by Warren Mosler, St. Croix, Virgin Islands
The term “innocent fraud” was introduced by Professor John Kenneth Galbraith in his last book, The Economics of Innocent Fraud, which he wrote at the age of ninety-four in 2004, just two years before he died. 1 Professor Galbraith coined the term to describe a variety of incorrect assumptions embraced by mainstream economists, the media, and most of all, politicians.
The presumption of innocence, yet another example of Galbraith’s elegant and biting wit, implies those perpetuating the fraud are not only wrong, but also not clever enough to understand what they have been doing. And any claim of prior understanding becomes an admission of deliberate fraud—an unthinkable self incrimination.
Galbraith’s economic views gained a wide audience during the 1950’s and 1960’s, with his best selling books The Affluent Society, and The New Industrial State. He was well connected to both the Kennedy and Johnson Administrations, serving as the United States Ambassador to India from 1961 to 1963, when he returned to his post as Harvard’s most renowned Professor of Economics.
Galbraith was largely a Keynesian who believed that only fiscal policy can restore “spending power.” Fiscal policy is what economists call tax cuts and spending increases, and spending in general is what they call aggregate demand.
Galbraith’s academic antagonist, Milton Friedman, led another school of thought known as the “monetarists.” The monetarists believe the Federal government should always keep the budget in balance and use what they called “monetary policy” to regulate the economy. Initially that meant keeping the “money supply” growing slowly and steadily to control inflation, and letting the economy do what it may. However they never could come up with a measure of money supply that did the trick, nor could the Federal Reserve ever find a way to actually control the measures of money they experimented with.
Paul Volcker was the last Fed Chairman to attempt to directly control the money supply. After a prolonged period of actions that merely demonstrated what most central bankers had known for a very long time—that there was no such thing as controlling the money supply—Volcker abandoned the effort.
Monetary policy was quickly redefined as a policy of using interest rates as the instrument of monetary policy rather than any measures of the quantity of money. And “inflation expectations” moved to the top of the list as the cause of inflation, as the money supply no longer played an active role. Interestingly, “money” doesn’t appear anywhere in the latest monetarist mathematical models that advocate the use of interest rates to regulate the economy.
Whenever there are severe economic slumps, politicians need results—in the form of more jobs—to stay in office. At first they watch as the Federal Reserve cuts interest rates, waiting patiently for the low rates to somehow “kick in.” Unfortunately, interest rates never to seem to “kick in.” Then, as rising unemployment threatens the re-election of members of Congress and the President, the politicians turn to Keynesian policies of tax cuts and spending increases. These policies are implemented over the intense objections and dire predictions of the majority of central bankers and mainstream economists.
It was Richard Nixon who famously declared during the double dip economic slump of 1973 that “We are all Keynesians now.”
Despite Nixon’s statement, Galbraith’s Keynesian views lost out to the monetarists when the “Great Inflation” of the 1970s sent shock waves through the American psyche. Public policy turned to the Federal Reserve and its manipulation of interest rates as the most effective way to deal with what was coined “stagflation”—the combination of a stagnant economy and high inflation.
This book is divided into three sections. Part one immediately reveals the seven ‘innocent frauds’ that I submit are the most imbedded obstacles to national prosperity. They are presented in a manner that does not require any prior knowledge or understanding of the monetary system, economics, or accounting. The first three concern the federal government’s budget deficit, the fourth addresses social security, the fifth international trade, the sixth savings and investment, and the seventh returns to the budget deficit. This chapter is the core message. Its purpose is to promote a universal understanding of these critical issues facing our nation.
Part two is a history of how I discovered these seven innocent frauds during my more than three decades of experience in the world of finance.
In part three, I set forward a specific action plan for our country to realize our economic potential and restore the American Dream.
Read 7 DIF in its entirety
Read 7 DIF in its entirety
