Keynes lashed out against neoclassical theory for treating capitalism as a barter or “real-exchange” economy, and offered his “monetary theory of production” as an alternative to the traditional approach based on the “Classical dichotomy.” This aspect of Keynes’s work has been developed by two traditions, the Post Keynesian and the Circulation Approaches (Deleplace and Nell, 1996). Post Keynesians have elaborated, among other topics, the relation of money (and money contracts), uncertainty, and historical time (Davidson), asset pricing and financial instability (Minsky), and endogenous money and credit creation (Moore, Wray). While Post Keynesians have generally emphasized money as a stock of wealth, circuit theory (Graziani, Parguez, Schmitt) has highlighted the importance of a rigorous analysis of the circulation of money for understanding the operation of capitalist economies, including the principle of effective demand.

All the following economic fallacies can be laid squarely at the door of Keynesianism: we need no longer worry about a depression, because government knows how to cure it with deficit spending and built in stabilizers; the governments ‘X’ trillion dollars of military spending is a useful prop to the economy; business will improve in the next quarter because government intends to grant more contracts and run a larger deficit; to check the inflation, the government should impose high taxation to sop-up the excess purchasing power; the governments main economic duty is to stabilise the economy and ensure full employment; in contrast to capitalism of the nineteenth century, which emphasised thrift and production, our modern capitalism depends on its prosperity for consumer demand.

Reading through that list, MMT is simply a re-adaption, re-packaging of Keynesianism. Nothing in MMT is original. Nothing in MMT is correct. Which rather makes those who claim MMT as an original theory either liars or fools.

Both Post Keynesian and Circulation Approaches accept the widely held view that modern money is not commodity money but rather token (or fiat) money (see, e.g., Moore, 1988; Graziani, 1988). But they criticize conventional theory for continuing to utilize a framework that treats modern money as though it were still a commodity money.

Clearly fiat money is not a commodity money. Who is this ‘conventional’ theory?

This paper begins with two comments on this fundamental point. First, while modern money does not derive its value from its status as a commodity, once a token is declared necessary for the payment of taxes it can be analyzed like any other commodity.

Incorrect.

A commodity has a limited or scarce supply. Fiat money does not.

Second, absent from most Post Keynesian and Circuit analyses is the institutional process by which a token obtains its value (becomes money). Many analyses “add in” government spending and taxation, and the central bank, after an initial investigation of the operation of a private money-using economy (see, e.g., Lavoie, 1992, pp. 151-69).

Fiat money is and was a con game. Originally we had a commodity money, gold & silver. To these commodity money, fiat was introduced, being exchangeable at a specific weight, viz 1oz of gold at a specific purity was equivalent to $20.47 in fiat currency. This prevented the government, or as it was, the banks, from ‘printing’ excessive fiat paper, as that paper was exchangeable into gold or silver by weight. If for a moment it was suspected that an ‘inflation’ had occurred, there would be a bank run, which when the individual owners of the banks were liable, prevented the excesses that we have today.

So the ‘value’ of money was originally the purchasing power of the commodity money. Gradually, over time, gold & silver went out of every day circulation, although they were still legally exchangeable, then, FDR outlawed gold ownership, only sovereigns could exchange, devalued or defaulted on gold, which finally ended with Nixon in 1971.

Thus the ‘value’ of fiat money ever so slowly came to be accepted on this gradual default by government over a period of about 100yrs. Now, very few understand money at all, and assign the value of the commodity money to the fiat paper.

Analyses of the circuit that begin with banks financing firms’ production (or households’ purchases) and end with firms (or households) paying back their loans leave unanswered the question of why anyone would initially sell real goods or services for the unit of account. The “common-sense” reply, “because they can use the funds to buy other goods and services” is not a satisfying one, for the further ‘infinite regress’ question remains the same: “why do those sellers want the unit of account?” What is missing is the process by which the unit of account is endowed with value.

