India Central Bank Chief Warns QE "Has Been More Cause Than Cure" For Economic Weakness

Tyler Durden's picture

Speaking at The Brooking Institution on April 12, Reserve Bank Of India Governor Raghuram Rajan  - no stranger to controversial truthiness (as we have noted here and here) - made clear his views on the rest of the world's central bankers as he concluded, "the first step to prescribing the right medicine is to recognize the cause of the illness. And, 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."


Authored by Raghuram Rajan via The Gulf Times,

As the world struggles to recover from the global economic crisis, the unconventional monetary policies that many advanced countries adopted in its wake seem to have gained widespread acceptance. In those economies, however, where debt overhangs, policy is uncertain, or the need for structural reform constrains domestic demand, there is a legitimate question as to whether these policies’ domestic benefits have offset their damaging spillovers to other economies.

More problematic, the disregard for spillovers could put the global economy on a dangerous path of unconventional monetary tit for tat. To ensure stable and sustainable economic growth, world leaders must re-examine the international rules of the monetary game, with advanced and emerging economies alike adopting more mutually beneficial monetary policies.

To be sure, there is a role for unconventional policies like quantitative easing (QE); when markets are broken or grossly dysfunctional, central bankers need to think innovatively. Indeed, much of what was done immediately after the collapse of US investment bank Lehman Brothers in 2008 was exactly right, though central bankers had no guidebook.

But problems arise when these policies are extended beyond repairing markets; the domestic benefits are at best unclear when economies are deeply damaged or need serious reform, while the spillovers from such policies fuel currency and asset-price volatility in both the home economy and emerging countries.

Greater coordination among central banks would contribute substantially to ensuring that monetary policy does its job at home, without excessive adverse side effects elsewhere. Of course, this does not mean that central bankers should be hosting meetings or conference calls to discuss collective strategies. Rather, the mandates of systemically influential central banks should be expanded to account for spillovers, forcing policymakers to avoid unconventional measures with substantial adverse effects on other economies, particularly if the domestic benefits are questionable.

For a long time, economists had converged on the view that if central banks optimized policies for their domestic situation, coordination could offer little benefit. But central banks today are not necessarily following optimal policies – a variety of domestic constraints, including dysfunctional domestic politics, may prompt more aggressive policies than are strictly warranted or useful.

In addition, cross-border capital flows, which increase economies’ exposure to the effects of one another’s policies much more than in the past, are not necessarily guided by economic conditions in recipient countries. Central banks, in an effort to keep capital away and hold down the exchange rate, risk becoming locked into a cycle of competitive easing aimed at maximizing their countries’ share of scarce existing world demand.

With a few rare but laudable exceptions, officials at multilateral institutions have not questioned these unconventional monetary policies, and have largely been enthusiastic about them. This approach carries two fundamental risks.

The first hazard is a breakdown of the rules of the game. Endorsing unconventional monetary policies unquestioningly is tantamount to saying that it is acceptable to distort asset prices if there are other domestic constraints on growth.

By the same token, it would become legitimate for countries to practice what they might call “quantitative external easing” (QEE), with central banks intervening to hold down their exchange rates, while building huge reserves. If net spillovers do not determine internationally acceptable policy, multilateral institutions cannot claim that QEE contravenes the rules of the game, regardless of how much instability it engenders.

In fact, this is no mere hypothetical. Quantitative easing and its cousins are implemented primarily in situations in which banks are willing to hold enormous quantities of reserves unquestioningly – typically when credit channels are blocked and other sources of interest-sensitive demand are weak. In such situations, QE “works,” if at all, primarily by altering exchange rates and shifting demand between countries. In other words, it is different from QEE in degree, not in kind.

The second danger is that source countries’ unwillingness to take spillovers into account causes unintended collateral damage in recipient countries, prompting self-interested action on their part. Even as source-country central banks have painstakingly communicated how domestic conditions will guide their exit path from unconventional policies, they have remained silent about how they would respond to foreign turmoil.

The obvious conclusion – reinforced by the recent financial-market turbulence that followed America’s move to exit from more than five years of QE – is that recipient countries are on their own. As a result, emerging economies are increasingly wary of running large deficits, and are placing a higher priority on maintaining a competitive exchange rate and accumulating large reserves to serve as insurance against shocks. At a time when aggregate demand is sorely lacking, is this the response that source countries want to provoke?

Despite the evident benefits of expanding central banks’ mandates to incorporate spillovers, such a change would be difficult to implement at a time when domestic economic worries are politically paramount. A more practicable solution, at least for now, would be for source-country central banks to reinterpret their mandates to consider the medium-term effects of recipient countries’ policy responses, such as sustained exchange-rate intervention.

Central banks could thus recognize adverse spillovers explicitly and minimize them, without overstepping their existing mandates. This weaker form of “coordination” could be supplemented by a re-examination of global safety nets.

