Modern monetary theory, or MMT, is all the rage in political and financial circles these days. The neo-Keynesian economic system has flooded the news, sparking heated debate between a host of emboldened advocates and a staunch pack of more orthodox economic thinkers.
If modern monetary theory is able to move from the fringes of economics to the policy mainstream, it could have serious consequences for the economy as well as capital markets. Investors should pay close attention to the debate and would be wise to resist the rise of MMT.
Discounting the dangers of debt
Modern monetary theory has been around for decades, and it is rife with the complex language and mathematics of the modern economics profession. Fortunately, a few writers and analysts have offered simplified explanations that allow ordinary folks to grasp the core concepts. Here is one concise and lucid explanation, courtesy of Bloomberg:
“A good place to start is with a simple description that you can carry in your pocket: MMT proposes that a country with its own currency, such as the U.S., doesn’t have to worry about accumulating too much debt because it can always print more money to pay interest. So the only constraint on spending is inflation, which can break out if the public and private sectors spend too much at the same time. As long as there are enough workers and equipment to meet growing demand without igniting inflation, the government can spend what it needs to maintain employment and achieve goals such as halting climate change.”
In other words, debt does not matter to nearly the extent conventional economics says it does. Governments can spend as much as they need (or want) to in order to provide public services, provided the economy itself continues to grow and workers thrive.
Inflation is so last century
Fears about debt and deficits are not the only factors MMT considers to be things of the past. The potential dangers of inflation are also given far less credence, as Bloomberg’s primer on the theory explains:
“Modern Monetary Theory says the world still hasn’t come to terms with the death of the gold standard in 1971, when President Richard Nixon declared that the dollar was no longer convertible into gold. In the modern era of fiat currency, MMT says, the U.S. and other big economies no longer need to worry about having enough gold to back their paper money, so they’re free to print however much they need.”
While it is true currencies are now unmoored from the gold standard, it is a bit of a stretch to say this gives governments license to print money at will. Of course, most economists who back modern monetary theory would not say that running the printing presses non-stop is viable, but their blase attitude toward the dangers of debt and inflation have - quite understandably - given many experts pause.
The danger of hubris
In fairness to the advocates of MMT, few truly believe there is zero consequence to deficit spending, with most agreeing that eventually the burden can grow too great. But they discount these consequences so strenuously, their caveats ring hollow.
It is true the major global currencies like the U.S. dollar have proven to be remarkably resilient in spite of the unprecedentedly loose monetary policy of the past decade. Orthodox economists have been flashing warning signs for some time, but the dreaded specter of rapid inflation (or even hyperinflation) has failed to materialize.
Even so, it is deeply irresponsible - and intellectually dishonest - to think this is proof that no amount of money-printing can cause spiraling inflation. History is rife with examples of similar hubris causing catastrophic tragedy.
Investors must not ignore this debate
Deficits and inflation have proven to be less terrifying boogeymen than many once feared, but that does not mean they can simply be ignored or discounted. These are real issues that must be addressed with maturity and clear-eyed analysis.
For investors, the risks of irresponsible monetary policy are obvious. For income investors, value can be destroyed. Economic turmoil or slowdown will drag on the portfolios of value and growth investors alike.
Every investor should be paying close attention to the debate and should be prepared to reallocate their holdings if indeed the ideas of modern monetary theory become the new orthodoxy.
Disclosure: No positions.
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