Debate rages over practicality of modern monetary theory
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Some alternative strategies struggle in first quarter following tough 2020
      Close up of Business people shaking hands, finishing up meeting, business etiquette, congratulation, merger and acquisition concept
      Cathay Innovation Partners takes minority stake in Seaya Ventures
      IACPM: Credit managers see stabilizing effect from stimulus programs
      KKR lifts out 3 to focus on clean energy infrastructure
    • Hub International continues buying spree with IBG acquisition
      Callan brings on 2 executives
      Hub International agrees to buy Plan Sponsor Consultants
      Aon names public markets solution leader
    • The J.P. Morgan Chase logo displayed at a branch bank
      J.P. Morgan sells $13 billion of bonds in largest-ever bank deal
      John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      IACPM: Credit managers see stabilizing effect from stimulus programs
      BofA: Most managers bullish on economy, markets
    • Pentegra launches pooled employer plan
      Teresa Hassara
      Ascensus taps MassMutual alum as new FuturePlan president
      Economic Group Pension Services scoops up third-party administrator
      OregonSaves gathers $100 million in assets
    • WTW to cut carbon footprint of OCIO portfolios by half by 2030
      SEC Commissioners Testify Before The House Financial Services Committee
      SEC shouldn’t require ESG metrics – commissioner
      Tracker gives investors insight into progress on social commitments
      Shoppers wear protective masks while visiting an Apple Inc. store at George Street in Sydney, Australia, on June 24, 2020.
      Apple backs SEC mandate on climate disclosure
    • New book culls institutional wisdom from podcast series
      Fearless Girl
      SSGA’s Fearless Girl statue now shattering glass ceiling
      Tangen video
      Norges chief dons chef’s hat to boost employees’ spirits
      Ken Griffin
      Ken Griffin donates $5 million to give Miami students internet
    • Karen Karniol-Tambour
      Bridgewater appoints 2 co-CIOs to oversee new sustainable investing group
      Hedge funds post best first-quarter return since 2000
      Jason Kephart
      Managers see good times ahead in 2021
      Jev Mehmet, CEO of Brevan Howard's Coremont unit
      Brevan Howard runs $50 billion unit like BlackRock’s Aladdin
    • University of New Hampshire endowment allocates $14 million
      Sen. Elizabeth Warren, D-Mass., listens during a Senate Health, Education, Labor, and Pensions confirmation hearing for Marty Walsh, secretary of labor nominee for President Joe Biden, in Washington on Feb. 4, 2021
      Lawmakers reintroduce climate-risk disclosure bill
      The U.S. Capitol and Library of Congress stand in this aerial photograph taken above Washington
      Senate bill seeks to make U.S. climate-change leader
      Brexit pushes 440 financial services firms to move some U.K. business to Europe
    • Morgan Stanley logo
      Morgan Stanley’s record quarter stained by Archegos collapse
      Man Group CEO Luke Ellis
      Man Group AUM up in first quarter on performance
      Michael Zerda
      LaSalle picks head of debt and special situations
      Susan Ford
      Duff & Phelps brings on institutional business development managing director
    • Corporate plan funding gets a boost from higher discount rates – Milliman
      Evan Siddall
      AIMCo lines up next CEO
      A bank customer takes Danish Kroner banknotes from an ATM in Aarhus, Denmark
      Denmark’s PFA Pension achieves 6.3% return in first quarter
      Ontario Municipal promotes from within for new global equities exec
    • Tufts taps interim co-CIO as new investment chief
      Michael Zerda
      LaSalle picks head of debt and special situations
      Evan Siddall
      AIMCo lines up next CEO
      Susan Ford
      Duff & Phelps brings on institutional business development managing director
    • Paul Morrissey
      Blackstone Growth picks managing director to lead European investing
      Bills of euro, dollar and pound currencies, among others
      Ardian closes latest buyout fund at $8.8 billion
      Hand typing on stationary iPhone at an office reception desk
      Private equity’s taste for tech spurs $80 billion deal spree
      Vista Equity promotes 2 to leadership roles on 2 funds
    • CalSTRS indutrial property
      Investors hungry for industrial properties
      Tim Wang
      GLP names co-president of logistics, industrial real estate for China
      Frank Forster
      StepStone Real Estate adds managing director for Europe
      Christine Iacoucci
      BentallGreenOak promotes from within to fill Canadian CIO role
    • Andy Schreiner
      New PEPs targeting firms without retirement plans
      Jackie Walorski
      Contribution catch-up for caregivers gaining favor
      Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Corporate pension contributions
      Eddy Awards 2021
      COVID-19: One year in
      Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • University of New Hampshire endowment allocates $14 million
      Memphis Light, Gas & Water scouting for special situations funds
      Washington State Investment Board earmarks $4.2 billion for 7 funds
      Virginia earmarks $1 billion for 4 managers
    • University of New Hampshire endowment allocates $14 million
      Memphis Light, Gas & Water scouting for special situations funds
      Washington State Investment Board earmarks $4.2 billion for 7 funds
      Virginia earmarks $1 billion for 4 managers
    • Passive Investment Management Services
      Active Extended Global Credit Manager Search
      Actuarial Services
      Investment Management Services
    • Private real estate funds continue rebound
      Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
      Stable value retains edge over money market funds
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • CalPERS cartoon
      Urgency underscores CalPERS' search for a CIO
      Multiemployer plans cartoon
      Money — but no fixes — for multiemployer plans
      Vaccination cartoon
      Rallying to meet the ongoing COVID-19 challenge
      Tesla cartoon
      Don’t confuse wealth creation with retirement saving
    • Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
      COVID-19 Makes LP Portfolio Management More Important Than Ever
      China: the outlook is bright for longer-term investors
      Finding Differentiation in Securitized Assets
    • John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      Jake Remley
      Commentary: Inflation expectations vs. reality in the bond market
      Greg Shea and Steven Kindred
      Commentary: The solution for yield-seeking allocators may be hiding in plain sight
      Jim Park
      Commentary: Asian Americans, Pacific Islanders face ‘bamboo ceiling’ in money management
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      Research for Institutional Money Management
      P&I Content Solutions
      Top questions for institutional investors
      Sponsored Content By Newton Investment Management
      Growth and Innovation in Emerging Markets
      P&I Content Solutions
      Fixed income 2021
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:23
      The passive fixed-income glut
      watch video
      1:38
      Is it time for DC plans to embrace private equity?
      watch video
      5:39
      The coronavirus pandemic: One year later
      watch video
      0:45
      Private funds weathered 2020 turmoil
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Understanding the PEP Evolution
      Divest or engage?
      Innovations in DC: Helping supercharge retirement outcomes
    • POLL: The Biden infrastructure plan
      POLL: Retirement income solutions
      POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Private real estate funds continue rebound
      Managed account adoption stalls in 2020
  • Events
    • Conferences
    • Webinars
    • DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Understanding the PEP Evolution
      Divest or engage?
      Innovations in DC: Helping supercharge retirement outcomes
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. ECONOMICS
April 15, 2019 01:00 AM

