Global economy MMT steps into the ring to challenge the macroeconomic status quo
A decade into the «lower for longer» interest rate environment, central bankers and governments around the world are looking for new methods to kickstart economic growth. One approach - Modern Monetary Theory (MMT) - is grabbing the spotlight with its unorthodox assertion that governments should spend more to boost employment and drive the economy.
This challenges the policy “status quo” in many countries, the conventional wisdom being that central banks should support sustainable growth by focusing on price (inflation) and financial stability, while governments should do their part by keeping deficits (i.e. spending) in check. The influence of the former has increased in recent decades, with monetary policy (e.g. interest rates) assuming the role of the moon in steering the economic tides.
MMT supporters, however, question the efficacy of this model. MMT starts with the premise that any sovereign country that has their own fiat currency cannot go bankrupt. This gives a government the ability to “print” as much money as it wants without having to raise taxes or borrow funds. The only factor that can constrain spending is inflation, which governments can manage through taxes and other measures.
Spending in areas that boost productivity such as education, infrastructure and research & development can lift long-term economic growth, while small government deficits can limit it, Stephanie Kelton, a well-known MMT proponent and an advisor to US Presidential hopeful Bernie Sanders in his 2016 campaign, explained on CNBC earlier this year. The policy goals should be to maintain a “balanced economy” with full employment and to guard against inflation, according to Kelton.
Deficit spending to the rescue
The political world is taking notice. Supporters of the “Green New Deal” in the USA – a proposed package of policies that aim to address climate change and reduce income inequality – say deficit spending would enable such a program. Over in Europe, outgoing European Central Bank President Mario Draghi suggested in late September that governments should consider new ideas such as MMT to deal with inequality.
But as Draghi noted, MMT has not yet been tested. Among critics’ chief concerns is that MMT could lead to roaring inflation, and the implications of shifting more responsibility over the economy from central bank bureaucrats to elected officials.
Therein perhaps lies an opportunity for MMT. Against the backdrop of still lackluster growth following the 2008 global financial crisis, there is a growing belief that governments need to make changes, in part by leaning more heavily on fiscal policy to drive economic growth.
Main asset classesMost asset classes showed a strong performance in 2019. Investors should not expect to see this feat repeated in 2020 although financial assets will likely continue to benefit from generally low yields.
Alternative investmentsAlternative investments have become increasingly established as a building block of portfolios, particularly in today’s world of low-for-longer interest rates and yields.
Investment strategy 2020Now that interest rates around the world have reached record lows or slipped into negative territory, even risk-averse investors will need to buy higher-risk assets to generate positive returns.