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.
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.