Modern Monetary Theory: Free Money or Fiscal Fantasy?

Summary

Merryn Talks Money — Modern Monetary Theory: Free Money or Fiscal Fantasy?

Host: Merryn Somerset Webb (Bloomberg)
Guest: Simon French, Managing Director, Chief Economist, and Head of Research
Date: February 16, 2026

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Episode Overview

In this episode, Merryn Somerset Webb sits down with economist Simon French to demystify Modern Monetary Theory (MMT)—often a hot topic in current economic and political discourse. Together, they dissect what MMT is, its theoretical foundations, real-world applications (especially recent pandemic-era policy), and why it's currently back in UK political debate. The discussion also tackles practical objections, the blurred lines between monetary and fiscal policy, and the risks of unconstrained government spending.

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Key Discussion Points & Insights

1. What is Modern Monetary Theory?

[03:29] Simon French:

• MMT posits that a sovereign currency issuer (like the UK) faces no hard limit on financing—it can create as much money as needed. The only true constraint is inflation.

• If inflation rises due to “too much money,” MMT theorists suggest government should then increase taxes to dampen demand and bring inflation under control.

  “There isn’t an effective constraint on financing... The only constraint in the ideas of modern monetary theory is that if you produce too much, it could be inflationary. The counter to that... you can use fiscal policy—tax increases—should inflation rear its ugly head.”
  — Simon French [03:29]

[04:08] Merryn Somerset Webb clarifies:

• Under MMT, the bond market (government debt issuance) becomes redundant; the state could just direct the central bank to produce money for welfare, infrastructure, or any need—so long as it's not inflationary.

  “You do not have to borrow money from the markets... you simply print the money that you want... and all you have to do is figure out exactly how much resource is available...”
  — Merryn Somerset Webb [04:08]

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2. Why Doesn’t MMT “Just Work”?

[04:58] Simon French:

• Real-world policy during the pandemic loosely resembled MMT: large-scale money creation (“money printing”), yet governments didn’t respond to the inflationary consequences by quickly raising taxes.

• Post-pandemic: inflation across Western economies rose by 25-30% over five years, disputing the idea that fiscal policy (taxation) can be a nimble enough tool to check inflation.

  "The idea that fiscal policy can respond in short order has been slightly disproven in practice.”
  — Simon French [04:58]

• Monetary policy is preferred as an inflation control tool because its impact is less disruptive than fiscal policy, which directly changes household and business behavior and can distort economic activity.

  “If you tweak fiscal policy, which is effectively what modern monetary theory says... you start to have second-order effects on behavior and quite inefficient, unproductive activity.”
  — Simon French [05:46]

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3. Can MMT Be “Done Properly”?

[06:52] Merryn Somerset Webb invites counterarguments:

• Some claim that the post-COVID response “wasn’t real MMT”—that if governments had fully understood and implemented MMT, inflation could have been managed.

[07:17] Simon French rebuts:

• Analogous to failed communist experiments (“we haven’t really tried it” defence).

• Empirically, the pandemic was a near-perfect control experiment for MMT—and the inflation spike happened partly due to unrestrained fiscal and monetary expansion, not just energy shocks.

  “Why is communism sort of ringing in my ears?... What better control experiment than the extraordinary expansion in the money supply that took place...”
  — Simon French [07:17]

• Fiscal policy changes (like tax hikes) are rarely as swift as monetary interventions; political and logistical barriers make timely tax adjustments extremely difficult.

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4. Human and Political Limitations

[08:32] Merryn Somerset Webb:

• Asks if human nature and politics inherently doom MMT.

[08:40] Simon French:

• MMT’s relevance was greater in low-inflation environments, but with high inflation now, risks of debasing currencies and misallocating assets are greater than ever.

