Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, has been patting himself on the back a lot lately. The departure of Bill Gross from Pimco, Krugman rightly argues, was ultimately about Gross betting spectacularly wrong on the U.S. economy. As Krugman pretty much predicted what would happen, he’s making sure everyone knows it both because (a) the guy is genuinely a teacher at heart, I believe, and sees lessons here and (b) he flat out loves being right. Like the gambler on a hot streak, Krugman yesterday doubled down, telling the world he was also right about Bitcoin. The cryptocurrency’s value has been in free fall of late, far from the highs set last year. While that fact is inarguable, Krugman’s contention that Bitcoin is a libertarian con game most certainly isn’t. Further, Krugman seems to believe the only value in Bitcoin is based on its clever solution to an old computer science problem. On that, he could scarcely be more wrong.
But then Krugman, for all his superior macroeconomic analysis during the financial crisis and beyond, has never been much of a seer. In fact, one of his most spot-on columns ever was all the way back in 1998 when he quite literally wrote: “Why most economists’ predictions are wrong.” In a brief essay ostensibly set up to point out the limitations of a book written in the 1960s that tried to look ahead to 2000, Krugman added some predictions of his own about a future much more near to the date of publication. One stands out as perhaps the most foolish thing written by a Nobel winner in the past half century (Hey, if Krugman can be hyperbolic, so can I):
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.
English: Paul Krugman at the 2010 Brooklyn Boo...
Krugman hates Bitcoin, but then he wasn’t very bullish on the internet either.
Now, the reason for dredging this up again — it was tossed around last year when Bitcoin was rising and Krugman was declaring it “evil” – isn’t to suggest that being wrong once invalidates all the man’s other work. But as I wrote in March (“You Don’t Need A Nobel Prize To Be Wrong About Bitcoin, But It Helps“), he was wrong about Bitcoin then and very likely still is now. And the problem ultimately has to do with the old adage that people tend to overestimate the possibility of technology in the short run but wildly underestimate it in the long run.
Name your own price
Here’s an example from the land of speculative frenzy cum even better reality, with a massive dose of pain thrown in between. Consider Priceline, the online travel broker. A dot-com poster child back in the late 1990s, the stock was at $497 when it went public, not terribly long after Krugman compared the internet to fax machines. It would double soon after and then join in the dot-bomb implosion. The stock lost more than 99% of its value by December of 2000, falling below $9 per share and wouldn’t reliably escape the $20s until 2006. Priceline today trades for $1139 per share, up 14,748% from its lows.
When, exactly, were you supposed to point and laugh at everyone who invested in the company? When were you supposed to call the idea of selling off excess hotel inventory a “con”? It’s impossible to know, of course, if the trajectory of Bitcoin will in any way resemble Priceline’s. For one, Bitcoin would have to continue dropping down to about $12 from current levels (around $305 as I write this, but very volatile) to match the fall of Priceline. For another, Priceline is a company and Bitcoin is a combination of a currency and a commodity, the latter a function of the “mining” that’s done to create the coins in the first place. The potential of Bitcoin far exceeds anything Priceline has done.
Conflating zealots and zeal
Krugman seems unable to see past the cadre of anger that exists among a minority of the Bitcoin community: “Some extremely wealthy libertarians have a lot to answer for if these sorts of ppl lose all due to believing in them,” he quotes Izabella Kaminska, of the Financial Times as saying. And, indeed, if you spend any time at all on Bitcoin forums, you’ll find a fair number of people spouting nonsense about the evils — there’s that word again — of fiat currency like the U.S. dollar. Those zealots see a Bitcoin world as a cure for inflation, which they believe has destroyed the value of the dollar and impoverished us all.
Krugman, however, is constantly pointing out that not only has inflation been quiescent for years, there’s almost no chance it will return anytime soon. And in what can only be described as irony, one of Bitcoin’s most important proponents seems to agree. The venture capital Marc Andreessen, whose firm has backed the Bitcoin exchange Coinbase and is clearly bullish on the technology, seems as far removed from the “inflation is imminent” camp as anyone. His Twitter feed regularly contains retweets of information that goes against the rising prices / dollar “debasement” meme. Including a recent retweet of this:
Inflation expectations are falling again. Remind me again why the Fed should be in a hurry to tighten.
http://t.co/hbcyGEOIKg — Matt O’Brien (@ObsoleteDogma) October 3, 2014
While I can’t claim to know precisely what Andreessen believes, I can tell you that his firm isn’t excited about Bitcoin because it’s some neo-libertarian fantasy to protect us from the evils of the Federal Reserve. Rather, they’re excited for reasons similar to why Bill Gates is. But don’t listen to me, listen to Andreessen himself, writing in Krugman’s paper earlier this year. He quotes a couple of economists with a pedigree that can even match Krugman (guys named Bernanke and Friedman).
Mainstreaming
In 2014, Bitcoin has become much more real. It’s usable at Dell and Overstock and 30,000+ other merchants. PayPal is cozying up to Bitcoin and will eventually make it a form of payment for the many online merchants that use its Braintree platform. That there are finally places to use Bitcoin is part of the reason the price may be declining. When the currency was entirely in the hands of speculators who had nothing much to do other than hold it, the market was somewhat static. Now, as Bitcoin is spent, merchants tend to convert it back to dollars rather quickly. That puts more Bitcoin out there, which tends to depress its value — at least in the short run.
So, too, does the ongoing effort of miners, whose machines continue to produce new Bitcoin. The coins will ultimately stop being produced in 126 years, but the vast majority of them will be mined before the decade is out. And there’s an arms race of sorts right now between large groups who’ve invested small fortunes in computing power to try to solve the puzzles required to earn chunks of Bitcoin as a reward. They, too, tend to be sellers of Bitcoin as they have bills to pay, both for even more computing power and for the electricity required to run it.
For these reasons, it’s possible the price will continue to fall. (This isn’t a prediction one way or the other, incidentally). Ultimately, it matters little. There’s a feedback loop at work here that should be self correcting. If Bitcoin truly crashes from here, mining will become less profitable and thus the new supply reaching the market will slow. In the meantime, transactions involving Bitcoin are slowly beginning to grow. The group that had bid Bitcoin over $1000 last winter was certainly overoptimistic in the short run, but Krugman’s screed about libertarian cons seems wildly pessimistic about the potential for Bitcoin even in the not-so-long run.