The accurate ‘regression theory of money’ traces the origin back to the point where commodity direct exchange, gradually came to accept that one or two commodities had high demand, and, would serve as a form of indirect exchange, so that the two parties could exchange, rather than find a matching exchange. Gold and silver, amongst other commodities gradually rose to pre-eminence. From that point, gold [or whatever commodity was utilised] had a commodity use value and an additional ‘money’ value component. This commodity money gave its money value to fiat money, as it was exchangeable. That of course now, is no longer true.

This paper takes the position that the question remains unanswered because it cannot be (adequately) answered unless the State is incorporated from the very beginning of the analysis. “Money is a Creature of the State” (Lerner),

Then this ‘paper’ is nonsense. Money is a tool of the free market. Government has simply co-opted money through theft and coercion.

and thus a “monetary” analysis cannot be conducted prior to the introduction of the State.

Incorrect.

Interestingly, the Chartalist view of a tax driven currency can be found in the writings of Keynes (not to mention Adam Smith!), the Post Keynesians, and the Circulation theorists, yet it is almost always presented as an aside, with the implications remaining unexplored (see Wray, 1998, on Smith, Keynes, and Post Keynesians such as Minsky; for the Circulationists, see Graziani, 1988).

Of course it can. Keynes was not original. He simply stole from economists before him. Unfortunately he stole the wrong bits. Adam Smith was an inflationist, and very much a government man. Keynes is essentially a Mercantilist.

In the Chartalist view, the State, desirous of moving various goods and services from the private sector to the public domain, first levies a tax.

Of course. When you want to steal private property, you have to figure out a way to take it that the majority do not directly recognise as theft, for if they did, then the game becomes much harder, and you personally might not survive to enjoy the benefits of your theft.

The State currency unit is defined as that which is acceptable for the payment of taxes. The imperative to pay taxes thus becomes the force driving the monetary circuit.

Money existed before the State managed to gain control of it. Money is useful, more than useful for trade. It eliminates the requirement for the coincidence of wants, which drive exchanges. Thus simply production, which creates demand, or ‘Say’s Law’ drives the monetary flow. That government co-opted the monopoly of money creation simply arrogated to government an enormous amount of power, and is the basis of their ever tightening stranglehold over us.

The present paper seeks to refine the concept of the monetary circuit using a multidimensional model designed to reveal and illuminate the workings of a tax- driven currency.

Sounds really impressive.

It will also be shown that this same model lends itself to the analysis of any commodity. In an adaptation of Moore’s (1988) terminology, the model includes “horizontal” and “vertical” components of the monetary circuit. Following outline and discussion of the model, it will be utilized to dispel the myth that deficits imply future taxation, as well as to briefly analyze the 1997 Asian Financial Crisis.

Then it is doomed to failure. Deficits either require increased taxation, increased debt or default. Simply printing more ‘money’ eventually destroys the fiat paper, which removes the monopoly from government. They would quickly try to regain control with the issue of a ‘new’ fiat money, it worked in Germany after their hyperinflation destroyed the currency. Would it work again?

The Vertical Component

We begin with the vertical component of the model, as presented in figure 1:
State (consolidated Treasury and Central Bank)
Private Sector–”Warehouse”- (cash, reserves, State securities)
Consumption (Tax Payment)

Figure 1: Currency Analysis: The Vertical Component

The tax liability lies at the bottom of the vertical, exogenous, component of the currency.

Money would exist quite happily even if the State was no more. Money is very useful in promoting and facilitating exchange. The free market created money.

At the top is the State (here presented as a consolidated Treasury and Central Bank), which is effectively the sole issuer of units of its currency, as it controls the issue of currency units by any of its designated agents.

Currently this is true. There is no necessity for it to be true. The free market, very easily can issue money.

The middle is occupied by the private sector. It exchanges goods and services for the currency units of the state, pays taxes, and accumulates what is left over (State deficit spending) in the form of cash in circulation, reserves (clearing balances at the State’s Central Bank), or Treasury securities (“deposits” offered by the CB).

Again, so what? That would describe any form of money. Money facilitates exchange. For there to be exchange there has to be production of goods and services. The use of money allowed the division of labour. It is the division of labour that create the gains of capitalism, which is facilitated by money.