  “When the facts change, you must change your view... There's a real risk of misallocation if you're pursuing MMT at this point...”
  — Simon French [08:40]

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5. Limits to Resource Assessment—Why the Market Matters

[09:49] Merryn Somerset Webb:

• How can a central authority determine the “right” amount of money, given it’s near impossible to calculate true resource availability?
• Markets excel at allocating resources—central planning struggles.

[10:07] Simon French:

• The UK faces significant supply-side constraints (energy, labor, capital).

• Three main issues:

  1. Energy: Policy-induced limitations.
  2. Labor: Increased costs, welfare disincentives.
  3. Capital: UK pension and savings funds allocate more globally than domestically, making local capital scarcer.

  “The UK also has rather outsourced its allocation of capital for a long time. So you've got three [constraints]... actually its ability to absorb a big expansion in the money supply without creating inflation... is probably more constrained now than any time in my professional career...”
  — Simon French [10:59 & 11:38]

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6. Could Supply Constraints Be Fixed?

[11:52] Merryn Somerset Webb:

• Theoretically, supply constraints (energy, labor, capital) are fixable by policy change.

[12:34] Simon French:

• Incentives matter more than mandates; past tax credits and savings incentives effectively kept capital onshore.

• Most MMT advocates (UK Greens, Labour’s left) actually propose policies that would tighten—rather than loosen—these constraints by favoring regulation and higher labor costs.

  “The proponents of MMT are not the proponents of making that journey... that would make the likelihood of success of MMT even lower than they're proposing.”
  — Simon French [13:35]

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7. Blurring Fiscal & Monetary Policy

[17:11] Merryn Somerset Webb:

• Notes the blurred distinction between monetary and fiscal policy—excess money creation quickly becomes about redistribution (typically a fiscal tool).

  “By creating, you know, inflation in asset markets... you redistribute wealth, which is the job of fiscal policy, not... monetary policy.”
  — Merryn Somerset Webb [17:11]

[17:54] Simon French:

• Agrees; it’s not black and white. However, fiscal tools are more directly allocative, and left-of-centre proposals (like wealth taxes) would require capital controls to be effective—contradicting their support for liberal labor movement.

  “On capital to be wanting to constrain movements and on Labour trying to increase those movements. That seems quite a difficult position to adopt.”
  — Simon French [19:38]

• Predicts some form of capital controls may well emerge in the UK (e.g., “exit tax” debate).

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8. Lessons from Political Shocks and Potential Policy Shifts

[20:50] Simon French:

• Investors are wary of a Labour shift to the left, referencing the upheaval from the Truss “mini-budget.”

• Warns that major change—such as MMT—requires understanding, preemptive policies, and mechanisms to crowd in capital (e.g., making gilts inheritance tax-exempt) or risk financial dislocation.

  “If you're going to introduce something like MMT, you're going to do a real pivot to the left, you need to recognise the policy environment as it's set up at the moment would doom you to pretty quick failure, as Liz Truss found out.”
  — Simon French [22:09]

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9. Case Study: Japan and the Global Capital Environment

[22:28] Merryn Somerset Webb and Simon French:

• Rising Japanese bond yields signal that capital that once flowed out of Japan (“carry trade”) may soon return, tightening global financial conditions.

• If Japanese investors bring cash home, markets in the West may experience repricing, especially in “private” assets that haven’t yet adjusted to post-pandemic rates.

  “The counter to that is some of the capital tailwinds, the financing tailwinds the rest of the economy have benefited from, are unwinding and potentially unwinding in quite quick order.”
  — Simon French [24:31]

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10. MMT and the Discipline of Markets

[28:29] Merryn Somerset Webb:

• The podcast returns to MMT's big weakness—without bond markets or the need to tax/borrow, public spending may lose vital discipline, causing poor capital allocation.

[29:00] Simon French:

• The need to issue debt or raise taxes forces governments to ask: is this spending efficient? MMT weakens that discipline.