Debate rages over practicality of modern monetary theory

Danielle Walker
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    REUTERS/Mike Segar
    Joachim Fels fields questions about the 'very hot topic' of modern monetary theory at almost every client meeting.

    Given the current political and economic climate, it's no wonder a renewed debate around modern monetary theory — an unconventional macroeconomic view introduced in the early 1990s by economist and former hedge fund manager Warren Mosler — has drawn experts at some of the world's largest money managers into the discussion.

    The stage is being set for the 2020 presidential race, Congress is preparing to tackle the government's debt ceiling and President Donald Trump's proposed government spending plan, released last month, has roiled Washington.

    That's helped push to the forefront the conversation about MMT, which contends that the U.S. government cannot go bankrupt because it prints and borrows in its own currency and is not constrained by the budget deficit. The Treasury Department estimated recently that the current budget deficit would reach $1.1 trillion by the end of fiscal year 2019.

    Joachim Fels, managing director and global economic adviser at Pacific Investment Management Co. LLC, Newport Beach, Calif., noted in a phone interview that MMT is certainly a "very hot topic," and hasn't escaped the attention of the bond giant's institutional investors and wealth management clients.

    "When I speak to clients, I get a question about MMT in almost every meeting now. It's a very hot topic. If MMT became reality it would have huge consequences for financial markets and investors," Mr. Fels said.

    A PIMCO cyclical outlook report last month, co-authored by Mr. Fels and Andrew Balls, managing director, CIO-global fixed income, noted: "In a nutshell, proponents of MMT postulate that active fiscal policy should be used to target full employment, and that monetary policy should finance directly … whatever deficit level fiscal policy chooses. Expansionary fiscal policy would thus automatically increase the money supply rather than the bond supply, and financing the deficit would never be a problem."

    While, in theory, MMT "can work," Mr. Fels said, it is the implementation of this view that raises his doubts.

    Mr. Fels called it "very naive" to expect the government to move swiftly on matters of fiscal policy, such as raising or cutting taxes, as "more often than not, you get gridlock in Congress."

    "Fiscal spending is always politicized. The difference is, under MMT, you put the entire burden for stabilizing the economy on the government, and therefore on Congress," Mr. Fels said. The view turns the division of labor between the Federal Reserve and Congress on its head, he added.

    Effect on interest rates

    PIMCO is fielding more questions from clients about MMT because "monetary and fiscal policy have a big impact on interest rates, and thereby affect the prices of bonds and other fixed-income assets," he explained.

    Furthermore, interest rates impact equity markets and valuations.

    "This debate is relevant for all asset classes, but first and foremost, for fixed income," Mr. Fels said.

    MMT essentially offers the idea that government spending or deficit financing can be used to "prime the economic pump," according to Lori M. Heinel, executive vice president and deputy global chief investment officer of State Street Global Advisors, Boston.

