Vontobel Multi Asset Boutique

Modern monetary theory – how do we get down from the debt mountain?

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As Swiss investors, we are familiar with mountains. The topic gets trickier when we move on to talking about mountains of debt in industrialized countries. Is it already so high that a financial and economic crisis is inevitable? Or can it continue to grow without risking collapse? What role is played by bodies such as central banks? What do investors have to be mindful of when governments and central banks team up under the name of “modern monetary theory”?

As we understand it, there are essentially four ways to conquer and descend from the debt mountain. One of these could be described as an obvious solution, whereby states generate surplus revenues and use this to repay debts. States could also attempt to decrease the value of debts through inflation or be granted debt relief. Yet one theory that has gained popularity recently is the idea that, instead of aiming to reduce debt directly, what is more important is boosting growth and employment. But won’t this “modern monetary theory” turn the descent into a risky alliance between governments and central banks, lulling everyone into a false sense of security?

As asset managers, we have almost 30 years of experience in dealing with debt and in this white paper we aim to take a look at debt generally and also to focus specifically on modern monetary theory. Our goal with this publication is not only to clear up a number of questions, but also to help investors more clearly visualize the dangers of high debts and alleged “simple solutions”. Ultimately, we aim to bring investors back down to safer ground, even if a storm is brewing. In the spirit of Reinhold Messner’s mountain companion Hans Kammerlander: “You cannot lay claim to a summit until you reach the bottom again – before that, the summit lays claim to you”.