‘MMT-Lite’ Is Reshaping Markets and May Get $2 Trillion Lift

If there’s one key takeaway for financial markets after a year of pandemic, it’s that officials now seem predisposed to throwing huge amounts of money at protecting their economies.

For some strategists this embrace of ultra-low interest rates and record fiscal spending is becoming a flirtation with Modern Monetary Theory, which says governments can spend heavily when price pressures are low. President Joe Biden’s multi-trillion dollar infrastructure plan is set to be the next big outlay.

Whatever the truth of the claim about MMT, the flood of cheap money is reshaping markets. Pricing models have warped, a new breed of activist retail investor is amassing on forums such as WallStreetBets and Bitcoin is surging. Even the recent hedge fund blowup failed to dispel the liquidity-fueled optimism. The next big shift may be a breakout in inflation, judging by warnings from the likes of former Treasury Secretary Lawrence Summers.

“What Covid-19 has done is accelerated fiscal policy and fiscal response, and married closer and closer coordination with monetary tools,” said Viktor Shvets, head of Asian strategy with Macquarie Capital Ltd. “It’s not MMT yet, but it comes very close to it. The result is market signals atrophy and deteriorate.”

In stocks, day traders flush with stimulus checks and mobilized by “meme” culture have made a mockery of traditional investing rules. Call-option frenzy has eased but remains historically elevated in derivatives markets. Cryptocurrencies have soared atop the tide of cash injections.

Government policies that Mary Nicola, global multi-asset portfolio manager at PineBridge Investments, describes as “MMT-lite” are also galvanizing the inflation debate headlined by Summers.