Sunday, November 28, 2010

How The New York Times Weighs Competing Self-Interests, Including Its Own

On Sunday, November 28th, 2010, the New York Times as well as a number of other major news media outlets agreed to release the contents of 250,000 US diplomatic cables made available to them by the WikiLeaks organization.

The New York Times will be releasing their analysis of these cables in parts over time. Before doing so, they issued a "Note to Readers" regarding their decision to publish and write about some of the diplomatic documents.

It would be instructive to examine the reasoning contained therein to get a better understanding of the role of the members of the "free press" in a country like America, actual as well as the way these members perceive themselves, as well as to gain some insight into an institution like the New York Times' effort to maintain objectivity in their news coverage and analysis. The results may be startling for the deluded who strongly believe that groups like the New York Times are members of an objective, unencumbered and free press.

The NYT:
The Times has taken care to exclude, in its articles and in supplementary material, in print and online, information that would endanger confidential informants or compromise national security. The Times’s redactions were shared with other news organizations and communicated to WikiLeaks, in the hope that they would similarly edit the documents they planned to post online.
It is clear from this first paragraph that the employees of the NYT see for themselves a special role and responsibility within society. It is not my intent, at least at the moment, to question this perception but rather to elaborate on it.

The NYT was granted access to an unredacted collection of the cables. In so doing, they were one of the first groups outside of the original government creators and users of these documents to have a completely unfiltered view of them. Now that they have had access, they have made some of their own redactions and have shared the redactions with other news organizations (as well as WikiLeaks) in hopes that they might be sensitive to disclosing anything with might "endanger confidential informants or compromise national security."

To be employed by the NYT, so far as I know, one does not need to go through any government security clearances or government background checks similar to what one might have to go through if one were to be employed by the US diplomatic corps or other high-level government bureaucracies. As it stands, NYT employees are no "better", more loyal, honest or of necessarily sounder judgment about any issue or topic, than anyone else outside the government (note-- I am not implying the government's employees are, I am making a comparison only amongst non-governmental employees for a reason). Nonetheless, they have arrogated for themselves such a "gatekeeper" role as if they do naturally posses more loyalty, honesty, sounder judgment, etc., simply by virtue of the fact that they are members of the media.

Furthermore, their judgment of what constitutes information that might "endanger confidential informants or compromise national security" is based off of... their judgment. They are implicitly asking for a lot of trust and authority in this situation. They are expecting their readers and the general public to assume that, without having the ability to consider such items of information for themselves, they can trust that the employees of the NYT would come to the same conclusions as they would about which items constitute imminent dangers to confidential informants and/or national security.

Finally, the term "national security" is by itself an arbitrary and nonsensical concept. A nation does not exist. Individuals exist. A nation is a figure of speech used to refer to a social aggregate composed of particular individuals within a particular set of boundaries, laboring under a particular political system and sharing a particular set of other arbitrarily defined commonalities such as language, culture, ethnic background, ideals, etc. Individuals have interests and subjective perceptions of what constitutes a threat or a protection of their personal security. There is no such thing as a one-size-fits-all "national security" which represents every individual within a "nation".

Therefore, the NYT's concern with protecting and censoring any information which could harm "national security" is again another way of saying they have complete, arbitrary power to use their own judgment in disclosing information or not disclosing information according to their subjective interpretation of how this might harm whatever they presume to be the interests of "national security".

The NYT:
After its own redactions, The Times sent Obama administration officials the cables it planned to post and invited them to challenge publication of any information that, in the official view, would harm the national interest. After reviewing the cables, the officials — while making clear they condemn the publication of secret material — suggested additional redactions. The Times agreed to some, but not all. The Times is forwarding the administration’s concerns to other news organizations and, at the suggestion of the State Department, to WikiLeaks itself.
In the interests of not being repetitive, I will not labor to explain in full detail why the idea of a "national interest" is a flawed one. Please review the paragraphs above on "national security" for a comparable analysis.

This next disclosure from the NYT is again worthy of comment and I want to again stress that my interest is simply in drawing obvious conclusions from a set of observations, not to offer any specific judgment at this time about whether those conclusions represent "good" or "bad" things.

The idea of a "free" and "objective" press connotes the following ideas: that the press is able to offer an objective view of the simple facts of news events (what people said, what people did, when the events took place, what events transpired leading up to these events which may have been related, where the events took place) without coloring or distorting the reportage with subjective opinions and/or biases; that the press is able to make these observations and comment on events without feeling any pressure or compulsion from third parties to present the news in a particular way (aka "stylizing the facts" or "spinning the news"); that the press is a watchful, skeptical and if necessary, antagonistic surveyor of those it covers, especially the political system and its participants, in the interests of providing the public with the information they need to make sound judgments about their government and its doing; that the press does not engage in censorship or self-censorship in order to appease pressure groups and political agents, outside of specific, limited circumstances whereby a particular individual may suffer physical or intense emotional harm if various details are disclosed (for example, when the press covers crimes involving a minor, sexual crimes or the claims of whistle-blowers who may be retaliated against if their identity is made known).

For good or for bad, neither the NYT nor any other media group may consider itself a member of the objective, free press when it not only censors its coverage in the name of protecting "national security" and "national interests", but also offers its planned reportage to political officials for review and final approval. it may not consider itself a member of the objective, free press when the NYT adopts further redactions and censorship requested by those political officials at the conclusion of the review when those redactions and censorship did not seem appropriate to the NYT according to its own "independent" judgment before it was offered for review.

The NYT:
The question of dealing with classified information is rarely easy, and never to be taken lightly. Editors try to balance the value of the material to public understanding against potential dangers to the national interest. As a general rule we withhold secret information that would expose confidential sources to reprisals or that would reveal operational intelligence that might be useful to adversaries in war. We excise material that might lead terrorists to unsecured weapons material, compromise intelligence-gathering programs aimed at hostile countries, or disclose information about the capabilities of American weapons that could be helpful to an enemy.
For good or for bad, this paragraph conclusively demonstrates that the NYT has thrown its lot in with the US government. The NYT clearly sees for itself a need to be "patriotic". It is not an "independent news agency"; it is an "American news agency" along with all that entails in contrast to the idea of an independent, allegiance-less news agency.

This policy, as stated, opens up a can of worms, again, for good or for bad. There are all kinds of potential decisions the NYT might make about disclosing or not disclosing information according to this policy which many might find controversial: the NYT may neglect to disclose instances of torture by US agents for fear that this intelligence could be a useful recruiting tool for designated adversaries of the US; the NYT may neglect to disclose knowledge of intelligence operations which involve direct violations of the law or involve other unscrupulous or immoral activities because doing so might undermine the US governments ability to develop intelligence on "hostile countries"; the NYT might neglect to expose known weaknesses or defects in American weapons capabilities which put the lives of American military personnel at risk, or pose potential harm to innocents who may be exposed to such weapons and their defects, because the NYT is concerned about protecting such information from those deemed by the US government to be its enemies.

In adopting such a policy, the NYT is putting itself in the position of playing god and potentially weighing human lives against one another. The NYT is putting itself into a position where it will have to make a decision concerning the "balance" of what might potentially be lost in terms of individual lives or wealth versus what might potentially be gained for US political interests in protecting some of its knowledge.

Additionally, in adopting such a policy the NYT, by implication, accepts the characterization of US political interests of its adversaries and accepts their judgments of such threats as sound. In other words, the NYT puts itself in a position whereby it loses its ability to independently judge for itself whether the classification of various individuals and entities as "enemies" by US government officials is justified and instead adopts these judgments as its own in making considerations about what information can be disclosed or must be redacted and kept from the public.

The potential for abuse is, again, obvious. Should resistance be merited in any given situation, it will be difficult if not impossible to generate such resistance when primary producers of news information such as the NYT have become essentially PR tools for disseminating the viewpoint and perspective of political interests as if these are objective facts without dispute.

The NYT:
As daunting as it is to publish such material over official objections, it would be presumptuous to conclude that Americans have no right to know what is being done in their name.
For a truly free and objective press, this task should prove no more daunting than it would be for any other normal, independent individual to overcome the objections of any government officials on any topic whatsoever.

