Paul Krugman: The tale of three money pits; It is also a tale of monetary regress — of the strange determination of many people to turn the clock back on centuries of progress.

The tale of three money pits

This is a tale of three money pits. It is also a tale of monetary regress — of the strange determination of many people to turn the clock back on centuries of progress.

27 DECEMBER

This is a tale of three money pits. It is also a tale of monetary regress — of the strange determination of many people to turn the clock back on centuries of progress. The first money pit is an actual pit — the Porgera open-pit gold mine in Papua New Guinea. The mine has a terrible reputation for both human rights abuses and environmental damage.But gold prices, while down from their recent peak, are still three times what they were a decade ago, so dig they must.

The second money pit is a lot stranger: The Bitcoin mine in Reykjanesbaer, Iceland. Bitcoin is a digital currency that has value because … well, it is hard to say exactly why but, for the time being at least, people are willing to buy it because they believe other people will be willing to buy it. It is, by design, a kind of virtual gold. And like gold, it can be mined: You can create new Bitcoins, but only by solving very complex mathematical problems that require both a lot of computing power and a lot of electricity to run the computers.

Hence the location in Iceland, which has cheap electricity from hydropower. Even so, a lot of real resources are being used to create virtual objects with no clear use.

The third money pit is hypothetical. Back in 1936, the economist John Maynard Keynes argued that increased government spending was needed to restore full employment. But then, as now, there was strong political resistance to any such proposal.

So, Keynes whimsically suggested an alternative: Have the government bury bottles full of cash in disused coal mines and let the private sector spend its own money to dig the cash back up.

It would be better, he agreed, to have the government build roads, ports and other useful things — but even perfectly useless spending would give the economy a much-needed boost.

Clever stuff — but Keynes was not finished. He went on to point out that the real-life activity of gold-mining was a lot like his thought experiment. Gold miners were going to great lengths to dig cash out of the ground, even though unlimited amounts of cash could be created at essentially no cost with the printing press. And no sooner was gold dug up than much of it was buried again, in places like the gold vault of the Federal Reserve Bank of New York.

Keynes would, I think, have been sardonically amused to learn how little has changed in the past three generations.

Public spending to fight unemployment is still anathema; miners are still spoiling the landscape to add to idle hoards of gold.

Bitcoin just adds to the joke. Now, we are burning up resources to create “virtual gold” that consists of nothing but strings of digits.

I suspect, however, that Adam Smith would have been dismayed.

Smith offered a classic paean to the virtues of paper currency. Money, he understood, was a way to facilitate commerce — and paper money, he argued, allowed commerce to proceed without tying up much of a nation’s wealth in a “dead stock” of silver and gold.

So, why are we tearing up the highlands of Papua New Guinea to add to our dead stock of gold and, even more bizarrely, running powerful computers 24/7 to add to a dead stock of digits?

Talk to gold bugs and they will tell you that paper money comes from governments, which cannot be trusted not to debase their currencies. The odd thing, however, is that for all the talk of currency debasement, such debasement is getting very hard to find. Inflation in advanced countries is clearly too low, not too high. Still, hyperinflation hype springs eternal.

Bitcoin seems to derive its appeal from more or less the same sources, plus the added sense that it is high-tech and algorithmic, so it must be the wave of the future.

But do not let the fancy trappings fool you: What is really happening is a determined march to the days when money meant stuff you could jingle in your purse.

In tropics and tundra alike, we are, for some reason, digging our way back to the 17th century.

ABOUT THE AUTHOR:

Paul Krugman won the Nobel Prize for economics and is Professor of Economics and International Affairs at Princeton University. This is an abridged version of a longer commentary.