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Modern monetary theory madness

The recent news has been flooded with commentary on Modern Monetary Theory (MMT). This tends to be a more leftist leaning theory that supports big government spending and large deficits that get monetised by a central bank.

Basically, governments create a surge in fiscal spending to fund employment and/or special projects and all this borrowing is absorbed in whole or part by the country's central bank. The key here is having control of the currency and taxation in that currency.

Two factors have helped push this once obscure economic philosophy into the spotlight. The first is the rise in a more populist agenda. Inequality and other social injustice issues like unfair educational access and universal healthcare have begun to tear at the very heart of many nations' social fabric.

Most solutions to these disparities are believed to be the job of government. Thus, there is an increasing demand and cry for additional spending to sort all these problems out.

The second factor is non-existent inflation despite unprecedented central bank intervention. In prior periods excessive and large government spending projects that created huge budget deficits could be a precursor to inflation.

But recent experiences seem to refute this notion. For example, despite interest rates being held at the zero bound for years and a flurry of central bank bond buying that helped depress interest rates, the US has not seen any significant trend in inflation. Japan is an even better example. Despite rates being pinned at zero for over two decades, and public debt that is over 2.5 times greater than the economy, inflation is still absent. The theory, therefore, suggests that deficits don't matter because inflation is not a problem, and rates can be essentially manipulated lower with aggressive central bank intervention.

Many critics like Jerome Powell, Larry Summers and Larry Fink would disagree and call MMT garbage, “voodoo economics” or potentially reckless.

The main arguments are that this form of monetisation will lead to hyperinflation at some point and the potential collapse of the currency. These thoughts seem sensible in theory, but recent events involving quantitative easing and deficit spending have not offered any real-life support.

If US budget deficits and spending continue to expand, we may get more of an idea if the fear of inflation is true, but record low unemployment levels have yet to spike significant growth or wage inflation. I suspect, however, is it is not that simple. In fact, I think demographics and low productivity may have more to do with inflation than government spending and deficits.

A couple things to consider. Governments are not necessarily the most efficient spenders of capital. Thus, having any government become a massive allocator of capital is most likely to lead to a very inefficient and likely suboptimal investment outcome.

I would prefer the focus was on allowing the private markets to keep more money and allocate it as they feel fit. In some cases, involving social issue this may not become a private sector focus.

The cases of equality of opportunity in education and healthcare, for example, it may be necessary for government to step in and support greater access, but for initiatives that involve capital spending in new endeavours and business, like the “Green Deal”, it would be better to reduce regulation and create a fertile environment for competition and/or investment.

The second consideration when one debates the merits of MMT is the current environment. Almost every major central bank is involved in some form of monetary experiment. If this were not the case, would currencies be as stable and inflation so benign? We may be in a unique period in which major financial players are all conducting central bank intervention so relative attractiveness of currencies is all very similar. For example, if Japan suddenly rolled back its aggressive monetary policy and Europe also became less accommodative, while the US engaged in a more aggressive MMT-style policy, I would find it unlikely that the dollar would remain stable in value. Given the fact that everyone is doing it, however, currency allocators have no clear-cut option to convert — currencies are essentially relative game.

Therefore, given the world's current demographic profile, persuasive worldwide central bank intervention, and anaemic growth, a mild dose of MMT might work, and I have a strange feeling that voters are lining up to give it a try. We may be entering a new economic era … whether we like it or not. Politics and economics are slowly becoming one and the same.


“The left's embrace of modern monetary theory is a recipe for disaster” by Lawrence Summers. Link is https://tinyurl.com/yychggd6

Nathan Kowalski CPA, CA, CFA, CIM, FCSI is the chief financial officer of Anchor Investment Management Ltd and can be contacted at nkowalski@anchor.bm Disclaimer: The sole responsibility for the content of this article, lies with the author. It does not necessarily reflect the opinion, policy or position of Anchor Investment Management Ltd. The content of this article is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy or for any other purpose. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable. They are not necessarily all-inclusive, are not guaranteed as to accuracy and are current only at the time written. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their professional financial advisers prior to any investment decision. The author may own securities discussed in this article. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. The author respects the intellectual property rights of others. Trade mark or copyright claims should be directed to the author by e-mail. ,/i>

A unique period: almost every major central bank is involved in some form of monetary experiment. If this were not the case would currencies be as stable and inflation so benign? asks Nathan Kowalski in today's Financial Ramblings from the Rock column (Photograph by Andrew Harnik/AP)

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Published March 18, 2019 at 9:00 am (Updated March 18, 2019 at 1:23 am)

Modern monetary theory madness

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