In recent years, Modern Monetary Theory (“MMT”) has been rising in prominence as several influential US policymakers and their economic advisors have advocated the adoption of this nontraditional economic doctrine in response to perceived failures of current monetary and fiscal policy. It is important to note that while the name is stated as a “theory,” it may be more accurate to refer to MMT as a policy, or doctrine, as it prescribes a manner in which a government can or should conduct monetary and fiscal policy. Proponents of MMT cite growing levels of wealth inequality, evidence of asset pricing bubbles, and a lack of sustainable inflation produced by existing practices, among other issues, as reasons to consider a new approach to economic policy.
In this paper, we will provide a brief background of fiscal and monetary policies employed by the United States, describe the theory and mechanics that underpin MMT, discuss the merits and risks of MMT, and detail the investment implications if MMT were to be deployed. MMT often elicits strong positive or negative responses in the academic and financial communities; this newsletter is neither an indictment nor an endorsement of MMT. However, we do believe MMT would increase the possibility of monetary destabilization and/or hyperinflation if implemented. A change to this doctrine would require that investors reconsider the core tenets of conventional asset allocation.