The fact the NYT views this responsibility as "daunting" is, again, telling. Part of the NYT's business model relies upon receiving its own special, high-profile "leaks" from government officials and political interests, along with its normal, everyday public access to less secret or mysterious sources. In seeking to protect its business model, the NYT must often choose between offending a potential source and losing the ability to be the recipient of success "access patronage" in the future, or to protect the interests of the source by agreeing to not make disclosures or engage in coverage that the source deems to be harmful to it.

In these situations, the NYT is making determinations about what best serves it, not what best serves "the public".

The NYT may feel torn about possibly affronting some of its sources in choosing whether or not to disclose information related to the diplomatic cable leaks. But for it to not even think twice about "redacting" this obvious bit of self-interest in making its policy explanation to its readers is at best a glaring oversight and at worst an outright act of fraud and deception.

A Refutation of Mosler Economics and Mosler's 7DIF, Part V

The following is Part V in a seven part series, "A Refutation of Mosler Economics and Mosler's 7DIF", which seeks to critically examine the fiscal and monetary policy solutions offered by Warren Mosler [PDF], a former candidate for the US Senate in Connecticut in the 2010 election.

Warren Mosler:
Deadly Innocent Fraud #5:
The trade deficit is an unsustainable imbalance
that takes away jobs and output.
Imports are real benefits and exports are real
costs. Trade deficits directly improve our standard of
living. Jobs are lost because taxes are too high for a
given level of government spending, not because of
As it stands on its face, there is nothing I disagree with here. Let's dig deeper and see if there is anything controversial.

A trade deficit, in fact, increases our real standard of living.
How can it be any other way? So, the higher the trade deficit
the better. The mainstream economists, politicians, and media
all have the trade issue completely backwards. Sad but true.
To further make the point: If, for example, General MacArthur
had proclaimed after World War II that since Japan had lost the
war, they would be required to send the U.S. 2 million cars a year
and get nothing in return, the result would have been a major international uproar about U.S. exploitation of conquered
enemies. We would have been accused of fostering a repeat
of the aftermath of World War I, wherein the allies demanded
reparations from Germany which were presumably so high
and exploitive that they caused World War II. Well, MacArthur
did not order that, yet for over 60 years, Japan has, in fact,
been sending us about 2 million cars per year, and we have
been sending them little or nothing. And, surprisingly, they
think that this means they are winning the “trade war,” and we
think it means that we are losing it. We have the cars, and they
have the bank statement from the Fed showing which account
their dollars are in.
Same with China - they think that they are winning because
they keep our stores full of their products and get nothing in
return, apart from that bank statement from the Fed. And our
leaders agree and think we are losing. This is madness on a
grand scale.
Mosler is right to assert that there is nothing controversial or problematic about receiving something for nothing. This is, in fact, the economic objective of all individuals who routinely try to pay as little as they can for whatever it is they determine they might need. Of course, government is the only actor in the economy (aside from petty private thieves) which ever manages to achieve such an arrangement, something for nothing, on a routine basis. Government simply steals from one person and then grants the property to another. It gives no compensation to its original victims.

And this is the central issue with Mosler's point interpreted more technically. He makes his arguments and assertions in terms of collective entities and aggregate accounting identities but he does so erroneously.

The reality is that "Japan" doesn't send "us" 2 million cars a year. Instead, a Japanese company, such as Toyota, sends individual cars to individual buyers in America. Because the Bank of Japan acts as a settlement house for foreign currency exchange, Toyota's dollar revenue ultimately gets remitted to the Bank of Japan, in return for yen, which Toyota then uses to pay its employees and suppliers who in turn utilize their local currency to secure real goods and services for themselves. The Bank of Japan remits the dollars to the Fed and chooses to keep those balances in US treasuries as savings.

It would be inaccurate to say that the car company Toyota gives cars away to Americans in a quest to accumulate growing US treasury balances, that is to say, that Toyota trades cars for "paper" or nothing. Toyota trades cars to Americans in hopes of acquiring currency which it can eventually exchange for real resources (either in its own country, with yen, or in America or other countries, with their respective local currencies).

The Bank of Japan, then, trades nothing for nothing (yen for dollars, dollars for US treasuries). Meanwhile, Japanese individuals and firms decidedly do trade something for something.

Mosler is correct to state that the "trade deficit" is merely the result of accounting identities related to these transactions. However, he is not correct to imply that aggregate, social entities are trading with one another, such as "China sends X to the US in return for nothing."

I’ve heard it all, and it’s all total nonsense. We are
benefiting IMMENSELY from the trade deficit. The rest of
the world has been sending us hundreds of billions of dollars
worth of real goods and services in excess of what we send to
them. They get to produce and export, and we get to import
and consume. Is this an unsustainable imbalance that we need
to fix? Why would we want to end it? As long as they want to
send us goods and services without demanding any goods and
services in return, why should we not be able to take them?
Again, Mosler is only able to make such an assertion by examining the collective accounting identities of "aggregate" economic activity. When you dig a little deeper to the individual exchanges being made in reality, there are qualitative differences between the various exchanges and these differences are important.

The Chinese government, by manipulating their currency via their dollar peg, is assisting the US government in financing its deficit spending (that is, debt-driven spending). In other words, in terms of real resources, along with the exchanges of private individuals in China and the US making exchanges of real wealth for real wealth, there are some exchanges being made which result in the US government acquiring real wealth in return for promises to pay back the lenders of that real wealth in the future, ostensibly with real wealth. Realize this is necessarily the intent of someone, somewhere along the line because in the absence of coercion, no one would exchange a material something for material nothing unless as an act of charity.

As discussed in previous installments, government expenditure is consumptive, not productive. All government can accomplish by its spending is to redistribute resources from those who would control it following voluntary exchange, to those it has decided to favor by bestowing them with its largess. Anyone who contests this principle is invited to review the following: Government Produces Nothing, Ever. I won't spend time further defending this principle as I have already elaborated on the fact that it logically follows from an understanding that a.) value is subjective, b.) all voluntary exchanges are wealth-enhancing or else they wouldn't be made and all involuntary exchanges are redistributive of existing wealth, at best, which is why they require force to occur. Because the government is in the business of redistributing wealth via involuntary exchanges (taxation), the government's expenditures can not result in a net economic benefit to society in comparison to the arrangements which would've occurred voluntarily on a free market.

Therefore, it is alarming if government debt is growing and it is alarming if the government manages to find a way to fool more and more individuals, through the complicated machinery of the economic and global financial systems, into giving it more and more real resources in exchange for promises to pay back that it has no ability to fruitfully do so without first stealing from someone else. It is wonderful if people really did want to send real resources to individuals in the US with no intent of being given any real resources in return. It is not desirable if the recipient of such charity happens to be the government. That increases the chances that such wealth will ultimately be squandered, to be of no material, productive benefit to future generations.

If Mosler disagrees and believes that government expenditure is equivalent to private expenditure in quality, or that it may even be superior to it in terms of economic benefits, he is again operating off an economic theory whose principles he does not clearly state, in order that his readers might be able to judge the validity of those claims for themselves.

And domestic credit creation - the bank loan - has
funded the Chinese desire to hold a $U.S. deposit at the
bank which we also call savings. Where’s the “foreign
capital?” There isn’t any! The entire notion that the U.S.
is somehow dependent on foreign capital is inapplicable.
Instead, it’s the foreigners who are dependent on our
domestic credit creation process to fund their desire to
save $U.S. financial assets. It’s all a case of domestic credit
funding foreign savings. We are not dependent on foreign
savings for funding anything.
Mosler is continuing a discussion based upon an example whereby a US individual purchases a Chinese car via a loan created by a US bank.

It is interesting and perhaps instructive that Mosler does not examine the dynamics of such a transaction involving a cash payment by the US individual, rather than a credit-based transaction requiring the creation of a new loan. One wonders why Mosler fails to examine the implications of such a potentiality.

Again, it’s our spreadsheet and if they want to save
our dollars, they have to play in our sandbox. And what
options do foreign savers have for their dollar deposits?
They can do nothing, or they can buy other financial
assets from willing sellers or they can buy real goods
and services from willing sellers. And when they do
that at market prices, again, both parties are happy. The
buyers get what they want - real goods and services, other
financial assets, etc. The sellers get what they want - the
dollar deposit. No imbalances are possible. And there is
not even the remotest possibility of U.S. dependency on
foreign capital, as there is no foreign capital involved
anywhere in this process.
Where does the capital come from, then? According to Mosler, it is simply summoned into existence via bank credit-creation and spreadsheets.

