Modern Monetary Theory - Fraud 7

This is the seventh part of a critique of some of the thoughts expressed by Warren Mosler in his booklet "Seven Deadly Innocent Frauds of Economic Policy"

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Deadly Innocent Fraud #7: It’s a bad thing that higher deficits today mean higher taxes tomorrow. Fact: I agree - the innocent fraud is that it’s a bad thing, when in fact it’s a good thing!!!

Mosler uses this section for a recap, so I might as well do the same.

Mosler appears to not understand the causes for inflation, which is simply a case of supply and demand. When we buy something with money we could as easily say that the seller is buying money in exchange for goods or services. The price in terms of money or goods is a function of the relative valuation on the part of buyer and seller, which is a function of the relative supply and intensity of demand. More dollars in circulation under conditions of the same level of goods and services leads those dollars to be worth less, and dollar prices rise. More goods and services with the same number of dollars leads to falling prices.

Mosler also appears to be confused over what constitutes wealth; wealth is not increased by adding a zero to the units in your bank account, if there is no greater amount of goods and services available for consumption. The creation of wealth is a function of production and trade, comparative advantage and the division of labor, and price signals that represent the constantly changing relative valuations of goods and services by members of the community. A sound money system in which to measure those valuations is crucial to the ability of people to plan for the future and make the most efficient use of their limited resources to satisfy the most important of their unlimited desires. Money supply manipulation has a pernicious effect on that ability that when taken to extremes can also be disastrous to the society.

The reason the "department store has lot of unsold goods and services" (p. 67) under current conditions is that there was unsustainable investment in producing those things, driven by low interest rates. Meanwhile prices have been propped up in areas such as housing, which has kept the market from clearing out the excess (i.e. it has kept individual people from lowering their prices to a point that other people are willing to pay).

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For more of this discussion, see the following posts concerning the other frauds

Introduction

1 - Government Spending

6 - Investment and savings

7 - Future effects

Wrap-up

This entry was posted on July 28th, 2012 at 22:18:00 by Adumbrator and is filed under Economics, the crisis.