For comparative purposes later in the paper, this accumulation will be considered “warehoused.” The currency units used for the payment of taxes (or any other currency units transferred to the State), for this analysis, is considered to be consumed (destroyed) in the process. As the State can issue paper currency units or accounting information at the CB at will, tax payments need not be considered a reflux back to the state for the process to continue. In fact, the assumption of such reflux would imply a function of that process that this analysis emphasizes does not exist.

All complete twaddle. The State cannot exist without the appropriation of real goods and services. Without this appropriation, the State ceases to exist. Fiat money is simply a smokescreen hiding the State’s appropriation of individuals production.

This completes the basic vertical component. Agents are said to participate in vertical activity if they obtain the unit of account from the State, pay taxes to the State, or intermediate the process. Central bank policy determines the relative distribution of the accumulated currency units of the private sector between cash, reserves (clearing balances), and Treasury securities. State (deficit) spending determines the magnitude of those accumulated financial assets.

Which as we have seen is an elaborate hoax and misinformation at every turn.

The Horizontal Component

The horizontal component concerns the broad category of credit. In contrast with the vertical component, gross expansion of the horizontal component is endogenous, and nets to 0. The majority of circuit analysis begins and ends with the horizontal component. Even when the State is introduced, it too is assumed to behave horizontally. State taxing and borrowing are treated identically to private sector selling and borrowing. Though this treatment of the State may not be technically incorrect, the use of the vertical component adds a characterization of State activity previously ignored.

Any commodity has at least a vertical component. Horizontal activity represents leveraged activity of a vertical component. For analytical purposes, a unit of a currency is a commodity with no cost of production, no substitution, no inherent storage costs or transaction costs, and no product differentiation. Corn can be used to specifically demonstrate how a currency lends itself to the same analysis as commodities (figure 2a).

In two paragraphs of writing, actually nothing is said. Bravo.

Farmer
Private Sector – “Warehouse”–>–>–>Credit Activity–>–>–>
Consumption (Eating)

Ok.

Figure 2a: General Commodity Analysis

With corn, the farmer can be considered at the top of the vertical component, and consumption (eating) at the bottom. The private sector remains in the middle, and transfers non corn (generally units of a currency) up to the farmer who sends down the corn in exchange. If the private sector purchases more corn than it immediately consumes, the difference is warehoused (accumulated). If we were to use the same language with corn as we do with currency, we would say that when the farmer exchanges more corn to the private sector than the private sector consumes, the farmer is engaging in the deficit spending of corn.

This is the problem when simpletons get hold of a topic. Fiat money and corn are not the same. They do not function in the same manner. Fiat money can be created instantly, at the push of a button, the Federal Reserve can create credits in the banking system. Our farmer here, cannot push a button and create corn instantly. There are three important differences [i] time [ii] cost [iii] losses.

The corn futures market is a leveraging of physical corn. There is a short position for every long position.

The corn futures market exist so that the producers can reduce their risk, so that users of corn can reduce their risk. Speculators play their part in assuming some of that risk. That the purchase of a futures contract only requires a partial payment, leverages that security, and requires that margin be held, or the physical commodity. The positions themselves, or volume are self-regulating, viz. ‘open interest’ which may, or may not result in futures positions that match the physical supply. Essentially Mosler’s statement makes no point and is superfluous nonsense.

Likewise, the creation of bank loans and their corresponding deposits is a leveraging of the currency, and every short position, or borrower, has a long position, or depositor, on the other side of the ledger.

The analogy just made with corn, totally breaks down. In the futures market, open interest can raise the number of contracts being speculated upon rise, to exceed the physical supply of corn. The volume of corn, may be affected in that the price of corn may rise so high, that additional planting takes place, to supply that demand. This is a normally functioning market.