    There are several implications of MMT that concern her, including the potential impact of these ideas on interest rates, but a major issue for her is how to determine which spending programs would stimulate the economy.

    "How do you decide which programs warrant the capital expenditure? That can become very political. Our view would be, how do you think about the range of things that money can be spent on and identify ones that are additive to the economy more broadly and drive more longer-term economic growth," Ms. Heinel said.

    Also, as the U.S. enters the 2020 presidential race, "either party could use modern monetary theory to justify whatever pet projects they have," she added.

    Investment impact

    Mr. Mosler, who developed MMT and now resides in St. Croix, said in an April 10 interview that if his take on monetary operations gained widespread acceptance, the result for investors, including institutions with a longer-term investment horizon, would be the opportunity to invest with less risk of macro volatility.

    As such, investor worries of a looming crisis would be alleviated, and riskier assets, such as early stage companies, would carry a "different kind of risk," as "the whole definition of risk shifts," he explained.

    Institutions would "not just be investing because (a company) can weather the storm," but because the company is well-managed, and its products or services are "superior and can flourish."

    MMT recognizes that the government is the monopoly issuer of the currency, and that the money to pay taxes and buy bonds flows from government spending, so it must "spend first," according to Mr. Mosler. Therefore, the idea that the government is revenue-constrained is "entirely inapplicable."

    MMT has gained a following from economists, such as Stephanie Kelton, a professor of public policy and economics at Stony Brook University, N.Y., and politicians, such as Rep. Alexandria Ocasio-Cortez, D-N.Y., who sees the theory as an answer to funding social programs.

    Even PIMCO's Mr. Fels said "there is some truth to some of the claims that MMT does make."

    "(MMT) does not necessarily lead to high inflation or hyper inflation as some people claim," Mr. Fels said, referencing the MMT view that the government can continue spending, or run a higher deficit, to achieve full employment.

    Yet the view has drawn criticism from industry heavyweights, including Laurence D. Fink, chairman and CEO of BlackRock Inc., who called MMT "garbage," in a March interview with Bloomberg Television, stating that he was a "big believer that deficits are going to be driving interest rates much higher and it could drive them to an unsustainable level."

    'Very skeptical'

    Nathan Sheets, chief economist and head of global macroeconomic research at PGIM Fixed Income, a unit of $1 trillion manager PGIM Inc., Newark, N.J., said, overall, "we find ourselves very skeptical of modern monetary theory."

    He added, however, that "there is a grain of truth in the observation that several countries, including Japan, have been able to run high debt levels at low interest rates."

    "Further, a case can be made with rates low, that it makes sense to borrow in the United States some large amount to build infrastructure projects," as infrastructure is likely to return more than its costs, Mr. Sheets explained. Following the global financial crisis, the American Recovery and Reinvestment Act of 2009 ushered in a $105.3 billion package for infrastructure investment.

    But, from a high level, he likens MMT to driving down a mountain road and trying to remain as close to the edge as possible, while not going off the cliff, which is not advisable.

    "When you are going down the mountain, you don't drive as closely to the edge of the road as you can," Mr. Sheets said.

    Over the medium term, if the U.S. doesn't address rising federal debt levels, the inaction is likely to weigh on the economy and be a source of uncertainty for investors in the U.S. market, he continued. For institutional investors, a shift toward an MMT view could have two ramifications:

    "On the margin, it would tend to make U.S. assets less attractive," such as domestic fixed income and equities, he explained. "It would make people more uncomfortable and nervous about the future and move people away from riskier assets into safer assets," such as government securities as a safe haven.

    Although Mr. Sheets sees some truths in MMT, PGIM Fixed Income does not incorporate the macroeconomic view into its investment outlook and does not see it as one the U.S. should follow, he said.

    Separately, if the view was to become mainstream in the U.S., he believes institutional investors would find that "concerning."

    "The traditional view that deficits are bad is still deeply rooted in the investment community," Mr. Sheets said.

    Related Articles
    Trump to nominate Stephen Moore to Federal Reserve Board
    Trump said to pick Herman Cain for Fed as new counterweight to Powell
    Trump nominates first assistant secretary of the Treasury for investment securi…
    Reviewing target-date funds is now top priority
    Senate has duty to denounce modern monetary theory, Republicans say in resoluti…
    Recommended for You
    Global economist warns of perils of short-termism
    Global economist warns of perils of short-termism
    Professors get Nobel award for climate change analysis in economics
    Professors get Nobel award for climate change analysis in economics
    BlackRock Investment Institute hires head of economic, markets research
    In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    Sponsored Content: In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
    COVID-19 Makes LP Portfolio Management More Important Than Ever
    China: the outlook is bright for longer-term investors
    Finding Differentiation in Securitized Assets
    Green and sustainable bonds in emerging markets
    Portfolio Protection: One Size Fits None
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    April 5, 2021 Page One

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center