  “The disciplines of the bond market mean that... ministers ask themselves the question... is this the most efficient allocation of capital? And MMT for me weakens that... Too little discussion is about the quality of public spending. Too much is about the quantum of public spending.”
  — Simon French [29:38]

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Notable Quotes

• On the theoretical appeal of MMT:
  “I love this. This is so simple. And we would have everything that we need... Let’s just do it.”
  — Merryn Somerset Webb [04:08] (ironically)

• On real-world limitations:
  “The idea that fiscal policy can respond in short order has been slightly disproven in practice.”
  — Simon French [04:58]

• On why MMT offers an illusory simplicity:
  “The unconstrained money printer is very, very attractive in kind of sound bite economics... But actually when you delve into the detail... the risk is an allocation of capital [with less discipline].”
  — Simon French [28:35]

• On the political reality:
  “I think my reading of the UK economy is it is pretty supply side constrained at the moment... its ability to absorb a big expansion in the money supply without creating inflation... is probably more constrained now than any time in my professional career.”
  — Simon French [10:07–11:38]

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Timestamps for Key Segments

• [03:29] — What is MMT? Simon’s definition
• [04:58] — Pandemic policy as a quasi-MMT experiment
• [07:17] — “It wasn’t real MMT!”: Did we ever try it?
• [10:07] — Why market allocation of resources matters—UK’s supply-side constraints
• [12:34] — Could the UK overcome these constraints? What politicians propose instead
• [17:11] — Blurring the line between monetary and fiscal policy
• [20:50] — Political risk, Labour’s potential shift left, and lessons from the Truss mini-budget
• [22:34] — Japan’s bond market turmoil and what it means for global capital
• [28:29] — Back to MMT: why the bond market’s discipline matters

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Memorable Moments

• [14:24] — Lighthearted banter about old-timey payments at “Renaissance fairs” (levity from ad break).
• [28:03] — “If you do get Anthropic and OpenAI listing... the amount of institutional and retail capital that will flow to them will leave very little left over for any small or medium-sized companies ...”

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Conclusion

This episode provides a lucid, candid, and accessible critique of Modern Monetary Theory—from theory to practice—anchored in UK and global realities. Simon French and Merryn Somerset Webb cut through the political “Instagram economics” soundbites, making a compelling case for why, despite its superficial appeal, MMT faces deep economic, political, and practical obstacles, especially amid today’s constrained and uncertain policy environment.

To follow Simon French:
Twitter: @frencheconomics

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For insightful market analysis and practical investing advice, subscribe to Merryn Talks Money wherever you get your podcasts.

Transcript

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[Maren Somerset Webb]

Bloomberg Audio Studios Podcasts Radio News. Welcome to Marin Talks Money, the podcast in which people who know the markets explain the markets. I'm Maren Sumset Webb. This week I am speaking with Simon French, Managing Director, Chief Economist and Head of Research. That's a lot of title, Simon and Head of Research and Head of Loyal listeners of the show will have heard John and me talking about modern Monetary Theory MMT as it's known in past episodes. But what we have Never done is taken the time to actually delve into this, tell you what it is, explain what it means, whether it's being used in the past, whether we think it should be used in the future, what it means, what it doesn't mean. And more relevant right now, why some of our politicians are picking it up. So the Green Party, which is polling, well, actually slightly less now, but was polling rather higher now, down to about 11%, but still important if there's any kind of combination of political parties at the end of the next election. Zach Polanski has been talking about MMT whenever he talks about economics and saying that we are getting economics completely wrong in the uk There is another way. We do it this way and all our problems will magically disappear. So let's start at the very beginning. Simon, what is modern monetary theory?

[Simon French]

Well, thank you for the opportunity to explain it. So, modern monetary theory. Yes, Modern monetary theory is the idea that if you have your own sovereign currency and the ability as an issuer through your central bank, to produce as much money as you like, there isn't an effective constraint on financing. The only constraint in the ideas of modern monetary theory is that if you produce too much, it could be inflationary. The counter to that from modern monetary theorists is you can use fiscal policy, and let's call it what it is, tax increases, should inflation rear its ugly head.