This confusion will be treated more concretely in Part VI, which deals directly with the role of savings in investment.

A Refutation of Mosler Economics and Mosler's 7DIF, Part IV

The following is Part IV in a seven part series, "A Refutation of Mosler Economics and Mosler's 7DIF", which seeks to critically examine the fiscal and monetary policy solutions offered by Warren Mosler [PDF], a former candidate for the US Senate in Connecticut in the 2010 election.

Warren Mosler:
Deadly Innocent Fraud #4:
Social Security is broken.
Federal Government Checks Don’t Bounce.
Here's how he fleshes it out a bit.

As we’ve already discussed, the government never has
or doesn’t have any of its own money. It spends by changing
numbers in our bank accounts. This includes Social Security.
There is no operational constraint on the government’s ability
to meet all Social Security payments in a timely manner. It
doesn’t matter what the numbers are in the Social Security
Trust Fund account, because the trust fund is nothing more
than record-keeping, as are all accounts at the Fed.
When it comes time to make Social Security payments,
all the government has to do is change numbers up in the
beneficiary’s accounts, and then change numbers down in the
trust fund accounts to keep track of what it did. If the trust fund
number goes negative, so be it. That just reflects the numbers
that are changed up as payments to beneficiaries are made.
So far, just an "operational" description of the mechanics of government accounting. Nothing controversial.

Mosler explains the "functional similarity" between Social Security and buying government bonds.

To understand what’s fundamentally wrong at the macro
(big picture, top down) level, you first have to understand that
participating in Social Security is functionally the same as
buying a government bond. Let me explain. With the current
Social Security program, you give the government your
dollars now, and it gives you back dollars later. This is exactly
what happens when you buy a government bond (or put your
money in a savings account). You give the government your
dollars now and you get dollars back later plus any interest.
Yes, one might turn out to be a better investment and give you
a higher return, but apart from the rate of return, they are very
much the same. (Now that you know this, you are way ahead
of Congress, by the way.)
A technicality to take note of-- whereas in his previous discussions of the market for government debt Mosler manages to twist out an explanation that such exchanges are "voluntary" because the buyers and sellers of government debt are not being forced to make these exchanges, this condition no longer holds true when considering Social Security. This is an exchange which is entirely involuntary. Individuals are forced to contribute to Social Security via payroll taxes.

The "function" might be the same (government takes money now and gives money back later) but the motivation for such an exchange is different (force, versus voluntary decision-making).

Mosler then explains the errors of a particular Social Security privatization scheme advanced by Stephen Moore of the Cato Institute:
And it gets worse! The ‘intergenerational’ story continues
something like this: “The problem is that 30 years from now
there will be a lot more retired people and proportionately
fewer workers (which is true), and the Social Security trust
fund will run out of money (as if a number in a trust fund is an
actual constraint on the government’s ability to spend…silly,
but they believe it). So to solve the problem, we need to figure
out a way to be able to provide seniors with enough money to
pay for the goods and services they will need.” With this last
statement it all goes bad. They assume that the real problem of
fewer workers and more retirees, which is also known as the
“dependency ratio,” can be solved by making sure the retirees
have sufficient funds to buy what they need.
Let’s look at it this way: 50 years from now when there
is one person left working and 300 million retired people (I
exaggerate to make the point), that guy is going to be pretty
busy since he’ll have to grow all the food, build and maintain
all the buildings, do the laundry, take care of all medical needs,
produce the TV shows, etc. etc. etc. What we need to do is
make sure that those 300 million retired people have the funds
to pay him??? I don’t think so! This problem obviously isn’t
about money.
What we need to do is make sure that the one guy working
is smart enough and productive enough and has enough capital
goods and software to be able to get it all done, or else those
retirees are in serious trouble, no matter how much money
they might have. So the real problem is, if the remaining
workers aren’t sufficiently productive, there will be a general
shortage of goods and services. More “money to spend” will
only drive up prices and not somehow create more goods
and services. The mainstream story deteriorates further as it
continues: “Therefore, government needs to cut spending or
increase taxes today, to accumulate the funds for tomorrow’s
expenditures.” By now I trust you know this is ridiculous and
evident that the deadly innocent frauds are hard at work to
undermine our well-being and the next generation’s standard
of living as well.
Mosler then admits that the Social Security problem is fundamentally one of allocating scarce resources:
Should our policy makers ever actually get a handle
on how the monetary system functions, they would realize
that the issue is social equity, and possibly inflation, but
never government solvency. They would realize that if they
want seniors to have more income at any time, it’s a simple
matter of raising benefits, and that the real question is, what
level of real resource consumption do we want to provide
for our seniors? How much food do we want to allocate to
them? How much housing? Clothing? Electricity? Gasoline?
Medical services? These are the real issues, and yes, giving
seniors more of those goods and services means less for us.
The amount of goods and services we allocate to seniors is
the real cost to us, not the actual payments, which are nothing
more than numbers in bank accounts.
Mosler's solution? Education:
And if our leaders were concerned about the future, they
would support the types of education they thought would be
most valuable for that purpose.
This is another example of Mosler relying on an unstated economic theory, whose premise is that higher spending on education by government necessarily translates into higher future productivity and therefore a more prosperous economic future for everybody compared to what it otherwise might be. He presents his conclusions based off of this unstated economic theory as if they are obvious simply from observing the problems of resource allocation related to Social Security, without notifying his readers that he is in fact employing a particular theory which is not offered for consideration and scrutiny.

As Mosler correctly identifies, the "problem" of Social Security is the allocation of scarce resources and the future production thereof, and this problem can not be solved by the issuance of new money (even though this seems hypocritical because in some of Mosler's other proposals he insists that the issuance of new money can be a catalyst to drive individuals to produce more than they otherwise would). However, he is wrong to assume that inadequate government spending on education now is the root problem of future scarcity.

The government's decision to spend more or less on "education" or to spend money on this type of education versus that type, does not offer any guarantee that the total costs of such decisions now will be more than made up for by the total benefits of future productivity gains. The government faces two problems in making its spending decisions, neither of which it has any way to overcome:

1.) The government has no method of predicting what pattern of production will be voluntarily preferred by consumers in the future, leaving it with no information as to what type or level of education spending it should commit to now in support of those future patterns
2.) The government, once committed to a decision to spend a particular amount on a particular type of education, has no way to calculate if the results of its decision were successful, ie, resulted in a net benefit (benefits accrued greater than costs incurred). The government does not operate according to entrepreneurial profit and loss and it has no DIRECT market prices to rely upon for any of its decision-making.

For example, the government may choose to pay a teacher $40,000 per year, and it may come to this decision by trying to examine the pay for "comparable" work (say, an accountant's annual salary, or a store manager's annual salary, which, for whatever reason, the government may determine to be "comparable"). But this doesn't represent an actual, market price for what a teacher's labor is "worth" annually because it was not a price arrived at through the voluntary buying and selling of the market. It doesn't represent any meaningful price signal about actual economic scarcity related to private supply and demand.

Furthermore, the government has no way to judge if it generates a "return" of greater than or equal to $40,000 worth of benefits from the expenditure on the teacher's salary. The government may try to simulate a "social return" statistic by looking at rates of graduation, rates of college attendance, rates of crime, rates of poverty, rates of health and wellness or rates of business creation or even economic expansion, etc., but none of these things represent a monetary rate of return that can be used for economic comparison via a common denominator.

All the government can do is guess. They just have to have faith in the righteousness of their own decision-making. Mosler has to do the same. This is not an economic theory but a political theory and it rests not on any economic truth but on the force of the opinion of Warren Mosler and anyone else who advocates such measures.

It's an opinion masquerading as a fact. It's a fraud.

Saturday, November 27, 2010

A Refutation of Mosler Economics and Mosler's 7DIF, Part III

The following is Part III in a seven part series, "A Refutation of Mosler Economics and Mosler's 7DIF", which seeks to critically examine the fiscal and monetary policy solutions offered by Warren Mosler [PDF], a former candidate for the US Senate in Connecticut in the 2010 election.

