Warren Mosler - The 7 Deadly Innocent Frauds of Economic Policy

One of the brightest minds in finance.

CNBC (6/11/10)

Warren Mosler is one of the most original and clear-eyed participants in todays debates over economic policy.

JAMES GALBRAITH, FORMER EXECUTIVE DIRECTOR, JOINT ECONOMIC COMMITTEE AND PROFESSOR, THE UNIVERSITY OF TEXAS - AUSTIN

I can say without hesitation that Warren Mosler has had the most profound impact on our understanding of modern money and government budgets of anyone I know or know of, including Nobel Prize winners, Central Bank Directors, Ministers of Finance and full professors at Ivy League Universities. It is no exaggeration to say that his ideas concerning economic theory and policy are responsible for the most exciting new paradigm in economics in the last 30 yearsperhaps longerand he has inspired more economists to turn their attention to the real world of economic policy than any other single individual.

DR. MATTHEW FORSTATER, PROFESSOR OF ECONOMICS, UNIVERSITY OF MISSOURI - KANSAS CITY

Warren is one of the rare individuals who understand money and finance and how the Treasury and the Fed really work. He receives information from industry experts from all over the world.

WILLIAM K. BLACK, ASSOCIATE PROFESSOR OF ECONOMICS & LAW, UNIVERSITY OF MISSOURI - KANSAS CITY

He [Warren Mosler] represents a rare combination: someone who combines an exceptional knowledge of finance with the wisdom and compassion required to get us an array of policies that will bring us back to sustainable full employment.

MARSHALL AUERBACK, GLOBAL PORTFOLIO STRATEGIST, RAB CAPITAL AND FELLOW, ECONOMISTS FOR PEACE & SECURITY

In this book, Warren Mosler borrows John Kenneth Galbraiths notion of innocent fraud and identifies seven of the most destructive yet widely held myths about the economy. Like Galbraith, Mosler chooses to accept the possibility that the fraud is unintentional, resulting from ignorance, misunderstanding or, most likely, from application of the wrong economic paradigm to our real world economy. To put it as simply as possible, many of the most dangerous beliefs about the way the economy functions would have some relevance if the U.S. were on a strict gold standard. Yet, obviously, the U.S. dollar has had no link whatsoever to gold since the break-up of the Bretton Woods system.

So what are the deadly (yet perhaps innocent) frauds? First, government finance is supposed to be similar to household finance: government needs to tax and borrow first before it can spend. Second, todays deficits burden our grandchildren with government debt. Third, worse, deficits absorb todays saving. Fourth, Social Security has promised pensions and healthcare that it will never be able to afford. Fifth, the U.S. trade deficit reduces domestic employment and dangerously indebts Americans to the whims of foreignerswho might decide to cut off the supply of loans that we need. Sixth, and related to fraud number three, we need savings to finance investment (so government budgets lead to less investment). And, finally, higher budget deficits imply taxes will have to be higher in the futureadding to the burden on future taxpayers.

Mosler shows that whether or not these beliefs are innocent, they are most certainly wrong. Again, there might be some sort of economy in which they could be more-or-less correct. For example, in a nonmonetary economy, a farmer needs to save seed corn to invest it in next years crop. On a gold standard, a government really does need to tax and borrow to ensure it can maintain a fixed exchange rate. And so on. But in the case of nonconvertible currency (in the sense that government does not promise to convert at a fixed exchange rate to precious metal or foreign currency), none of these myths holds. Each is a fraud.

The best reason to read this book is to ensure that you can recognize a fraud when you hear one. And in his clear and precise style. Mosler will introduce you to the correct paradigm to develop an understanding of the world in which we actually live.

L. RANDALL WRAY, PROFESSOR OF ECONOMICS, UNIVERSITY OF MISSOURI - KANSAS CITY, RESEARCH DIRECTOR, CENTER FOR FULL EMPLOYMENT & PRICE STABILITY, SENIOR SCHOLAR, LEVY ECONOMICS INSTITUTE, AUTHOR OF UNDERSTANDING MODERN MONEY, THE KEY TO FULL EMPLOYMENT AND PRICE STABILITY AND EDITOR, CREDIT AND STATE THEORIES OF MONEY: THE CONTRIBUTIONS OF A. MITCHELL INNES

WRITINGS of WARREN MOSLER

(found on www.moslereconomics.com)

The Seven Deadly Innocent Frauds

Galbraith/Wray/Mosler submission for February 25

Mosler Palestinian Development Plan

Soft Currency Economics

Full Employment AND Price Stability

A General Analytical Framework for the Analysis of Currencies and

Other Commodities

The Natural Rate of Interest is Zero

2004 Proposal for Senator Lieberman

EPIC - A Coalition of Economic Policy Institutions

An Interview with the Chairman

What is Money?

The Innocent Fraud of the Trade Deficit: Whos Funding Whom?

The Financial Crisis - Views and Remedies

Quantitative Easing for Dummies

Tax-Driven Money

SEVEN DEADLY INNOCENT FRAUDS

OF

ECONOMIC POLICY

WARREN MOSLER

VALANCE CO., INC.

COPYRIGHTWarren Mosler, 2010

Published by Valance Co., Inc., by arrangement with the author

www.moslereconomics.com

All rights reserved, which includes the right to reproduce this book or portions thereof in any form whatsoever except as provided by the U.S. Copyright Law.

Library of Congress Cataloging-in-Publication Data in progress for

ISBN: 978-0-692-00959-8

The text of this book is set in 12 pt. Times. Printed & bound in the U.S.A.

16 15 14 13 12 11 10 10 9 8 7 6 5 4 3 2 1

FIRST IMPRESSION

VALANCE CO., INC.

CONTENTS

Foreword

Prologue

Overview

Introduction

Part I: The Seven Deadly Innocent Frauds

Part II: The Age of Discovery

Part III: Public Purpose

*NOTE: Page numbers have been removed in this electronic book as they will depend upon file type, device type, and user preferences. See electronic table of contents.

Warren Mosler is a rare bird: a self-taught economist who is not a crank; a successful investor who is not a blowhard; a businessperson with a talent for teaching; a financier with a true commitment to the public good.

We have co-authored testimony and the occasional article, and I attest firmly that his contributions to those efforts exceeded mine.

Many economists value complexity for its own sake. A glance at any modern economics journal confirms this. A truly incomprehensible argument can bring a lot of prestige! The problem, though, is that when an argument appears incomprehensible, that often means the person making it doesnt understand it either. (I was just at a meeting of European central bankers and international monetary economists in Helsinki, Finland. After one paper, I asked a very distinguished economist from Sweden how many people he thought had followed the math. He said, Zero.) Warrens gift is transparent lucidity. He thinks things through as simply as he can. (And he puts a lot of work into thistrue simplicity is hard.) He favors the familiar metaphor, and the homely example. You can explain his reasoning to most children (at least to mine), to any college student and to any player in the financial markets. Only economists, with their powerful loyalty to fixed ideas, have trouble with it. Politicians, of course, often do understand, but rarely feel free to speak their own minds.

Now comes Warren Mosler with a small book, setting out his reasoning on seven key issues. These relate to government deficits and debt, to the relation between public deficits and private savings, to that between savings and investment, to Social Security and to the trade deficit. Warren calls them Seven Deadly Innocent Fraudstaking up a phrase coined by my father as the title of his last book. Galbraith-the-elder would have been pleased.