Conversing with a Fed advisor about Bitcoin

A friend of mine is a well-known finance professor and advises the Fed. We hang out once a year for a few hours, but never discussed Bitcoin. He has always thought it is trash, worthless, useless.

We hung out last week and he was interested this time in discussing Bitcoin. It didn't really get anywhere, but I probably didn't do the best job in defending Bitcoin. The fact that he is a very prominent finance professor didn't make it easy.

Today he sent me an opinion piece written by Paul Krugman that just came out yesterday which basically declares crypto to be dead. Yet again. Ths time I can gather my thoughts properly before responding, but I thought I would share them here in case anyone has any comments on my response that could be helpful:

"Thank you for sending me this article. I hate to parrot the same type of talking points that Krugman hears, but I do believe that Krugman "doesn't get it". More to the point, though: no-one has explained it to him, because what is written in his article is mostly unrelated to what "enthusiasts" would talk about.

First, forget about anything non-Bitcoin. Second, and the main point: Inflation is, generally speaking and in the last 100 years, a horrible thing. If inflation comes about from positive economic activity, then fine. But if you sum up all of the inflation over the last 100 years in the USA, I am guessing it has been a huge negative on overall society. This is a claim that I am making, unverified (by me). If I am wrong about this, then I am very misinformed and would gladly relinquish a lot of my support for Bitcoin.

Inflation is the main problem that bitcoin is trying to solve. Satoshi Nakomoto probably said it best in as few words as possible:

"The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible."

Satoshi's #1 point above is about the debasing of fiat currencies. His #2 point is fractional reserve lending. Why is fractional reserve lending a problem? Seems to have worked all these years. Except that it hasn't, and in 2008 the banks had to be bailed out, with us taxpayers footing the bill in the short term and the long term.

You will notice that Krugman's article states nothing about the above. And that's why he "doesn't get it".

This is what Bitcoin is all about. But the most natural follow-up question is: How does Bitcoin solve the above problems? Why Bitcoin? Why not rocks or seashells or stuffed animals? That is another conversation."

QAR