Warren Mosler:
Deadly Innocent Fraud #3:
Federal Government budget deficits take away
Federal Government budget deficits ADD to
Let's see how Mosler fleshes this out.

This third deadly innocent fraud is alive and well at the very
highest levels. So here’s how it really works, and it could not
be simpler: Any $U.S. government deficit exactly EQUALS
the total net increase in the holdings ($U.S. financial assets) of
the rest of us - businesses and households, residents and non
residents - what is called the “non government” sector.
In other words, government deficits equal increased “monetary
savings” for the rest of us, to the penny.
Simply put, government deficits ADD to our savings (to the
penny). This is an accounting fact, not theory or philosophy.
There is no dispute. It is basic national income accounting. For
example, if the government deficit last year was $1 trillion, it
means that the net increase in savings of financial assets for
everyone else combined was exactly, to the penny, $1 trillion. (For
those who took some economics courses, you might remember
that net savings of financial assets is held as some combination
of actual cash, Treasury securities and member bank deposits at
the Federal Reserve.) This is Economics 101 and first year money
banking. It is beyond dispute. It’s an accounting identity. Yet it’s
misrepresented continuously, and at the highest levels of political
authority. They are just plain wrong.
True: this is a financial accounting identity.

False: the belief (whether Mosler holds it or not) that increased financial savings necessarily represent increased real savings.

So far, Mosler has not stated whether he equates financial savings with real savings. Regardless, I will clarify that anyone who would state such a thing as "an increase in financial savings necessarily means an increase in real savings" would be wrong.

If the US government expands its budget deficit and thereby expands the total amount of financial savings as a result (because all debt is held by somebody outside of the government sector as savings, as per Mosler's statement of the accounting identity), it does not follow that the pool of real savings (anything which may serve as a capital good in the production of higher order goods, for example, machinery, food stocks, clothing stocks, commodity stockpiles, fuel supplies, etc.) is increased proportionally, as an identity.

In other words, it would be wrong to assume that, because larger government deficits represent larger financial savings, larger financial savings represent larger real savings and therefore larger government deficits mean larger real savings which means we are all wealthier and economically better off if the government expands its deficit.

Mosler proceeds to explain how government deficits add to (financial) savings:
1. Start with the government selling $100 billion
in Treasury securities. (Note: this sale is voluntary,
which means that the buyer buys the securities
because he wants to. Presumably, he believes that
he is better off buying them than not buying them.
No one is ever forced to buy government securities.
They get sold at auction to the highest bidder who is
willing to accept the lowest yield.)
It is important to point out a clarification regarding Mosler's note that these purchases are "voluntary." They are "voluntary" within the conditions predicated by a government which has enacted legal tender laws (threat to use force against anyone who does not settle debts in the legal tender) and which guarantees its own ability to make good on its debts by its ability to ultimately tax individuals either directly or indirectly (through issuance of new money) to raise the funds needed. Of course, none of this can at all be considered "voluntary" because it rests on government's monopoly of the use of coercion.

The government does not make productive expenditures which return to the government its original cost plus profit (which can be used to pay principal and interest), unlike the productive expenditures of private investment. Government expenditure is consumptive-- once the government spends, it receives nothing in return. The wealth is gone. If the government finances its expenditures through debt, it must steal (tax) at some other time to raise the funds necessary to pay off the debt.

Without it's ability to steal (tax) the funds it needs to pay off its debt, the government would be left with nothing to pay off its debt. No one would voluntarily lend to the government who was at all concerned with getting a return on their loan because they'd realize the government would not have the ability to make good on that debt. The only people left financing the government's expenditures would be those who found it to be a charitable activity to do so.

It is within this context of coercion and manipulation of people's opportunities to dispose of what remains of their wealth as they see fit that Mosler states that people "voluntarily" buy government debt. Yes, no one is ever forced to buy government securities, but some people are forced to provide the government with the resources it needs to pay off these securities at time of maturity.

Mosler describes a conversation with Al Gore.

Early in 2000, in a private home in Boca Raton, FL, I
was seated next to then-Presidential Candidate Al Gore at a
fundraiser/dinner to discuss the economy. The first thing he
asked was how I thought the next president should spend the
coming $5.6 trillion surplus that was forecasted for the next 10
years. I explained that there wasn’t going to be a $5.6 trillion
surplus, because that would mean a $5.6 trillion drop in nongovernment
savings of financial assets, which was a ridiculous
proposition. At the time, the private sector didn’t even have
that much in savings to be taxed away by the government, and
the latest surplus of several hundred billion dollars had already
removed more than enough private savings to turn the Clinton
boom into the soon-to-come bust.
I pointed out to Candidate Gore that the last six periods of
surplus in our more than two hundred-year history had been
followed by the only six depressions in our history. Also, I
mentioned that the coming bust would be due to allowing the
budget to go into surplus and drain our savings, resulting in a
recession that would not end until the deficit got high enough
to add back our lost income and savings and deliver the
aggregate demand needed to restore output and employment.
I suggested that the $5.6 trillion surplus which was forecasted for the next decade would more likely be a $5.6 trillion deficit,
as normal savings desires are likely to average 5% of GDP
over that period of time.
That is pretty much what happened. The economy fell
apart, and President Bush temporarily reversed it with his
massive deficit spending in 2003. But after that, and before
we had had enough deficit spending to replace the financial
assets lost to the Clinton surplus years (a budget surplus takes
away exactly that much savings from the rest of us), we let the
deficit get too small again. And after the sub-prime debt-driven
bubble burst, we again fell apart due to a deficit that was and
remains far too small for the circumstances.
Mosler again is employing an unstated economic theory that he is using to interpret the events of the 2000s to reach a conclusion about the cause of the recession.

He claims that the deficit was "too small". It is unclear if he means to imply this was the cause of the "sub-prime debt-driven bubble" bursting or if he means to state that this was a contributing factor to the recession that followed, along with the government deficit which was "too small."

Mosler does not state how he calculates whether the deficit is "too small" before a recession occurs. It is "clear" to him in retrospect that if a recession occurs, it means the deficit was not large enough. But if this is true after the fact it must also necessarily be true before the fact and therefore there must be some theory or pattern of reasoning one could use to predict that the deficit is not "big enough" to meet the needs of the economy.

Individuals can save in vehicles other than government securities. If the government does not run a deficit and thereby expand the supply of government securities which people can place their savings into, individuals can choose to either spend their wealth on personal consumption or private savings/investments, such as bank deposits or the purchase of corporate debts.

Mosler doesn't explain why savings held with the government (Treasuries purchased by the non-government sector) serve to ward off recessions, but savings held with private businesses lead to recessions.

Mosler concludes:
So what is the role of deficits in regard to policy? It’s
very simple. Whenever spending falls short of sustaining
our output and employment, when we don’t have enough
spending power to buy what’s for sale in that big department
store we call the economy, government can act to make
sure that our own output is sold by either cutting taxes or
increasing government spending.
Taxes function to regulate our spending power and the
economy in general. If the “right” level of taxation needed to
support output and employment happens to be a lot less than
government spending, that resulting budget deficit is nothing
to be afraid of regarding solvency, sustainability, or doing bad
by our children.
If people want to work and earn money but don’t want to
spend it, fine! Government can either keep cutting taxes until
we decide to spend and buy our own output, and/or buy the
output (award contracts for infrastructure repairs, national
security, medical research, and the like). The choices are
political. The right-sized deficit is the one that gets us to where
we want to be with regards to output and employment, as well
as the size of government we want, no matter how large or how
small a deficit that might be.
What matters is the real life - output and employment - not
the size of the deficit, which is an accounting statistic. In the
1940’s, an economist named Abba Lerner called this,
“Functional Finance,” and wrote a book by that name
(which is still very relevant today).
You can read all about Abba Lerner's "functional finance" on Wikipedia here. Here are the major principles:
  • The principal economic objective of the state should be to ensure a prosperous economy.
  • Money is a creature of the state; it has to be managed.
  • Fiscal policy should be directed in the light of its impact on the economy, and the budget should be managed accordingly, that is, 'balance' is not important in itself.
  • The amount and pace of government spending should be set in the light of the desired level of activity, and taxes should be levied for their economic impact, rather than to raise revenue.
  • Principles of 'sound finance' apply to individuals. They make sense for households and businesses, but do not apply to the governments of sovereign states, capable of issuing money.
Mosler states that "functional finance" is "still very relevant today." This appears to be approval of functional finance and therefore the principles of functional finance. We therefore have some insight into the economic theory Mosler is utilizing to reach his ultimate conclusions about how monetary policy should be employed to benefit the economy.

