The Madness of the Modern Monetary Theory

The team at Pyrford examine fiscal policies adopted by countries to boost economic growth.

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We note the latest hot topic in economics is Modern Monetary Theory, or MMT. We think one of the “M”s should stand for madness. The theory runs that if you have control of your own money supply, deficits don’t matter as you can always print as much money as you need. Japan is often held up as one of the poster-boys for this theory as it runs never-ending budget deficits, and by the end of 2018 had expanded general government gross debt to 237% of GDP (source: IMF). It may not have escaped your notice, however, that Japan doesn’t qualify as a poster-boy for economic growth and an improvement in real living standards.

We think one of the “M”s should stand for madness.

Because interest rates are close to zero in much of the world, the “experts” believe that monetary policy has run its course and fiscal policy is the only lever that governments have left at their disposal. But we think they should focus on why the world is in this predicament and not on the latest radical panacea. Is not the “predicament” something to do with too much debt?

Looking through the latest IMF forecasts, it is clear that the US is already close to testing the MMT theory. It is expected to run budget deficits averaging 4.2% of GDP over the next six years, whilst general government debt to GDP is forecast to reach 110% of GDP by 2024.

In Spain, a rambunctious general election campaign appears to have handed controversial Socialist leader and current Prime Minister Pedro Sanchez a surprise victory – provided he can cut deals with several smaller parties. His party won 29% of the vote following a voter turnout of around 75%. Mr Sanchez has taken a leaf out of the MMT gospel by promising to substantially ramp government spending (and upset many other eurozone leaders). The only problem is that Spain has no control over its currency. This could prove interesting.

China’s President Xi Jinping has a rather different approach to boosting growth, having announced a planned expansion of the Belt and Road Initiative (BRI) to embrace broader economic and social cooperation between signatory countries. To quote the President: “We need to promote a global partnership for connectivity…we will transcend geographical distance and embark on a path of win-win co-operation…we want to sow the seeds of cooperation, harvest the fruits of development, bring greater happiness to our people and make our world a better place for all.”

The BRI was initially conceived as a series of widespread infrastructure projects (roads, ports etc.) but it seems that China’s ambitions now extend further. Around 120 countries have already signed various agreements as part of the project. The stated goals are lofty and idealistic, but some have questioned China’s motives. The tentacles of the communist superpower already spread far and wide, and the expanded BRI will ensure further influence and spread. Legitimate questions are also being asked about cost and return. We don’t know the answers, but we understand the reservations that have been expressed.

Looking elsewhere, we note that Brexit has once again been postponed. We’ll refrain from further comments.

Risk Disclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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