- Amid resurgent and persistent inflation, the modern monetary theory (MMT) is losing its appeal.
- The US Federal Reserve raised interest rates in response to high inflation numbers.
- Panelists at the Equity Risk Premium Forum expressed ambivalence towards MMT.
- MMT policies were criticized for benefiting the rich rather than having a redistributive effect.
- Forecasts for the equity risk premium (ERP) made by panelists in 2011 were vastly underestimated.
- There was a discussion about whether the ERP is an actual “risk” premium.
- Various explanations were given for the high ERP, including stocks being perceived as riskier than they are and loss aversion behavior.
- The realized 10-year and 20-year ERP were both higher than expected.
Amid resurgent and persistent inflation, the bloom appears to be fading from the modern monetary theory (MMT) rose. The US Federal Reserve recently raised interest rates in response to high inflation numbers, casting doubt on the efficacy of MMT. Panelists at the Equity Risk Premium Forum expressed ambivalence towards MMT, with some criticizing its redistributive effects. They argued that MMT policies tend to benefit the rich rather than achieving their intended goal of helping the poor and working class.
During the forum, panelists reflected on their forecasts for the equity risk premium (ERP) made in 2011. It became evident that their predictions had vastly underestimated the actual figure. This led to a discussion about the nature of the ERP, with some questioning whether it is a true “risk” premium. Roger Ibbotson suggested that stocks may be perceived as riskier than they actually are. Jeremy Siegel proposed the Tversky-Kahneman loss aversion explanation, suggesting that people react differently to losses and gains.
The final installment of the discussion highlighted the realized ERP over the past 10 and 20 years. The realized 10-year ERP from September 2011 to September 2021 was higher than expected, indicating a stronger premium for equities. Similarly, the 20-year ERP was also higher than anticipated, although the margin over bonds was relatively thin.
