Paul Krugman Proclaims “Gold Is Dead!” Says Even Bitcoin Has More Utility
Paul Krugman said gold is dead. In fact, “Bitcoin has more utility than gold,” according to the popular lefty economist.
Krugman made the comments at ChainXChange, a blockchain artificial intelligence and innovation conference in Las Vegas.
To put this into perspective, you have to understand that Krugman is no fan of bitcoin. In a recent New York Times column, he explained why he’s a cryptocurrency skeptic.
“It comes down to two things: transaction costs and the absence of tethering.”
In a nutshell, Krugman believes cryptocurrency takes a step backward in monetary evolution because it “must be mined — created through resource-intensive computations.” In other words, it takes a lot of energy to create a bitcoin. On the other hand, central banks can create dollars out of thin air. In his view, this is a feature, not a flaw.
Krugman also doesn’t like bitcoin because it’s value isn’t “tethered to anything.” In other words, there is nothing underlying its value. And of course, dollars printed out of thin air have all kinds of value.
In this column, Krugman actually stumbles into a rare moment of honesty about the government fiat money system. One could easily argue that the dollar isn’t tethered to anything either. It has value because people have faith that it has value. But when you boil it all down, dollars are nothing more than pieces of paper and numbers in computers. But as Krugman points out, they are backed by the “full faith and credit” of the US government and we need dollars to pay taxes.
The value of a dollar doesn’t come entirely from self-fulfilling expectations: ultimately, it’s backstopped by the fact that the US government will accept dollars as payment of tax liabilities — liabilities it’s able to enforce because it’s a government. If you like, 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.”
Tell that to the people of Venezuela.
The point here is that Krugman is no bitcoin apologist. He wrote, “cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years.” So, when he says bitcoin has more utility than gold, he’s not talking up crypto, he’s dissing the yellow metal.
But Krugman painted himself into a corner, and I think he realizes it. The “lack of tethering” argument he makes against crypto in his NYT column applies equally to fiat dollars. Despite men with guns, the dollar’s value can still decline virtually zero. In fact, neither cryptocurrencies nor dollars have any utility beyond their usefulness as a medium of exchange or a store of value.
It’s unclear whether Krugman means bitcoin has more utility than gold simply in terms of its use as money, or if he’s talking in a broader sense. But there is no question that gold has far more actual real-world utility than either cryptocurrencies or government-backed fiat money. As a result, gold will always have a value floor below which it will not fall.
Gold’s value is certainly higher than it otherwise would be because of its role as money. But people use gold for many other things. They make it into jewelry. And they use it in industrial and technical applications. In fact, demand for gold in technology has grown for seven consecutive quarters. Over the past decade, the tech sector accounted for more than 380 tons of gold demand annually. That’s 13% ahead of central bank purchases during the same time period.
So, even if everybody completely quit using gold as money, it would still have substantial value. On the other hand, bitcoin and fiat dollars have absolutely no utility beyond their role as money.
That’s why Krugman felt the need to make this tethering argument for the dollar. In one sense he’s right. While bitcoin could theoretically fall to zero, as long as the US government requires us to pay taxes, the dollar will have some value above zero. But the dollar can certainly inflate to the point that it becomes essentially valueless.
Economist Robert Murphy does a good job of explaining this in a recent episode of the Contra Krugman podcast. As he explains, there is no floor on how weak the dollar can become in terms of purchasing power merely because the IRS insists on receiving dollars for its tax bills.
If by assumption, the dollar’s very weak, then that means you could sell one hour of your labor to get a trillion dollar bills. So, the fact that you need to hand over to the IRS a bunch of dollar bills, by itself does not tell me any information about the relative strength of the dollar. That’s consistent with the dollar being worth, you know, $1 gets you a loaf of bread or you need a quadrillion dollars to get a loaf of bread. That’s equally consistent with the fact that I have to pay my taxes in dollars.”
Again, we just have to look at countries like Venezuela and Turkey as they suffer through hyperinflation to see this truth. Government backing does not guarantee value. Gold will always have some value because it does have utility.
Krugman is a devoted disciple of government money. That shows through in this asinine statement that both fiat and bitcoin have more utility than gold. People have valued gold for thousands of years, both as money and for its other uses. That hasn’t changed. Gold’s not dead. And I have to say, putting your faith in an institution that has run up $21 trillion in debt just doesn’t seem like the wisest approach – even if its agents do have guns.
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