> When you transfer bitcoins to someone else, it’s as if you handed over a paper bag filled with $100 bills in a dark alley.<p>This analogy is so wildy off the mark. In fact, an opposite scenario is more apt; a transfer of bitcoins is like handing someone a bag filled with cash, and then announcing it to everyone else in the world so that we can all agree on who has possesion of what. Only now you have a robot or other faceless surrogate perform the transaction for you, and (ideally) nobody knows which surrogates, or addresses, map to which people. The fact that Krugman's analogy botches the primary mechanism that makes crypto-currency work is disappointing.<p>Edit: wording.
I've always heard Krugman referred to in reverential terms, so this really leaves me scratching my head.<p>Setting aside the near ad-hom based on the fact that people use currency for drugs, he seems to take the idea that bitcoin is anonymous for granted. That means he doesn't understand what he's talking about, and there can't be two ways about it.<p>Bitcoin can be considered pseudonymous, and in a system where exchanges need to abide by money transmitter laws combined with the fact that every transaction is a matter of public record, the situation is murky at best. And when you actually think about it, if people must identify to exchange bitcoin for other currencies, that might mean a sea change in the transparency of financial transactions.<p>Krugman, if you read this, think of your goddamn reputation and do some research! There are about a million exciting inferences to be made based on the hard rules of the bitcoin protocol. Start here. <a href="http://bitcoin.org/bitcoin.pdf" rel="nofollow">http://bitcoin.org/bitcoin.pdf</a>
First, take a gander at M0, to get a sense of how much money has been printed:<p><a href="http://research.stlouisfed.org/fred2/series/BASE" rel="nofollow">http://research.stlouisfed.org/fred2/series/BASE</a><p>That shows you what <i>actually</i> happened to the money supply. In other words, the central factual claim made by Krugman is false:<p><pre><code> The practical misconception here — and it’s a big one — is
the notion that we live in an era of wildly irresponsible
money printing, with runaway inflation just around the
corner. It’s true that the Federal Reserve and other
central banks have greatly expanded their balance sheets —
but they’ve done that explicitly as a temporary measure in
response to economic crisis. I know, government officials
are not to be trusted and all that, but the truth is that
Ben Bernanke’s promises that his actions wouldn’t be
inflationary have been vindicated year after year, while
goldbugs’ dire warnings of inflation keep not coming true.
</code></pre>
As that graph shows, we are indeed in an era of out of control money printing[0]. Moreover, food[1] and energy[2] prices are through the roof, and housing is being artificially propped up by QE4 -- in which dollar holders are diluted to the tune of $85B per month[3] so that the government can take mortgage-backed securities off the hands of their favorite banks. The CPI intentionally excludes[4] the consequent energy and food price increases (ostensibly due to their "volatility") thereby systematically understating the consequences of printing 85 billion dollars per month, every month, to infinity.<p>[0] <a href="http://research.stlouisfed.org/fred2/series/BASE" rel="nofollow">http://research.stlouisfed.org/fred2/series/BASE</a><p>[1] <a href="http://research.stlouisfed.org/fred2/graph/?g=8l2" rel="nofollow">http://research.stlouisfed.org/fred2/graph/?g=8l2</a><p>[2] <a href="http://goo.gl/R4r0f" rel="nofollow">http://goo.gl/R4r0f</a><p>[3] <a href="http://www.forbes.com/sites/afontevecchia/2012/12/12/qe4-is-here-bernanke-delivers-85b-a-month-until-unemployment-falls-below-6-5" rel="nofollow">http://www.forbes.com/sites/afontevecchia/2012/12/12/qe4-is-...</a><p>[4] <a href="http://www.bls.gov/cpi/cpifaq.htm#Question_13" rel="nofollow">http://www.bls.gov/cpi/cpifaq.htm#Question_13</a>
I think Krugman hit the nail on the head with some comparisons here, such as of being a bit-bug is no different than being a gold-bug and how money cannot stand outside the system. That's exactly what the value of money is-- it's other people's belief in whether other people believe in it, which actually is pretty much how social networks work.<p>The thing I never liked about bitcoin was the whole let's prevent inflation by not allowing the 'printing' of money bit that are baked into how the bitcoin supply expands. I don't see any reason to expound on that other than to make a political, rather strongly libertarian-leaning, statement.
