Modern Monetary Theory (MMT) has been winning over a number of influential supporters, including freshman Congresswoman Alexandria Ocasio-Cortez. In a recent research note, we discussed the dangers MMT could pose to capital markets -- and to investorsâ portfolios -- were it to move from the academic fringe to the policymaking mainstream.
Of course, we are far from alone in pointing out the risks implementing MMT could pose to the economy. Indeed, its sudden burst of popularity has sparked a sharp backlash from a host of respected economists, political leaders and industry professionals.
Warren Buffett (Trades, Portfolio), the CEO of Berkshire Hathaway BRK.ABRK.B and doyen of value investing, is the latest big name to come out against MMT. As is often the case with the Oracle of Omaha, his analysis is straightforward, lucid and almost certainly correct.
Going soft on deficits
For many years, BuffettĂ fretted openly about unchecked deficit spending, fearing that ever-increasing debt would prove unsustainable. On many occasions, Buffett warned that heavy debts would eventually drag on the economy, even risking a future severe crisis. Yet, in his latest annual letter to Berkshire shareholders, Buffett sounded far less worried about the dangers of deficits and inflation:
âThose who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our countryâs national debt has increased roughly 400-fold during the last of my 77-year periods. Thatâs 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To âprotectâ yourself, you might have eschewed stocks and opted instead to buy 31ââ4 ounces of gold with your $114.75.
âAnd what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.â
That is quite a change for a long-time deficit and trade imbalance hawk. Indeed, his comments on the power of American economic dynamism to outpace the risks of debt and inflation sound a lot like what MMT advocates are saying.
But still no fan of MMT
Just a few weeks after publishing his surprisingly dovish shareholder letter, Buffett offered his opinion on MMT proving that, despite his less hawkish view on deficit spending, he is no ally of the MMT crowd:
âIâm not a fan of MMT, not at all ... We donât need to get into danger zones, and we donât know precisely where they are.â
The danger zones Buffett fears are created by the twin effects of âspiralingâ inflation and unchecked deficit spending, i.e., the two core pillars of MMT. Buffett has shown that, while he is not scared of trade deficits or deficit spending anymore, he is not prepared to go all-in on the idea that printing money endlessly is in any way a good idea.
Some observers were surprised by Buffettâs emphatic denunciation, especially in light of his recent softening on the subject of deficits. But they should not be shocked. After all, it takes a considerable leap in logic to get from the idea that deficits may not be as bad as he once thought to the notion that governments should enjoy carte blanche to print money at will -- and without consequence. But Buffett is no fool, and he sees the dangers unfettered money-printing and deficit spending would entail for even the most dynamic economy.
Beware too much of a good thing
The simple fact is that deficits can be sustainable, but only up to a point. Eventually, the debt pile becomes too great for even a dynamic growing economy to handle.
Buffett may not be terrified of our trade deficit with China, or with the continuously rising levels of public debt, but that does not mean he has lost his faculties for reason. He understands, as any reasonable person ought to, that running the printing presses non-stop -- and spending without thought of how mounting debts will be repaid -- is a recipe for eventual disaster. It is possible to prime the pump without succumbing to the idea that the iron laws of economics no longer operate for some reason.
The power of positive thinking is all well and good, but one must be cognizant of the risk that positivity can swiftly turn to mania. Buffettâs take on MMT is more than reasonable. Investors should hope policymakers heed his warnings.
Disclosure: No positions.
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