Everything You Wanted To Know About MMT (But Were Afraid To Ask)

Trading Implications

If I am correct, I suspect we will see many Democrat candidates (perhaps all?) adopt MMT as a tenant of their platform. And here is a crazy thought for you - what if Trump beats them to it?

I have long argued that eventually, we will hit a period where governments will spend and Central Banks will facilitate their deficits. MMT provides academic justification of where we all know we are headed anyway.

In one of the interviews I watched with Professor Kelton, she said that the idea of deficits being funded with bond issuance is purely a self-imposed limitation. It’s required by law, but in reality, it doesn’t need to be done. The law can be changed. The government could simply spend $100 while only taking in $90 and directly writing cheques against the Federal Reserve to pay for the $10.

Think about how inflationary this will be! But isn’t that the whole goal?

I have always chuckled at the idea that governments were powerless to create inflation. If they want to create inflation - they can. There just needs to be the political will. And it looks like that will has finally arrived.

So what does this mean for your portfolio?

Although I don’t have any concern about the government funding itself, I do have lots of worries that inflation would quickly rise and before too long, the government would be forced to cut back it's spending, and that typical of governments, it would prove much more difficult than instituting spending. Therefore I would expect fixed-income to be a terrible investment under MMT. Even if the government pegs rates low, inflation will be the real risk. It would make little sense to sit in an asset that pays fixed.

To me, MMT would scream that the best course would be to buy real productive assets hand over fist.

Ben Hunt had an interesting piece in his excellent blog Epsilon Theory titled, “Modern Monetary Theory or: How I Learned to Stop Worrying and Love the National Debt”. I would argue that he represents conventional Wall Street thinking in terms of his pessimism regarding MMT, but I would like to highlight two terrific points from his writing.

  1. Ben believes MMT will gain traction in the coming years; “As I said, you may not have heard about MMT yet. But you will. You won’t be able to avoid it. Why? Because MMT is the post hoc justification of both easy fiscal policy and easy monetary policy. As such, it is the new intellectual darling of every political and market Missionary of the Left AND the Right.”
  2. He also contends that MMT will switch QE’s inflation in financial assets to inflation in the real world.

I agree with Ben that MMT will change the type of inflation the economy experiences. I will leave it to much smarter people than I to decide if this is a good or bad thing.

In the meantime, in the coming months, quarters and years, watch for MMT to become a much larger source of change for your portfolio and trading. You might think it’s great and that the financial world could use a change. Or you might think it’s terrible and will be a disaster. Doesn’t matter what you or I think. MMT is coming. Ignoring it would be foolish.

I will leave you with two quotes. One from Ben Hunt and one from Stephanie Kelton. They sum up the battle that will soon envelop the political and financial landscape.

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Gary Anderson 4 months ago Contributor's comment

MMT doesn't have only inflation to fear. It has the bond market to fear. Massive collateral destruction and margin calls the world over. Remember when W Bush spent like a madman and Cheney said deficits don't matter? Well, about that time US productivity declined and the Great Recession was on. Helicopter money would control the growth of the money supply. I don't see that happening with MMT.