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Free Minds & Free Markets

Hey, Paul Krugman: Here’s What Bitcoin Is Good for

To assume that governments do better at keeping currencies stable ignores parts of the world.

BitcoinsAlexandersikov / Dreamstime.comIt will probably come as no surprise that Paul Krugman is a cryptocurrency critic. The Nobel-winning economist and New York Times columnist is a known skeptic of laissez-faire alternatives to government interventions, and it makes sense that this doubt would carry over to distributed digital money. In 2013, he went so far as to claim that "bitcoin is evil" because he dislikes the "libertarian political agenda" he perceives at its core.

Recently, Krugman issued a more measured take on why he distrusts cryptocurrency. His opposition boils down to two things, transaction costs and volatility, which I'll get into more in a minute. Admirably, he admitted that he indeed could be wrong, and issued a challenge: "if you want to argue that I'm wrong, please answer the question, what problem does cryptocurrency solve?" I am happy to help.

Krugman begins his article with a high-level sweep over the contours of monetary history, starting with metallic standards, and then banknotes, to central bank-created "fiat" money, and finally digital payment systems managed by third parties. He says that the prime mover of monetary destiny is a currency's propensity to reduce the frictions of making a transaction. Governments are so superior in the creation and management of money, in this view, so it is natural and indeed beneficial that we have evolved this standard. Cryptocurrencies challenge this government monopoly, so they are therefore undesirable or perhaps even "evil."

As he puts it: "cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years. Why would you want to do that? What problem does it solve? I have yet to see a clear answer to that question."

So, what is cryptocurrency good for, anyway?

Contrary to Krugman's argument that cryptocurrencies present an insurmountable level of transaction costs to an exchange, they can actually be the only remaining option when fiat currencies have failed.

The reason that bitcoin is so attractive as an alternative currency is because it is a censorship-resistant means of payment online regardless of what happens to existing financial institutions. The blockchain technology at its heart replaces the need to rely on a trusted third party–like a central bank, or a commercial bank, or a credit card company—to make payments online. Transfers are facilitated by a network of distributed computers that blindly run the code to create new currency at an expected rate (which means no unexpected inflation) and transfer money between parties. So long as you hold the cryptographic private key to your cryptocurrency files, there is nobody on Earth that can inflate away or confiscate your money.

For one timely but tragic use case, we can look to the ongoing monetary crisis in Turkey. Last week, the lira began plunging in value to record lows after U.S. sanctions and rocky responses from the Turkish government spooked investor confidence in domestic markets. This comes on the heels of years of poor monetary and fiscal management by the Turkish government. Things had deteriorated so much that the economists and financial journalists who reported honestly on the monetary situation feared retribution from agents of the government. Now, the Turkish economy is caught in a downward spiral of inflation, capital flight, and probable capital controls.

Krugman argues that "fiat currencies have underlying value because men with guns say they do. And this means that their value isn't a bubble that can collapse if people lose faith." The Turkish government has a lot of guns indeed, and yet the lira is still losing more value each day.

People will try to save value in the face of an inflationary event through any possible means. They will try to exchange their increasingly valueless domestic currency for any kind of asset or safer foreign currency so that they can salvage whatever value for themselves that they can. But governments try to crack down on this kind of thing, and people of lower income classes often do not have the means or connections to monetarily "get out" while they can.

This is a perfect use case for cryptocurrency, and in fact it is a route that others in Cyprus, Greece, and especially Venezuela have turned to in hard times. We can expect that others in Turkey may also turn to cryptocurrency.

Bitcoin is often dismissed as "volatile," and Krugman repeated this criticism. Yet bitcoin's volatility pales in comparison to nations in monetary distress and is therefore very attractive in those cases. As bitcoin use becomes more widespread, it is possible that its volatility will flatten out over time.

People in developed, stable economies with access to traditional banking options take it for granted that we will always be able to get the funds to make the payments that we want. But this is not the case in much of the world, nor is it always ensured for us.

So, to answer Mr. Krugman's question most simply: Cryptocurrencies are good for facilitating permissionless direct digital exchange when no other institution can be counted on to do so. The value of a cryptocurrency like bitcoin is therefore not entirely "[untethered] to reality," but rather is partially backed by the knowledge that a holder can always exercise this fundamental ability to exit.

Of course, in the grand scheme of things, bitcoin is an infant currency. There are a lot of kinks to iron out. It is true that bitcoin is currently much more volatile than established currencies like the dollar. A lot of people don't like the idea that other people would be given the ability to transact however they would like. They will surely dislike cryptocurrency for that reason. And there are technical improvements to be made as well. Right now, engineers are working on symbiotic technologies to interact with the bitcoin blockchain that will hopefully increase the throughput and affordability of transactions.

