Dismiss MMT at Your Peril

Key Points

  • Modern Monetary Theory (MMT) argues that governments with fiat currencies should coordinate treasury and central bank actions to fund government programs by directly printing money, unconstrained by tax receipts or borrowing capacity.
  • Progressive politicians embrace MMT because the doctrine allows them to advocate substantial increases in social spending without imposing the taxes traditionally assumed necessary to fund such spending.
  • MMT is attracting a growing following because it also promises to reverse the contribution to wealth inequality of today’s conventional monetary policy.
  • Historical experience with policies similar to MMT has resulted in periods of high and volatile inflation, which depresses the real returns of mainstream stocks and bonds.
  • Savers and investors may wish to revise financial plans to allow for the heightened risk of inflation given that policies influenced by MMT appear to be increasingly likely.

Don’t dismiss Modern Monetary Theory (MMT) as unlikely to influence policy. This heterodox economic doctrine advocates sharply increased fiscal expenditures backed by money creation. An alluring promise of MMT is that it directly confronts a perceived flaw in today’s conduct of monetary policy: pumping liquidity into financial markets as the standard response to stock market and economic turbulence inflates asset price bubbles and thereby exacerbates income inequality.

Recognize that monetary policy–fueled bull markets only benefit the few who own stocks. Three US billionaires are now collectively worth more than the 160 million Americans in the bottom half of the wealth distribution. A dramatic increase in social spending as proscribed by MMT advocates may well help alleviate some of this inequality.

Investors, however, should be aware that MMT-inspired policy raises the risk of inflation. Unexpected inflation shocks cause the prices of stocks and bonds to plummet. Proponents of MMT may interpret destruction of financial wealth as necessary and beneficial because few of the bottom 160 million hold any stocks or bonds. A burst of inflation will help level the playing field.

Many prominent politicians currently embrace MMT more as political strategy than economic policy. Over recent decades, Republicans have successfully prevented an expansion of US government spending to fund European levels of social benefits by cutting taxes and raising deficits when in power, and then demanding austerity to remedy the accumulating debt when Democrats are in power. Having learned from this gambit, prominent members of the progressive wing of the Democratic party are now turning the tables. MMT allows them to promote a massive expansion in government spending without admitting that a corresponding tax increase (likely a European-style VAT) will become necessary to offset that spending.