Kevin Lamarque/Reuters
U.S. Rep. Alexandria Ocasio-Cortez (D-NY)
- Chris Brightman, chief investment officer at Research Affiliates, weighs in on the Modern Monetary Theory conversation with historical anecdotes and forward-looking market calls.
- The debate surrounding MMT rages on as prominent political figures like Alexandria Ocasio-Cortez put income inequality at the forefront of their 2020 policy agenda.
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It's no secret that the global financial crisis changed the way the world thinks about money.
The disparity between the haves and have-nots grew exponentially during that time, as the wealthy rode the vibrant coattails of Federal Reserve-induced easing, while the less-fortunate were left sifting through the rubble. As a result, the churning of the ashes spawned a new way of thinking, with the goal of benefiting more than just a select few Wall Street fat-cats.
And, depending on who you ask, Modern Monetary Theory seems to address that need for wealth distribution.
The unorthodox economic conjecture has recently made its way into the spotlight due to its controversial nature, constant evolution, and fervent politicization. Rep. Alexandria Ocasio-Cortez of New York is perhaps the most outspoken proponent of MMT.
The concept itself is built upon the principal that governments with fiat currencies can print unlimited amounts of money to fund spending. In addition, governments need not worry about deficits since they can simply issue more currency in order to meet their prior commitments.
In essence, MMT calls for an increase in social spending without the need for a material increase in taxes, and thus provides an egalitarian landscape for US citizens to thrive within.
But not all are on board.
Chris Brightman, chief investment officer at Research Affiliates - the Pimco subadviser that advises on more than $160 billion - has seen this scenario play out before, and he's not keeping quiet any longer.
"For the full decade of the 1970s, bonds and cash provided negative real returns as unexpected inflation turned real rates negative," he said in a recent research note. "If MMT becomes policy, then we can expect a similar bout of high and volatile inflation leading to negative real returns for bonds and cash."
The chart below depicts the relationship between the US 10-year and the consumer price index (CPI) - a main measure of inflation within the US economy. Notice the rapid growth in CPI during the 1970's.
Research Affiliates LLC
The politicization of monetary policy propelled Richard Nixon into a second term in 1972, after Nixon relentlessly pressured Fed Chairman, Arthur Burns, to ease rates. Consequently, CPI rose from 3% in 1972, to 11% by the end of 1974.
Brightman is clearly worried that the US is on the verge of repeating the mistakes of the past - and that's not good for markets.
"One way or the other, a return to high and volatile inflation can be expected to depress future capital market returns," he said.
Put briefly, if inflation grows unchecked, investors are going to be in a world of hurt. In order to combat runaway price increases, the Fed will have to raise interest rates, and the Congress will have to raise taxes - both of which are detrimental to returns.
Distinguished economists such as Kenneth Rogff, Paul Krugman, and Larry Summers have warned against MMT's implementation, referring to the phenomenon as "nonsense," "just wrong," and a "recipe for disaster."
But that's not stopping the debate.
As unbridled income inequality pushes its way towards the forefront of the 2020 political arena, proponents of MMT continue to tout the thesis as a one-stop-shop, cure-all for those who are tired of the top 1% owning 40% of the US' wealth.
Although it's clear that there are glaring lapses within the US economy, politicians' infatuation with MMT seems to be more of a political strategy than a rational economic theorem backed by anecdotal evidence.
"Informed investors can prepare by paring back positions in mainstream stocks and bonds, diversifying into real assets, and revising down future real return expectations," Brightman said.