The fierce discussion over MMT last summer has sparked further discussion, one which Coutts’ Balzer senses could cause a paradigm shift. MMT might be shot down by big industry players, but gets to the heart of the question about the future of monetary policy and what kind of role governments are going to play in this process going forward. In addition it is currently experimenting with negative interest rates.’ If not MMT, what else? ‘The US is pretty much leading the debate on MMT at the moment and Europe is much slower anyway in those kinds of discussions. ‘It is hard to say what kind of shape it is going to take as some proposed policies are more infrastructure-oriented and others are more green policy-focused, but ultimately it will be the same measure. In contrast with these views Coutts’ Balzer (pictured) doesn’t rule out that the theory will gain popularity outside of the US, as Europe tends to catch on fast with whatever the US is doing. Meanwhile, Lombard Odier’s Monier also sees very little chance of MMT becoming economic orthodoxy, in part because it looks so politically counterintuitive to tell voters to ignore debt. ‘I don’t think MMT is necessarily something that we should give a lot of thought to,’ Kamal says. He also doesn’t see the policy gaining traction outside of the US, given that other countries’ currencies don’t have the reserve status the US dollar has. Fahad Kamal, chief market strategist at Kleinwort Hambros, says MMT is rather a fringe economic view in the US at the moment and the markets haven’t moved to price it in yet. However, not every investment decision-maker considers it the top item on their agenda. ‘People from the financial industry and some hedge fund managers started coming in and commenting on the theory, which means we can’t ignore this topic,’ Balzer says. You know MMT is probably a big deal when the US Congress is asking the Fed’s chair Jerome Powell about it. Such government spending would raise redistribution issues, the risk of crowding out the private sector, asset price inflation and even greater inequality,’ he added. ‘Even if there was no risk of hyperinflation, there may be other side effects to fiscal leniency. In one of his latest commentaries, Stéphane Monier, CIO of Lombard Odier PB, said MMT cannot help identify when inflation becomes economically problematic. For equities it is a bit less clear but there will be quite a stark impact on asset allocation if inflation rises.’ ‘If it happens, then we will adjust portfolios because high inflation will have strong implications for bonds in particular.
Balzer says he doesn’t want to approach the subject from a political standpoint, but he uses it in conversation with clients to demonstrate how insensitive policymakers have become to potentially inflationary measures going forward. MMT’s potential to trigger rampant inflation is one of the biggest concerns for Sven Balzer, head of investment strategy at Coutts. ‘If past hyperinflationary episodes are any guide, such as Venezuela and Zimbabwe, it’s almost never the case,’ he says. ‘MMT presupposes that once aggressive fiscal policy is in place and growth/inflation has recovered, policymakers can easily avoid the temptation to print money and transition to a more conventional policy framework. However, it advocates a much more aggressive form of Keynesian-style stimulus, focusing more on fiscal rather than monetary measures, he adds.
Will Hobbs (pictured), CIO of Barclays Investment Solutions, says MMT is not that far away from mainstream economic theory, as it recognises a trade-off between growth and inflation. However, asset allocators’ views on MMT are similarly sceptical, as they question both its implementation and its side-effects. The idea caught on with left-wing politicians, who put it forward as a solution for expensive healthcare projects or the Green New Deal, which is a major sustainability-focused spending package in the US with an estimated cost of around $16.3 trillion. Mosler proposed that governments with reserve currency, like the US, could raise their debt ceiling without sending the economy into a tailspin. The debate about the viability of MMT was triggered by US left-wing policy thinkers, who revived an idea developed by American economist Warren Mosler in the 1970s. Jeffrey Gundlach called it ‘complete nonsense’ and Larry Fink referred to it as ‘garbage’ on live TV.įollowing such vigorous attacks by fund industry veterans, including Warren Buffett, it’s hard to resist the temptation to give the theory a second look. Modern Monetary Theory (MMT) first appear on investment community’s radar in early 2019 and caused quite a stir.
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