[Maren Somerset Webb]

Okay, so in very simple terms, you do not have to borrow money from the markets. There is no need for the bond market to exist at all. You simply print the money that you want. You tell the bank of England to print as much as you like, and then you spend it on whatever you want. Welfare, infrastructure, all the things that the UK economy apparently so desperately needs. And all you have to do is figure out exactly how much resource is available in the UK economy. So you print exactly the correct amount of money, because if you were to print too much, you would get inflation. But if you do make a mistake, that's okay, because then you just put up taxes to dampen down economic activity and the inflation disappears. I love this. This is so simple. And we would have everything that we need. Let's just do it.

[Simon French]

If only it was so simple. So I think there are a couple of counters which I put on the table early on in this podcast, which is, first, we had a little bit of experiment with MMT during the pandemic. There was a lot of money printing or in digital form. Of course, it's even easier than that. It's a stroke of a key on your keyboard in order to produce this money, inflation reared its ugly head. And what did governments do across the world? Did they raise taxes in order to bring back inflation? They didn't largely. Fiscal policy remained also expansionary alongside monetary policy, which is one of the reasons why across western economies the price level today is between 25 and 30% higher than it was just five years ago. The idea that fiscal policy can respond in short order has been slightly disproven in practice. And then there's also the theory. The theory is why monetary policy and interest rates are chosen as the lever with which to manage the macroeconomy is because it isn't as distortionary as fiscal policy. What does that mean in plain English? I mean, I don't need to tell you, Marin, that when you change tax rates, people respond. People plan in terms of their lifestyle choices, their retirement choices, their asset allocation choices. And therefore if you twe weak fiscal policy, which is effectively what modern monetary theory says you should do in order to offset that unlimited monetary constraint, you start to have second order effects on behavior and quite inefficient, unproductive activity. And that's why the consensus over the last 40, 50 years has to be news. Monetary policy as your key lever with which to ration the money supply.

[Maren Somerset Webb]

Okay, so if you take the first one of those that we had an experiment with this during the pandemic, we printed piles of money, we created inflation, and the fiscal authorities then didn't deal with that properly. I mean, you could say, I mean if I were for example, Gary Stevenson or another populist pretend economist, I would say, well that's just because it wasn't real mmt. And if we were to put this in properly and governments were to properly understand it, this wouldn't have happened.

[Simon French]

Why is communism sort of ringing in my ears? Because that of course is the excuse is well, we haven't really tried communism properly have similarly with mmt. I mean look, what better control experiment than the extraordinary expansion in the money supply that took place in a pretty unconstrained way. It is pretty close to a perfect control experiment. And certainly those who say that this was all an energy price shock are kind of missing the ramp up that took place in the second half of 2021 before Ukraine was really on most investors agendas and dislocated the energy price market. So you seeing if you like the legacy of money supply pushed into the economy and a lack of fiscal response. I just think it's both the lack of political leadership with which to raise taxes and also the fact that fiscal policy is rarely introduced as quickly as monetary policy. You have fiscal events, different styles of fiscal events in different countries, but it doesn't lend itself to a quick response. And what you need is a lever that when it recognizes a pickup inflation can respond quite quickly to dampen that down.

[Maren Somerset Webb]

Okay, so there's really no way that MMT can work with human nature and with politics.

[Simon French]

I think that's right. I mean there is a element of this which in terms of MMT which has some or had perhaps some validity when we were in a very, very low inflation, low interest rate environment, which is the risk of deflation, disinflation. The spectra of that did require policymakers to look at alternative models. But when the facts change, you must change your view on the appropriateness, particularly at this point in the cycle of doing something which is a big expansion of monetary supply at a time when you speak to a lot more investors than I do, who are worried about the debasement of fiat currencies and what that does to the efficiency of the financial system, of course, to promote growth, but also the prices of other assets, fixed assets. There's a real risk of misallocation if you're pursuing MMT at this point in the cycle.

