The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

MPT & MMT

03/13/2019

I believe in Modern Portfolio Theory (MPT), which is the investment philosophy of virtually all institutional money managers in this country.  This Nobel Prize-winning theory found that a portfolio can achieve higher returns with lower risk – the “Holy Grail” — by allocating the portfolio across many asset classes, such as big company stocks, small company stocks, short-term bonds, long-term bonds, commodities, real estate, etc.  (The trick is how much of the portfolio is allocated to each asset class.)

I do NOT believe in Modern Monetary Theory (MMT).  In fact, I think it is downright crazy!  Originally developed in the University of New South Wales, it explains there are almost no limits on the amount of government debt that can be issued, especially for a reserve currency.  Progressives in this country find this economic theory convenient in supporting their calls for universal Medicare, free college, etc.  Whatever we need to spend, we simply sell more bonds to the Fed, who puts the bonds on their balance sheet as assets.  We can have it all, as long as the Fed continues to buy bonds.  It is the “logically absurd conclusion” to quantitative easing (QE).  You might think of MMT as  — “QE gone wild.”

Here’s the trick:  Our GDP would have to grow at least as much as the interest paid on those bonds.  After all, a growing economy can safely handle growing debt.  But, what is it doesn’t?

Also, what happens if interest rates rise substantially?  We can just issue more bonds to pay the interest, until such time as the “bond vigilantes” start dumping bonds, sucking cash out of the economy, causing the dollar to appreciate too much, crushing our exports, and depressing GDP.

MMT is just crazy!

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