If by the gold standard you mean the one that millions of people all over the world voluntarily chose over the course of thousands of years? Well, at least until it was co-opted by fiat currencies in many countries. I'd rather have the problems that come with a free currency than those that come with a fiat one.
Can you eat gold? No. Can you make anything useful with it, other than some component in electronics? No. Gold was only valuable because it didn't corrode, and was scarce in the ancient world, therefore making it an ideal medium of exchange in an environment of weak central governments and zero ability to stop counterfeiters.
If a zombie apocalypse happened today, and somebody tried to buy food or weapons from me with gold, I'd tell them off. Gold has ZERO inherent value. When you understand that the purpose of a currency is simply to facilitate exchange of goods and services as efficiently as possible, you reach a conclusion that a gold standard is stupid, because it prevents governments from increasing quantity in times where hoarding is occurring.
Can you eat dollars? Can you make anything useful with them, other than small fires or cocaine straws? If there was a zombie apocalypse today and somebody tried to buy food or weapons from me with dollars, I'd tell them off. Dollars have ZERO inherent value.
When you understand that the purposes (PLURAL) for a currency are (according to wikipedia and many other places) a medium of exchange; a unit of account; a store of value; you'll reach the conclusion that the dollar standard is stupid because it cannot be a store of value so long as there is a printing press. http://en.wikipedia.org/wiki/Money
> Can you eat dollars? Can you make anything useful with them, other than small fires or cocaine straws? If there was a zombie apocalypse today and somebody tried to buy food or weapons from me with dollars, I'd tell them off. Dollars have ZERO inherent value.
Yes, precisely. Gold is just another kind of 'fiat' currency. You're catching on.
Given the choice between two kinds of arbitrary, intrinsically valueless currency, I'll take the one whose supply we have far more control over.
> Given the choice between two kinds of arbitrary, intrinsically valueless currency, I'll take the one whose supply we have far more control over.
* Who is this "we" you are referring to? You seem to be implying that the people have some control over the currency when the reality is that the Federal Reserve and in fact all centralized currencies are incredibly corrupt and machined and manipulated for very powerful people. When interest rates are manipulated or certain banks get access to loans and getting money and bailouts through these central banks, that's so obviously not for the people. Gold can't be manipulated in this way, but paper can. That's why the government loves its paper. It can pay for wars and anything it wants through inflation instead of raising taxes. But the end result of wealth getting sucked out of peoples' hands is the same.
* For the record, everything is intrinsically and inherently valueless. You can't use a microscope to examine any type of object and find a tiny particle called "value". All value people place on everything in an economy is subjective in nature, whether its gold or paper or corn or milk or iron or wood. Your argument here for gold being valueless doesn't make a point because that's inherent in anything and everything.
* That being said, gold has successfully been used as a currency throughout the planet's history. It was accepted worldwide with no barriers to its ability to trade throughout countries.
* The argument that people make against gold being suitable as a currency because of its lack of stability compared to paper is unbelievably laughable. What type of event is more likely: gold somehow losing its application in all kinds of industries/mass quantities of gold being suddenly discovered that alters its fundamental market value (events never before seen in human history) or somehow corrupt politicians and powerful people that manage these paper currencies manipulating the currency for their own benefit?
* That being said, regarding this larger argument about Bitcoin, these coins lack any practical value as far as I can see outside of perhaps anonymity. I say perhaps because Bitcoin isn't actually an anonymous currency, but all transactions can ultimately be traced in some fashion. So it remains to be seen if this will work as a currency long-term.
The point wasn't that dollars are inherently valuable, rather that gold is as much a fiat currency as any other, it is just one that is propped up on a shared delusion of inherent value rather than other factors.
>Can you make anything useful with it, other than some component in electronics?
Yes, you can. Gold has uses in dentistry and aerospace as well. For example, a space suit has a really thin layer of gold foil to keep out (some kinds of) radiation.