[Maren Somerset Webb]

Well, it seems to me that one of the most difficult bits of this is the bit we discussed at the beginning, which is that you have to actually understand how much resource there is available in your economy. And this kind of thing is absolutely impossible to even begin to guess at. You need the market to do that. You can't have a central authority trying to figure that out.

[Simon French]

That's right. Well, let's make it specific to the uk. I think my reading of the UK economy is it is pretty supply side constrained at the moment as a result of decisions around energy policy, most saliently, but also in the labor market. Increasingly we are starting to see constraints on labor supply partly through the on costs associated with employing labour and then also quite capital constrained. I mean, we're making this recording at a time when question marks over whether capital will has freely flow around the world in a Trump world, as we've seen in previous decades. But the UK also has rather outsourced its allocation of capital for a long time. So you've got three.

[Maren Somerset Webb]

What do you mean outsourced its allocation of capital?

[Simon French]

Well, in effect, it has allowed its institutional savings industry to move from position of having a home buyer slightly, exists in pretty much every other major economy to a situation where it is increasingly allocating on the geographical benchmark. That's fine if everyone else does it, no one else has done it. The UK is an outlier and therefore is constrained in terms of its ability to deploy capital into its domestic economy to fuel growth. So you think about those three elements, energy, labor, capital, constricting the real resources of the economy and therefore actually its ability to absorb a big expansion in the money supply without creating inflation, I think is probably more constrained now than any time in my professional career and I've been a professional economist for almost a quarter of a century.

[Maren Somerset Webb]

And of course you could fix all those supply constraints, couldn't you? You could fix the energy problem simply by changing direction. It wouldn't be immediate at this point, but it is definitely fixable with maybe one high profile resign. You could fix the labor bit by changing the cost of employing labor. You could stop putting it up and maybe put it down a bit. And you could change some of the welfare parameters that keep people out of work. And on the capital allocation area you could change that simply by regulating to persuade force pension funds in particular to keep capital in the UK by shifting the Israel allowances around, which you and I have discussed before all these, these three things could be changed.

[Simon French]

Yeah, on the last one I've probably gotten a bit of journey since we first spoke about this. I think mandation enforcing was perhaps where I was a few years ago. I think actually it's still the more I've researched this area, the more I just look at the incentive structure, the USTA under the pep, the personal equity plan and indeed which was the forerunner.

[Maren Somerset Webb]

Of the ISO for younger listeners.

[Simon French]

Correct. And also in the pensions through the dividend tax credit there used to be an inbuilt incentive. It is one of incentives rather than necessary force foundation. But we've gotten so agnostic that perhaps it was appropriate at a time when people were at least paying lip service to the global rules of the game. But in an environment where they're not. I think that policy environment is not for purpose. But going back to your three points, let's be really pragmatic about the ability of a U turn on the cost of energy, the cost of employment and the allocation of capital. The proponents of MMT are not the proponents of making that journey. If you think it's largely coming from the Green party and the left of the Labour Party, they want to double down on those. Well, they're pretty quiet on capital allocation, but certainly on the first two, when you look at liberating the energy market, putting an abundance of energy into the UK economy to increase its supply side. Whether they want to move away from the on costs of labor to making a more flexible, more dynamic labor market, they want to go in the opposite direction. That to me my economic model would suggest you are constricting the supply side even more. Making and perhaps this is the uncomfortable truth for the left of UK economics and politics is it would make the likelihood of success of MMT even lower than they're proposing.

[Maren Somerset Webb]

Interesting. Thy ticket Lady Jennifer of Coolidge. Well, many thanks good sir. Here is my Discover card.

[Simon French]

They accept Discover at Renaissance fairs.

