Market Extra: Have the bond vigilantes killed off modern monetary theory? MMT proponent Stephanie Kelton says that’s nonsense.

by | Oct 20, 2022 | Stock Market

As investors assesses the remarkable turnaround in fiscal policy from one of the world’s number-six economy, the U.K., the one conclusion surely is that a nation’s financial flexibility is limited by the willingness of world markets to finance it. “Ending MMT is the international lesson of the U.K. debacle—any populist selling fiscal pipedreams will be confronted by the precedent of the U.K.,” said Paul Donovan, chief economist at UBS Global Wealth Management, in a recent note.

To which Stephanie Kelton, the leading proponent of modern monetary theory and author of The Deficit Myth replies, “rubbish.” (Kelton also participates in the Best New Ideas in Money podcast with MarketWatch reporter Charles Passy.) In a phone interview with MarketWatch, she said the market reaction to the mini budget — of an estimated £45 billion of tax cuts on top of energy price support for two years– was not unreasonable. “Given the expectation that the energy subsidies combined with the tax cuts were almost certainly going to be exacerbating inflation pressure, and that would mean the Bank of England would move even more aggressively,” said Kelton. What Truss messed up was the messaging, and the lack of coordination with the Bank of England, she said. “You needed to coordinate ahead of time, and message with the Bank of England ahead of time, and have a clearer understanding of market reactions, that initial impulse, may happen,” she said. “But there is a …

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