He totally skipped over the best argument for Bitcoin, the reliance on middle-men when exchanging money online. You either have Paypal or some other kind of credit card processor that takes %3 or more of every transaction.<p>If only the value of BTC would settle down a bit, it would make a great way to facilitate micro-transactions.
I don't know if I agree with everything Krugman says here but the more I think about bitcoins and real money the more I realize how much better life would be if the world of abundance would finally get here.<p>The idea of treating electricity and clean water (among a whole host of other resources) as abundant as the air we breathe is one worth pursuing.
Not sure I buy the most persuasive argument,<p><i>bitcoins are the ultimate fiat currency, with a value conjured out of thin air, paper currencies have value because they’re backed by the power of the state</i><p>Dollars and yuan are fiat currency. What difference does it make that bitcoin holders aren't back by a state? Is anything going to change if countries convert their reserves to bitcoin? How many bitcoins does the US own?<p>This seems like an argument that will evaporate given enough time.
Krugman: "I guess you could make that case if the money we actually have were misbehaving. But it isn’t."<p>Translation: "Our fiat currency hasn't failed this time... yet. Ipso facto, it will never fail. Anyway, it's not worthwhile to try to forsee future problems until they actually happen."<p>I'm not a fan of CNBC, but every once in a while they say something decent.
<a href="http://www.cnbc.com/id/48349503" rel="nofollow">http://www.cnbc.com/id/48349503</a>
“'Every single fiat currency in history has collapsed, this time will be no different.'”<p>I'm not predicting the demise of any major currency. However, I can't say I don't have my concerns about current practices, and history does not bode well.
I see BitCoin as an opening gambit not an end position. It's likely that BitCoin will bubble, froth, and ultimately collapse, but that it will be replaced by something of similar form with certain structural improvements.<p>I read (wish I could link to give credit to the commenter) a nice analogy today - of BitCoin being the Napster of the space, innovator but not the ultimate winner.<p>Krugman's point as to its necessity is valid, however I still see it as likely that we'll end up with a currency of consensus, which has exchange value because a critical mass of people believe in its value and are prepared to act on that for a sustained period of time.
The first dot-com crash and the housing crash were both painfully obvious, but things went on swimmingly in spite of the obvious foolishness of it all long enough for people to forget their skepticism and buy in. Then, there weren't anymore people to buy in and both markets crashed.<p>It's going to happen with the dollar too. Everything is going to keep going fairly OK, even though we all know it shouldn't, until the day it doesn't.<p>Just because it hasn't crashed yet doesn't mean it isn't capable of or likely to do so.
Am I the only one amused by the Winklevoss twins declaration of "faith in a mathematical framework that is free of politics and human error"?<p>1. You don't need faith in math. That's the point.<p>2. Just because it's based on math doesn't mean it can't all come crashing down.<p>3. If you think you can invest money in math, please contact me privately about some exciting differential equations you may be interested in.
I usually like Krugman, but this column is botched. Krugman does not get bitcoin protocol but is a bit better with Bitcoin.<p>Just reading about "complicated math problems" make my brain hurt. There is nothing complicating in a hash function except designing it properly.<p>While there are valid attacks on bitcoin he is not making them.
Krugman: "bitcoins are in a sense the ultimate fiat currency, with a value conjured out of thin air"<p>I recently did a little reading into the mechanisms behind bitcoin, and am intrigued. I was skeptical but certainly understand the merit now, though I don't understand enough details (especially the transaction-fee-only endgame) to rule out vulnerabilities. However, it does seem clear that the miners actually perform a valuable service of ensuring the integrity of the bitcoin system. So, for Krugman to say that the bitcoins are created out of thin air is disingenuous, if not surprising.
Krugman really dropped the ball on this one. He really needs to sit down with a technologist and have them explain to him how bitcoin works before he writes anymore critiques of Bitcoin.<p>However, looking pass his technological misunderstanding, he does raise some good points about why bitcoin can not be the idealistic currency people want it to be.