Featured Image
Around The Curve
Written Article

Advice from Emerging Markets on How Best to Implement Modern Monetary Theory

Featured Graphic In recent years, a theory by the name of Modern Monetary Theory (MMT) has gained prominence in the economic policy arena in the U.S. In brief, MMT argues that countries that issue their own currencies can never run out of money the way a business or a person can and that government taxing and spending decisions should prioritize achieving full employment. Therefore, a country need not worry about the ensuing budget deficits as these will be financed by money printing.

The theory has "modern" as its first word, but there's nothing modern about it. Emerging markets (EM) have engaged in MMT for decades and here's the key takeaway: it works until it doesn't. Heterodox macroeconomic policies lead to economic imbalances which eventually get resolved—sometimes in quite dramatic fashion. Implementing MMT in the U.S. will ultimately be a political decision. What follows is some advice gleaned from EMs on how to delay the eventual reckoning.

  1. Term out your debt. Short-term debt maturities mean frequent opportunities for creditors to evaluate your situation and potentially refuse to roll over debt coming due. On the positive side, U.S. debt coming due within one year is at multi decade lows—at under 30%—although the gross size is a staggering $4.1 trillion.
  2. Beware of foreign debt holdings. Domestic-currency debt is indeed easier to pay back, but when foreigners hold your local-currency debt, things can quickly turn. If foreigners flee your domestic debt, this can place downward pressure on your currency which can exacerbate inflationary and financial market imbalances at just the wrong time. Foreigners currently hold 40% of U.S. Treasury marketable debt.
    Chart 1
  3. Limit current account deficits. A current account deficit is by definition a sign of insufficient savings to fund investment. The shortfall is made up by borrowing although it can show up in different places and has partly manifested itself in the U.S. corporate sector where debt loads have risen substantially. While affordability and interest coverage are currently (?) comfortable that may not always be the case.
    Chart 2
  4. Recognize the tradeoff between money printing to pay debt and inflation. The theory is factually correct in stating that a sovereign can always print money to pay down its domestic-currency debt. However, there is no such thing as a "free lunch." Money printing often has inflationary consequences, unless offset by otherwise tighter monetary policy.
  5. Be mindful of the domestic political cycle. Imbalances can persist for a long time, but what unsettles investors is unexpected policy changes. These usually occur after changes in political leadership which is why election years in EM countries tend to be dicey.

The MMT crowd will argue that none of the aforementioned matters, because of the dollar's status as the world's reserve currency. However, reserve currency status does not last forever. Just ask the British pound, the French franc, the Dutch guilder, the Spanish peseta, or the Portuguese escudo.

Groupthink is bad, especially at investment management firms. Brandywine Global therefore takes special care to ensure our corporate culture and investment processes support the articulation of diverse viewpoints. This blog is no different. The opinions expressed by our bloggers may sometimes challenge active positioning within one or more of our strategies. Each blogger represents one market view amongst many expressed at Brandywine Global. Although individual opinions will differ, our investment process and macro outlook will remain driven by a team approach.

©2020 Brandywine Global Investment Management, LLC. All Rights Reserved.

Social Media Guidelines

Brandywine Global Investment Management, LLC ("Brandywine Global") is an investment adviser registered with the U.S. Securities and Exchange Commission ("SEC"). Brandywine Global may use Social Media sites to convey relevant information regarding portfolio manager insights, corporate information and other content.

Any content published or views expressed by Brandywine Global on any Social Media platform are for informational purposes only and subject to change based on market and economic conditions as well as other factors. They are not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information should not be considered a solicitation or an offer to provide any Brandywine Global service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Additionally, any views expressed by Brandywine Global or its employees should not be construed as investment advice or a recommendation for any specific security or sector.

Brandywine Global will monitor its Social Media pages and any third-party content or comments posted on its Social Media pages. Brandywine Global reserves the right to delete any comment or post that it, in its sole discretion, deems inappropriate or prevent from posting any person who posts inappropriate or offensive content. Any opinions expressed by persons submitting comments don't necessarily represent the views of Brandywine Global. Brandywine Global is not affiliated with any of the Social Media sites it uses and is, therefore, not responsible for the content, terms of use or privacy or security policies of such sites. You are advised to review such terms and policies.