Next Leg Up $1336, page-366

Rajan seems like a smart chap that can see the wood from the trees.

His argument is basically that monetary easing (credit expansion) has caused asset prices to grow but our economies are yet to grow enough to expand into the void that's been created. A bit like buying your children shoes that are two sizes to big because you know they'll grow into them and you'll save some money. Problem is with children you know they'll grow, but with economies you can't be that sure.

Interesting also his take on negative interest rates unintendedly causing people to save rather than spend as many more people become more focussed on how they will afford to retire, thus curtailing spending that would otherwise be a consequence of accommodative monetary policy. The truth is that in most western economies we have reached peak private debt and the average person is deleveraging. Regulations after the GFC have added to the problem as well because it is currently harder to obtain credit for the average person because of new laws designed to protect the system and credit consumers from their own stupidity. Much of the money that has been printed has gone towards bailing out the banks after the GFC via cheap loans. These banks have a natural advantage in terms of completion over the main street businesses they were traditionally meant to service and now in many instances are in completion with their main street clients. A completion the banks will always almost win due to their deep market knowledge (insider knowledge) and the advantage dished out to them by virtue of the cheap loans. Under these circumstances it is very hard to see how the main street economies in the US and Europe will be able to flourish when you effectively have a profit drain straight into the pockets of the ultra rich.

It would seem that Rajan favours the liquidity/bankruptcy solution to the credit crisis if it can't resolve itself. That is letting the system fail which should iron out the dislocations and bottlenecks that aren't appearing to resolve themselves after so many years of accommodative policies. He doesn't seem in favour of helicopter money.

He is also in favour of the Fed continuing with its path of lifting interest rates (with a measured approach) which would seem consistent with his other monetary philosophies.

The big drop in 2016 first quarter GDP in the US is going to represent a big headache for the Fed because while growth is on a moderate (but not ground shaking) trajectory of say (2 o 2.5%) they can convince the markets that their policies are working or at least that they are riding the wave successfully. If GDP falls or remains near zero for two or more consecutive quarters it will become clear that there is no wave left to ride and with no monetary dry powder left what happens then?

This report from Moody's that I just got in my in box doesn't paint a very good picture of non-financial sector business in the Asia Pacific region.

https://www.moodys.com/research/Moo...-in-1Q-2016-to-continue-throughout--PR_347671

Conclusion:

"Nonetheless, Moody's believes that accommodative monetary policies globally will provide sufficient market liquidity, allowing most corporates in Asia Pacific to maintain their access to funding; thereby somewhat mitigating default risks."

So the only solution according to Moody's is more accommodation. Those oversized shoes must be getting awfully uncomfortable being bought originally with the Greenspan put.

https://en.wikipedia.org/wiki/Greenspan_put

Funnily enough Greenspan changed his tune since buying those oversized shoes for the world.

Eshmun