[Maren Somerset Webb]

Yeah they do here. Discover is accepted at the places I love to shop. Getth with the times. With the times.

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[Maren Somerset Webb]

Okay, let's go to the second major objection that you had that fiscal policy to control an excess supply of money is very difficult to do. Very difficult to do. There is a sort of blurred line, isn't there, between monetary policy and fiscal policy anyway? And people behave as though these two things are very different and monetary policy is somehow neutral. But one of the things that one of the reasons why Japan didn't come to the same kind of QE policies as the west in the beginning was because they felt very strongly that if you print a pile of money, you change monetary policy into a fiscal policy because effectively by creating, you know, inflation in asset markets, for example, you redistribute wealth, which is the job of fiscal policy, not of monetary policy. So these lines are very blurred.

[Simon French]

They are. And you know what? That's absolutely correct of you to pick me up on that, is that I shouldn't present this as black and white, that monetary policy certainly in its current guise or its more recent guise, has no allocative impact. It does, but it's one of degrees. I think in aggregate, if you look at the two major policy levers for central bankers, so balance sheet and policy deposit rates, they are less allocatively impactful than if you like single taxes, VAT income taxes, wealth taxes. And also, if one thinks of the type of taxes that the left want to raise, they are largely ones that have something of an intellectual contradiction because they we largely want to be taxes on wealth, it appears on assets. And in order to do that in a globalized world with interconnected financial systems, and indeed with a relatively porous movement of people, you would have to introduce capital controls or some form of capital controls. This is whispered on the left, but it would almost certainly be necessary for the effectiveness of the tool. So they want to constrain one factor of production, capital, limit its movement across borders. And yet on another side of the facts of production on people movements, they want a much more liberal movement of people across borders. So that's labor. And where's the intellectual consistency? I mean, maybe people don't bother about intellectual consistency anymore, but I Think I do. I think if you believe in a more liberal flow of factors, production, it.

[Maren Somerset Webb]

Has to be all of them.

[Simon French]

It'd be all of them. But this one appears on capital to be wanting to constrain movements and on Labour trying to increase those movements. That seems quite a difficult position to adopt.

[Maren Somerset Webb]

I mean, there is a sense, isn't there, that capital controls in some form will be with us in the next couple of decades? I mean, there was a lot of discussion in the run up to the budget, the last appalling budget, about an exit tax for people leaving the uk, which seems absurd to people who've been brought up in a global environment, but was perfectly normal idea in the 70s, for example.

[Simon French]

It was. And maybe that is the journey we are on. And certainly, look, you and I, I think listeners can be clear where we sit on this particular issue, but if you are going to go in that direction, then I think recognizing that left unchecked in terms of the, the controls environment, the tax environment, you would get a pretty abject failure. So you would need to take preemptive action. One of the things that I've written about in recent weeks is if we're going to get a movement to the left amongst the current Labour government after the local elections in May, we are.

[Maren Somerset Webb]

Looking to stop you right there and say, are you assuming that Keir Starmer might not make it very long after the local elections? They'll go very badly and we'll see a regime change in the Labour government.

[Simon French]

I can see what you're doing there is to make me commit to what I think is going to happen. My economic predictions are much better than my political predictions, although that's not a particularly high bar. But one thing I would say is that when speaking to investors, that is something they are laser focused on. The idea that actually the setup for the UK isn't too bad this year, with gilt yields at least the spread coming down, the mortgage refinance, headwinds easing further energy costs, time of recording relatively benign and yet wide expectation there'll be a leadership challenge. Shift to the left. What's interesting is whether the left have learned anything from the rights identity crisis in the last Parliament, when Liz Trust and the Mini budget introduced a very different economic policy from the other side of the aisle, or at least notionally from the other side of the aisle. I think this time they may put in preemptive measures. The left, if they go down this route, and one of the things you could do, for example, on gilts, would be to make them Exempt from inheritance tax to try and crowd in capital in a market you think would potentially dislocate. These are the type of things that if you're going to introduce something like mmt, you're going to do a real pivot to the left. You need to recognise the policy environment as it's set up at the moment. Would doom you to pretty quick failure, as Liz Truss found out. It'd be interesting to see whether the left have learned any lessons from that.

