It’s a populist environment these days as politicians race to propose or even roll out ideas that were viewed as controversial or naive in the past. Tariffs are new norms, and anti-immigration policies have become hot topics among people and politicians. The world of finance has also caught on with this populist trend, as increasing numbers of economists, senators, sell-side analysts and even well-known fund managers recently have shared their thoughts on the latest hot topic in finance: Modern Monetary Theory(MMT).
Here’s a graph from Wikipedia showing the number of times the page MMT has been visited every day. And it’s clear that this radical proposal, which was once a vague economic theory has now become a major topic of debate among policymakers and economists with astonishing speed. Here are some opinions from notable figures about MMT: Alexandria Ocasio-Cortez, James Galbraith, and Ray Dalio.
Modern Monetary Theory’s basic principle is straight forward: Under a fiat currency system, a government can print as much money as it likes. As long as a country can mobilize the necessary real resources of labor, machinery, and raw materials, it can provide public services. Our fear of deficits, according to MMT, comes from a profound misunderstanding of the nature of money. MMT supporters think deficit spending could lead to inflation, which they see as the only downside to more spending. But for the past few decades, inflation has been negligible. Deflation or low inflation is probably a bigger threat to the global economy.
To Seismic, the rationality or the justification for MMT isn’t as relevant as the increasing debate and consideration for MMT. This theory, should it gain more traction, could have the potential to alter the course of future path of monetary and fiscal policies for many countries. And just like building a startup, the process from non-existence to gaining prominence for MMT will be lengthy and profound.
The biggest issue with MMT is monetizing national debt via central bank. This theoretically means the Treasury can issue unlimited debt to central bank can purchase these debts easily because they can always print more money. There are two obvious concerns from this approach. First is the concern about high inflation. However, as mentioned above, with mild inflation pressure in the past decade, and aging demographics for many developed nations, we don’t think concerns for inflation will prevent the public from accepting more government spending. Second concern is about the rising deficit and debt level. We often see politicians raise their concerns about growing deficit. However, it appears that this concern is more like an excuse to pushback spending proposals because the general public does not care much about it. From the chart below you can see the traffic for Wiki page “National debt of the United States.” And despite record debt borrowing from the Trump administration, the traffic remains stable, meaning most people does not care about government borrowing.
At Seismic, we’ve taken notice of MMT since late last year. And quickly we realized the significance of the theory and the potential it has on policymakers and financial world. So we decided to leverage our strength, and build a monitor to track the sentiment and popularity of MMT.
Aside from Trump’s tax cut policy, the next plan to give MMT a leg up is actually something that’s been proposed 3 years ago: President Trump’s infrastructure plan. The plan, which called for $1 trillion spending to build, renew and repair infrastructures in America.
There’s a noticeable pickup in sentiment for infrastructure starting in early April. The sentiment got a strong boost in mid-April thanks the news reports about President Trump and House Speaker Nancy Pelosi both intend to work on a bipartisan infrastructure package. So it is very clear that MMT in the form of infrastructure package could be working underway. The real issue is how both parties work together and deliver this infrastructure plan that can help boost their positions for the 2020 election and approval rating.
MMT is here to stay. Ignore it at your peril and you will miss out on many great shifts and regime changes. The implications on market and investment opportunities are what Seismic lives for. We will keep monitoring MMT development and update it periodically.