- Ray Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund, says Modern Monetary Theory may be the future of US economic theory.
- MMT has been proposed by Alexandria Ocasio-Cortez as one way to fund her Green New Deal.
- Critics of MMT have slammed it as a misguided policy that could end in an inflationary spiral.
- Visit Markets Insider’s homepage for more stories.
Ray Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund, says something like Modern Monetary Theory (MMT), the controversial economic theory championed by Rep. Alexandria Ocasio-Cortez, could actually happen. The billionaire hedge-fund manager detailed his comments in a wide-ranging essay posted on LinkedIn.
Dalio states that one element of MMT, the effective printing of money by governments, will be "inevitable" during the next recession. He argues this is because monetary policy and fiscal policy alone will not be able to pull the economy out of the next downturn.
Dalio also predicts the US will also have 0% interest rates in the future as the country follows the path of Japan and Europe. Ocasio-Cortez has proposed MMT as one way to fund her proposed Green New Deal.
The essential idea of MMT is that governments can fund an extraordinary expansion of programs without harming the economy. Dalio says MMT-based proposals could happen, but he also noted there were many different ways to deploy the "printed" funds, with Ocasio-Cortez’s proposals just one possibility.
"These tools have the power to do real good but they also can do real harm if not used responsibly," Dalio wrote. "So the governance and decision rights would need to be carefully engineered."
Dalio commented that some MMT-based proposals advocated by Ocasio-Cortez might make sense. For example, he voiced his support of guaranteed jobs in a recession, but argued that the way this was implemented would be critical.
The theory was also strongly rebuked by Fed Chairman Jay Powell in his testimony to Congress. "The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong," the Fed chair said
Ocasio-Cortez drafted the Green New Deal, a non-binding resolution that was submitted to the House, to "achieve net-zero greenhouse gas emissions through a fair and just transition for all communities and workers."
Other proposals floated by Ocasio-Cortez’s office included guaranteed jobs, higher education and an economy "free of monopolies." These specific proposals did not make their way into the final text of the Green New Deal resolution.
Still, conservatives pounced on the announcements, with President Donald Trump slamming the policies as a "socialist nightmare." Despite this outcry, Dalio said MMT or other similar proposals might actually be the future should the economy fall into a recession.
"In other words, they are policies that provide printed money to spenders with incentives for them to spend it," Dalio said. "These sorts of policies will undoubtedly be politically controversial for both central banks and governments."
While sounding extreme, the idea of printing money is not so different from the Fed’s policy of "quantitative easing" during the financial crisis. At least according to former Fed Chairman Ben Bernanke.
"So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing," Bernanke said in an interview with 60 Minutes.
One element of MMT that Dalio explicitly disagreed with was the idea that inflation was driven primarily by the pricing power of corporations. He said inflation was instead largely driven by the supply and demand of labor and commodities.
He also warned that, to the extent possible, decision-making around these issues should be left to the "highly skilled" and not those politically motivated. He cited World War II and the interwar years as examples of where ideas similar to MMT were successfully implemented.
- The 50 best-selling music artists of all time
- 10 reasons you should buy the $1,000 iPhone XS instead of the more affordable iPhone XR
- Share your opinion — become a BI Insider!