“Even if pure Modern Monetary Theory is unlikely to be adopted, some of aspects of it could be implemented in the medium term.”

Modern Monetary Theory (MMT), a macroeconomic theory advocated by heterodox economists, is gaining traction in the US. The theory adopts an experimental approach to economics, underscored by the fundamental belief that money is created by the government via budget spending – and not via money creation by central and private banks, as per traditional theory.

Proponents of MMT in the US interpret current low inflation levels as an indication of not enough money in the system, and as a result, insufficient budget spending. Central to their view is that the Federal Reserve should be merged with the US Treasury department and interest rates brought to zero in conjunction with increased fiscal spending.

In a nutshell, MMT effectively brings interest rates to zero, while increasing fiscal spending to stimulate demand.

Even if pure MMT is unlikely to be adopted, some of aspects of it could be implemented in the medium term. Because it is highly experimental, MMT poses risks.

In theory, gold would be boosted by interest rates at zero, and some central banks may also seek to diversify away from the US dollar.

From an equities perspective, low yields would not necessarily lead to a valuation bubble. Growth and defensive styles would probably benefit the most.

In terms of asset allocation, the inverse correlation between equities and bonds could increase; indeed, MMT could reinvigorate the traditional balanced portfolio.

Read full report