Quick Thoughts: Diving into Debt, MMT, and Their Deep Water Waves

by Stephen H. Dover, CFA, Franklin Templeton Investments

After the first global pandemic in a century, growing pressures on sovereign balance sheets from stimuli in 2020-2021 and policy responses to the coming waves of debt—trends previously in place—have only accelerated. Our Stephen Dover, Head of the Franklin Templeton Investment Institute, and Investment Strategist Kim Catechis, examine the debt wave that drives many of the economic policy discussions today.

The first global pandemic in a century sharply accelerated previously existing trends. Foremost is the general malaise of democracies at their embedded social and economic inequalities that were exacerbated by COVID-19. These factors, along with the growing pressures on sovereign balance sheets from the extent of stimuli in 2020–2021, drive many of the discussions on economic policy today.

• The tension between inflation and deflation will continue, but the calculus has changed. Longer term, control of inflation trumps economic growth, but resolution will vary by country or region.
• The ongoing monetary and fiscal policy debates and struggles encompass conspicuous political blocs focused on the priorities of senior populations, which are typically inflation, healthcare, and law and order.
• In countries with already declining populations, fiscal incentives to boost fertility rates are increasingly complemented by a drive to change economic and social welfare policies, straining many sovereign finances to the breaking point.
• COVID-19 has exacerbated socioeconomic inequalities in many countries; progressive and redistributive taxation will likely experience increased prioritisation globally, unorthodox economic experiments will be attempted, and Big Government is back.
• Unorthodox theories, such as Modern Monetary Theory (MMT), may proliferate. MMT says monetarily sovereign countries which spend, tax, and borrow in a fiat currency that they fully control, are not operationally constrained by revenues when it comes to federal government spending. In truth, it seems only one country has a track record of conducting a version of MMT: Japan. But Japan is a unique situation: a wealthy country whose institutional savings pools hold most of Japan’s sovereign debt.

Read more about the debt wave in Franklin Templeton Investment Institute’s Deep Water Waves. We explore the interplay between these factors, pressures, and their likely impacts on investment outcomes in the next decade.

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