Mr. McCulley, now retired from Pimco, used the same kind of analysis to guide his investing decisions after the financial crisis. He figured the only way that private borrowers could shrink their vast storehouse of debt was to have the government buy up those assets. He was unconcerned that the federal deficit would balloon as a result.
Pimco’s view during the crisis, he said, was “shake hands with the government,” because it had the largest checkbook. That is why the firm invested heavily, for example, in the federally guaranteed mortgage-backed securities that most other firms were shedding.
Mr. Koo of Nomura has further developed the idea of sectoral balances to explain the most recent wave of recessions and argue for larger government deficits. The problem that major economies in Japan, Europe and the United States have today, he said, is that despite low interest rates, investment opportunities in domestic markets don’t offer sufficient returns to lure borrowers to go into debt, using the vast pools of available savings.
That means “the government has to spend money to keep the economy going,” he said. And as long as the government invests in projects that produce an economic return greater than the yield on 10-year Treasury notes — currently about 2.5 percent — “this will never be a burden on taxpayers.”
Ray Dalio, the founder of Bridgewater Associates, one of the world’s largest hedge funds, made a similar point in a paper he released recently about saving capitalism. Without any specific reference to M.M.T., he noted that “policymakers pay too much attention to budgets relative to returns on investments.”
The View From St. Croix
A couple of M.M.T.’s academic strongholds are the University of Missouri-Kansas City and the Levy Economics Institute at Bard College. And there, too, Wall Street’s attraction to the theory has played a role.
Warren Mosler, a hedge-fund mogul who resides in low-tax St. Croix, helped bankroll some of the work at those schools, donating money for student scholarships and conferences.
