Fed’s Powell trashed MMT, but Wall Street sees room for US to try it

Talk to Wall Streeters about Modern Monetary Theory and they tell you Jerome Powell was right: The manifesto for free-spending governments is a terrible idea -– and if it’s ever implemented, America can expect a nightmarish financial future.

But right now, the $15.6 trillion US Treasury market seems to be as relaxed about budget red ink in practice as the MMTers are in principle.

Benchmark 10-year yields remain below 3 per cent, a historically low level, even as America plunges deeper into deficit and jacks up debt sales to a record. That’s no surprise to MMT economists -- who predict more of the same. They argue that because the US borrows in its own currency, it can print dollars to cover its obligations, and can’t go broke. And when inflation is low, as it is now, there’s room to spend more.

Last week, Federal Reserve Chair Powell described that school of thought as “wrong.’’ Investors tend to agree that it would end in tears one day. Just not anytime soon.

“You have to say that markets are willing to be patient for a while with this kind of stuff,’’ said Michael Shaoul, chief executive officer at Marketfield Asset Management LLC. Everyone Did ItOne precedent is the trillions in debt that the Fed purchased after the 2008 financial crisis. The giant experiment in cheap money didn’t trigger inflation or awaken the bond vigilantes. Instead it has helped keep yields down.

There were no adverse consequences for the US because everyone else was doing the same thing, according to Mark MacQueen, co-founder of Sage Advisory Services, which manages about $13 billion. “It’s been a race to the bottom by all central banks,’’ he said. “Everyone printed all this money.’’ Now, the Trump administration is engaged in a fiscal experiment to match that monetary one, pumping deficits into an expanding economy on a scale America hasn’t seen since the 1960s. The stimulus has contributed to faster growth. And the prospect of retrenchment under a Democratic successor is fading.

The bond vigilantes, who famously compelled President Bill Clinton to scale back his first term agenda and focus on deficit reduction instead, don’t bother Democrats like Alexandria Ocasio-Cortez. The New York congresswoman is proposing a 70 per cent tax rate for the rich, but that would only recoup a fraction of the costs of a Green New Deal or Medicare For All –- programs endorsed by Ocasio-Cortez and several of her party’s 2020 frontrunners. She’s invoked MMT as a way to pay for the rest.

‘My Market Hat’Shaoul is skeptical partly because he says experience shows that government isn’t good at allocating resources: “I think MMT is a terrible idea –- as a taxpayer.’’ His take as an investor is a bit different. “If I put my market hat on,’’ he said, “you could probably get away with a further loosening of fiscal controls, and a central bank supporting it.’’