It would appear safe to say that Mosler does not understand the functioning of markets and that he is an advocate of Keynesian economics (Lerner is cited as the inspiration for the use of monetary and fiscal policy as the two tools of Keynesian economics) as the principles of functional finance are similar/in many cases the same as Keynesian economics.

Therefore, all criticisms and debunkings of Keynesian economic theory will likely similarly apply to Mosler economics. In attacking some of the premises and claims of Keynesian economics, the foundation of Mosler economics is similarly eroded.

Many authors have spent much time and effort debunking these claims independently. Here is one such effort on The Myth of Functional Finance. If you are interested in those efforts I suggest you search for them, principle by principle, on your own. I won't waste time by repeating them all here. Rather I will try, in the future as I have so far up to this point, to address these principles when Mosler seems to be inferring them or relying upon them in his analysis, even when he does not openly state that that is what he is doing.

A Refutation of Mosler Economics and Mosler's 7DIF, Part II

The following is Part II in a seven part series, "A Refutation of Mosler Economics and Mosler's 7DIF", which seeks to critically examine the fiscal and monetary policy solutions offered by Warren Mosler [PDF], a former candidate for the US Senate in Connecticut in the 2010 election.

Warren Mosler:
Deadly Innocent Fraud #2:
With government deficits, we are leaving our debt burden to our children.

Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.
Notice Mosler's condition of "collectively". His argument rests upon this conditionality.

In fact, the idea of our children being somehow
necessarily deprived of real goods and services in the future
because of what’s called the national debt is nothing less than
Governmental debt has two effects on real wealth.

First, government expenditure is not productive but consumptive. The government does not earn any return on its expenditures which allow it to recover its original cost outlays along with a profit. It simply consumes real wealth now. Because that real wealth is spent now, it is not potentially available to be invested now by private individuals who would thereby create greater future wealth by means of their present investment.

So, to the extent that government spending consumes resources which can not be invested now to produce a greater abundance of real goods and services in the future, future generations will be deprived.

Second, government debt does change the distribution of wealth in the future. To pay its debts in the future, the government will have to either:
a.) issue new debt, whose purchase by private individuals will result in a shift of the distribution of real wealth from private to government hands
b.) acquire the necessary resources via taxation, which will result in a shift of resources from private to government hands
c.) issue new currency, which will result in a shift of resources from private to government hands by virtue of the non-neutrality of money

It is true that if some of the government debt is held by private individuals, the government's payments on principal and interest may simply result in a transfer from one individual (who is taxed or buys the new government debt) to another individual (who owns the previous government debt). But these distributions, while possibly the outcome of voluntary choices by two individuals to buy government debt (in the case where individual A is being repaid with money raised by the issuance of new debt to individual B) are overall not the outcome of an entirely voluntary, market process because the government's decision to raise debt in the first place is due to its unilateral discretion and has a market solely because buyers of the debt anticipate that the government will ultimately be able to extinguish its debt by taxing individual producers of wealth.

Mosler agrees:
Federal Government Taxing and Spending Does
Influence Distribution
Distribution is about who gets all the goods and services
that are produced. In fact, this is what politicians do every time
they pass legislation. They re-direct real goods and services
by decree, for better or worse. And the odds of doing it for
better are substantially decreased when they don’t understand
the Seven Deadly Innocent Frauds. Each year, for example,
Congress discusses tax policy, always with an eye to the
distribution of income and spending. Many seek to tax those
“who can most afford it” and direct federal spending to “those
in need.” And they also decide how to tax interest, capital
gains, estates, etc. as well as how to tax income. All of these
are distributional issues.
Mosler then states that recessions are caused by the government taxing away too much spending power:
Today (April 15, 2010), it’s clear that Congress is taking
more spending power away from us in taxes than is needed to
make room for their own spending. Even after we spend what
we want and the government does all of its massive spending,
there’s still a lot left unsold in that big department store called
the economy.
How do we know that? Easy! Count the bodies in the
unemployment lines. Look at the massive amount of excess
capacity in the economy. Look at what the Fed calls the
“output gap,” which is the difference between what we could
produce at full employment and what we are now producing.
It’s enormous.
This raises a question-- why would the individuals in the economy produce more than they have the means to purchase with their spending power left over after the government is finished taxing them?

And another question-- what prevents individuals from adjusting the prices they charge for these goods and services so that they will be able to purchase all of the leftover goods?

When I look at today’s economy, it’s screaming at me that the problem
is that people don’t have enough money to spend. It’s not
telling me they have too much spending power and are overspending.
Mosler seems to be relying on a particular economic theory of business cycles and spending here because it is not at all the case that the only conclusion to draw from observing a recession is that there is not enough money in the economy.

In Mosler's first chapter, he explains that when people pay their taxes, all that happens is that digits are changed downward in the checking account of the taxpayer, and changed upward in the accounts of the government. He provides an example of physical currency being destroyed if it is sent to the IRS, but such an occurrence doesn't change the total amount of money in the system, only the amount of money in the system which is currently in the form of paper currency. When people pay their taxes, it does not result in a shrinkage in the supply of money.

How then could the tax rates set by Congress be "too high" so that they have taken "too much" spending power from private individuals, thereby causing a recession? Congress spends all the money it acquires through taxation. The money doesn't leave the economy.

Where does the recession come from?

When we operate at less than our potential - at less
than full employment - then we are depriving our children
of the real goods and services we could be producing on
their behalf. Likewise, when we cut back on our support
of higher education, we are depriving our children of the
knowledge they’ll need to be the very best they can be in
their future. So also, when we cut back on basic research
and space exploration, we are depriving our children of all
the fruits of that labor that instead we are transferring to the
unemployment lines.
This is Mosler again making arguments based upon an unstated economic theory under which he is operating and interpreting his view of economic events.

Mosler makes pains to convince his readers that he FIRST looks at the economic facts as they are and SECOND draws conclusions from them, but it is unclear how he reaches these particular conclusions without a third step, predating the FIRST, which is to consider a particular economic theory. Mosler's theory, which he relies upon to reach his judgment after observing the facts, but which he does not state, appears to be "The government can improve future economic outcomes beyond their purely voluntary potential by redistributing real wealth from areas where private individuals would deploy it, to educational and research endeavors chosen by the government."

This is what Mosler seems to be implying by stating that when we "cut back" on spending on higher education, basic research and space exploration (three areas of the economy which are today nearly totally dominated by the government), the economy will operate at less than its potential in the future as a result. It is possible Mosler meant something other than this but it's unclear why he would state it like this if he did, knowing that government does dominate these areas and therefore a person making assumptions about what he is saying would likely be led to believe that Mosler is implying that more government spending in these areas at the expense of less private spending in other areas would be a net benefit to the economy.

Assuming this is what Mosler meant, an economic truth needs to be observed: the government has no means of calculating that its expenditures will produce superior economic outcomes from those chosen voluntarily by private individuals. The government does not operate on a profit and loss basis. It has no means to measure and compare the benefits or costs of its various expenditures because it doesn't engage in monetary calculation which is the common denominator of all other economic exchanges.

Because value is subjective, and all exchanges which occur voluntarily imply that each participant in the transaction subjectively determined he would benefit by making the exchange, and all exchanges which occur involuntarily (that is, via force or theft) imply that at least one participant in the transaction was harmed according to his value preferences, it can be inferred that no government expenditure (involuntary exchange) can potentially be superior in economic benefit to the voluntary exchange it displaced.