Also, there's a reason jewelers like to use gold. It's very malleable, so it's easier to make intricate designs. Yeah, that property won't help much in the zombie apocalypse, but in the real world there will always be some amount of demand for gold in jewelry (plus jewelry-like products such as guns with gold inlay).
While it's true 90% of the gold that gets mined goes straight into a vault somewhere it has far more intrinsic value than any fiat currency.
"because it prevents governments from increasing quantity in times where hoarding is occurring."
As opposed to a currency which allows a government to deliberately and invisibly transfer wealth from the poorest to the richest in society? With hoarding you can switch to silver or copper. With the current system you have to put up with the decisions of an unaccountable class of people who can manipulate the currency for their own personal gain without repercussion.
It's as if the government was trying to solve the problem of hoarding by printing more money and giving the money to the hoarders.
Inflation doesn't transfer wealth from the poorest, for normal-world version of "poorest." They have debt, not piles of cash hidden in their mattresses, and inflation reduces the amounts of those debts.
Inflation is a bugger for someone who wants to hide dollars in their mattress and have them be worth the same in 30 years.
The newly minted money is given to: the banks. Who benefits from that new money? The banks! Who benefits from the banks benefiting? The rich! The poor have to pay higher prices and see their raises lag the increased prices. The poor get poorer while the rich get richer.
Once your income substantially outstrips your daily need for food, water, shelter, etc inflation hurts you less as you are able to invest. The poor are always behind and thus pay the most for inflation.
"and inflation reduces the amounts of those debts."
Only if inflation is at a higher rate than than the interest on the debt. Which is rarely the case. Bank loans are constructed so that the bank makes money and that couldn't happen if they loaned money at a lower rate than inflation allowed.
If you want to escape inflation, you put your money in a savings account and hope that the interest rate is properly matched to the inflation rate (they're commonly indexed to inflation.) This is less feasible for poorer people who don't have enough money to take out bank accounts and who necessarily have a higher percentage of their money in cash.
It's amazing how consistently the defense of gold is "because we used to". Autocracy and theocracy served humanity so long also, why do we need this democracy thing?
At least the gold supply tended to increase over time, and (by luck) tended to increase by the size of the overall economy.
With Bitcoins having a finite supply, it's guaranteed deflation. The early adopters love it for that, but there's no reason for anyone else to hop on board.
But only if it's the sole/main currency. Otherwise it becomes like gold is today, only a bit easier to move money in/out of it. That's always been the main flaw in the "deflationary" theory, it depends on some absolutes that wouldn't exist in the real world.
> But only if it's the sole/main currency. Otherwise it becomes like gold is today, only a bit easier to move money in/out of it. That's always been the main flaw in the "deflationary" theory, it depends on some absolutes that wouldn't exist in the real world.
The deflation argument is usually an argument against the proposal that Bitcoin ought to become a major currency and that it should displace traditional sovereign currencies. So, no, its not a problem with that argument that it relies on assumption of a dominant-currency role for Bitcoin.
Its probably true that such a role won't ever happen, in no small part because there are enough people with enough economic power that understand the problem to prevent it from happening, but that doesn't make the argument is invalid as to why it shouldn't happen.
Deflationary, sure. But where are the problems? More people are CHOOSING to conduct transactions in bitcoin. If we can tolerate 2-8% inflation yearly surely we could tolerate that much deflation.
> More people are CHOOSING to conduct transactions in bitcoin.
Which isn't really an issue now because the total volume is small enough as to be irrelevant to any well-defined economy. It would be an issue if it was to become used, globally or in any region, as the principal currency, which is the only situation where its supply characteristics would actually be deflationary.
> If we can tolerate 2-8% inflation yearly surely we could tolerate that much deflation.
This relies on the premise that inflation and deflation of similar percentage magnitude are equally tolerable. I would suggest that the justification for making this assumption is, at best, non-obvious.
You can't just say that "deflationary is a problem because it is" as that's a non-argument rather than an argument.
