Paul McCulley has become the second notable Pimco alum to embrace Modern Monetary Theory.
During an interview with Bloomberg TV, the former Pimco chief economist and current Cornell Law School professor said he has a lot of sympathy for the controversial economic theory du jour, which has been embraced by "Democratic Socialists" like Alexandria Ocasio-Cortez (who sees it as an option for financing her 'Green New Deal') and decisively rejected by Fed Chairman Jerome Powell (who flatly told Congress that MMT "is just wrong") and former Treasury Secretary Larry Summers (who said it was fallacious on multiple levels).
Though he's "not a card-carrying MMTer", McCulley argued that such a radical shift in the monetary policy outlook would offer a "robust architecture for a fiat currency world." Furthermore, today's monetary thinking, McCulley said, is left over from a time when America's money was backed by gold.
He added that the notion that larger deficits would lead to runaway inflation has already been roundly rejected by reality, according to Bloomberg.
The Pimco veteran, now a professor and senior fellow in economics at Cornell Law School, says he’s frustrated by the often-voiced view that running bigger budget deficits - and supporting them with easy central-bank money - is a step toward hyperinflation.
"Last time I checked, the U.S. has missed its inflation target for 10 years running, of which seven or eight were at zero interest rates," he said in an interview. "Let’s look at reality here. Zimbabwe is not on our curve."
If there was one thing he would change about MMT, as many progressives currently see it, it would be Congress's role in managing the money supply.
The theory supports a bigger role for Congress in managing the economy, and a smaller one for the central bank. McCulley favors a middle path. He said the MMTers have logic on their side "but they have difficulty dealing with the political reality of an independent Fed."
He argues that outside of crisis times like 2008, interest-rate and budget policy should be distinct - but cooperative. "Congress is going to have to own the unemployment target and the inflation target," he said. And MMT needs to come clean about the need for changes to the Fed’s legal mandate, so it can support deficit-spending.
"They’re scared to actually talk about it plainly," he said. Though he appreciates why they don’t - because "Wall Street will get wrapped around the axle."
Still, the voices of Wall Street remain widely arrayed against MMT, with BlackRock Chief Executive Officer Larry Fink telling Bloomberg that the theory is "garbage".
"That’s garbage," Fink said in an interview with Erik Schatzker on Bloomberg Television Thursday. "I’m a big believer that deficits do matter. I’m a big believer that deficits are going to be driving interest rates much higher and it could drive them to an unsustainable level."
Of course, with the way the US budget deficit is trending, it's probably only a matter of time before President Trump - who has described himself as "the king of debt" and bashed Powell for having the gall to try and raise interest rates - becomes the next big personality to embrace MMT.
Watch a clip from BBG's interview with Fink below: