Mosler: "7 Deadly Innocent Frauds of Economic Policy" (BC#2)

[Seneca]

But, Jacob, favoring soft over hard money does not require one to believe that governments will act in the best interest of the people. (I sure don't!). It requires only an understanding that government, through rule of law, can control economic reality completely in either scenario. Even the most democratic, limited government, can exert complete control. This is because there is no practical way to separate laws that affect "money" from those that don't. Hard money offers no protection from a government that chooses to use law or other means to take more social resources to serve the public purpose or to favor one group of citizens over another.

Did you really just argue a money issued solely at the whim of the government, and intentionally manipulated to produce their desired outcomes, gives the people more freedom from government control than a hard money not manipulated at the whim of a government?

Money is not a social contract. It is a convenient token to allow the butcher to buy bread without trading a pound of meat for it.

Fiat monies (whether Dollars, Bitcoins or Chuck E Cheese tokens) give the issuer another tool to manipulate the economy with, but it is by no means a tool of unlimited power.

[jacob]

@baulrich - You need to consider the practical issues. Sure, a government with hard-money can enact a law that has the police go from door to door to collect 10% of people's hoard of hard money. They can check money-flows at bottle necks too. This is how the Eastern Block countries did it with foreing currency (mainly greenbacks) before the cold war ended.

And sure, the government with soft money can just adjust their central accounting and write a check out to themselves so as to increase the money supply by 10%.

Both has the effect of increasing the governments purchasing power to 10% of the economy.

Rhetorically speaking, which one do you think will go over best with the public?

In principle, the laws is the same, but in practice, the behaviour of the market participants (the citizens) will not be.

Therefore, hard money DOES put some constraints on what the government can do because there are some laws which will be much harder to execute.

One related example ... consider why income taxes are deducted directly from each paycheck BEFORE people receive their wages. Compare that to sending in a check for your taxes every month separately. Also compare to doing it annually. These three scenarios are financially the same and laws could be made for all three of them. So why is the first method universally preferred?

Because with soft money you can fool most of the people most of the time. With hard money that gets a lot harder.

[baulrich]

One related example ... consider why income taxes are deducted directly from each paycheck BEFORE people receive their wages. Compare that to sending in a check for your taxes every month separately. Also compare to doing it annually. These three scenarios are financially the same and laws could be made for all three of them. So why is the first method universally preferred?

The auto-deduction method is preferred by the government collecting the tax for the same reason that the service provider wants the customer to set up auto-payment: to do all they can to get paid promptly and reduce the overhead associated with collecting payments. I'm sure a large percentage of taxpayers and consumers prefer those methods because it reduces their administrative overhead, whether or not they believe there tax or utility bill is too high.

@baulrich - You need to consider the practical issues. Sure, a government with hard-money can enact a law that has the police go from door to door to collect 10% of people's hoard of hard money. They can check money-flows at bottle necks too. This is how the Eastern Block countries did it with foreing currency (mainly greenbacks) before the cold war ended.

And sure, the government with soft money can just adjust their central accounting and write a check out to themselves so as to increase the money supply by 10%.

That's why I included the examples of different income tax rates for earned income vs. capital gains or laws that allow money "accounts" to exist that are tax-deferred. Those are rules that most people would agree are not "extreme" use of government power. And they are laws that likely to "go over well with the public" regardless of whether hard or soft money reigns. The point is that governments need not go to "extreme" measures under either scenario to pass laws that have real economic impact on currency users. Laws DO impact economic actors in a variety of other ways besides "debasing the currency".

I'm not sure of the point you are trying to make with your "extreme" example of government police collecting "hard" money from citizens. The 10% tax (wealth tax in your example) is extreme because it's a 10% wealth tax! and it's being collected by police! I'm presuming the hard-money economy in this example uses government-issued currency (backed by hard money) and not just hard money itself. But if that government is thinking practically, as you suggest, it will just print the additional money it needs. It does not require police force for a government to debase a hard currency!

As an aside, one of the hard-money advocates should clarify for me what should be money. Gold? Silver? Both? anything else?

To go back to the monopoly example: Players could agree on an updated set of rules that include:
- players received $1000 (instead of $200) each time they passed Go
- a 20% "real estate" tax for each house/hotel each time Go is passed
- a separate "bank" that would pay 10% interest per round to players with deposits there, but deposits were required to be kept there for 20 turns.
- an immediate, one-time 10% wealth tax

If these rules are proposed to players before a game is started, players may disagree about the merits of the new rules, but ultimately no player is discriminated against as long as they are all smart enough to employ a strategy that makes sense in light of the new rules.

However, if the rules are proposed in the middle of an existing game, it's hard to change any rules without unfairly discriminating against someone. The extent to which each players is affected depends on his status in the game and how his assets are allocated.

But... in either of those cases, what if the person acting as the banker also announced that money in the bank was low and there would not be enough money to play the next round unless monopoly money was taken (put in the bank) from last year's worn out game?

Players may disagree with the new rules because they
a) think they will hurt their ability to prosper in the game
b) make the game more unfair to some players

But I can't understand why any player would object to the need for the bank to obtain more money. In these scenarios, it's the rule changes that alter the dynamics of the game; not the decision to fill the bank with new money.

[George the original one]

> I'm not sure of the point you are trying to make with your "extreme" example of government
> police collecting "hard" money from citizens. The 10% tax (wealth tax in your example) is extreme
> because it's a 10% wealth tax! and it's being collected by police! I'm presuming the hard-money
> economy in this example uses government-issued currency (backed by hard money) and not just
> hard money itself. But if that government is thinking practically, as you suggest, it will just print
> the additional money it needs.

Wait a minute... I thought hard money was supposed to prevent the ability of the government to print money? If the government can debase that hard money, then it's not really hard money, is it?

[henrik]

The auto-deduction method /.../ administrative overhead

You've obviously never been an employer:) Auto-deduction doesn't reduce anyone's overhead. The taxpayer gets their annual tax bill/refund from the government anyway. The only difference is 12x2 extra transfers per employee per year, complication of the tax declaration, and an extra party, the employer, brought in.

[jacob]

@baulrich - Because disallowing the bank to fill itself up also disallows some of the rules. It's a super-rule which prevents the bank from giving away more than it takes in.

Players may object to the super-rule because they don't like any of the rules that the super-rule enables.

They can do so politically or by altering their behavior such as doing less business with the bank which effectively means holding less of the bank's cash. The latter is the market response.

[baulrich]

Well, at least we have reached the crux of the disagreement.

It's a super-rule which prevents the bank from giving away more than it takes in.

If the bank was prevented from giving away more than it took in, then what would the players use to play the game? The monopoly bank must be "in debt" for it's players to have money. Just like the real world. If any player has cash in his hand then the bank is "in debt" by that amount as compared with the start of the game.

Players may object to the super-rule because they don't like any of the rules that the super-rule enables.

This is the point I've been trying to clear up. There is no cause and effect between refilling the bank and any of the rules (whether those rules result in the bank running a deficit or surplus). If there were only 3 players at the board, it may be possible to enact those new rules without the need to refill the bank. But the rule changes would effect the 3 players in EXACTLY the same way whether the bank money was doubled or not.

Likewise, if there are instead 12 players at the board, even under the original rules the bank could be nearly empty. If there are no rule changes enacted, how would it affect each player's status in the game if the amount in the bank was doubled? tripled? It would have no effect in any scenario if the RULES weren't changed.

Sure, if the bank amount is tripled and the players agree on a rule change to pay each player $20,000 per round (instead of $200), there's your hyper-inflation scenario.

But if the number of players at the board was in the 100's or 1000's, the outstanding "debt" of the monopoly bank would have to be much larger to ensure everyone had enough money to play with. No player should be alarmed to see the monopoly bank debt clock ticking upwards as more players join the game. Only rules changes should concern them.

In real life, the money in the bank is infinite. And the money "in play" is represented by the national debt. What determines the economic reality for the players is the circumstances and amounts in which money is distributed to and retracted from the players.

[jacob]

If bank was prevented from giving out more than it took in, the players would use the money they already have. This would work no matter how many players you added.

Of course if the bank just printed the money and kept it in the vault where nobody ever saw it, nobody would care. However, as soon as the bank started giving it out it would hurt people with cash savings and benefit people in debt. Since everybody is now receiving more money they can afford to pay more for goods. Consequently, those who already had savings get less goods for their savings. Those in debt will be able to sell goods for more money and thus pay off their debts proportionally more easy.

I think you touch upon this problem by admitting to the hyperinflation problem. You're saying sure, hyperinflation is bad but a little inflation is inconsequential if everybody knows about it. Indeed, but everybody does not know about it. To the extent we know, we can just demand that much more interest for our savings. However, as long as there's lax rules on no rules on the bank printing money, the inflation rate is uncertain. Because the inflation rate is uncertain, people trade in bonds. Because the inflation rates between countries is uncertain, people trade in currencies. And finally, because of this trading, speculators (the market) can try to neutralize or even counteract any bank printing. As Soros did.

Now my question to you in the multiple monopoly board scenario.

Suppose you have $250000 saved and the other players at your board have nothing saved. Each turn pays $200. However, now the bank announces that five turns from now, the turn wage will increase to $1000 (or $210 or whatever). What will you do with your $250000 now if anything? You can buy houses and hotels at your board. You can trade your board's currency for another board's (no other boards have announced such a hike). You can buy real estate on other boards.

Think about this. Because those who worry about unlimited bank printing think a lot about this and they will respond in some way.

[baulrich]

If bank was prevented from giving out more than it took in, the players would use the money they already have. This would work no matter how many players you added.

Over what period of time is that "balanced budget" constraint placed on the bank? 1 round? 20 rounds? If the balanced budget was adhered to, it would mean at the end of that period, ALL money had flowed from players hands back to the bank! including the money they were "distributed" at the beginning of the game! Balancing the budget for a particular time period means (in net) no money was distributed to or retracted from players during that period. But "paying off the debt" means that the players are left with no money to play with! How can it be any other way?

Surely you see the conundrum in saying the players would "use the money they already have". Where did THAT money come from? The bank, of course since the money is a public monopoly. Which means your balanced budget requirement would require it make its way back to the bank by the end of the designated period.

How is it possible for a player to "already have money"!? For your model to work, you have to think of money as existing "outside" of the game. As if the monopoly game was "funded" by a group players bringing money that already exists to the game and then creating, by democratic process the "rules of the game" and a bank to manage processing. In this model the "bank" really would need to borrow money from the players who funded the game, instead of creating money for them to play with. Surely you can see this is completely different model than the monopoly analogy we've used up to this point. Because the money in existence is no longer public monopoly, it's an asset of those who already own it.

Let's continue with that example and see why it's neither fair nor sustainable. Say a group of 10 cousins wants to play a game. They have a board and pieces, but no "monopoly" money so they agree to "fund" the game with their own assets. The 6 cousins ranging in age from 8-12 basically have no money. They can each contribute $ .50, for a total of $3.00 to fund the new government/game. The 4 older cousins are 14-17 in age and have part time jobs. They can contribute $100 each to the game. If we continue with your model of hard money and also add your requirement of no bank/government debt, the game would start with each of the 6 younger players with 50 cents, each of the 4 older with $100 and no money in the bank. The bank would get money if someone paid tax and it would pay money when players passed GO. When it ran into the likely scenario that it didn't collect enough tax to meet its obligations, it would have to borrow from players (with money) and pay interest. Of course that debt would have to be repaid quickly to avoid a deficit (for that accounting period) and then the only way to maintain the balanced budget is to increase tax or reduce payments for passing GO.

To a game designer that doesn't look like a fair game, but if the players really believe that money exists outside of the game (and adopt hard money), there's no other way to proceed. To make their game "look" more like a regular monopoly game, they could "pool" their $403, distribute $10 each to each player, and leave $303 in the bank. But that would leave the 6 younger players paying interest to borrow $7 each, while the 4 older players had $90 each in interest-bearing savings, while still holding $10 to play with. How is interest even accounted for in a hard-money system?! For it to be paid, it has to be created, but it cannot be created before "obtaining" more gold, or whatever. In the example the players would have to be finding coins in couch cushions or mowing the grass for adults. In the real world, this activity equates to mining and refining gold, etc. One should be very careful when analyzing this analogy. Because mowing a yard in real life is productive, but doing it to get money to play monopoly is just as silly as digging metal out of the ground to have money in real life!! Those inefficient activities are only required where hard money reigns.

As our game progresses, the number of players will increase. Some of the older cousins may leave the game, while additional young cousins will become old enough to play. Most of the younger cousins will come into the game with no money. If they want to have $10 in their hand to take advantage of opportunities they encounter, they must borrow it and pay a price for it. But a small minority of younger cousins will have the benefit of inheriting the assets (property and cash) accumulated by their older siblings who left the game.

The game described above is obviously unfair to the younger cousins who start with fewer resources, and becomes increasingly unfair with each generation. And it's unsustainable because when the number of players has doubled from 10 to 20, there will still be (roughly) $403 to go around. The only way there could be more is if more was contributed to the game (more gold was mined). If those 20 players were twice as "productive" as 10, then there would be the same stock of money chasing twice the goods/services. Is this scenario of hyperdeflation not just as detrimental to the player will little money as a doubling of the money supply would be to a player with a large savings? The only way to avoid prevent deflation would be to spend more and more resources to secure hard money, which will eventually be depleted.

Prior to 1850 gold was not just a precious metal but a genuinely rare one. World gold production from 1800-1850 totaled around 1,200 metric tonnes; from 1851-1900, propelled by the discovery in the United States, Australia and, later, South Africa, it was almost 10,400 m.t. – virtually a ten-fold increase. Indeed, in those
last 50 years of the nineteenth century about twice as much gold was mined as in previous
history. Between 1847-52 alone, annual output rose from 35 m.t. to 265 m.t.

The reason the international gold standard was sustainable (for a short while) is because during that time it was mined and refined at a feverish pace.

Suppose you have $250000 saved and the other players at your board have nothing saved. Each turn pays $200. However, now the bank announces that five turns from now, the turn wage will increase to $1000 (or $210 or whatever). What will you do with your $250000 now if anything? You can buy houses and hotels at your board. You can trade your board's currency for another board's (no other boards have announced such a hike). You can buy real estate on other boards.

It looks like I've already "won" that game

Without knowing more about the other boards, I'd probably purchase all the real estate on the original board and invest in houses and hotels to the maximum extent. If there was no rule change, the other players would likely would be put out of their misery quickly. But if the rule change was enacted and we each got $1000 per GO, my wealth, as a percentage of the total wealth of all players, would still remain about the same. In absolute terms I'd continue to get richer, as each round I'd collect $1000 for myself, and I'd also have a good shot at milking nearly $1000 from each competitor. If I enjoyed shooting fish in a barrel, I may even be persuaded to vote the payments per round even higher.

[jacob]

Money is only a public monopoly under your assumptions. Under mine, it's just a commodity like any other commodity that by public convention is used to quote prices.

In this context, the bank simply operates as a storage container, much like a grain silo. You can not take out grain that someone else has not put into the silo. This is very simple. It does not require you to use a calendar in your book keeping.

If a player does not have grain, he can simply trade some of his goods for grain. Now he will have grain. Where does he get goods if he doesn't have any? He creates them.

In terms of perceived impossibility of interest, you're either confusing reserve banking with simple banking or you're making the assumption that money HAS to be lent into existence. However, money is NOT necessarily the same as credit. Obviously there's a problem if there is 100 pieces of grain in the entire economy and someone owns all of them and lends them all out demanding, say, 1 grain of interest. There's no way to get 101 pieces. However, someone can lend out 10 and demand 11 back. This is not a problem.

Look, I understand where Mosler is coming from and how the accounting works. I also understand how credit works in a banking context. What I'm saying is that besides this, there's a market reality that needs to be adhered to. This is what I want to draw attention to. It seems to me that you guys are just invoking "... and then a miracle happened" when considering the consequences of monetary policy.

Maybe consider the following thought-experiment: I will now create the micro-nation of Jacob. I am now the public of my nation, the entire public, and thus I claim banking monopoly. I can therefore run my money system as I want and issue as many Jacobians as I desire. In theory, this should solve any problem I might have in terms of feeding the public (me). I can simply write checks issued on Jacobian currency. Now, how long do you think I'm going to last? Specifically, what do you think will happen to the USD/Jacobian exchange rate? How will I get the USD I need to pay for groceries?

The logical conclusion is that you as a nation are only completely free to fiddle with your own currency if you are completely self-sufficient and shut off all trade with other nations. The US can somewhat get away with this because it's a large nation, but to the Jacobian nation, it would be catastrophic.

Going back to the monopoly example, a rule preventing the bank from increasing turn payouts from $200 to $1000 thus causing you to put all the other players out of their misery and probably stop playing thus rendering your hotels worthless... would also prevent you from doing just that.---Or more accurately, it would prevent it from being in your best interest to do it. In fact what happens in the real world is a combination of what you just suggested and other people who also have a lot of money seeing what you're about to do and thus buying properties on other boards instead to save themselves from the now dying economy of your board.

[Felix]

Do you agree that the dollar as it exists currently IS being lent into existence?

I would even say that every other currency currently in existence is also being lent into existence. Barter/commodity currencies seem to be mainly hypothetical at this point in time.

I get the argument about "who will accept my fiat money?". The answer to this is brute force. You force people in your country to accept your currency in stores and you collect taxes denominated in that currency by force. (In the MMT world this not only the description of where money gets its value from, but it is also the historical account of how fiat money came into existence (State theory of money) and was made valuable.) Without force, fiat money is just a piece of paper or a number in an online account.

Now every monopoly board does just that (no country seems to use a commodity right now). You do not have to be perfect in this game, you just seem to have to suck less at it than others. There seems to be some rate of inflation in fiat currencies. Their relative trade value is influenced by this factor. But there are other factors influencing Forex prices besides that like the strength and size of the underlying economy (forced to accept that currency), employment statistics (how many people work to get that currency), private debt levels etc.

This brings me to another point, namely the other side of the coin: deflation.
If you accept hyperinflation as a possible policy outcome, what about massive deflation? Do you consider that as equally destructive? It is just as much redistribution of money, only now in the other direction.One reason I believe that fiat money is the way to go is because a government has tools to fight against deflation when the private sector is paying down debt and entering a downward spiral of falling prices and economic activity (recession). One of the jobs of a central bank is to maintain price stability to prevent stuff like this or at least keep it at low levels.

"Government money printing" as such only raises prices if it does not result in the increased use or creation of real goods and services. You would have to assume full employment and complete usage of real assets (companies working at full throttle employing all their machinerie, all real estate used, etc.) for a direct rise in prices to be true. Usually this is not the case and more money from the government would simply allow the use of these resources, maintain price stability and allow the private sector to deleverage without wrecking the economy.

This is based on the paradox of thrift argument and I find it to be a pretty good agent-based model of deflation. I still find arguments against this to be based on the fallacy of composition.

I've also been thinking about the economics-politics link. While there is a correlation usually, I would guess that the arrow of causation is more often from economics to politics.

It is, however, just as possible to argue for nightwatchman-state politics with MMT and to argue for more economic equality under Austrian economics.

Let's say hell freezes over and Seneca switches to MMT and I switch to Austrian economics:

MMT-Seneca would argue that since the government intervenes in the free market by restricting money artificially and thereby hinders real-world productivity, the government should tax people less so there is sufficient money available for economic activity at existing prices (not distorting price signaling in market prices). They should also lower interest rates to stop punishing entrepreneurial risk-taking in favor of lazy rent seekers collecting guaranteed government interest cheques at other people's expenses.
(This is pretty close to what Mosler himself is arguing for, actually.)

Austrian Felix would counter that this would lead to hyperinflation because taxing less at the existing level of spending it is just as much government market stimulation distorting prices as increasing spending. The government should stop stealing from people through a fiat money banking system and corrupt government spending leading to a redistribution of wealth from the poor to the rich using government force. "Rewarding risk-taking entrepreneurs" just leads to a new business cycle in the long run, hurting the poor the most in the inevitable downturn in the future. We should stop corporate welfare and get money out of politics to limit corruption.