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.
Facts:
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
imports.

As it stands on its face, there is nothing I disagree with here. Let's dig deeper and see if there is anything controversial.

Mosler:

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."

Mosler:

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.

Mosler:

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.

Mosler:

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.