Dalio Says Something Like MMT Is Coming, Whether We Like It Or Not
Central banking as we know it is on the way out, and it’s “inevitable” that something like modern monetary theory will replace it, billionaire investor Ray Dalio said.
The doctrine, known as MMT, says that governments should manage their economies through spending and taxes -- instead of relying on independent central banks to do it via interest rates. It also seeks to allay fears over budget deficits and national debts by arguing that countries like the U.S., which have their own currency, can’t go broke and have more room to spend than is usually supposed -- provided inflation is subdued, as it is now.
Debate over MMT, which languished in obscurity for decades, has exploded in recent months. The idea has been criticized by a series of financial heavyweights, from Warren Buffett to Federal Reserve Chairman Jerome Powell. But Dalio, the founder of Bridgewater Associates, the world’s biggest hedge fund, said policy makers will have little choice but to embrace it.
Their challenge will be “to produce economic well-being for most people when monetary policy does not work,” Dalio said in his latest LinkedIn post. Over the past four decades, the era of central-bank dominance, income and wealth inequality has surged in most developed nations.
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Cutting interest rates, or buying securities in the process known as quantitative easing, have almost exhausted their ability to stimulate economies, he wrote. They’ll likely be replaced by a third-generation monetary policy, which Dalio labeled “MP3.’’ It will involve “fiscal and monetary policy coordination” along the broad lines suggested by MMT economists, he said, though not necessarily following their exact prescriptions.
The shift is well under way, Dalio said. With interest rates pinned near zero in Europe and Japan, and likely to head back there in the U.S. when the economy falters, the fiscal-policy takeover is “by and large what has been happening” already.
The U.S. ramped up budget deficits after the 2008 crisis, and has been doing so again under President Donald Trump. The bond-market response has supported MMT arguments: yields on government debt haven’t risen much, even though there’s much more of it around.
Japan has been doing it for even longer -- yet after two decades of large deficits, it can still borrow money virtually for free.
Dalio gave examples of how such policies could evolve, without endorsing them. Central banks might print money directly to finance government programs -- bypassing the need to sell bonds. They could buy real estate “which would then ideally be used for socially beneficial ends.” They could also write off debts hanging over the economy, in a kind of “jubilee.” In downturns, they could deliver cash straight to the public, an idea widely known as “helicopter money.”
There are risks, Dalio acknowledged. Such policies would put “the power to create and allocate money, credit, and spending” in the hands of politicians.
“It’s difficult to imagine how the system will be built to achieve that,” he said. “At the same time it is inevitable that we are headed in this direction.”
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