The Wall Street Firm That Uses Modern Monetary Theory


Turns out it's not just the Economist magazine and econ bloggers that are using Modern Monetary Theory. An independent Wall Street broker-dealer has been using it for their economic forecasts.

From a press release on MarketWatch:

John Thomas Financial successfully incorporated Modern Monetary Theory (MMT) into their economic forecasts last year, producing exceptional forecasting results.

Modern Monetary Theory, or MMT as it is frequently referred to, is an economic school of thought developed in the mid 1990s that describes governments and economies, which operate under fiat money systems where there is no convertibility or fixed rate of exchange.

Governments that operate under fiat systems need not be constrained in their spending because they are the monopoly issuers of the currency.

As such they are not dependent on taxes or borrowing for revenue and the central bank and fiscal authority, together, act to set interest rates, not the market.

"Because of our more accurate understanding of the monetary system we were able to correctly forecast such things as GDP growth, stock prices, interest rates, currencies and commodities while others got these markets very wrong," said Mike Norman, John Thomas Financial's Chief Economist.

In addition, the firm was able to take advantage of major market moving events like the S&P downgrade of US credit and European solvency. "A lot of people panicked, but we had a clear understanding of what was happening and what the outcome would be. In many cases we faded these misinformed views," said Norman.

John Thomas Financial may be the only firm that is openly using MMT but in recent conversations with hedge fund traders I've learned that others are incorporating the distinction between currency users (such as the Eurozone countries and municipal debt issuers in the US) and currency issuers (such as the US federal government, Japan, and the UK) in their analysis. One large, successful credit trading firm says it is trying to develop a model to identify arbitrage opportunities in credit default swaps based on MMT.

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