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Valance Co. April, 15, 2010, 117 pgs.
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The author also posts a discussion of these
'frauds' here. this version is in an easily understood format. Some of the
ideas expressed are correct in that the 'fraud' they expose is a false concept.
But in doing so the author creates other false concepts. And he ignors or
conceals the actual current real activities of government in the process.
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Reviewer Comment:
This is extreme MMT. The author takes this Modern Monetary Policy beyond any
limit and claims that the world monetary policy is a giant fraud. He lists
these and also offers a set of alernative monetary - fiscal policies that would
solve all economic problems. He organizes the book into four major sections: 1.
to 'reveal' the frauds. 2. the develoopment of his own 'awarness' of these
frauds. 3. he applies this knowledge to analysis of contemporary
fiscal-financial-monetary life. 4. He describes his own solutions - a plan of
action to 'realize our economic poential and restore the American dream.
The author apparently obtained significant wealth through the hedge fund he
organized and more recently has dabbled in politics, building automobiles and
engaging in hobby economic theory. See -
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Mr. Mosler lists his seven frauds as
follows:
1 The government must raise funds through taxation or borrowing in order to
spend. in other words. government spending is limited by its ability to tax or
borrow.
2. With government deficits, we are leaving our debt burden to our children.
3. Government budget deficits take away savings.
4. Social Security is broken.
5. The trade deficit is an unsustainable imbalance that takes away jobs and
output.
6. We need savings to provide the funds for investment.
7. It's a bad thing that higher deficits today mean higher taxes tomorrow.
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Fraud 1
The author is correct that the government does not need to raise funds in order
to 'spend'. But 'spend' is a euphomism for confiscate. The government
confiscates privately produced goods and services and consumes them (including
by its clients). In premodern societies this was accomplished by 'tax in kind'
deliveries of actual goods (grain for instance) and demanded corvee labor. To
enable greater flexibility governments create tokens that they exchange with
producers and then 'tax' the same tokens back to balance its accounts.
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Fraud 2
The author is again correct. The 'debt' column in the government account books
is the counterpart of the 'credit' that the government has issued in exchange
for real goods and services in excess of that amount it has taken back via
'tax'. See 'fraud 1". When one exchanges a promise to deliver a good in
the future for receiving one today that is the normal definition of 'debt'. But
this debt will never be 'repaid'. It cannot be because the government won't
have produced new goods in the future any more than it has such produced goods
to exchange NOW.
To the extent that the 'debt entry' may be reduced from time to time the
accounting result is that an equal amount of 'credit' is canceled. The
government 'pays' ('spends') by exchanging two forms of debt with private
producers. One is cash, currency, which debt does not include any return
payment nor is its future value assured. The other is 'credit' instruments
(bonds, bills, et cetera) which does carry a promise to repay by issue of
currency. Since the future relative value of that future currency is not
assured the government agrees to pay the holders 'interest', to encourage them
to retain it rather than cash it in.
Our children will not repay that 'debt' BUT they very well might demand the
government redeam it by exchanging it for currency. And this is the fiscal
disaster the government officials (Treasury - FED and others) faced in 2008
when they urged their wives to rush and withdraw cash from ATM's. The
government might be expected to exchange debt instruments (securities) for cash
which does not exist. And this might be even worse if foreign holders of our
government debt securities demand cash. To avoid that financial disaster in
2008 the government created a massive amount of more credit and exchanged much
of it with foreign banks.. -
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Fraud 3
The problem with this concept making it a fraud is the confusion over the
definition of 'savings'. The author accepts this common misunderstanding that
any currency or 'credit' provided by government in exchange for real goods and
seervices that the government consumes, which is not immediately consumed by
the private sector is 'savings'. But it is not. Real savings can only be
created in the production process when there is a 'retained surplus' resulting
from the value of the production exceeding the value of the consumption
required during that process and consumption made from the produced goods. Any
financial instruments (currency or credit) issued by government and not
consumed is not savings but accrued debt.
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Fraud 4
The author is correct for the same reasons that his discussion of 'fraud 2' is
correct. The FICA 'tax' that is officially separated from income and other
taxes is not actually separate. All forms of government taxation are forms of
government confiscation. The FICA 'tax' replaces corvee labor extracted from
the productive public.
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Fraud 5
Both this 'fraud' as it is described and the author's opinion that it is a
'fraud' are both mistaken. The very idea that foreign producers would exchange
real goods and services of value for something worthess is absurd. But there
are multiple and separate reasons for the failure to recognize the nature of
the problem.
1. the idea that an American consumer is exchanging goods he produced with
foreign producers directly is false. The exchange is conducted by the
government banks in both countries. To the extent that the relative value of
the produced American goods desired by the foreign government do not equal the
the relative value of the produced foreign goods desired by the American
consumers the difference in notional relative value is adjusted by the currency
values established by the two government banks. Note also, I point out that in
the case of China the specific goods imported are those desired by the Chinese
government, NOT individual Chinese producers.
2. But the real overlooked falicy is about the idea that the difference between
imports and exports (apart from the currency manipulation) is adjusted by the
sale of US Treasury instruments to the foreign bank AND that those instruments
are AT the Treasury. In the era in which trade balances were adjusted by gold
transfers (gold was the international financial reserve) the government
importing greater value of foreign goods than it exported had to make up the
difference in gold, which was either physically shipped out or kept in a US
bank vault. Now the US dollar is the world financial reserve standard. the US
treasury instruments act as the financial reserves on foreign bank accounts
just as the do in American bank accounts. With 'fractional reserve' banking it
is just as possible for a foreign government bank to issue loans (credits) to
whomever as it is for a US bank to do so. US dollars thus are used in the
world's credit markets daily in a volume vastly exceeding the total annual US
production.
3. The fundamental concept preached by libertarians and some other economists
that imports are an economic gain and exports are an economic loss is refuted
by the actual, real example of so many countries (such as Germany, South Korea,
Japan, Singapore, Taiwan, ) that have so obviously greatly raised the standard
of living of their entire populations by focusing on increasing exports.
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Fraud 6
The author claims this concept is a fraud because he does not understand the
definition of 'savings'. Yes, we DO need savings to create investment. Because
real savings are only created, as I note above, from the 'retained surplus'
from production - that part of private production not consumed that is then
available for investment - that is creating capital.
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Fraud 7
The author is correct that deficits and taxes are not linked directly.But that
in no way helps to make MMT valid. And the whole discussion based on financial
- monetary - measures conceals what government is really doing. Since the
earliest times when 'taxes' first became payable in government created monetary
instruments such as coins they were a substitute for 'taxes' originally
demanded in kind or in corvee labor. In the earlier polities the rulers simply
confiscated a portion of privately created production - or they claimed
ownership of the production by themselves or the gods they represented. But as
societies became more complex the problem for the rulers was to distribute the
goods received as taxation to greater numbers of government workers -
especially soldiers - and government clients. The introduction of coins
(currency) forced the private producers to exchange (sell) their goods and
services for the coins government had given its soldiers and workers. The
rulers were then able to take back the same coins in the new form of taxation.
The final result was the same. The ruler's deficit consists of having issued
more credit in exchange for produced goods and services that they take back as
tax.
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Sebastian Edwards - Modern Monetary
Theory: Cautionary Tales from Latin America
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