A skeptic may counter that bitcoin's use case as a "currency of last resort" does not justify its prevailing market price of several thousand dollars. Well, maybe not. But it is simply ignorant to claim that cryptocurrency has not presented a major innovation in the fields of money and commerce. If that innovation is as revolutionary a benefit as its proponents claim, then maybe that market price isn't as misaligned as it might appear to a neophyte. On a long enough time horizon, we may all be cryptocurrency holders.

Photo Credit: Alexandersikov / Dreamstime.com

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  • chemjeff radical individualist||

    So is this the solution to the Alex Joneses and the Stormfronts out there when traditional institutions refuse to do business with them?

  • Freddy the Jerk||

    Wow.

    You're giving Tony a real run for his money in the "Most Retarded Strawman Argument of the Year" competition.

  • Kyfho Myoba||

    Actually, not a straw man, that's a good idea.

  • Rich||

    "please answer the question, what problem does cryptocurrency solve?"

    "please answer the question, what problem does the Federal Reserve solve?"

    "please answer the question, what problem does the National Debt solve?"

    ...

  • TLBD||

    Guys like Krugman seem obsessed with money as if it is any more than a representation of the value of property.

    Fiat, to me, only has the slight advantage in that it tricks people into investing by distorting signals. This can work out well, but can also lead to disaster, especially when the economy cannot deal with a critical number of bad investments.

  • Leo Kovalensky II||

    That's easy. The national debt solves the problem of keeping elected officials in office when they make promises to provide services that the people aren't willing to pay for. The Federal Reserve solves the problem of how we can continue deficit spending in light of an enormous national debt.

  • GlenchristLaw||

    The. U.S. dollar has lost over 98% of its value since the establishment of the Federal Reserve, which is committed to forcing it to decay an additional 2% per year at a minimum.

    Pot, meet kettle.

  • swampwiz||

    Fork U

  • Juice||

    "fiat currencies have underlying value because men with guns say they do. And this means that their value isn't a bubble that can collapse if people lose faith."

    This is juvenile thinking. I can't believe this guy won a Nobel Prize.

    Of course the money will lose value if people lose faith despite any guns or threats. Look at Venezuela or any other country that has undergone hyperinflation.

    What gives money value is the knowledge or belief that others give it value and will continue to value it tomorrow. People want money because other people want money. It's that simple. So a form if currency isn't easily duplicated, then people will tend to have some faith in its value since they know that value isn't easily diluted. Cryptos do this better than government fiat currencies.

  • Scarecrow Repair & Chippering||

    I can't believe this guy won a Nobel Prize.

    The economist won the Nobel Prize. Then it's like Krugman got tenure and decided to be a Progressive shill for the NYT instead of thinking for a living.

  • Cynical Asshole||

    Then it's like Krugman got tenure and decided to be a Progressive shill for the NYT instead of thinking for a living.

    To be fair, it's a pretty easy way to make a living, and like you said, it doesn't involve any thinking or hard work for him. Kruggernuts is exhibit A for the old axiom that "a mind is a terrible thing to waste."

  • Juice||

    *if a form of currency...

  • LeaveTrumpAloneLiberal-tarian||

    What I appreciate about Bitcoin is it's stability. You see, six months ago, when the totally unfair accusations against Paul Manafort resulted in an indictment, I converted all my USD to Turkish Lira in a fit of rage and resentment against Deep State operatives. And, today, if you look at the lira/btc conversion rate over that period even a Democrat would have to admit that it's rock solid. Another reason I don't like fiat currency— volatility.

  • loveconstitution1789||

    Bitcoin and Cryptocurrencies keep government out of the power structure. That is why people like him hate this type of money.

  • JesseAz||

    Im just shocked that Krugman didn't decry the external costs of Bitcoin leading to global warming.

  • Diane Reynolds (Paul.)||

    To be sure, Bitcoin is racist.

  • Cynical Asshole||

    In 2013, he went so far as to claim that "bitcoin is evil" because he dislikes the "libertarian political agenda" he perceives at its core.

    Ah yes, the nefarious "libertarian political agenda" to leave people alone. Truly a statist asshat like Krugman's worst nightmare.

    Krugman argues that "fiat currencies have underlying value because men with guns say they do. And this means that their value isn't a bubble that can collapse if people lose faith."

    In addition to being wrong on the face of it, the fact that Kruggernuts goes to the appeal to state sanctioned force tells you everything you need to know about him. Christ, what an asshole.

  • ||

    Admirably, he admitted that he indeed could be wrong, and issued a challenge: "if you want to argue that I'm wrong, please answer the question, what problem does cryptocurrency solve?" I am happy to help.