The risks generated by the current non-system are neither an advanced-country problem nor an emerging-economy problem. The threat posed by competitive monetary easing matters to everyone. In a world with weak aggregate demand, countries are engaging in a futile competition for a greater share of it. In the process, they are creating financial-sector and cross-border risks that will become increasingly apparent as countries exit their unconventional policies.

The first step to prescribing the right medicine is to recognize the cause of the illness. And, 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.

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knukles's picture

No shit, Apooh.
Just add back into disposable income the bazillion trillions of dollars that would be earned in interest if rates awere not artificially depressed.
And on top of it, the system is awash with funds.  There's no reason to print more.
Rates going up, will actually spur the Real Economy

And while we're at it, fuck Paul Krugman and the Marxist Frog, Piketty (Who cares if I spelled his name wrong.)

max2205's picture

What do Indians know about money?  What makes them think that they can tell our fucking bitch what to do..


Fuck them

Oh regional Indian's picture

I think Fed Res has quietly released it's attack dogs on itself.

Think about it, if you have a planned....errr....demise...much better no? Blow up some empty buildings and shit with airliners and crap and claim paper burnt but gold just vapourized....



Meanwhile you are thicker than a brick in DUMB.


maskone909's picture

The indian central bank chief just became the proud new new owner of an SENCO FRAMEPRO701XP FramePro701XP Clipped Head Framing/Sheathing Nail Gun

Luckhasit's picture

They might not know anything about fiat.  But they sure as hell know something about gold. 

And what they know, we forgot.

daveO's picture

They hate being ripped off, just like the rest of us. At least, in their case, they don't have to worry about an out of control DC. They have nukes and could defend themselves.

LawsofPhysics's picture

What part of all stimulus is fungible don't people understand?

Chief Wonder Bread's picture

Fungibility is a good way of looking at it. Stimulus works in mysterious ways (if the following is true):

Simon Derrick from BNY Mellon said a recent buying spree of US Treasuries and agency debt by Belgium of all places looks like a Chinese front.

edit: of course it's not stimulating anything except front-running by the kleptocrats, but that's a different story.

JRobby's picture

The banking cartel was faced with covering the impossible, the mother of all debits (MOD). Almost funny. Total notional value. A number the size of which is only contemplated in theoretical math think tanks. How could they make the math work under current world GDP scenarios? Not possible.

Relax the rules, give the banks some $$ in a very visible way to placate the masses and ease panic. I can't think of a funny analogy. Bandaide does not work. It is washed away in the torrent of red ink without notice.

The illness of greed once again destroys. No one pays except the rest of the world while the party continues after a slight hiccup. 

Wise up



LawsofPhysics's picture

Indeed, and sadly enough it will work as there seems to be a sucker/slave born every minute and no one can remember what the fuck real value or collateral is anymore...

dontgoforit's picture

This has been anything but 'stimulus.'  This has been and continues to be 'life-support' with mind-altering and addictive side effects:  "QE; isn't it about time you switched to QE?  It will cure all your ills as it kills you."

JRobby's picture

When will a Colonel Nathan R. Jessup character stand up and say his line?

The game is over. No one will admit it. They want to stay at the tables until the very end thinking they will have some advantage in the aftermath. Perhaps for a little while. There are too many people to feed.

daveO's picture

The charade goes on until no one accepts the dollar in trade. I think that's why the FED started tapering. They can see it coming.

game theory's picture

CWB, thanks for linking that telegraph story.  

If China keeps it up, it seems we'll get another round of QE.

cocky roach's picture

They don't understand all of it.

i_call_you_my_base's picture

"causes unintended collateral damage in recipient countries, prompting self-interested action on their part."

Oh, you thought that was unintended, did you?

knukles's picture

Would you like a curry Slurpee?

i_call_you_my_base's picture

Is that in the urban dictionary?

atomp's picture

I think it's in the Profanisaurus

johny2's picture

it is monetary trickle up effect that is the cause. and the small matter of the lack of any more earths to explore so we can expand exponentially there

CrashisOptimistic's picture


Look around.  It's 6 years since the great smash up and people are still talking about how to finally fix what's wrong.

How about . . . there is no fix?  How about considering that?

There is no fix.  Descent is inevitable and inexorable.  Do anything you want with economic or fiscal or monetary policy.  It won't help.

Only oil matters.  It's energy ratio scarce and getting more scarce -- and this is forever.

Most of you reading this will not live to full life expectancy.  How about considering that?

dontgoforit's picture

There's much truth in CrashisOptimistic statement.

Hohum's picture

QE may be a failure, but a 10 Y UST rate of 4% would collapse the economy quite quickly.  With higher interest rates, there's no more shale oil and gas boom.