I will address the notion of deflation and inflation of a similar percentage being tolerable: http://en.wikipedia.org/wiki/Deflation#Major_deflations_in_t... That graph shows that inflation and deflation largely canceled out for many, many years here in the US. And the world survived those times or else we would not be here today. As such I would argue that it is possible for an economy to handle deflation as well as inflation.
One of the arguments that people make re:inflation is we're modern and look at all the good things the modern world has. I'm not convinced of the causal link between modernity and inflation; just because they happened at the same time doesn't mean there's causality. http://xkcd.com/552/
The bank runs and depressions were quite common in the 1800's and before, because of no effort to control inflation or deflation.
Once, there was a huge investment in, get this, Wooden Roads. Everyone knows wood rots, but somehow these wooden road investments developed a huge bubble. http://www.stocklobster.com/9998mhpr.html
If you take the time to read The Wealth of Nations, there is a pretty good description of banking and how it works without a common currency backed by the government. If bitcoin became the entrenched currency, what would happen is banks would issue Bitcoin vouchers to people, "This voucher from Bank of XXX is redeemable for 1 Bitcoin upon presentation." This would increase the supply of bitcoins. What the bank would actually do is probably transfer some of these bitcoins and continue on being a fractional bank, retaining say 10 Bitcoins, and investing 90 Bitcoins. If these bitcoins investments go to buying stuff from other countries, you get new capital(In the Smith sense of Capital) into the buying country, if you
just lend your bitcoins to the foreign country, you get the profit, but you lose some capital (your bitcoins are in another country now, not producing capital in your own country, so even though you get a small percentage of profit, you don't grow the total capital in your country).
Uh, well, read Wealth of Nations, and take notes.
So these banks would still be fractional and exposed to the dangers of a bank run, because they are fractional. If you don't want a fractional bank, you need a bank that charges a storage fee. So you need deflation that outpaces the storage fee, or your stored bitcoins are losing value all the time. You can keep Bitcoins in cold storage, but then they are a) harder to use and b) must be protected. An encrypted hard drive is not a good solution because of hard drive failures. Printing them out essentially turns them into cash.
> That graph shows that inflation and deflation largely canceled out for many, many years here in the US.
Which doesn't actually support the position it is offered as defense for, that similar levels of inflation and deflation have the same harms. Them tending in the long term to be equal (leaving no long-term net inflation/deflation) doesn't mean that variation from 0 on each side is equally harmful.
> And the world survived those times or else we would not be here today.
The world survived the times when chattel slavery, autocracy, de jure religious prosecutions were the norm, too. That doesn't mean that those things are good, or even no worse than the features of the modern developed world that have replaced them.
> One of the arguments that people make re:inflation is we're modern and look at all the good things the modern world has.
As its not one that either Krugman nor anyone in the exchange leading up to your post made, that's a strawman.
Deflation will pretty much guarantee that Bitcoin will never replace a "real" currency.
It prevents a key economic activity: borrowing money. I'll let you put together why deflation kills incentives to loan money, hence making it impossible for people to borrow.
Once you've done that, please explain to me how there were loans made over the last 400 years in light of the fact that only the last 80 years has had reliable consistent inflation.
What do you think were the interest rates on these loans? Historically loan interest rates were extremely high, for multiple reasons:
1) To cover the opportunity cost of holding the money during actual deflation
2) To cover the risk of a possibility of deflation
3) To allow the loaning institution to profit even when deflation occurs
4) The high demand for loans, due to a vastly diminished supply of loans
If you live in a time of high barriers to borrowing money, you will live in a time of vastly decreased social mobility. You know, kind of like the time prior to the last 80 years. That wonderful age you gold-standard lovers wish you lived in.
I'm not opposed to "high" interest rates. It encourages thrift and thrift is what built the modern world. The economy can only grow if production is greater than consumption on a macro level. How do you ensure that production is greater than consumption? You encourage savings via a "high" (some might say reasonable) interest rates.
