Blacktower Street Advisors

Modern Monetary Theory ​ We are living in a world of profound economic and political changes that, among other things, will lead to a massive redesign of the global financial system using the fruits of global technological progress and will affect almost everyone: from an investment banker in Manhattan to a souvenir merchant in the Abuja market.

 

If I am not mistaken, in 2019, Julius Baer's Secular Outlook, issued under the leadership of the Group's Chief Investment Officer Yves Bonzon, predicted the inevitable transition to "unorthodox macroeconomic policies" (including the principles of Modern Monetary Theory), as one of the trends. I confess that at that time I was somehow sceptical about the near end of the "neoliberalism" era and could not imagine that in less than a year we would live in a new reality where an unorthodox macroeconomic policy would become the main driving idea to reduce the adverse effects of the pandemic in the economy. Even then, it was challenging to imagine that the pandemic would become the very "black swan" that would change not only our usual way of life but the entire economic and political landscape of the world, thus confirming the opinions of economists that stimulating the real economy through the credit channel had exhausted itself. In these realities, for the first time in many years, the concept of unorthodox macroeconomic policy and its strand - Modern Monetary Theory (MTT) - resound frequently as an alternative to “neoliberalism”; this signaled the end of more than 45 years of “neoliberalism” giving way to an “old adversary”.

 

As a result, we have witnessed how the world's leading economies quickly equip themselves with the principles of MTT, which form not only a fiscal stimulus to an economy faced with falling velocity of money and structural deficits in demand, but also a closer interaction between fiscal and monetary policies. In this note I will not elaborate on this but point out that we are witnessing the rapid growth of the role of central banks, where they not only bear the monetization of public debt in a progressive way, but give money directly to the population, which will be possible in the future thanks to technological advances. Given the topic's relevance, I will probably return in future publications to the principles of MMT, its effectiveness in mitigating the income inequality, and its approach to inflation control. However, the Ukrainian war, a “black swan” event, certainly slowed down the energy transition, with Europe being the main driver, and accelerated the transition from deflation to inflation. Against the backdrop of small and medium-sized businesses suffering from inflationary pressures, especially in Europe, and the decline in expected revenues of companies from the renewable energy sector, the upstream companies have significantly improved their estimates of expected profits for 2022. Deglobalization ​ Also, given that a rapid energy transition is an additional trigger for rising inflation, there are fears that the energy transition and the achievement of the Sustainable Development Goals (SDGs) will take a back seat in the current hysteria.

 

The deglobalization of the world economy and the gradual change in the domestic political situation in developed countries will lead to a trend towards the return of advanced technological industries back in the country, an example of which is the United States. Developing countries will not remain uninvolved. On the one hand, this situation will push them to ensure food security. To this end, they shall increase domestic investment through fiscal incentives, encourage Foreign Direct Investment (FDI) and public-private cooperation, and remove legislative and several other barriers. On the other hand, the deglobalization of the world economy and geopolitical changes are pushing them towards creating regional economic unions with closer integration with their nearest neighbors. For example, one can show Turkic-speaking countries' intensive economic integration within the Organization of Turkic States in post-COVID realities. ​ SDGs and sustainable investment ​ It can be assumed that with the current geopolitical and economic changes, which, in my opinion, will take place in the next 4-5 years, there is great potential for growth in sustainable investment. Moreover, the pandemic also showed that companies with high ESG levels performed better than others in crises due to a better risk-return ratio. Based on data published by UNCTAD (World Investment Report 2022), in 2020-2021, sustainable financing in global capital markets showed significant growth. The value of sustainable investment products in global financial markets in 2021 was $5.2 trillion, including sustainable funds and sustainable bonds, including green, social and mixed sustainable bonds. The main driving force is the European market.

 

UNCTAD estimates that by the end of 2021, the number of sustainable funds reached almost 5,932, vs 1,304 in 2010, and continues to grow. These funds' total assets under management (AUM) also show exponential growth and have already reached an all-time high of $2.7 trillion in 2021. The sustainable funds are still growing mostly in developed markets, with Europe taking the lead. The USA is the second largest market. However, sustainable funds make up only 1% of their total stock market. The situation is similar with China: despite being in an honourable third place, the total amount of AUM in the share of the entire stock market remains insignificant.