We need to start looking at the whole system and figure out how to create wealth.  It won't be easy.  All QE does is create "wealth,"  the paper kind that can disintegrate in a New York minute.

combatsnoopy's picture

No stupid. The trade and investment and JOB and wage and purchasing power deficits collapsed the economy.

Americans are really THIS stupid?   HOLY FUCKING SHIT! 
You need to stick more sheets of LSD on your skin buddy.  

The budget has to balance with more VALUE.  Not currency.  But VALUE.   Which $4 trillion/day is traded on the currency exchange everyday to protect.

Just ask Mrs. Wantanbe. 

Hohum's picture


Your civility is underwhelming.  Holy shit, man!  You know what; economies run on net energy.  And that's not doing so well.

daveO's picture

Yep. It goes back to free trade. Send the jobs to China and, at the same time, drive up energy demand. This nation gave it all away. 

Chief Wonder Bread's picture


I sort of agree with you, but I think 'we' (?) need to first figure out how to stop destroying wealth. The paper kind of "wealth" that you talk of is actually anti-wealth.

MFL8240's picture

What are you people talking about, just look at the stock market.

combatsnoopy's picture

H1b Visa workers from India no longer get jobs as Financial "Engineers" illusionary contortionists in the U.S.?
That's only after the US outsourced Accounting jobs from high unemployment Silly Valley to India during stagflation.
While they were taking out counterfeit backed subprime loans to flip houses/ 

So how does Mr. Kashkari feel about this?

These people are supposed to be rocketscientists, right?  Did they just now figure this out? When they're buying oil from Iran which is supposed to have sanctions?  Is this the only time they stepped up to the plate with honesty?   Only after they imposed the Clinton kleptocratic enforced white trash caste system in the U.S.?

Don't worry India, the American boomer Medicare entitlements ensure that you have unlimited demand for pharmaceuticals which are developed in your country.

Oh btw, when are they going to take that wonderful Mumbai Exchange volume and stick it on the U.S. exchanges?

Yup yup yup--- these morons around the world somehow believe that the Average AMerican during stagflation has unlimited access to wealth.

Gees, does inflation cure stagflation?

Idiots.  OMG.

McMolotov's picture

Burn the heretic!

NotAMathWhiz's picture

When the Fed farts this guy (and every other EM) has to smell it.  Unfortunately he's downwind, and has no choice.  He can piss and moan all he wants as the US whipsaws his economy to pieces, but the Fed has basically told him to go fuck himself.

I have to think he'll get a certain amount of satisfaction, and the opportunity to say 'I informed you thustly' when our debt turd finally crushes us.

Itchy and Scratchy's picture

Raise the debt ceilin'!

Bluntly Put's picture

FV = PV * (1+i)^t

A letter of credit assumes that the present value is constant over the term of the bill. The present value is denominated in dollars when the dollar is used as the reserve currency. Dollars do not have a constant value, ever. So, our trading partners are forced to adjust the stock of their currency to keep their exports competitive. The end result are currency wars which lead to physical wars.


NotAMathWhiz's picture

That's exactly what I said, they're downwind and have to smell the fed's farts.  Yours might get a higher grade from the perfessor, but the class will like mine more.

TrustWho's picture

Arrest Bernanke and Greenspan.

Al Huxley's picture

They're going to kick him out of the club for shit like this, his stance on gold notwithstanding.  Somebody else gonna be parking the real club members' cars from now on...

Captain Willard's picture

I would take him more seriously if there weren't a massive bad debt problem in the Indian banking system. He should get his shit together and then give lectures all over the US. So far, he's been spending more time here than there.

A country with a budget deficit, trade deficit and bad banking system shouldn't lecture another country with a budget deficit, trade deficit and bad banking system.

rsnoble's picture

LOL Mr. India........we have to have a fucking recovery before we can talk about a 'stronger' recovery.

Pareto's picture

I stopped reading after I read this:  To be sure, there is a role for unconventional policies like quantitative easing (QE); when markets are broken or grossly dysfunctional, central bankers need to think innovatively. Indeed, much of what was done immediately after the collapse of US investment bank Lehman Brothers in 2008 was exactly right, because - well - whats the point right?

SidKhadak's picture
Raghuram Rajan & the NWO Agenda for India


So, on one hand we’re being advised to dump our declining Agricultural Heritage for economic growth and increasing the GDP by shifting into manufacturing; while on the other bilateral trade treaties are being signed that would flood the Indian market with cheap foreign goods. Importing cheap and highly subsidized agricultural commodities as well as manufactured goods is like importing unemployment.

What I don’t understand is what would we be manufacturing than and for whom ? Further on the agenda is from manufacturing into services sector turning the population into just obedient slaves of Globalization.

Raghuram Rajan & the NWO Agenda for India