Paul McCulley and Modern Monetary Theory go way back.
The former Pimco chief economist says he’s “not a card-carrying MMTer.’’ But he has a lot of sympathy for the doctrine that’s burst into the debate about America’s public finances -- and is drawing a barrage of criticism from mainstream economists and the financial world. BlackRock Chief Executive Officer Larry Fink became one of the latest to weigh in on Thursday, calling the theory “garbage.”
MMT argues that governments borrowing in their own currencies can’t go broke and have room to spend when inflation is muted, like now. There’s supporting evidence from Treasury markets, where yields have stayed low even amid a supply glut as U.S. deficits widen.
But few Wall Streeters have been willing to seriously debate the theory’s merits, while Federal Reserve Chair Jerome Powell -– and economists like Larry Summers and Paul Krugman –- have denounced it. Fink, speaking on Bloomberg TV Thursday, warned that “deficits are going to be driving interest rates much higher and it could drive them to an unsustainable level.”
McCulley has never run with the financial herd. His thinking has been underpinned by what he calls “principled populism’’ for decades –- a span that includes his tenure as the top ideas guy at what was then arguably the world’s most successful bond fund. (His old boss Bill Gross also sounds a bit like an MMT convert nowadays.) McCulley coined two terms that became widely used to define crisis risks around 2008: the “shadow banking’’ system and the “Minsky Moment.’’
Now, he’s speaking up for MMT -– a school of thought that Powell said is “just wrong’’ and Summers called “fallacious on multiple levels.’’
Not Zimbabwe
McCulley says it offers a “robust architecture for a fiat currency world.’’ That’s a claim made by MMTers too, who say a lot of conventional economic thinking is a leftover from the days when America’s money was backed by gold.
The Pimco veteran, now a professor and senior fellow in economics at Cornell Law School, says he’s frustrated by the often-voiced view that running bigger budget deficits -- and supporting them with easy central-bank money -- is a step toward hyperinflation.
“Last time I checked, the U.S. has missed its inflation target for 10 years running, of which seven or eight were at zero interest rates,” he said in an interview. “Let’s look at reality here. Zimbabwe is not on our curve.”