculative investment) are criminals.

[Jester Messiah]

11. Interesting. Thanks for the explanation.

Although, in the absence of bitcoin criminals could find other commodities to trade, as they ever have.

[DanTex]

15. This is true.

In my opinion the biggest economic objection is the fact that it will be deflationary, and there's really no getting around this. As much as people complain about having a federal reserve, having an unmanaged fixed-supply currency is worse.

As far as criminal uses, IMO the jury is still out on that. Right now, it is popular for things like drug trades because it is an easy way to transfer money anonymously over the internet without involving a bank. Also, unlike a bank account, there is no way for any government to freeze or seize assets in a bitcoin wallet. But I don't think there are any large-scale criminal enterprises using bitcoins a major means of transferring money (of course, if they were I wouldn't know). Right now, most bitcoin users are just using them as speculative investments, and only a few small time drug dealers or libertarians are actually using them to transact commerce.

One reason why bitcoins might not be the criminal free-for-all that some people fear is that all bitcoin transactions are recorded, so one could argue that they are more traceable than paper currency. The problem is that the transactions only involve ID numbers and not names, so unless the government can figure out who owns which bitcoin wallet, then the bitcoin economy remains anonymous. And bitcoin wallets can be created anonymously at any time. On the other hand, if the government suspects that a certain bitcoin wallet is being used for drugs, say, they can wait until the owner tries to either convert the bitcoins to currency or spends them in another way that reveals the user's identity.

This leads to the issue of bitcoin laundering. Right now, it is pretty easy to launder small amounts of bitcoins. In fact there are websites that will do this: you transfer some bitcoins to them, and they transfer back the same amount of bitcoins minus a fee from a different wallet so that now you have "clean" bitcoins that aren't connected by transaction chains to your previous wallet. But it's still pretty small-time, and it's not clear whether this would scale to the point where large criminal enterprises would be able to launder huge amounts of money regularly, or whether the fact that there are transaction records actually would end up benefitting the police more than the money launderers.

[JHB]

13. I think he's playing on the goldbug claim that fiat money is evil

It's a Libertarian refrain, and bitcoin is touted as adhering to "true libertarian principles" about money.

[warrior1]

14. I listened to a podcast by

Stuff you should know on How Bitcoins works,

Um It's really about sticking to the "man." Not dealing with middle men when it comes to transactions. But buying Bitcoins you are still at the mercy of deflation. The 25 Bitcoins that are issued ever ten minutes isn't really available to the average users because of the electrical power needed to run big computers to find them. They will maxed down in 2017.

After listening my impression it was sort of based on a libertarian point of view. I honestly wouldn't find them safe at all. Not that someone could steal, but still that's open for debate, it's the money you could lose.

[TampaAnimusVortex]

17. Bitcoin doesnt care what Krugman thinks...

http://www.coindesk.com/could-bitcoin-surpass-google-market-cap/

"Bitcoin is a protocol, not a currency. Currency is just the first app."

The protocol is a new technology that allows a global consensus on who owns what without a centralized third party. The transparent decentralized public ledger will change every sector. Here are a few examples of possible usages for the protocol; creation of decentralized autonomous corporations crowd fund, vote, pay out dividends, Twister(decentralized twitter), Bitcloud, Namecoin(decentralized DNS), Mastercoin can be used to create custom currencies, smart money, smart contracts, derivatives, identity and reputation systems, savings wallets, crop insurance, centrally managed data feeds, smart multi signature escrow, full-scale live on-chain stock market, on-chain decentralized marketplace using the identity and reputation system as a base, decentralized drop boxes etc etc and the list continues to grow. The Blockchain will drastically change the business model for the transaction fee based parasite companies... Needless to say BTC is much more than just a price, medium of exchange or store of value. Its a new technology that everyone will be using whether the know it or not...

Examples of protocol usage http://twister.net.co/

http://boingboing.net/2014/01/17/bitcloud-bitcoin-like-system.html

http://torrentfreak.com/how-the-pirate-bay-plans-to-beat-censorship-for-good-140105/