When ‘money’ is created via credit expansion, this is categorically different. The commodity itself is being created, not through a re-allocation of resources, but through fixed fractional lending. The collateral used in this credit expansion is a violation of contract. Demand deposits, contractually do not transfer ownership of the money, for any time period to the bank. The ownership of the deposit 100% remains with the depositor. Thus the credit expansion on the foundation of demand deposits is illegal. It can only happen because the banks operate on the understanding that they are free from prosecution from the government, that of course takes a hefty cut via taxes of these illegal profits.

The futures market also happens to be a market that leverages the currency, as corn, for example, is exchanged for units of the currency. Thus the horizontal component for currency analysis can be indicated by introducing credit into the picture (see figure 2b).

Currency speculators etc. take leveraged positions in currencies, as do exporters/importers. The function of the currency markets are to reflect the various purchasing powers of the various currencies vis-a-vis each other. The futures market do not drive the demand for credit, which is the demand dynamic that drives a credit expansion.

State (consolidated Treasury and Central Bank)
Private Sector – “Warehouse”–>–>–>Credit Activity–>–>–>
Consumption (Tax Payment)

Figure 2b: Currency Analysis: Vertical and Horizontal Components

Moving on.

This model is consistent with the Post Keynesian notion that reserve imbalances can be reconciled only by the central bank. In this model, the horizontal activity always nets to 0. Reserves are clearing balances that can only come from vertical activity. Furthermore, in the US system, the Fed controls the mix in the “warehouse” and can, for example, by purchasing securities on the open market, decrease securities held by the private sector and increase reserves of the private sector (clearing balances).

Whenever the banking system operates a fixed fractional reserve credit expansion, a Central Bank is an essential component, without one, fractional reserve lending collapses very quickly with numerous bank failures. When your loans exceed your deposits by a factor of 10 or more, a bank run can develop very quickly, ending your bank overnight.

The function of the Central bank, as the ‘lender of last resort’ is to supply in unlimited quantity, ‘new money’ to satisfy the ‘demand’ for money held as a demand deposit, and now demanded. The Central Bank is a creature of government. Thus government allows the theft of the banking system and actively supports it.

Because of deposit insurance, in effect the Fed guarantees that inter-bank checks will clear when presented at the Fed. This means that if the banking system doesn’t have sufficient reserves as required by the Fed, at least one bank will be showing an overdraft at its account at the Fed. Such an overdraft is, of course, a loan from the Fed, and an example of vertical activity. So, in the US system, required reserves come from the Fed in one form or another on demand, and the Fed sets the terms of exchange—interest rate and collateral—for the transaction.

Twaddle.

Deposit insurance creates trust in the banking system that allows and promotes the banking system to operate and control credit expansions, which in turn, allows government to arrogate to itself ever greater control over the money system.

A Note on Pricing

The State is effectively the sole issuer of its currency.

True.

It took a while, but government eventually managed to arrogate to itself the monopoly of money. When it finally did, under Nixon, all the gloves came off, and government became the largest and most powerful criminal organization in existence.

As Lerner and Colander put it, “if anything is a natural monopoly, the money supply is” (1980, p. 84). This means that the State is also the price setter for its currency when it issues and exchanges it for goods and services.

Incorrect.

Government is a price taker. The more money that government creates, the lower the purchasing power of that money. Producers will not accept lower ‘real’ prices, thus nominal prices rise to reflect the inflation, which then requires government to either raise more revenue via taxation, or, create more money. The result is always a little of each.

It is also price setter of the interest (own) rate for its currency (Keynes, 1936, ch. 17) The latter is accomplished by managing the clearing balances and securities offered for sale. The corn farmer, however, is generally not the single supplier of corn, and therefore is not a price setter. In addition, as there is no central warehouse, or its equivalent, the “own rate” for corn is 0% or negative, reflecting only a cost of storage and a cost of short selling.

Incorrect.

The market rate of interest is now set by government via Federal Reserve proxy. The natural rate of interest however is the rate of interest that prevails, and drives the business cycle, which due to government interference into the market rate of interest, hides and distorts the natural rate, leading to the increasing frequency and severity of booms and busts. It is clear the the MMT brigade have zero understanding or conception of time preferences, which drive the natural rate of interest. Totally clueless.

