The graph on bitcoinmarket certainly shows this. If I wanted to buy a motorcycle in bitcoins in 2010 I would have needed several thousand. Now I only need a few hundred. Which means that I would have been stupid to spend my bitcoins last year. If deflation continues and bitcoins continue to be worth more and more, then the rational thing to do is never spend my bitcoins at all. And most economic theory says that the more people spend money the healthier the economy becomes so Krugman is arguing that bitcoins are an unhealthy direction for the economy to head in.
Doesn't that seem like a bizarre theory since the economy is in shambles and debt-financed spending seems to be getting higher and higher (consumer/credit card debt, etc.)
I thought people were supposed to be encouraged to save, pensions, 401k and Roth IRAs, etc. Is overall economic health inversely related to individual economic health?
Investment is a good thing to have, too:
GDP = Consumption + Gross Investment + Government Spending + Trade Surplus/Deficit
Paying back of credit card debt (at least principal) doesn't fall into this equation. The interest falls into the Consumption category (paying for a service). That's why consumer debt adversely hurts GDP when out of control.
This is a major hole in my current understanding of economic theory. My gut reaction tells me that being in debt should be bad but if you think about it, it's really a good place to be. If the general monetary supply is inflationary, then money you owe is gradually losing value. Which is an excellent proposal for those in debt: do nothing and wait, and you will owe less material value. So when you say that "future money is not going towards goods and services" I am at least a little OK with that, because future money isn't worth as much as money today, in actual fact.
Money works when it is exchanged for goods and services.
When money stops moving, the economy "stops". There isn't any exchange going on (or there's far less than before). Economic activity slows, employment slows, etc.
Credit and leverage, done right, allow more work from a given initial money supply (technically, credit increases the money supply), but this is predicated on the borrower repaying the initial investment. Done wrong, credit is extended for activities which don't allow repayment, and not only can't the the interest be paid, but the initial principle is lost -- and the money supply contracts.
Money is not wealth (value imbued in goods/services), but it can be (with a stable currency) a measure of wealth.
If the amount of money in circulation is decreasing (or the real wealth of an economy is increasing relative to a fixed money supply, say, with a gold/silver standard), then the value of a given denomination of coinage increases. Hoarding coin/currency/money becomes a wealth-accruing activity, while facilitating economic activity (by spending money) largely loses wealth. Hence the problem with a highly deflationary currency.
Economic theory says you want a currency whose value tends to be stable, or slightly inflationary, with time, in order to encourage spending rather than saving.
Note that none of this addresses the underlying physical economy, resource limitations/depletion, or other criticisms of traditional orthodox economics (most of which are highly valid -- we live on a planet of limited resources and good planets are both hard to find and the commute is a real drag).
Regarding your comments on savings: yes, there is a well-known "savings paradox" where individual incentives to save are opposed to the overall economic goals of growth. This is one of many such individual/group paradoxes, and is one of the principle reasons for laws (legal, moral, or otherwise). The 1971 book The Logic of Collective Action by Mancur Olson is one of the better illuminations of the concept: http://economics.about.com/cs/macroeconomics/a/logic_of_acti...
There are numerous other conflicts and paradoxes within economic theory and reality. Free markets, where they exist, work quite well. They're rather more rare, I'm coming to believe, than is frequently thought, and many forces work to limit them (political, plutocratic, monopolistic, and others).
Other than Mancur Olsen, some of the more interesting reading I've found includes George Akerlof ("The Market for Lemons"), Garrett Hardin ("Lifeboat Ethics", "Tragedy of the Commons", and several books of essays), Neal Stephenson's Baroque Cycle (a cunningly disguised treatise on the emergence of stock corporations, banking, and modern finance and capital), Niall Fergusson's The Ascent of Money (a less cunningly disguised version of same), and The Ordinary Business of Life which is dry as dust but still a wonderful exposition of 3000 years of economic thought.
A book I've just heard of but haven't read is David Graeber's Debt: The First 5,000 Years. He's a radical anthropologist, but has some really keen insights and views on the formation of credit and money (guess which came first).
It's not like exchange particles, where lower densities leads to lower transfer of force. Any quantity of money, as long as it is divisible, can attain a sufficient value to be useful as a store of value. A medium of exchange merely needs to be a store of value.
Because of the lack of dependence of the value of the total money supply on its total quantity, nominal spending declining due to deflation does not reduce real spending and the market is always able to sell of the merchandise on the shelves, with the value of currency adjusting to what is needed to serve the role of store of value in exchange.
What deflation does do is discourage lending. This is a legitimate economic problem, but it's not that pronounced. The Bitcoin economy would have 3% deflation a year if the world adopted it. This is not drastic and would still allow significant lending.
Money is a temporary store of value. Imagine a world without it. How would commerce work? Via direct barter. Direct barter is inefficient, because you may have to engage in an entire chain of transactions in order to get the one good you are trying to obtain. That's money's purpose -- to make this more efficient.
What Krugman is saying, and I think it's hard to dispute, is that a currency that incentivizes hoarding rather than transfer of temporary value is an extremely inefficient one, in terms of economic activity. And free markets hate inefficiency, right?
http://krugman.blogs.nytimes.com/2009/07/07/the-paradox-of-t...
