If there’s one thing to know soon, it’s MMT

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MMT stands for ‘Modern Monetary Theory’, and it may be the next must-know term to know and understand before it becomes mainstream.

OK, but what exactly is Modern Monetary Theory?

The Roosevelt Institute published an article about it eight years ago, and it simply describes a school of thought in macro-economic thinking that revolves around fiat currency and how sovereign governments issue them:

‘They insist that the notion of “fiscal sustainability” or “solvency” is not applicable to a sovereign government — which cannot be forced into involuntary default on debts denominated in its own currency. Such a government spends by crediting bank accounts or issuing paper currency. It can never run out of the “keystrokes” it uses to credit bank accounts, and so long as it can find paper and ink, it can issue paper currency. These, we believe, are simple statements that should be completely noncontroversial. And this is not a policy proposal — it is an accurate description of the spending process used by all currency-issuing sovereign governments.’

In short, proponents of MMT opine that governments should not be too concerned over fiscal deficits. According to them, currency-issuing governments cannot really default on their obligations (debt) since its denominated in the currency that they issue. Obviously, there is no doubt that MMT could be abused by policy-makers when taken to the extreme.

The article also proceeded to defend against the instinctive criticisms of MMT, such as ‘helicopter money’ arguments and the possibilities of rampant hyperinflation as the public’s trust is lost in fiat currency. Take a read.

Why is MMT Important?

Regardless of whatever you may think of MMT, knowing it is vital at the current juncture as it is steadily gaining traction in the policy-making circles, particularly in the Western developed world. Professor Stephanie Kelton is one strong MMT proponent, and for those who are unaware, she is the economic advisor to the Democrat politician Bernie Sanders.

Bloomberg has caught onto it as well with a recent coverage:

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With more populist politicians on the rise and wide income gaps in societies, there is increasing pressure for fiscal stimulus and higher budget deficits in order to boost growth conditions. Naturally, the whole idea of MMT looks very appealing under such circumstances.

In fact, the words ‘spending cuts’ have disappeared from public consciousness altogether. Dr Ben Hunt from Epsilon Theory brought this up in a recent post:

‘Anyone remember the Fiscal Cliff of January 2013, when markets swooned over a deficit-driven government shutdown? When U.S. debt was downgraded over the budget deficit? When the Sunday politics shows were awash in words like “sequestration” and “CBO projections” and “debt ceiling”? Ah yes, those were the days.’

This is his narrative map of all Bloomberg articles from October 2017 to October 2018 that have anything to do with the US budget deficit:

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‘This is 25 measly articles over the course of a year. This is the ABSENCE of a narrative.’

Over in Europe, there is hardly any talk about austerity now. Left-leaning politicians in Britain are gaining popularity, and Labour’s Jeremy Corbyn has been increasingly outspoken for running higher fiscal spending (check his Twitter). In Italy everyone is watching how the new populist, EU-sceptic coalition government continues to balance its campaigned goals of fiscal stimulus and appeasing Brussel’s bureaucrats.

A simple search via Google Trends shows that austerity lingo has declined substantially over the past five years. On the other hand, interest and curiosity for ‘MMT’ has risen.

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While MMT hasn’t taken root entirely among all politicians and policy-makers, there is a very high probability that it could go mainstream in economic decision making when growth conditions deteriorate in the future (like during a US recession).

This could cause a paradigm shift among investors and market observers…

Macro investing is about identifying and anticipating the shifts in dominant narratives held by the majority of market participants, and understanding what that means for asset markets once those shifts happen. 

If and when MMT takes hold in policy-making circles and becomes the dominant philosophy in guiding governments’ modus operandi, investors will need to prepare for the realisation that governments may ignore fiscal restraints, or adopt a combination of unorthodox monetary policies (outright monetisation of debt anyone?) to fulfill their policy aims.

Sounds outrageous? Well, so did the concept of negative central bank policy rates / negative corporate bond yields three years ago…


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