The model allows for two primary paths in the vertical component of a currency. The first is described above, and the second exists because it will be assumed that the State allows bank deposits to be used for payment of taxes. Therefore banks are allowed to automatically function as intermediaries between the State and the private sector. This happens whenever a bank draft (check) is used for payment of taxes. The banking system is simultaneously obligated to accept funds from the State on terms dictated by the State to cover clearing balances debited when such checks clear.

The model is totally incorrect. The paragraph above simply describes a basic clearing function of banks. It has absolutely nothing to offer with regards to the understanding of money and its functions.

Initial demand for the currency- that which is necessary to pay taxes- originates with those with tax liabilities. When analyzing an economy, knowledge of the type of tax liabilities in force is fundamental to understanding its operation. For example, an asset tax, such as a property tax, will yield different results than a transaction tax, such as a sales tax, value added tax, or income tax.

Horseshit.

A tax is a tax is a tax. Taxation, through a raising of time preferences, reduces production and creates structural unemployment. It matters not if the tax is an income tax a VAT tax or property tax.

Utilizing the Model

We now proceed with an example of how this model can be integrated into an analysis of the monetary circuit. In this example, we begin with the following assumptions:

Why bother? Your understanding is fatally flawed, pure unadulterated nonsense.

1) The State has levied an equal head tax on all individuals.
2) The State hires only labor.
3) There is no net desire to save net financial assets (no deficit spending and no corresponding involuntary unemployment- see FEAPS, JPKE Dec. 97).
4) The State does not hire all the available labor (there is a private sector).
5) Producers qualify for bank credit.
6) Consumers have no access to credit.

The model. I thought that the MMT brigades point was that they represented a true description of the money system: here they are with a ‘model’ that clearly makes some assumptions that do not pertain. Nonsense.

The monetary circuit begins with the vertical component, when the State describes that which it will accept for payment of taxes. The head tax is payable only in units of that currency. This causes taxpayers to offer goods and services in return for units of the currency. The State is now able to use its currency to purchase goods and services.

Whoa. Hang on chaps.

MMT adherents, amoungst them that fool Cullen Roche, hold that tax revenues are not required by government to fund their spending.

From Cullen Roche

The key takeaway here is that the government balance sheet is not like a household or a state. It does not finance spending via revenues or debt issuance. The US government, as a monopoly supplier of currency in a floating exchange rate system never really has nor doesn’t have money.

You chaps need to get on the same page.

This process results in the monetization of transactions in the State’s currency. Taxpayers are continuously offering goods and services for sale, and soon other private sector agents who desire that which is offered for sale, seek the means of obtaining units of the currency demanded by the sellers.

Money originated on the free market. There is zero requirement for the government in the creation of money. Government performs this service only so that they can expropriate your property from you.

The forces at work in the vertical component are sufficient to cause sellers of goods and services to denominate their offers in units of the State’s currency. There follows an exchange in the unit of account from the State to the private sector, and from the private sector to the State, as the State spends and the taxes are paid.

The coercive force ‘persuades’ producers and consumers to transact in the increasingly worthless fiat paper.

Credit (horizontal activity) arises when a buyer desires to make a purchase by borrowing that which the seller demands. The buyer could borrow directly from the seller. This would result in the transfer of the items sold in exchange for a promissory note of the buyer, denominated in the State’s currency, accepted by the seller. This note can be considered a form of money, depending on one’s definition of money. The note presumably has value, or the seller would not have accepted it.

Credit is a result of different time preferences. How that credit is created is key. MMT describes the mechanism based upon fractional reserve lending. Fractional reserve lending is the extension or creation of credit based on nothing. Credit should involve the exchange of time preferences. MMT is clueless.

Therefore, in the above example, the credit is created via an exchange of time preference, not through an ex nihilo fiat expansion as would pertain with the banking system.