The counterintuitive thing is that you would think that all savings flow back into the economy as investment so demand will always equals supply. This is an axiomatic assumption of classical economics (the idea is known as Say's Law) and is what people generally believed before Keynes basically demolished it.
Keynes' General Theory was revolutionary because it attacked the foundations of the classical economics which were still taught but which clearly failed to describe the real world. His book outlined a number of reasons why economies don't stay in equilibrium: expectation changes, wage stickiness, the "animal spirits" of investors, etc.. You can take or leave his individual points (people have tried regressing them out), but at the end of the day he was a voice in the wilderness telling the world that deflation was bad at a time when conservative economists were advocating deflation as the solution (!!!). Secretary of the Treasury Andrew Mellon at the time was even saying the same sort of thing we hear from Austrians and Ron Paul today, that the solution to the Great Depression required the government to "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate [and] purge the rottenness out of the system."
This was actually monetary policy after 1928 and it only made things worse, tanking the economy and ultimately sparking a series of bank crises in 1931. Yet there is no explanation for how things could have gone so badly according to the classical economic theories which predate Keynes. Keynes' core insight was showing on a theoretical basis how economies can fall into suboptimal equilibria ("liquidity traps") characterized by high unemployment and deflation and fail to recover on their own. By the time Friedman made the remark that "we are all Keynesians now," he was pointing out that even Keynes' critics accepted his points as true by the 1970s, a time when the academic debate had shifted to whether fiscal policy (government spending) or monetary policy (interest rate manipulation) made for better policy.
> Keynes promotes printing of money and lots of government spending
This is the sort of thing you hear from people who haven't read him - Keynes did not champion indebtedness. The closest you will get is an allegory he presents in the General Theory of having the government bury money in mineshafts so the unemployed can dig them up.
Republicans trumpet this example as absurd because they think Keynes is telling us to pay people to dig holes. In fact, Keynes knew the example was absurd and was using it to parody his critics. Replace the moneybags with gold and you have exactly what happens to deflationary economies on the gold standard: as the value of gold rises in relation to the currency, the economy devotes more resources to digging up gold until the money supply expands enough that deflation stops. It is not hard to see from this example that embracing deflation is about as silly paying someone to dig holes in the ground, and actually much worse given the enormous social costs of mass unemployment you have to suffer in the meantime.
I know that winning the Nobel Prize is not the end of the world and that there are often political motives behind these prizes (Obama anyone?), but between believing a guy who won a Nobel Prize in economics vs. believing a random guy on HN with no real argument, the choice is easy (to me at least).
To the best of my knowledge, Krugman rarely (if ever) hurls ad-hominems: he always tries to explain why he strongly disagrees with conservatives, tea party, or Obama. The adjective he uses for them almost always fit his explanations.
Hayek also won the Nobel Prize and would undoubtedly disagree with almost everything Krugman believes.
He won for "pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena" - http://www.nobelprize.org/nobel_prizes/economics/laureates/1...
I don't believe the gold standard is a good for our mandated monetary system, but I also don't believe forced currency monopolies and gold confiscation should exist in a "free" country - http://en.wikipedia.org/wiki/Executive_Order_6102
> Imagine, if you will, someone who read only the Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis?
Biased or unbiased doesn't matter. The truth is biased. If the WSJ or Krugman says the passage of X bill will destroy Thailand's exports, and Thailand's exports rise, that's a failure. If the WSJ or Krugman say that Thailand is a beautiful country, that's irrelevant to the question.
Can you or Frum point out specific examples that might make one conclude that one op-ed page was more reliable than the other?
BTW, truth is not biased. 2 + 2 = 4 is not biased. Only people can be biased. Using throw away cliches like that doesn't get us anywhere.
Truth is biased; it will ignore every argument you make that contradicts what it knows to be true. 2 + 2 = 4 is irredeemably biased against 2 + 2 = 5. Disturbingly partisan.
Bias has to do with how we perceive the world. To say that data has a bias comes from a unique perception of fairness, not the data itself. To exclude relevant data to make a point, which these op-ed pages are notorious for, is a form of bias. More definitions here: http://www.merriam-webster.com/dictionary/bias
In this case, an appeal to authority is a perfectly valid way of asserting that a certain conclusion is more probable than the other.
In any case, if the underlying argument is valid it really doesn't matter who is making it, right? An appeal to authority is really just a shortcut to avoid the full argument but it only works if the full argument (with no appeal to authority) can be made.
Certain circles of people do view him as an authority, but many others do not. There is no consensus as to Krugman's expertise and so relying on his authority (as opposed to his particular argument on a particular issue) is dubious.
Economics is a difficult field in which to find concensus on many issues and so an appeal to authority in this area should automatically raise eyebrows.
I agree with his assessment (bitcoin would be a disaster as a national currency), but don't think this is a problem since it is valuable as an asset store and transfer mechanism, and seems to be holding value.
Genius.
For bonus points, read the actual book. Informed discussions are always more interesting.
At that time:
$10 -> B10 -> 1 widget
Now move forward to a 10x increase in Bitcoin:
$10 -> B1 -> 1 widget
So the price of widgets went from B10 to B1. Deflation.
Meanwhile, MtGoX currently shows 7.00.