Deflation also requires more collateral, because in case of default, the bank won't be able to sell the collateral for the value it had when the loan was made, which risks insolvency and the loss of depositors' funds.
Yeah, just because a currency is deflating doesn't mean you can't charge interest and have it be worth your while. You get back your principal plus whatever amount it take to make you take the risk.
Inflation is worse for lenders than deflation. Each dollar they get back is worth less when it is returned, not more.
Borrowers love inflation. If there was great deflation, it gets quite painful to pay back loans. The lender is quite happy about it though.
I think I read, though, that both severe deflation and inflation push up rates. If deflation is severe, it can push many borrowers into bankruptcy, making lending more risky.
So Gold that was deflationary over long periods was not a 'real' currency? Your economic arguments are simply wrong. Deflation by money destruction will hurt the economy, like in the Great Depresion. Deflation that happens because of increased in production will not destroy lending. The real intrest rate will still be positiv.
The real story is more complicated since I have ignored money demand.
Note that I have not said Bitcoin will become a 'real' currency. There are real problems, Im just saying that your argument is wrong.
bitcoin's inherent deflation is not by money destruction nor increases in production, thus these arguments are not relevant, although true within its own context. since bitcoin, like gold, has a finite quantity, deflation is mostly due to demand, which you have chosen to ignore in your argument.
In a country drowning in debt, both public and private, limits on the ability to borrow money could be a welcome development. It all depends on how much deflation discourages people from lending money. This is derived from the expected rate of return of the borrowed money vs the current rate of deflation.
This is a statement of political ideology and not one of settled fact. If the comparison you're making is to the USD, our borrowing costs are so low that there are lots of activities for which short-term potential inflation is more than offset by gains to the economy. This isn't voodoo macroeconomics; it's no more complicated than the decision between paying down a home mortgage and investing that money for a return.
This would be a limit on borrowing money for EVERYONE, regardless of their ability to pay it back. Lots of people overeat, so I guess we should jack up the price of food.
What you have just proposed is an increase in the cost of starting a new business, no matter how good an idea is. Just because the banks are bad at determining who can and can't pay back a loan doesn' mean those who CAN should pay a tax.
So inflation isn't a tax on people who save their money? Or, by artificially preventing deflation through a central bank we aren't subsidizing the cost of borrowing through this tax?
Nonsense. You can simply state that can simply agree to pay back an amount of bitcoin equivalent to a certain amount of gold, the most stable commodity there is. Or dollars. Or bread sticks. Or anything else you prefer.
What you are describing is a currency peg. This is what the Silk Road does with the black market items people buy on there with bitcoins. This is an acknowledgement by the Silk Road of bitcoins being a great medium of exchange due to the difficulty of tracing them, but a horrible holder of value due to their volatility.
But then you aren't really borrowing/loaning bitcoins. The transaction is taking place in whatever currency you're agreeing to pay it back as. Say currently 10bitcoins = 1oz gold. So I agree to loan you 10bitcoins, and you agree to pay me back their equivalent price of 1oz of gold +interest in 5 years in bitcoins. The loan is being taken out based on gold, and bitcoins are just an intermediary, but they are essentially acting as a certificate for that gold.
i'm not sure what his definition of a "real" currency is, but to me, a "real" currency is one in which all transactions occur within that currency. if you use bitcoin, but somewhere along the lines of a transaction you exchange mediums, it's no longer "real", you're just bartering.
And yet despite all the deflation people are conducting transactions in bitcoin.
How long do you have to hold on to money before it's hoarding? A second? A minute? An hour? A year? The vast majority of money is hoarded because most people don't earn a dollar on one hand an immediately spend it on the other.
> And yet despite all the deflation people are conducting transactions in bitcoin.
Deflation is something that happens to an economy; it can be a result of constrained supply of currency in the economy, but constrained supply of bitcoin now, which accounts for a very small share of the currency used in exchanges in any coherent economy isn't deflationary, even if the supply characteristics of bitcoin are such that it would be deflationary if it were a dominant currency.
