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.