Terming a shift towards modern monetary theory (MMT) as ‘inevitable’, billionaire investor Ray Dalio has said that it will replace central banking as we know it, a Bloomberg report said.
Dalio, founder of Bridgewater Associates, the world’s largest hedge fund, also said that the US will look at facilitating growth by adopting zero interest rates to finance big government spending.
However, critics feel that injecting so much cheap money into the economy will lead to hyperinflation, a CNBC report noted. Some of the high profile critics include Warren Buffet and Federal Reserve Chairman Jerome Powell.
As per MMT, governments can manage their economies through spending and taxes — instead of relying on interest generated via central banks. For countries with their own currencies like the US, the theory proposes that budget deficits and national debts could be paid by printing more notes — provided inflation is subdued.
Though controversial, MMT is also backed by Democrat presidential candidate Bernie Sanders and NY Rep. Alexandria Ocasio-Cortez. Dalio opines that the implementation of MMT is only a matter of time.
“To me the most important engineering puzzle policy makers around the world have to solve for the years ahead is how to get the economic machine to produce economic well-being for most people when monetary policy does not work,” Dalio wrote on LinkedIn.
Stating that MMT could redirect stimulus from those who own financial assets to those who don’t, he added, “It is inevitable that this shift will happen because it is inevitable that central bankers will want to ease when interest rates are pinned at 0 percent and when quantitative easing will be ineffective in achieving the goal.”
Dalio joins other prominent Wall Street figures like Jan Hatzius, the chief economist at Goldman Sachs; Paul A. McCulley, a former chief economist at Pimco; and Richard C. Koo, chief economist at the Nomura Research Institute in Tokyo among others, who have pointed out the inefficiency of capitalism in addressing income gap in the US, as per a New York Times report.
But, while backing the basic philosophy of MMT, he acknowledges the weaknesses. “The big risk of this approach arises from the risks of putting the power to create and allocate money, credit, and spending in the hands of politically elected policy makers.”
Adding, “In my opinion, the system would have to be engineered in a way that decision making would be in the hands of wise, not politically motivated, and highly skilled people. It’s difficult to imagine how the system will be built to achieve that. At the same time it is inevitable that we are headed in this direction.”