[Maren Somerset Webb]

Yes, it will be interesting.

[Simon French]

Don't hold back, Marin, innit?

[Maren Somerset Webb]

While we are are on the subject of bond markets, guilt markets, etc. Have you been watching Japan?

[Simon French]

Yes, with interest for a number of years actually. I know the movements have been quite extreme in recent trading sessions, but this has been a couple of years in the making. I've written a couple of columns about this, so.

[Maren Somerset Webb]

Isn't it. Yeah. Japanese bond yields really, really sore at this point. You know, you look at that, look at the chart and it looks a bit like the silver chart, right? A little bit parabolic there at the end. What does that mean? What's going to happen?

[Simon French]

Well, there's a couple of things going on in Japan. I think if it was just the long end of the curve, I would say that there's long end dislocation going on around the world at the moment, which is partly an institutional shift away from defined benefit pension schemes, of which Japan, the UK and the Netherlands are at the forefront of that. So the long end sell off in those three countries has been the most pronounced partly because the DB pension schemes are leaving the market in terms of ready buyers of that and fair play to issuing authorities in those countries. They've reduced duration of new issuance. So okay, it's interesting when you look at your terminal, the 30, the 40 year yield, but it actually is not that relevant for government financing. What's interesting in Japan is how the short end is also selling off quite asymmetrically to the rest of the world. What does that tell you? It tells you that suddenly you're repricing the inflation risk in Japan. Now that's a problematic situation for Japanese financing given debt to GDP is 225%, which is about twice the wider G7 average. But your question was around. I got there in the end.

[Maren Somerset Webb]

Thank you.

[Simon French]

Thank you. Was what does that mean for the rest of the world? Well, for the rest of the world it means that this. We talk about exporting of capital and in the UK context, in the Japanese context, they've been exporting capital. The Famed carry trade to the rest of the world, offering fairly loose financial conditions for other major economies.

[Maren Somerset Webb]

Now suddenly, point being, just be clear that you can borrow, you can borrow in yen very cheap. You have been able to borrow in yen very cheaply and lots of people have taken advantage of that. They borrowed cheap yen, they invest elsewhere and then they make the spread correct.

[Simon French]

Now, if you are a CIO in Tokyo currently looking at the nominal, we'll come to real yields in a second. But nominal yields available suddenly for the first time in more than a generation, repatriating that capital to get nominal returns in your domestic economy is an attractive trade and notwithstanding the sort of weakness of the yen. But I think still there is a, perhaps something of a money illusion effect which was likely to bring capital back into Japan. And the counter to that is some of the capital tailwinds, the financing tailwinds the rest of the economy have benefited from. Japan are unwinding and potentially unwinding in quite quick order. Now the real yield is important. So just for inflation, it is the degree at the moment, the short end of the curve. Generally, inflation expectations and yields have moved in tandem. But if that starts to dislocate and you start to get real yields emerging at the short end of the Japanese curve, then you start to get some really interesting dynamics. Because what has become, you start to see a steady repatriation of capital might become quite a quick repatriation of capital capital.

[Maren Somerset Webb]

And then what happens?

[Simon French]

Well, then I do think you start to see some actual fundamental repricing of assets in the western world.

[Maren Somerset Webb]

Of what type of assets?

[Simon French]

Well, to some extent public markets have quite relatively efficiently repriced their assets to a higher interest rate environment after 2022, I think in private markets where those revaluations have not taken place or there's certainly been a financing opportunities to roll over at valuations that haven't really been tested, that amplifies the pressure, honestly. And therefore do you see a situation where you start to see some of those stresses that we saw emerge? I'm timescale here about with Silicon Valley bank and some of the concerns over funding there start to rear the head again. I think that's a real.