The lost output and depreciated human capital is
the real price we and our children are paying now that
diminishes both the present and the future. We make do
with less than what we can produce and sustain high levels
of unemployment (along with all the associated crime,
family problems and medical issues) while our children are
deprived of the real investments that would have been made
on their behalf if we knew how to keep our human resources
fully employed and productive.
This is Mosler's conclusion to the chapter. Again, what economic theory is Mosler operating off of when he makes these assertions about the potential creative/productive power of government spending?

I have made my own guess and declared this theory to be fallacious if it is indeed the one off of which he is operating.

Tuesday, November 23, 2010

Can The "No Labels" Movement Avoid Hyper-Partisanship?

I don't think so. And I think the movement is already, in its infancy, 100% phony. Here's the WSJ:
An alliance of centrist Republicans and Democrats is seeking to organize a grass-roots movement targeting the middle of American politics, a political sphere depopulated by the midterm elections and a vital tool for any potential third-party presidential candidate.

The group, called "No Labels," has drawn support from supporters and advisers of New York City Mayor Michael Bloomberg, the country's most powerful independent politician, raising questions about his national political ambitions. Mr. Bloomberg has been invited to attend the group's Dec. 13 launch.

Political analysts see a potential Bloomberg bid if Washington's divided government turns into gridlock, if the economy doesn't improve, and if former Alaska Gov. Sarah Palin and President Obama are the likely nominees. Mr. Bloomberg said he wouldn't consider running in 2012. "I have the best job in the world," he said.

No Labels is led by Democratic fund-raiser Nancy Jacobson and Republican strategist Mark McKinnon, who were introduced to each other by Kevin Sheekey, Mr. Bloomberg's political adviser.
So, what kind of politicians are moving in to support "No Labels"?
Backers include co-chairman of Loews Corp. Andrew Tisch, Panera Bread founder Ron Shaich and ex-Facebook executive Dave Morin. Los Angeles Mayor Antonio Villaraigosa, as well as U.S. senators Joseph Lieberman of Connecticut and Michigan's Debbie Stabenow, will attend the New York launch.
It's weird, I read that list and a perfect label for that group of scumbag plotters and liberty-grabbers comes to mind: "socialist".


Mike Bloomberg, nanny/welfare-socialist.
Tony Villaraigosa, nanny/welfare/ethno-socialist.
Joe Lieberman, war-socialist.

The political-center of this country is firmly socialist. The entire political spectrum of this country runs the gamut from big-time socialist to little-bitty socialist, people who love military socialism to people who love cultural socialism and everything in between. Nowhere on that spectrum lies anyone who gives a damn about pure, unbridled individual liberty. Appeals to bring people back to the center are appeals to bring on more socialism. It's clear this is the case judging by the kind of interventionist slimeballs that are being attracted to this organization.

Classic Misdirection: TSA Blames Opt-Out Travelers For Delays

Federal transportation screeners, airlines and travelers have been preparing for tomorrow, one of the busiest travel days of the year. It may be complicated by some groups’ planned protests of body scanners.

Passengers should “use some judgment” and not tie up others traveling to see loved ones over the holiday, John Pistole, administrator of the security agency, said yesterday.

“We’ll be fully staffed,” Pistole said on NBC’s “Today” show. “The question becomes what happens to the wait times, and do people end up missing flights because a small or large group, whomever it is, decides to protest and delay those vast majority of people who just want to get home for the holidays.”
The pragmatist credo: "You may have just as much liberty as you want, up to the point at which you prevent me from boarding my holiday travel airplane, then you may have no more."

In other words, can it, liberty-nuts. You're getting in the way of our progress, the way the kulaks, Jews, Tutsis and various petty bourgeoisie did.

Why Did The North Koreans Shell The South? Who Cares: Time To Craft Policy

Here's an example of what passes for "news coverage" and "expert analysis of current events" within esteemed institutions of journalism such as the Wall Street Journal:

In case you missed it, the script is as follows:
-Summarize the (murky, indefinite) details
-Bring on an "expert", preferably an academic tied to a former or current political regime, and ignore that because of this status the person is far from an impartial observer
-Allow the "expert" to provide insight and commentary that is about as valuable and explanatory as that which you might get from flash-polling the average Joe walking down the street; allow the "expert" to litter his meaningless response with lots of hope, conjecture and outright guessing
-Don't call the "expert" out on his inability to bring anything concrete, clued-in and specific to the table
-Allow the "expert" to fill the rest of the time-slot with a brazen attempt at conditioning the mind of the viewer with what he thinks should be the proper "policy response"

No one seems to have any clue what is going on in the world or why, least of all the journalists and policy-makers. This little clip is strong evidence of it. The "expert" from Georgetown was able to provide absolutely zero context to this event aside from mentioning the violence could be related to the transition in power in North Korea recently (I assume that reasoning would also apply to Obama's stepping-up of CIA drone attacks in Pakistan following his ascension to power). No discussion of what is happening in that country, who the players are, what role might the Chinese government be playing behind the scenes and how might this relate to recent economic and political saber-rattling between the US government and Chinese government, how often things like this happen, why one country's military is able to bombard another without it resulting in a full-on shooting war (in other words, what calculus is used to determine tolerable levels of violence) and no hint of whether the South Korean and other allied militaries and politicians have provided any recent provocations of their own.

Just, "Wow, that was bizarre, may be related to X, Y or Z, but here's the important thing-- let's make sure we craft the proper policy response to this event!"

Kind of reminds you of the United States government's response to the financial meltdown: forget about figuring out why this happened, let's start proposing solutions everybody! (Oh and by the way, please ignore that the solutions don't address the problems, which they obviously couldn't because we never discussed them in the first place and really, this whole crisis has just given us the perfect excuse to implement some new policies we've been dying to put in place the whole time anyway.)

The world badly needs a free market-perspective, skeptical, thoughtful, honest and intelligent press corps. Not this clueless, immature, naive, political lapdog gang of monkeys in clown suits.

Thursday, November 11, 2010

Whose Animal Spirits?

Following the commentaries and observations in various major financial media, it's often difficult to tell whose references to Keynes's "animal spirits" theory are done seriously and whose are done tongue-in-cheek. Seeing as how Keynesianism is firmly entrenched as an economic philosophy amongst most investment professionals, however, I have to assume that for the most part the references are made in earnest.

That got me wondering: when an economic commentator refers to the dearth of animal spirits as an originating cause of a dramatic decline in aggregate demand, whose specific animal spirits do they have in mind? In other words, in this Scapegoat Economic view, who is being blamed for not doing their patriotic duty in demanding enough final goods like everybody else?

It would seem reasonable to believe that the commentator does not have himself in mind. It's probably also likely that he is not secretly harboring a grudge against any of his friends or family for suddenly losing their animal spirits and neglecting to demand enough goods and services from others. Personally speaking, at the onset of this most recent recession I don't recall demanding fewer goods and services from those around me and I don't know anyone personally who came clean in a moment of immense self-doubt and sense of unbridled guilt to admit that they just couldn't bring themselves to demand enough from others at the beginning of the recession, thereby making their own small contribution to the mess we find ourselves in today.

It's actually a tiny bit humorous-- the much vilified, often castigated consumer of the current recession was well-known as a hero before hand, demanding every year more houses, more cars, more food, more energy, more Apple products and gadgets... more, more, more!

And so I am left wondering, "whose animal spirits" have up and gone away and left us with this economic mess? Will the real economically-depressed individuals please stand up?

Wednesday, November 3, 2010

A Refutation Of Mosler Economics And Mosler's 7DIF, Part I

The following is Part I in a seven part series, "A Refutation of Mosler Economics and Mosler's 7DIF", which seeks to critically examine the fiscal and monetary policy solutions offered by Warren Mosler [PDF], a former candidate for the US Senate in Connecticut in the 2010 election.

Warren Mosler's 7DIF begins with the first of the "Seven Deadly Innocent Frauds":
Deadly Innocent Fraud #1:
The federal 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.

Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.
From these "facts" (Mosler's face-value observation of what physically occurs when the government finances one of its own expenditures) Mosler proceeds to spin a web of confusion. He starts by pointing out that all government financing today takes place on a series of digital spreadsheets maintained by commercial banks and government agencies. When taxes are paid, a taxpayer's spreadsheet balanced is lowered and a government spreadsheet balance is raised. Similarly, when the government spends, one of the government's spreadsheet balances is lowered and the spreadsheet balance of the recipient of that transfer (a contractor, welfare recipient, bribed foreign dignitary, etc.) is raised.