    Links article containing 5 'answers'. 2 of which aren't answers or are answers that bitcoin doesn't solve anywhere near adequately while other solutions already exist, 2 of which are oxymoronic, and 1 is rather literally "because it's not money!", answering a question no one asked.

    Krugman's a moron but at least when he says things like "fiat currencies have underlying value because men with guns say they do." he knows which side his toast is buttered.

  • Weigel's Cock Ring||

    The "Tony" signal has been lit!

  • Earth Skeptic||

    So, wait, at the very least cryptocurrencies provide anonymity and privacy. And I thought Krugman and his NYT fellow travelers all had their panties twisted about big companies (looking at you Facebook) spying on people. Standard currencies allow the feds to track our transactions. But Krugman is against government spying, too, right? Or is he for that? Sign me

    -Confused

  • ||

    So, wait, at the very least cryptocurrencies provide anonymity and privacy.

    No. Or, at the very least, it depends on how you define anonymity and privacy.

  • Diane Reynolds (Paul.)||

    He says that the prime mover of monetary destiny is a currency's propensity to reduce the frictions of making a transaction.

    He is correct about this.

    Governments are so superior in the creation and management of money, in this view, so it is natural and indeed beneficial that we have evolved this standard.

    I think there's an argument to be made that at least so far, the idea that government creating a unified standard of money helped things along when transitioning into modern times. Whether this will remain the case in perpetuity is unknown, and seems unlikely to me.

    "cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years.

    Only insofar as cryptocurrencies *might* introduce some of the old problems with money before it was standardized. Cryptocurrencies-- fwiw attempt to solve the issue that modern governments are desperately trying to debase their own currencies.

    fiat currencies have underlying value because men with guns say they do. And this means that their value isn't a bubble that can collapse if people lose faith

    About this he's absolutely wrong, and history proves that.

  • JFree||

    Bitcoin is crap. Blockchain has a world of potential that goes way beyond cryptocurrencies.

    Krugman opining on technology just reminds me of his old 1998 observation about 'the Internet':

    The growth of the Internet will slow drastically, as the flaw in 'Metcalfe's law'-which states that the number of potential connections in a network is proportional to the square of the number of participants-becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.

  • Diane Reynolds (Paul.)||

    Holy shit, Krugman said that? That's priceless. I'm hanging on to that one.

    I agree with you on Bitcoin being crap and blockchain's potential, btw.

  • CE||

    No one could have predicted cat videos though.

  • Rock Lobster||

    Krugman argues that "fiat currencies have underlying value because men with guns say they do. And this means that their value isn't a bubble that can collapse if people lose faith."

    What an astonishingly stupid statement--even for Paul Krugman. On the other hand, it certainly clarifies what forms the basis of his moral and political worldview. What evil assholes the educated leftist cadre are.

  • CE||

    Krugman argues that "fiat currencies have underlying value because men with guns say they do. And this means that their value isn't a bubble that can collapse if people lose faith."

    So my Confederate Dollars are still worth what they say they are?

  • Ben of Houston||

    If you actually had any in decent shape, they'd be worth a small fortune in a museum.

  • JFree||

    They're worth a considerably smaller fortune on EBay

  • Eman||

    My uncle's argument about btc was "it only has whatever value people think it has." Of course that's true, but is there anything that isn't true for?

  • Kyfho Myoba||

    Nope. Nothing. There is no such thing as "intrinsic value". All value necessarily implies a valuer.

  • swampwiz||

    The reason that fiat currency will always be king is because, as the American fiat currency says, it is "legal tender for all debts, public or private".

    And let's not even get into the scam of being someone who "invents" a currency and thus gets economic power because of the fiat currency that he bought at a price of $0.

  • Kyfho Myoba||

    Bitcoin has some ridiculously high transaction costs, but there are a couple of cryptos that actually have lower transaction costs than regular banking and/or credit cards. The DASH crypto has costs of 2 cents or less, and is about as anonymous and private as you want it to be. Only Monero is (just a little bit) better.

    So we're down to volatility as the only roadblock.

  • AD-RtR/OS!||

    Krugman has a history of ignoring relevant facts.

  • OyVey!||

    The real problem with cryptocurrencies is that there is no limit to how many currencies can exist. Thus, the increased supply of cryptomoney can reduce its value. Government created currencies are limited to one per government.

    It's true that if a government bank prints more money, it will reduce its value. But government banks are aware of this and thus have an incentive not to do so. Creators of a new cryptocurrency might be aware that it will reduce the value of cryptomoney, but they will not care because they still created value for themselves and the decreased value will be borne by those that own other currencies.

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