[Maren Somerset Webb]

It's fascinating when you look at the valuations of private companies when I was looking the other day at the valuations of publicly list AI related companies and the private ones. So if you look at OpenAI, anthropic, et cetera, if you look at them as a multiple of sales, because there's no actual money involved, we look at them as a multiple of sales. Those private companies that are expecting to IPO this year are currently priced at astronomically higher levels than the publicly listed ones. It's fascinating to see what happens when they come to ipo. Does that price stand? And if not, then what?

[Simon French]

So we're probably the big names, the names you've just reeled off. There's probably a combination of enough hype and indeed an expectation of very rapid inclusion in the major indices to attract passive money for maybe some of those deals to go through. I think what you worry about, or you would worry about if you're a portfolio manager is the middle and long tail of companies at similarly elevated valuations who won't have that perhaps sort of rock star attraction of getting those kind of valuations. Maybe we don't care about that anymore. But I care about it from a growth, I care about it from a growth standpoint because if we keep on crowding capital into a small number of very, very large players, it's not great for economic efficiency.

[Maren Somerset Webb]

That's where as well, isn't it? If you do get, let's say you do get anthropic and OpenAI listing, these are such huge humdinger IPOs that the amount of institutional and retail capital that will flow to them will leave very little left over for any small or medium sized companies that want to come to market.

[Simon French]

Yeah, I think for me that is the concern with the level of concentration we're seeing in the allocation of capital on both geographic grounds and indeed on sector grounds.

[Maren Somerset Webb]

We have veered away from mmt, haven't we? We have these podcasts. They never quite work like they're supposed to.

[Simon French]

How do we bring it back to mmt? I think we bring it back to MMT because the idea of a the unconstrained money printer is very, very attractive in kind of sound bite economics. Little clips for Instagram or for TikTok. But actually when you delve into the detail here, the risk is an allocation of capital which we were talking about in terms of to large companies, private companies in the public and the private realm. Think about it in terms of the allocation of capital from the public sector. One of the things, I think the reasons why fiscal policy and the bond market is a good check on governments is it makes them ask themselves a value for money question at the outset. Is this a good use of money? Because at some point, whether it's taxes later or borrowing right now, taxpayers have to pay for this. There's no getting away from that. You can change the ordering, which is what MMT does. But ultimately, at some point, that liability has to be covered. And I do think the disciplines of the bond market mean that in I mean, I spent the first 12 years of my career in Whitehall, means the ministers ask themselves the question is maybe not enough, but they certainly are definitely not enough. But is is this given the alternative ways in which not just we could spend it, but the private sector could spend it, households could spend it, businesses could spend it, Is this the most efficient allocation of capital? And MMT for me weakens that. If you like that discipline, which is really, really good for allocative efficiency. Too little of a discussion is about the quality of public spending. Too much is about the quantum of public spending.

[Maren Somerset Webb]

Nicely brought back, Simon.

[Simon French]

Thank you. We got there. We just about, didn't we? Yeah.

[Maren Somerset Webb]

Thank you so much for joining us today. That was an excellent explanation of something that I think is increasingly important. Thanks for listening to this week's Marin Talks Money. If you like our show, rate, review and subscribe wherever you listen to podcasts and keep sending sending questions or comments to marinmoneyloomburg.net. you can also follow me and John on Twitter OR X. I'm MarinW and John is JohnStepek. Simon is very active on Twitter. Simon, what's your handle?

[Simon French]

French Economics.

[Maren Somerset Webb]

French Economics. So do follow him and listen to what he says because he's very good. This episode was hosted by me, Marin Somerset Webb. It was produced by Somersadi and Moses Andam Sound designed by Blake Maples and Aaron Casper. And special thanks at calls to Simon French.

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