Like it or Not, a Modern Monetary Theory Experiment Is Underway

Robert Hormats, who has worked in senior economic and trade policy roles under five different U.S. presidents and spent 25 years at Goldman Sachs Group Inc., believes the Covid-19 pandemic has forced the government to embark on what could be considered an involuntary experiment with Modern Monetary Theory.

Now a managing director at wealth-advisor Tiedemann Advisors, Hormats joins this week’s “What Goes Up” podcast to discuss MMT, the U.S.-China relationship, prospects for a coronavirus vaccine – and how investors should think about all of it.

Some highlights of the conversation are below:

“Well, now we have a particularly unusual set of circumstances whereby we're in the midst of forced, or involuntary, utilization of modern monetary theory…This is not unheard of. And I'd say this was done during World War II, where the Fed guaranteed the Treasury that it would buy Treasury bonds at a very low rate to keep interest rates low to keep the debt servicing costs of the of the government low. So theoretically, this can last a very long time as long as the Treasury is making these big bond issues a regular occurrence as it appears.”

“And the Fed’s Jay Powell has said he is going to, in effect, continue to keep rates low. But he said also something we should be aware of: ‘The Fed can't do it all and the Fed cannot do this indefinitely.' But what is indefinite? How long can this occur? What are the end results of this, at some point, if trees don't grow to the sky? What could disrupt the markets and what could cause either the Treasury to run into trouble with its issues, or the Fed to feel uncomfortable underwriting those issues for the indefinite future? We don't know that. This is all terra incognita.”

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