The bond vigilantes of yesteryear who used to enforce fiscal discipline by spurring higher interest rates may have been bought off by a free spending “sugar daddy” named Uncle Sam.

The disappearance of that particular class of investor —who seem to have all but disappeared in an era of trillion dollar spending deficits and a softening economy — is one of the enduring mysteries of global markets.

Although the U.S. yield curve may or may not be signaling the onset of a recession, rates remain near historical lows, even amid an endless sea of government red ink.

These days, bond markets largely take their cues from the Federal Reserve’s one-two monetary punch of bond buying and interest rates. Yet veteran market watcher James Paulsen believes investors “worry too much about the Fed,” and should recognize that markets have “switched to a new juice.”

That particular beverage happens to be a federal government intent on cutting taxes, while spending with seemingly reckless abandon.

“Should stock and bond investors be leery of the unconventional contemporary fiscal environment, or should they simply relax, admit the Fed may have lost a step and just embrace their new Sugar-Daddy’s fiscal juice?” Paulsen asked in a research note to clients on Monday.

The link to MMT

Elements of Paulsen’s argument dovetail with Modern Monetary Theory (MMT), a hotly debated economic theory that posits a government can stimulate the economy via infinite deficit spending. In theory, a government that can print money can’t ever run out of it.

The idea of Uncle Sam as a “Sugar Daddy” has adherents on both sides of the political spectrum, but is generally viewed as a precursor to surging inflation, unsustainable deficits and a currency that ends up worthless.

Yet a few market observers say that current economic conditions, primarily a strong jobs market and resilient consumer demand, could counteract the effects of deficit spending on yields.

Philipp Carlsson-Szlezak, an economist at Bernstein Research, noted this week that “it's not clear – from an orthodox economic perspective – how expanding deficits in the context of full employment coexist with falling interest rates, as MMT suggests would be the case.”

Still, he insisted that a full embrace of MMT “would end badly, as in a currency/ inflationary collapse.”

The current debate over MMT is being deployed “politically to give expansionary fiscal policy a new intellectual veneer,” Carlsson-Szlezak wrote, adding that the “compulsive stimulus” of the last few decades have given MMT fresh legs.

Still, “as with all such fiscal stimulus, including President Trump's unabashedly pro-cyclical tax cuts” — deficit-fueled growth results in tradeoffs and a number of economic risks, he added.