Editor's letter

MMT: a fig leaf for central-bank money printing

Like or not (and we don't much like it), modern monetary theory is on the way.

Bet you wish you held shares in Tesla. Or if you do (as most of our readers will, via their holding in the Scottish Mortgage investment trust), I bet you wish you held more shares in Tesla. They have risen fourfold this year and an extraordinary 80-fold since listing ten years ago. Believers in Tesla’s potential have made fortunes. Non-believers still think the whole thing is nuts. But nuts or not, it might go higher. Chris Andrew of Clarmond compares the firm to JDS Uniphase, a “semiconductor optical visionary” stock wildly popular in 1999. It rose five times in the year it joined the S&P 500 (as it is rumoured Tesla will this year) and 100 times in the decade leading up to its joining, as everyone jostled to get a piece of what they were convinced was “unique technology”. At its peak, JDSU’s market value soared to 20% of that of the largest listed company of the time (Microsoft). 

Today Microsoft is number two. Apple is number one. Were Tesla to be worth 20% of Apple, its share price would go from around $1,500 now to $1,900 – a number pretty close to that forecast by “the most bullish Wall Street analysts”. There might be new names here, says Andrew. But this is an “old script”. One about a “once-in-a-lifetime tech company with a cult following being hysterically cheer-led by the Street and added to the key mainstream index on bizarre valuations at the same time as the central bank is flooding the markets with liquidity”.

The key here might be the last part about central banks. It is this that is driving the tech boom (bubble?) and that has helped push even UK markets (still relatively cheap!) up 20% since lockdown began. It also isn’t going to end anytime soon. In this week's magazine, we look at Modern Monetary Theory, the academic fig leaf for central bank money printing. The idea is compelling: if you control your own currency (ie, you aren’t in the eurozone); if your economy has productive capacity; and if you can convince everyone that inflation is not a problem, you can (and should) print at will and with no limit to activate that capacity. Debt doesn’t matter. Deficits don’t matter. The fact that the UK, like many other countries, has backed itself into a situation in which tax revenues no longer have a hope in hell of ever covering spending commitments doesn’t matter. 

All that matters is that you, as a government, can figure out 1) exactly what the productive capacity of the economy is; 2) how best to use it; 3) the signals it will send when it is used and more demand will create inflation; and 4) the correct way to stall the inflation. You see the problem. There is no model that can help you with 1-4 with any precision. So it is almost certainly a recipe for both capital misallocation and inflation (the deflationary impulses of demographics, technology and debt can only fight money printing for so long). 

However, as John and I say on the podcast this week (listen to it here) our opposition to MMT is pointless. It is on the way – or depending on how you define it, already under way. All we can do is to figure out how we should invest as a result. Gold is part of the answer, and so are value stocks, commodities and property (although commercial property requires some caution). And what happened to JDSU? When sanity returned to the market (it always does in the end) the shares fell by 99.8%.

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