Beyond Bulls & Bears

Perspectives

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

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.

This post is also available in: German

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.

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Past performance is not an indicator or a guarantee of future results.

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realised. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Get Content Alerts in My Inbox

Receive email alerts when a new blog is posted.

Leave a reply

Your email address will not be published. Required fields are marked *