> How long do you have to hold on to money before it's hoarding? A second? A minute? An hour? A year?
Probably best to say that any money held in cash is "hoarded", and characterize hoarding by degree rather than as a binary quantity.
> The vast majority of money is hoarded because most people don't earn a dollar on one hand an immediately spend it on the other.
People who deposit money in a bank (which amounts to a loan, even though it may be at an effective zero or, given fees charged by the institution, negative interest rate for some accounts) are not hoarding it. And, neither, for the most part, is the bank, who is turning around and investing/lending most of the funds deposited.
If people are cashing their paychecks and stuffing the money in their mattresses, then, yeah, they are hoarding it, but that's not all that typical.
Any USD to bitcoin exchange price reflects both a bitcoin buyer and a bitcoin spender (seller). The bitcoin exchange price can only increase through people spending bitcoins on USD. Besides, if this argument that "the only rational thing to do if you own a deflationary currency is to hoard it" is correct, then that implies that "the only rational thing to do with an inflationary currency is to buy a deflationary currency regardless of the exchange price."
Ummm, no. The bitcoin price can only go up if people are spending US dollars, Euros, etc on Bitcoins, not the other way around as you describe it. You do understand how currency exchanges function, do you not? If people are goign to an exchange, giving the exchange bitcoins, and then taking dollars for said bitcoins, the ratio of bitcoins to dollars within the exchanges holdings has just gone up, lowering the number of dollars it takes to buy a bitcoin....... so if the bitcoin takes MORE dollars, euros, etc to buy, then the opposite must be occurring.
"And yet despite all the deflation people are conducting transactions in bitcoin."
Yes, because how else are they going to buy weed, ecstacy, cocaine, illegal electronics, steroids or any other banned substances that form the backbone of the commodities people are actually purchasing with bitcoins. Have you ever been to the Silk Road site? I bet you haven't. Here's a hint: you won't be able to use your browser to go, so look up Tor.
Edit: For the noninformed who say "dollars?" There is a huge incentive to use Bitcoins on Tornet sites like Silk Road to trade black market goods. This is because Bitcoins can cross international borders and are encrypted, are not subject to bank regulations, etc. They are essentially difficult for Law Enforcement Agencies to trace, but not impossible.
> And yet despite all the deflation people are conducting transactions in bitcoin.
Did you know that prices in Silk Road are pegged to USD? As it should. Either way, that's called argument ad populum. "And yet despite no revenue sources people are buying dotcom stocks"...
> How long do you have to hold on to money before it's hoarding?
This is called moving the goalposts. It's also a stupid argument in many other ways, by the way, and you should know better. "Evolution does not happen because not every single organism gives birth to one of another species"...
Bitcoin as payment is a novelty. And it's difficult to point to activity on the exchanges as evidence for bitcoins acceptance as a currency, since it's not possible to separate out the speculators from those that honestly think bitcoin has a future.
I did some bitcoin transactions as a lark a few years ago. It was an interesting experiment and I wanted to try it up close.
If it wasn't for the deflationary aspect, I might love it; but it's not, and it won't be changed to it, because the bitcoin community thinks deflation is the bestest thing ever.
You say it does not, I say it does. If an economy can handle fluctuation in the value of money in one direction surely it could do so the other way too. In fact, this is precisely what has happened over thousands of years. The constant loss of value of money without limit is a relatively recent invention. In centuries past prices would go up, then back down, then back up, then back down and so on. If our unsophisticated, foolish and stupid ancestors could handle such fluctuations certainly the enlightened and modern people of today could as well.
Before the modern era, economies were quite fragile, falling into crisis frequently and severely (see http://en.wikipedia.org/wiki/File:US_Unemployment_1800-1890....). The one saving grace was that in those times most people were farmers, and thus were self-employed (and could at least eat).
In my lifetime the economy has been quite fragile too. I'm not convinced that the booms and bust of old are any worse than they are today. Sure these days they're smoothed out more but the pain lasts longer.