Based on this observed mechanic, Mosler assumes that government finance is similar in arbitrariness to score keeping in a bowling alley or on a football field:
Your team kicks a field goal and on the scoreboard, the score changes from, say, 7
points to 10 points. Does anyone wonder where the stadium got those three points? Of course not! Or you knock down 5 pins at the bowling alley and your score goes from 10 to 15. Do you worry about where the bowling alley got those points? Do you think all bowling alleys and football stadiums should have a ‘reserve of points’ in a “lock box” to make sure you can get the points you have scored? Of course not!
This is the first of many of Mosler's confusions about the cosmetic appearance of reality and the actual state of reality underneath it. The analogy he draws is flawed.

In a game of sport, the point system is a mathematical abstraction used to keep track of rank amongst the players within the context of the game. Though it is awkward to even contemplate such a possibility, participants in a game such as football or bowling could conceivably recognize that one or another participant or team is "ahead" or "behind" without giving out and assigning numerical scores to each. Similarly, aside from whatever time limits might be imposed on the players according to the rules of the game, the potential score that can be achieved by anyone is infinite-- there is no reserve of points that can be used up, nor is there a need for there to be one. The score does not represent scarcity or ownership over any resource, it merely records relative progress and rank.

This is entirely different from the purpose and operations of a monetary system, even one which is entirely fiat and mostly exists in virtual reality amongst a matrix of spreadsheets, as most modern monetary systems exist in their present form. In a monetary system, the money itself represents potential claims to real, existent goods and services. All else being equal (ie, the money supply is not increasing or decreasing), the amount of money each person has does not represent how they are ranked against other money holders but rather how much actual purchasing power they might lay claim to.

If I have $20 and you have $10, I am not "winning." Money balances are not a score keeping system. They're simply a means of storing real value and they provide a means for facilitating exchange between real goods and services. The abject failure of Mosler's analogy should be obvious when you consider the following:

The government does not produce any real wealth for itself; all wealth the government controls must first be produced by private individuals and then taxed into the control of the government. When the government creates new money, it does not create new wealth. That is to say, if the government desires to purchase a $20,000 pick-up truck for a government agency, it must tax $20,000 worth of value from the public, at which point it can exchange that value for an actual pick-up truck. If the government decides to finance this expenditure through the issuance of $20,000 of new money (digital or paper currency), the creation of the new money does not itself summon a new pickup truck into existence. The government still must spend that new money on the truck, and the reason the new money has the value of $20,000 is because it siphoned a fraction of that total value from the previously existing stock of money. Because this transfer of wealth was involuntary and carried out by the government in the name of the public interest, it qualifies as a tax.

Mosler misses this because he never stops to examine where the wealth that the government comes to control by creating new money actually came from in the first place. It's odd that he misses it because his next (flawed) analogy implicitly acknowledges it, even if Mosler does not:
What they all seem to miss is the difference between spending your own currency that only you create, and spending a currency someone else creates. To properly use this common federal government/household analogy in a meaningful way,
we next look at an example of a “currency” created by a household.

The story begins with parents creating coupons they then use to pay their children for doing various household chores. Additionally, to “drive the model,” the parents require the children to pay them a tax of 10 coupons a week to avoid punishment. This closely replicates taxation in the real economy, where we have to pay our taxes or face penalties.

The coupons are now the new household currency. Think of the parents as “spending” these coupons to purchase “services” (chores) from their children. With this new household currency, the parents, like the federal government, are now the issuer of their own currency. And now you can see how a household with its own currency is indeed very much like a government with its own currency.

Let’s begin by asking some questions about how this new household currency works. Do the parents have to somehow get coupons from their children before they can pay their coupons to their children to do chores? Of course not! In fact, the parents must first spend their coupons by paying their children to do household chores, to be able to collect the payment of 10 coupons a week from their children. How else can the children get the coupons they owe to their parents?
Mosler has the last question exactly backwards. The proper question to examine in a study of monetary economics is not, "How do real goods and services obtain their monetary value?" but rather, "How does money obtain its value in terms of real goods and services?" Notice, again, the simple creation of the coupons in this example does not result in the generation of completed chores. It is the effort of the children themselves in doing the chores which the parents force the children to bid away for coupons lest they pay a penalty, which the parents are ultimately taxing with their coupon scheme. Without the children producing chores, the parents would not have the chores completed and they would be forced to produce chores themselves.

Consider Mosler's example another way: say that the parents created for themselves thousands of coupons, so many more coupons that the children could not produce the related "value" in chores if they were to slave away 24 hours a day, 7 days a week. Would the simple fact that the parents created so many coupons mean that they had successfully acquired the real chore wealth that the coupons themselves are supposed to represent? Would their house, say, suddenly sprout a second or third story, or a remodeled kitchen?

No, it would not, because that value had not yet been produced by the children for the parents to tax away from them.

In summary so far, the government does need to tax real wealth away from the public if it desires to use real wealth in pursuit of its own ends. Furthermore, the creation of new money (inflation), is one way in which the government chooses to accomplish this and, though today it is as simple as changing digits on spreadsheets, it is nonetheless still a tax.

In this light, we can see that Mosler's next example about the origin of money and the purpose of government spending is also confused and misleading:
Now let’s build a national currency from scratch. Imagine a new country with a newly announced currency. No one has any. Then the government proclaims, for example, that there will be a property tax. Well, how can it be paid? It can’t, until after the government starts spending. Only after the government spends its new currency does the population have the funds to pay the tax.

To repeat: the funds to pay taxes, from inception, come from government spending (or lending). Where else can they come from?

Yes, that means that the government has to spend first, to ultimately provide us with the funds we need to pay our taxes.
An important distinction should be made here-- the new national currency being formulated by Mosler and spent into existence by the example government is a fiat currency, that is to say, it's value is derived solely from the issuing government's ability to use coercion to change the attitudes of the country's various citizens toward the currency.

Without a legal tender law backed by government force, individual market participants would be free to choose other commodities as their preferred medium of exchange. And without taxation, which is a coercive expropriation of private property by the government in order for it to finance itself, no market participant would have any incentive to accept the new fiat currency as payment. Without a tax liability payable only in the new government currency, no one would have any need or desire to utilize the new bills.

Mosler asks, "How else can it be paid?" In the absence of legal tender laws and government fiat currency, decreed taxes could be paid through direct levy of actual goods and services (that is, real wealth). In other words, rather than taxing "a tank's worth" of currency from National Tank Company, the government could simply force National Tank Company to provide it with one tank as payment of its specific tax liability. Similarly, rather than taxing "a few hours salary of an accountant" from an accountant, the government could impress the accountant into service to do accountancy for the government as payment of the accountant's specific tax liability. The fact that Mosler was unable to imagine or articulate these alternatives leads one to believe he meant to imply the conditions of legal tender laws.

The trick here, the confusion in Mosler's thinking, is the conflation of real wealth with taxable funds, for example:
We need the federal government’s spending to get the funds we need to pay our taxes.
The implication (in case it is not obvious, though it will become more so as we further explore Mosler's logic) is that we need government fiat currency to pay our taxes; we need government spending to acquire the fiat currency; therefore we need government spending to drive the economy.

Again, this logic puts the cart before the horse. Without the production of real wealth by individuals in the first place, government would have no resources which it could spend its currency on. One problem of many with Mosler Economics is that his monetary model begins in the middle of itself, so to speak. It utilizes for explanation of how a phenomenon occurs a set of conditions that could only exist if the phenomenon in question had already occurred. In this specific case, Mosler tries to explain how a new currency comes into use by claiming that the government spends it into existence, as if this is an "originating" act. The truth of the matter is that a previously existing market economy, complete with a functioning market currency, needed to already exist in order for their to be any goods and services on which the government could spend its newly created currency.

Yes, without the spending of the government itself (backed up by threats of force by those who refuse to accept the currency) people would be bereft of a mechanism to acquire the legal tender solely permissible to use in paying their taxes. But that does not mean that it is government spending which drives the productive process itself underlying this mechanism which allows the government to thereby acquire real wealth for its own consumption.

