As U.S. Veers Toward ‘MMT-Lite,’ Deutsche Bank Says Watch FX

(Bloomberg) -- As the debate about modern monetary theory rages on amid swelling U.S. deficits, Deutsche Bank AG’s Alan Ruskin says to keep an eye on currencies.

MMT advocates contend that since the U.S borrows in its own currency, it can print dollars to covers its obligations -- and thus run sustained budget gaps without going broke. Deutsche Bank’s chief international strategist says the country is closer than many realize to operating under MMT, as America’s debt burden soars to a record above $22 trillion.

Exchange rates offer a clean read on whether those policies are reaching unsustainable levels, Ruskin argues. A nation’s currency would likely “flash red” should financing costs outstrip growth, and its interest payments spur a “snowball” in the debt burden as a share of the economy, according to Ruskin.

“We are close to practicing MMT-lite than commonly assumed, most notably in the U.S., and especially were the economy to slow sharply early into a new populist administration,” Ruskin wrote in a note Thursday. “Of the market variables that can best flag when policy is overreaching, the exchange rate is likely to be best at playing the role of ‘canary’ -- flagging MMT-type policy excesses.”

That’s because exchange rates “as a relative price will say something about how policy compares with other countries,” he wrote. It “would presumably capture any of the financing imbalances that are triggered by fiscal expansion.”

Talk of MMT has been making the rounds on Wall Street in recent months, with the likes of DoubleLine Capital’s Jeffrey Gundlach criticizing it, while former Pimco chief economist Paul McCulley said he sees value. The theory attracted little attention until liberal Democrats, including Representative Alexandria Ocasio-Cortez, were elected.

American policy makers run the risk of growing complacent toward matters of fiscal restraint, given that the dollar is the reserve currency of choice for most central banks, Ruskin said. The status has helped the U.S. curb funding costs while allowing it to run budget deficits, as trading partners stow their dollars in Treasuries.

“This may also be a situation where the dollar’s premier reserve currency status is generating complacency and a tendency not to believe in the old fiscal limits,” Ruskin wrote.

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Randall Jensen

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