When removing a bandaid do you simply rip it off all at once or slowly peel it back? Which is the superior method?
The whole point of having a country with a central bank that can print money at will (fiat currency), is to have full control over inflation/deflation. When the increase/decrease of the monetary supply is controlled by outside factors, whether it's tied to shiny yellow rocks, or computed bits, or another country's currency, then you run into problems like this:
- Bank runs. It's standard practice that banks will loan out more money than they have in deposits, because it's unlikely that all their loans will go bad at once, and/or it's unlikely that all their deposits will want their money back at once (this is known as fractional reserve banking[0]). But if your currency is anchored to something fixed, this can happen. FDIC insurance is guaranteed in the US because even in some absurd financial economic meltdown scenario, Ben Bernanke can print out USDs to make every depositor whole, if necessary. The only "cost" to that kind of "bailout" is the potential inflation. But you can't do this as a government if your monetary supply is limited because it's fixed to something you can't directly control. The government can borrow money and then make depositors whole, but those that you borrow money from may impose conditions, and those conditions may exacerbate the problem you're trying to solve. See: Cyprus[1].
- The deflation-debt spiral[2]. Yes, inflation "punishes savings," but deflation punishes debt. Generally, debt becomes a big problem in recessions. If you owe $20,000 on your car, and you get a 20% wage cut because your company can only sell goods at 20% of the price they were previously able to, your debt does not go down to $16,000. It's still $20,000. So more of your income will go to paying off debt, which means less of it will go to discretionary spending, which means even more economic slowdown, which means more deflation, which means more wage cuts, which means debt becomes an even bigger burden, etc.
The only real danger to a fiat currency is whether your government's central bank will be so irresponsible with the money supply that inflation spirals out of control. If you're a resident of a third-world country like Zimbabwe[3], transacting in bitcoins will be great because you'll happily trade potential deflationary pain for not being at the whim of a dictator that will print money to increase inflation to one thousand trillion bazillion percent. But if you're the resident of a first-world country which has a responsible central bank, then increasing the monetary supply to fight off deflation is a very good thing.
>> "The whole point of having a country with a central bank that can print money at will (fiat currency), is to have full control over inflation/deflation."
This exact idea is at the heart of George Soros' description and prescription for the Euro financial crisis, whereby individual Euro members do not control the European Central Banks and cannot control their own situation to their likings: http://www.spiegel.de/international/europe/george-soros-on-t...
And there was I thinking that the whole point of a central bank and fiat currency is so that the ruling elite can fund the things that they want to fund (typically war and standing armies, as the line items that were hardest to pull off without fiat currencies, but also graft, bread, circuses and targeted entitlements for various means ranging from rewarding and enriching key supporters to buying the grudging support of the broader populace) without causing the same level of social unrest as has historically been caused by direct confiscatory taxation or dilution of precious metal coinage.
Compare events relating to coinage, taxation, and war in the Roman era or late Medieval era versus the modern age, or versus the first well-documented Chinese era of paper currency.
There is a lot to be said for having an elite that thinks twice about going to war or enriching their immediate supporters, because raising the funds to do so will cause riots. Unfortunately those at the top can get away with far more in this era of ubiquitous use of fiat currencies, and the world suffers for it.
Someone who knows more about this stuff than me: would it be possible to create a crypto-currency that avoids the problems existing currencies have with (inf|def)lation?
I'm thinking of a system like bitcoin that also acts like a central banker in regulating the money supply, perhaps by linking the availability of new coins to the current supply/demand.
Yes, and from what I understand some people have made Bitcoin competitors that tend to grow.
They haven't taken off, because 1) we already have a crypto-currency, and 2) they don't have the "get rich quick with this new currency" because they aren't deflationary so they don't attract the speculators.
Some people will say "we need the speculators in order to start the market," but the speculators have ruined the ability to use Bitcoin as a currency. Just because the light is better over there instead of here where you lost your keys doesn't mean you should look over there.
