2/18/2015

G20 reversal means Raghuram Rajan is last man standing in wild west-style currency war - The Economic Times

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G20reversalmeansRaghuramRajanislastmanstandingin
wildweststylecurrencywar
ByRSriram,ETBureau|16Feb,2015,03.00AMIST

PostaComment

MUMBAI:RaghuramRajan,centralbankgovernorofreputeandIndia'sstaunchestinflation
warriorinalongtime,findshimselftobeinapeculiarsituationthesedays.Hewasproved
rightin2008whentheglobalfinancialcrisisexposedthedarkunderbellyofaconvoluted
systemwherecomplexderivativesandextraordinarilyhighleveragecombinedwithgreed
andfeartobringWallStreettoitsknees.In2005,whenhepredictedthedangersofsucha
marketandwarnedofacrisis,hewaslaughedatit,evenridiculed.
HewascalledaLudditeandhisfearsweredismissedasexaggerations.Rajan,thenwith
theIMF,wasononeside,whilethemandarinsoftheUSfinancialsystem,fromtheFederal
ReserveonwardstothehighpriestsofUSacademia,wereontheotherside.Thismuch
everybodyknows.Whatislessobviousandlessvisibleishowlittlethingshavechanged
sincethen.
No,Iamnotreferringtothechangesintheglobaleconomicorpoliticallandscapesince
then.ThedarkdaysofSeptemberOctober2008areobviouslyfarbehindus.TheUSisina
farbettershapeEuropeisstaringatadeflationaryabyss,whileJapanisploddingon,in
searchoftheelusiveelixirofgrowth.

Goneisthelanguageonnormalisationofmonetarypolicyand
howthatwouldbepositiveforglobaleconomy.

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onindepthcoverage

Perceptionsaboutemergingmarketshavechanged.BRICShasgivenwaytotheFragileFivewhich,inturn,hasevaporatedleavinginits
wakeavastlydivergenteconomicblocwithdisparategrowthexpectationsandstrategies.Iaminsteadreferringtothecontinuingdebate
aboutglobalmonetarypolicies,theroleofcentralbanksinspurringanemicgrowthevenaspoliticiansworryaboutslightestchangesin
theirpopularitymorethantheprosperityoftheirowncitizens.
Iamalsoreferringtotherecentdebateaboutmonetaryeasing,itsdeleteriouseffectsonlongtermgrowthanddemandandtheaddiction
toartificiallylowinterestratescreatedbycentralbankbondbuying.InaninterviewrecentlytoET,Rajancalledsuchcentralbank
interventionsplacebos,notrealmedicineandheworriedthattheworldisgettingintoa'chakravuha'fromwherethereisnoeasyexit.
Unfortunately,fewseemtobelistening.
ThelatestG20communique,issuedonFebruary10afterthemeetingoffinanceministersandcentralbankgovernors,isagoodexample
ofhowprioritieshavechangedsincetheylastmetinBrisbaneFebruary2014.Goneisthelanguageon"normalisationofmonetarypolicy"
andhowthatwouldbe"positiveforglobaleconomy.Alsomissingisthelanguageonneedforfinancialstabilitythrough"reducedreliance
oneasymonetarypolicy".
InBrisbane,themessagewasclear.Focusontransitiontoanormalphaseaftertheexcessesofthepastfewyears.InIstanbul,oneyear
later,easinghasbecomethepredominanttheme.Consistentwithcentralbankmandates,currenteconomicconditionsrequire
accommodativemonetarypoliciesinsomeeconomies,thecommuniquereads."Inthisregard,wewelcomethatcentralbankstake
appropriatemonetarypolicyaction.TherecentpolicydecisionbytheECBaimsatfulfillingitspricestabilitymandateandwillfurther
supportrecoveryintheeuroarea".
Tobefair,centralbankersandfinanceministershavelimitedchoice.Growthisfalteringacrossmuchofthedevelopedworld.The
eurozoneisteeteringontheedgeofdeflation.GreeceisinturmoilandEuropeanpoliticiansdon'tappeartohavemuchclueashowto
unlockgrowthandbringdownunemployment.Afewweeksbeforethemeet,theECBunleasheditsonetrillioneuroplusblasttodrive
downinterestratesandspurlendingandindustrialactivity.

