It's quite common for liberal economist Paul Krugman to ruffle the feathers of Republicans with his Keynsian-infused biweekly columns. But today, The New York Times columnist rattled a more obscure subset of society: the reclusive cyber geeks of the Bitcoin world, who are letting their outrage be known. For the uninitiated, Bitcoin is a digital currency that can be exchanged for goods and services at participating vendors (for practical purposes, there are very few well-known organizations that accept them outside of WikiLeaks). What does Krugman think of this novel currency, which has no transaction fees and doesn't rely on a central bank? After championing it as a "good investment" (its value has "soared" in comparison with the dollar), he dismisses the currency as a workable model for society:
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.
Heresy! The dismissal of the currency has triggered a range of emotions from the Bitcoin community and even poisoned the well with liberal vs. conservative infighting in a place first-and-foremost united behind this strange currency. Many initially reacted with euphoria that a Nobel-winning economist had acknowledged their obscure currency:
At the Bitcoin forum, Bitcointalk.org, evorhees expresses initial delight:
OMG!!!! Krugman wrote an article on Bitcoin!?!?!?!
That is actually serious news!
User elux responded in kind:
Awesome to have Krugman with his Nobel clout discussing Bitcoin.
But the delight of new-found exposure didn't last long. In a post titled "Liberals HATE Bitcoin," Evorhees writes:
This is the same "economist" that still doesn't understand Bastiat's broken window fallacy.
If Krugman's against it, Bitcoin must be absolutely amazing!!
A number of other Bitcoin users began commenting on Krugman's wall and complaints of censorship began swirling. molecular writes:
I posted a comment. No off-topic or abusive content. Well, I call him childish, is that abusive?
User hugolp says he/she was censored as well:
Krugman is known for censoring comments he does not like. In fact, he was getting schooled in his own blog (even by other keynesians) so he lowered the size allowed for the comments so people could not elaborate a propper answer to his posts. Krugman's blog at the NYT is more of a political propaganda platform than anything else.
But as Krugman began receiving attacks for his liberal leanings, other Bitcoin users began defending him, suggesting a more complex political dynamic within the community. User ampirebus writes:
im a liberal and a bitcoin enthusiast, by the way krugman wasnt very hash on bitcoin especially compared to republican/conservative journals... he said it was a good investment for early adopters but didnt look realistic for a long term gain or viable as a replacement for the dollar... which is a pretty high bar
it really gets my goat when i see people turning everything into a political faction tribalist war or something
you should feel good inside that one of the smartest minds in economics looked into bitcoin seriously
User hugolp adds:
I actually though the post wasnt that bad. I was specting Kruggy to be much more agressive towards Bitcoin.
Finally, others took on Krugman's arguments on the merits. User osmosis notes that Krugman says "The actual value of transactions in Bitcoins has fallen rather than rising." He/she asks "Is there any data to support his claim he makes?" Responding, user evoorhees writes:
Depends on the timeframe you use. If you measure from the price peak, then transactions have fallen. If you measure from the beginning of the year, transactions are up significantly. Stats are always deceptive =)
On the transaction point, it's important to realize that as services consolidate the transactions visible to the blockchain may fall even though real transactions increase. For example all the trades between mtgox or instawallet or flexcoin accounts won't show up on the chain.
And lastly, andrewbadr takes on Krugman's assertion that "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":
Bitcoin *is* facilitating transactions. The Bitcoin economy is growing, slowly. There are a lot of people, including funded startups, working on making it useful in more cases. It's far, far too early to say that Bitcoin isn't facilitating enough transactions.
Bitcoin hoarding is not due to the fixed total supply, but due to the expectation that the Bitcoin economy will grow. If there was built-in inflation at 3% and the economy was growing at 20%, hoarding would still happen.
No matter how much hoarding is happening, there will be some exchange rate from Bitcoins to dollars. The existence of a traded exchange rate is proof that some people think Bitcoins are not undervalued. These people will be willing to spend their Bitcoins.
The claim that Bitcoin is worthless because of guaranteed deflation is self-contradicting.