Government spending does not create that which government ultimately seeks to spend (consume)! Let's continue:
The fact that government spending is in no case operationally constrained by revenues means there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.

This, however, does NOT mean that the government can spend all it wants without consequence. Over-spending can drive up prices and fuel inflation.

What it does mean is that there is no solvency risk, which is to say that the federal government can’t go broke, and there is no such thing as our government “running out of money to spend,” as President Obama has incorrectly stated repeatedly.
Mosler again hangs his hat on a technicality. The objective of government finance is to provide the government the means to acquire and expend claims to real goods and services within the economy. The objective of government finance is not to impress people with its digital accountancy tricks. The acquisition and expenditure of fiat currency by the government is not the end goal, but rather a means to the end goal of controlling the distribution of a proportion of a society's real wealth.

Mosler's explanation is true only if the term "solvency" is defined as "able to make good all liabilities in terms of a fiat currency with infinite potential supply" rather than the way the term is normally used to mean "able to make good all liabilities in terms of real goods and services promised."

The government creates entitlements for various people which are in turn liabilities for the government. In effect, the government pledges to various interest groups their ability to receive from the government definite amounts of real goods and services.

Let's say that one of those promised entitlements is that everyone gets a free prime ribeye steak each week. The capital markets, seeing that this is a frivolous use of wealth and noticing also that the government has already pledged to everyone an entitlement in a free car, a free home, a free motorboat and a free college education, decides to refuse to subscribe to the government's issuance of debt to pay for the steaks and so the government is left with no choice but to print up more of its currency to float its own debt. This increase in currency brings with it a rise in prices, including prime ribeye steak prices, resulting in a shortfall in the government's steak-purchase account.

At this juncture, the government faces two options: it can refuse to make good on all outstanding entitlements by only issuing prime ribeye steaks to a fraction of those it originally promised them to, or it can economize on the entitlement by issuing everyone a pound of 85% lean ground beef.

In this example, the government may have maintained its "solvency" by matching the money-value of its own liabilities with sufficient issuance of its own money, but it did not simultaneously manage to avoid defaulting on its obligations either in the form of outright failure to produce part of the obligation or by reducing the quality of the obligation made. The point is that Mosler is correct in a technical sense, but not in a meaningful sense, the consequences of which contain real implications for a society's material well-being.

The fact is: government deficits can never cause a government to miss any size of payment. There is no solvency issue. There is no such thing as running out of money when spending is just changing numbers upwards in bank accounts at its own Federal Reserve Bank.
There is no "solvency" issue, but there is always a solvency issue in the sense that the government's ability to make good in real terms on its various liabilities is not infinite.

Still operating under the flawed assumption that he has disproved the government's need to finance itself via taxation, Mosler then produces an example to explain why the government taxes in the first place:
The following is not merely a theoretical concept. It’s exactly what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British coins. So the British placed a “hut tax” on all of their dwellings, payable only in British coins. Suddenly, the area was “monetized,” as everyone now needed British coins, and the local population started offering things for sale, as well as their labor, to get the needed coins. The British could then hire them and pay them in British coins to work the fields and grow their crops.

This is exactly what the parents did to get labor hours from their children to get the chores done. And that’s exactly how what are called “non convertible currencies” work (no more gold standards and very few fixed exchange rates are left), like the U.S. dollar, Japanese yen, and British pound.
In other words, individuals laboring for fiat currencies are in fact the slaves of those currency regimes. Consider what Mosler is really illustrating with his example from Africa-- none of the natives had any interest in voluntarily working the British fields. Only by threatening to seize their dwellings if they did not pay a tax liability priced in British currency did the British manage to force the native Africans into labor for them.

The relationship of an individual with a tax liability in US dollars to the US government is the same. It is forced labor. It does not matter how one might justify such a relationship, perhaps with appeals to the Greater Good or the commonwealth or to serving society. The inescapable fact, which Mosler stumbles upon rather non-controversially, is that fiat currency regimes are forced labor regimes. At this point, the libertarians and the cynics amongst us might feel it appropriate to question just who it is that is serving who in these schemes.

If you're not convinced that this is what Mosler is hinting at, albeit it unawares, consider his explanation of how an economy should be organized to allow for the proper proportion of private and public expenditure:
Therefore, the way I see it, we first set the size of government at the “right” level of public infrastructure, based on real benefits and real costs, and not the “financial” considerations. The monetary system is then the tool we use to achieve our real economic and political objectives, and not the source of information as to what those objectives are. Then, after deciding what we need to spend to have the right-sized government, we adjust taxes so that we all have enough spending power to buy what’s still for sale in the “store” after the government is done with its shopping.
This is the model for a command economy, not a free market economy. A command economy serves the interests and objectives of the politicians and other government agents who control it. A free market economy serves the interests and objectives of the many producer/consumers who compose it. In a command economy, the monetary system is manipulated (albeit never successfully over the long run) to direct the productive activities toward the goal of central planners. In a free market economy, the prices freely arrived at by the voluntary exchanging of goods provide signals and incentives for various producers to meet the needs and wants of various consumers in the most cost-effective way possible.

Once again, Mosler has it exactly backward, if the goal of Mosler Economics is to promote the satisfaction of individual consumers and not the satisfaction of political agents. "Financial" considerations are the consideration of real costs and real benefits. Attempts to suppress or manipulate the free outcomes of a monetary system to promote the political goals of a government are the denial of the considerations of real costs and real benefits. They are the swapping of real costs and real benefits for arbitrarily distributed costs and imagined, whimsical benefits.

Furthermore, it is impossible to plan the "right" size of public infrastructure to achieve a desired set of real benefits without first knowing what those desired real benefits are and which of them are ascertainable within the context of real costs. If public infrastructure seeks to assist with the production of economic goods and services it must itself be a part of the economic process, it can not stand outside of it. As Mosler himself says one paragraph earlier:
The real “costs” of running the government are the real goods and services it consumes - all the labor hours, fuel, electricity, steel, carbon fiber, hard drives, etc. that would otherwise be available for the private sector.
Public infrastructure has real costs. One can not take as an economic starting point their provision being a "given" and then go from there. An economic actor says, "I need to transport my cargo from A to B, therefore, I will build a road." The purpose for the road's construction predates the road itself. Mosler Economics proposes that one can first build the road and then discover or create the purpose of the road being built after the fact.

Taken literally and at face value, this form of economic "planning" is absurd. It would amount to all manner of things and goods being constructed and fabricated in what could only be described as a truly random fashion-- a dam built across a dried up riverbed, a canal dug through the middle of a land-locked city, a road built where nobody would drive upon it. Later, after they are built, the economy would be tasked with somehow finding a use for them.

Of course, this is not how public infrastructure is actually planned. For any of these projects to be rationalized there would first need to be a purpose, and because these projects are not being initiated and funded by the voluntary, private marketplace but rather by the coercive public apparatus of government, the rationalization of these projects can only be to satisfy the demands of special interest groups or the fantastic dreams and ambitions of politicians and government agents. These projects would not be guided by the ultimate demands of the end consumers through price signals of the market, which take into account the real costs of their realization but rather by the demands and declarations of government representatives who can't be troubled by nuisances like "financial" considerations, as Mosler puts it.

Mosler's "shopping spree" analogy is similarly flawed. Tax levels can not be arbitrarily raised or lowered in order to clear the market of what goods and services remain after the government has picked it over, thereby arming consumers with "enough" spending power. Consumers demand real goods and real services of specific quantities, qualities and types according to their individual preferences. If the government comes in and buys all the green sweaters in the economy, for instance, it doesn't matter how much spending power people have-- they will go without their desired green sweaters and thus suffer unnecessary economic hardship, their wants unsatisfied.

In other words, the government taxes us, and takes away our money, to prevent inflation, not to actually get our money in order to spend it.
Mosler's ultimate conclusion is false. As explained above, inflation is a tax. Government levies taxes to acquire control over real resources. The government's tax level does not regulate the issuance of new currency (inflation) or the potential rise in prices which is an outcome of that currency issuance.

Mosler has not succeeded in refuting the first of his so-called "Seven Deadly Innocent Frauds" but has instead introduced his own Deadly Fraud, the innocence of which is questionable and the ignorance of which is undeniable.