But clearly any value is subject to change, as the buyer’s financial condition may vary. There is also no reason such a note could not be negotiable, and circulate in the economy, as each new holder of the note attempts to use it to purchase from other sellers. Reflux could occur either when the original issuer of the note obtains it back via a sale of goods or services, or when the original issuer of the note retires it by exchanging it for State currency.

Mosler strays into the theory of value. Simply another area that he displays profound ignorance. The theory of value is correctly enumerated via marginal utility. No need to waste time here.

Notice that while the note was circulating, it was not an acceptable means of tax payment. The note was, however, an example of the leveraging of the State currency. It was endogenous horizontal activity. The holder of the note had a “long” position and the issuer a “short” position. The net was always 0. The note was, however, denominated in units of the State’s currency. Horizontal activity is always denominated in units of a vertical component.

Mosler simply wraps all his nonsense into a paragraph that provides zero knowledge.

The same transaction could have been intermediated by a bank. Perhaps the seller did not want to accept the note of the buyer, but would accept a bank deposit. The buyer could then go to a bank and request a loan. If approved, the result would be that the bank would hold the buyer’s note, and grant the seller a deposit in the bank.

Incorrect.

It would not be the same transaction at all. The bank could create the loan ex nihilo. I could not do so, thus any credit that I extend, must by definition be an exchange of time preference.

Banking thus assumes the credit risk of the buyer (presumably expressed in the interest rate charged). Banks undertaking this type of business activity are similar to insurance institutions, managing risk through analysis and diversity. Again, this is horizontal activity.

Incorrect.

The Central Bank assumes the risk, which is to say the taxpayer assumes the final risk. This has been clearly illustrated in the empirical evidence of the financial crisis of 2008 of which the economy is still struggling. No other example is required to refute the entire MMT nonsense: as Hume described, only one example is required to debunk a bankrupt theory.

Bank deposits are the accounting records of loans.

Incorrect.

Deposits describe the type of contract that exists, which defines ownership. A ‘demand’ deposit as contrasted with a ‘time’ deposit. This is where I start to lose all respect for these clowns. Are they really that fucking stupid? Or, are they purposefully lying to you? Either answer should fill you with fear and cause you to run a mile.

There is gross expansion of financial assets, but the net is always 0. For every deposit there is a loan from which it originated.

Incorrect.

Fractional reserve lending creates $10 in loans for every $1 deposit. That is the purpose. To create a credit expansion, from which the owners of the monopoly and their servants can expropriate your production.

Do note, however, that as bank deposits are acceptable for tax payment, they may function as part of the vertical component. Again, the banks acting in this capacity are, in the case of deposits being used for tax payment, intermediating vertical activity.

Of course they are. The ponzi scheme only functions if they are.

Tax payers not wishing state employment, or who don’t qualify for State employment, will seek other, alternative means of obtaining currency. Directly or indirectly the needed funds must, given the above assumptions, ultimately come from someone employed by the State. In the simplest case, individuals offer goods and services to those employed by the state in return for some of the currency originally earned from the State.

What a gross distortion of the truth. It is clear that adherence to the garbage that constitutes the MMT ideology only serves the government. Interestingly Mosler has, or tried to move into government, thus rather than being a fucking idiot, I suspect that he is lying for self-serving reasons.

Non taxpayers, too, are apt to become monetized, as when they see goods and services for sale they, too, desire units of the State currency of denomination. They may, for example, sell their labor to those employed by the State, and then, with the currency units thus obtained, make purchases from tax payers not employed by the State.

Waffle.

At some point, an entrepreneur may arise and attempt to organize production, with the objective of making a profit, which can then be used to make personal purchases. This may begin by borrowing from a bank to pay the wage bill, and end with the recovery of expenditures and profit through sales of final output. The example of this paragraph is representative of existing circuit analysis. But now we can go further, as even the most complex of the interactions of firms, consumers, taxpayers, and the State are readily examined in the context of our model.

The point of this paragraph is zero. Possibly less than zero. Reading it is likely, if you accept it, to reduce your knowledge.

The remaining paragraphs in the article will be rebutted later as they mostly concern taxes. Needless to say, what a crock of shite.