http://economictimes.indiatimes.com/news/economy/finance/g20-reversal-means-raghuram-rajan-is-last-man-standing-in-wild-west-style-currency-war/articlesh

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2/18/2015

G20 reversal means Raghuram Rajan is last man standing in wild west-style currency war - The Economic Times

JapanstartedtheprocessmorethanayearagoandsteppedupthepaceofpurchasesinOctoberlastyear.InChina,producerprices
havebeenfallingforthreeyearsnowandconsumerpricesinJanuaryfelltoafiveyearlowpromptingeconomiststocallforspeedierrate
cutstoavoida"deflationaryspiral".Afullblowncurrencywarisbeingwagedwithcurrenciesofmajoreconomiesplumbingmultiyear
lows.AnyfurtherChineseeasingwilldrivedowntheyuan,sendingawaveofultracheapgoodstomarketssuchasIndia,where
industrieslikesteelandengineeringarealreadyfacingmassiveChinesedumping.
Theconsequencesofthisonaneconomyrecoveringfromparalysisandpolicymismanagementcouldbedisastrous.Europeanand
AmericanpolicyplannershopethataweakeurowillmakeEuropeanexportscompetitivewhileastrongdollarwillfurtherdrivedown
inflationtherebyputtingmoremoneyinthehandsofAmericanconsumers.Personalconsumptionexpenditurecontributesalmost70%to
USGDPandfallingpricesarelikeahugetaxcut,someAmericanpolicymakersseemtobelieve.Theyalsothinkthatthebiggerthreatfor
theUSisnotthestrongdollarbutweakglobalgrowth.
WithUScompaniesincreasinglyreliantonforeignmarkets,thecountrycannotaffordtolettheworldslipintoarecession,theargument
goes.ButfallinginflationwillspoiltheFed'softstatedstanceofincreasinginterestrateslaterthisyear.Slidingcommoditypriceshave
alreadymadethe2%inflationtargetdifficulttoachieveandifpricescontinuetostaylowandthedollarhigh,thetargetmaywellbecome
impossible.
WhatwilltheFeddothen?Theycandelayratehikesbutthatwillonlycausecausemoreturmoilandconfusion.Rajan'sargumenthas
beenthatsuchunconventionalmonetarypolicies(UMP)aredifficulttoexit.Theydon'tcreatesustainabledemandandcreateawealth
effectwhichthenreverseswhenthepolicyisreversed.InaspeechattheInstituteofMonetaryandEconomicStudies,BankofJapanin
May28,2014,RajanputforwardtwomainreasonswhyexitfromUMPsisdifficult.
Alowinterestratecyclenudgeslenderstorelyonassetsalesasabackstopandincreaseloantovalueratioswhenthecycleturns,asset
pricesplungeandsodoesloanrecovery.Centralbankersmaybelievethattheycanholddownratesforaslongaspossiblebyreassuring
marketsthatratehikesarefarawaybutsurgingeconomicdatamaymakesuchassurancesseemlesscredibleleadingtoastampede
fromassetclasses.
Likein2005,Rajanisaloneinthisfight.Heisthelastmanstandingevenasmajorcentralbanksacrosstheworldreposefaithinmore
monetaryeasingtomakeupforlackofpoliticalwill.TheworldcannotaffordtomakethemistakeofignoringRajanagain.Asecondglobal
financialcrisiswillbedisastrousespeciallywhenmuchoftheworldhasnotrecoveredfromtheaftereffectsofthefirstone.
Centralbankersmaybelievethattheyaredoingallittakestostimulategrowthbutwhattheyaredoingistryingtomakeupforthe
fecklessnessofpoliticians.Asusual,thesuffererswillbeinnocentsavers,smallinvestorsandmuchofthemiddleclass.Theywillhaveto
bearthebruntofthepain.

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http://economictimes.indiatimes.com/news/economy/finance/g20-reversal-means-raghuram-rajan-is-last-man-standing-in-wild-west-style-currency-war/articlesh

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