August 7, 2014
Outspoken non-status-quo thinker Reserve Bank of India Governor Raghuram Rajan may be set to have his central banker card revoked… for telling too much truth (here in 2012, here in 2013, and most recently here). Having previously noted that “international monetary cooperation has broken down,” the WSJ reports that Rajan warned Wednesday that the global economy bears an increasing resemblance to its condition in the 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense. Simply put, he concludes, “we are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost.”
As The Wall Street Journal reports, Rajan explains the difference between now and 1930 is:
competitive monetary policy easing has now taken the place of competitive currency devaluations as the favored tool for playing a zero-sum game that is bound to end in disaster.
Now, as then, “demand shifting” has taken the place of “demand creation,” the Indian policymaker said.
As was the case in the 1930s, the lack of coordination between policymakers is producing spillovers that may be difficult to control, and the world’s financial system may soon face fresh turbulence at a time when central banks have yet to repair the damage that the 2008 financial crisis caused to developed economies.
“We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” said Mr. Rajan in an interview with the Central Banking Journal.
A sudden shift in asset prices could happen in a variety of ways, Mr. Rajan said. The most obvious route would be as a result of investors chasing higher yields at a time when they believe central bank policies will protect them against a fall in prices.
“They put the trades on even though they know what will happen as everyone attempt to exit positions at the same time – there will be major market volatility,” said Mr. Rajan.
And finally on the incompetence of economists (cough central bankers cough)
Mr. Rajan said economists still disregard the central role of financial systems in the economy and believe they can predict upcoming disruptions.
“They still do not pay enough attention–en passant–to the financial sector,” Mr. Rajan said. “Financial sector crises are not as predictable. The risks build up until, wham, it hits you.”
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All very Zero Hedge-like, but from the mouth of a former IMF Director and current world central banker…
As Rajan previosuly concluded:
“when it comes to what is ailing the global economy, extreme monetary easing has been more cause than cure. The sooner we recognize that, the stronger and more sustainable the global economic recovery will be.”
This article was posted: Thursday, August 7, 2014 at 10:53 am