Long time readers may remember Professor Rajan from such hits as:
Raghuram Rajan on The Boom and Bust in Farm Land Prices in the United States in the 1920s
and:
India’s Central Bank Governor Discusses Robber-Baron Capitalism and a Fine Veg Cutlet
Okay, I'm being a bit whimsical, the man is brilliant and I wish he was running the U.S. Fed rather than sitting in his comfy endowed chair at the Booth School of Business.
From Neue Zürcher Zeitung's TheMarket.ch, February 10:
Raghuram Rajan, Professor of Finance at the University of Chicago and former Governor of the Reserve Bank of India, believes the risk of persistently high inflation is significant. He warns that financial markets are underestimating the possibility of a substantial rise in interest rates.
The news is troubling: In the U.S., inflation rose further to 7.5% in January; again faster than expected and the highest level since the early 1980s. Bond market yields are rising, with interest rates on ten-year treasuries trading higher than pre-pandemic levels for the first time.
Despite these violent movements, equity markets remain surprisingly calm. The S&P 500 is barely more than 6% below its record high of early January – and that, in Raghuram Rajan’s view, is precisely the problem.
«Central banks have to switch to a different environment where they have to signal quite strongly that they mean business in going back to their old task which was containing inflation,» says the Professor of Finance at the University of Chicago and former Governor of the Reserve Bank of India. «Unfortunately, the perception that central banks are unwilling to do what it takes on the downside - not on the upside - makes this somewhat harder,» he adds.
Dr. Rajan knows what he is talking about. In the summer of 2005, he caused a stir when he warned against excesses in the banking system in front of the assembled financial elite at the economic symposium in Jackson Hole. He was sharply criticized back then, but today he is one of the most renowned economists of our time.
In an in-depth interview with The Market/NZZ, which has been lightly edited and condensed for clarity, he explains why he sees a real risk of persistently high inflation and what this could mean for financial markets. He also comments on China’s ambitious reform plans and on structural changes in the economy caused by the pandemic.
«We sort of stopped thinking about countries like Italy. But if we come out of the pandemic and interest rates are not at 1% or 2%, but at 4% or 5%, what happens to public finances? Obviously, the biggest risks are always the ones you don’t see. But this is a risk we haven’t paid attention to for a long time»:—Raghuram Rajan.
Professor Rajan, in your latest essay for Project Syndicate you argue that we’re approaching «the end of free-lunch economics». What do you mean by that?
In developed countries, we’ve grown used to central banking as effectively having an unlimited capacity to do things that seem pleasant. In other words: We can keep interest rates really low which, of course, is not pleasant for the savers, but quite pleasant for borrowers and more generally for the economy. Meaning, we can buy assets and that increases asset prices. Typically, those who own assets enjoy that, whether it’s houses or financial assets. Overall, there has been very little constraint on the leeway to do more in terms of stimulative policies because of the low level of inflation....
....MUCH MORE
Some previous visits:
- Raghuram Rajan: "When the Interests of Monopolists and Authoritarians Coalesce"
- Raghuram Rajan: "Disruption, Concentration, and the New Economy"
- "World Out Of Whack: An Absurd Unintended Consequence Of Abnormally Low Rates"
- Fannie and Freddie Must Die! Some guy in Chicago Takes on Paul Krugman's Version of the Mortgage Mess (FNM; FRE)
