Advertisement
Features

James Montier: MMT could be worth a try

MMT is doing a better job of providing insights into the functioning of the modern economy than conventional neoclassical economics, says James Moniter of GMO.

James Montier, investment strategist,GMO

Critics of modern monetary theory (MMT) condemn it as "madness, nonsense, mess, garbage, and even voodoo", says James Montier, the independent-minded investment strategist at US asset manager GMO, in a research note. But what if they are wrong? In Montier's view, core MMT principles such as "money is a creature of the state" and that "loans create deposits" mean that this new, controversial branch of economics is doing a better job of providing insights into the functioning of the modern economy than conventional neoclassical economics. And its focus on sensible objectives for fiscal policy, physical constraints on the rate of economic growth and the role of excess private debt in creating economic instability offer "a much more accurate and insightful framework" than the "broken orthodoxy" its opponents are defending.

Advertisement - Article continues below

This isn't just a theoretical argument it has implications for global markets, Montier tells Barron's. For example, conventional thinking holds that rising government deficits should lead to higher bond yields. But MMT explains why deficits could put downward pressure on interest rates. This seems more consistent with the experience of the last few decades. "Look at Japan, which has had huge deficits, and where have interest rates gone? To zero." It also follows that deficits are good for equity markets "if governments are actually running deficits, it's a boost to profits".

Still, even taking that tailwind into account, stock valuations in the US look extreme, especially since earnings growth has been propped up by debt-funded share buybacks. The resulting sharp rise in low-quality corporate debt will come back to bite investors in the next recession, he concludes. That may be closer than expected, judging by the Federal Reserve's recent move towards cutting interest rates.

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
The charts that matter: gold finally sets a new record high 
Global Economy

The charts that matter: gold finally sets a new record high 

As gold surges past its previous high, John Stepek looks at how it's affected the charts that matter most to the global economy.
1 Aug 2020
Abby Joseph: US markets have no margin for error
Investment gurus

Abby Joseph: US markets have no margin for error

Much of the markets' recent strength is down to the US Federal Reserve using monetary policy to backstop the equity market, says Abby Joseph Cohen, se…
31 Jul 2020
Gold bugs' dreams are coming true – but we could still see a V-shaped recovery
Gold

Gold bugs' dreams are coming true – but we could still see a V-shaped recovery

John and Merryn talk about how it's perfectly reasonable to expect a V-shaped recovery and to continue holding gold as well. Plus, inflation, staycati…
30 Jul 2020

Most Popular

BP has slashed its dividend – and markets love it
Income investing

BP has slashed its dividend – and markets love it

BP has bowed to the inevitable and cut its dividend in half – and its share price promptly rose. John Stepek explains what it means for shareholders …
4 Aug 2020
Listed companies are dying out, and that could have serious consequences
Stockmarkets

Listed companies are dying out, and that could have serious consequences

Private equity is taking over from public stockmarkets as the biggest provider of capital to companies. That’s bad for investors and bad for society a…
3 Aug 2020
Gold hits the big $2,000 level – are Aim miners about to play catch up?
Gold

Gold hits the big $2,000 level – are Aim miners about to play catch up?

With the price of gold shooting through $2,000 an ounce, the yellow metal looks unstoppable. Things are so bullish, even Aim-listed junior gold miners…
5 Aug 2020