$node.PillImageNode.Description

Economist Raghuram Rajan on Monetary Policy, Trade and Communities

Published on03 MAR 2020

The article below is from our BRIEFINGS newsletter of 03 March 2020

Raghuram Rajan, former chief economist for the International Monetary Fund (IMF) and India’s former central banker, shared his views on monetary policies, the risk of global supply chains and the importance of communities in a wide-ranging conversation with Goldman Sachs’ Katie Koch, co-head of Goldman Sachs Asset Management’s (GSAM) Fundamental Equity business, at a GSAM Forum event in New York. What follows are excerpts from their conversation. 

Katie Koch: Let’s start off with the global perspective: Where do you think we are in the economic cycle and how much further you think we have to go in the US? 

Raghuram Rajan: What is interesting is that we have a global economy which continues to be chugging along at a mediocre pace—neither too hot nor too cold—which doesn’t have enough momentum to take off but is not so bad that it plunges into a recession either. And if—and this is a big if—coronavirus is contained, there’s no reason why we won’t see this continue for some time. Of course, monetary tightening is one of the factors that could disrupt this process, but central banks, including the Federal Reserve, have indicated that further tightening is off the table for now. 

Katie Koch: If the central banks are preferring to run economies “hot,” why have we seen so little inflation—despite relatively tight labor markets? 

Raghuram Rajan: If you talk to business owners today, they will tell you they can’t find people to hire even though they’re willing to pay more. One possibility—which we’ve seen in Japan—is that with an aging population, you’ll have older employees retiring and younger people moving in. So while companies may be paying the new people higher wages, the average wage bill won’t be increasing as much given that the experienced, more expensive, employees have moved on. The other comparable period where we had low inflation and tight labor markets was in the mid-1960s. At the time, we had similar conditions before inflation suddenly took off. Inflation will reassert itself at some point, but I think we have some room. 

Katie Koch: Given your experiences at the IMF and at India’s central bank, what do you make of the rising populism around the world and whether that could be a potential constraint on growth and trade?

Raghuram Rajan: If you notice where the protests are taking place, they’re in the areas where the populations haven’t benefited as much from globalization, technology improvements and trade. That’s creating internal frictions and we’re seeing the type of policy paralysis that we have in Washington today being replicated across other countries. And when you have internal policy paralysis, you don’t have strong growth. At the same time, we’re seeing renewed focus on the efficiency and risk exposures of global supply chains. So when you have a problem in China—such as coronavirus disrupting global supply chains—you’re going to see a pulling back on trade and potentially some re-shoring of manufacturing jobs. 

Katie Koch: On monetary policy, how do you feel about the credibility of central banks and their ability to get us out of the next recession?

Raghuram Rajan: A lot of monetary policy works through changing people’s expectations in the direction that you want. And in the real world, one of the hardest things to do is to change people’s expectations. My sense is that we don’t have a strong sense of how to do that. Consider Japan, which is the first country to deal seriously with the problem of an aging population. The country has been at the forefront of inventing new monetary policy tools to boost growth, but these tools have had a very modest impact. Although central banks still have some room —by restarting quantitative easing, for example—I don’t think there’s a huge amount.

Katie Koch: Let’s pivot to India. Prime Minister Modi has committed to reaching a $5 trillion GDP by 2024. If we were to extrapolate that from where we are now, that assumes India’s economic growth would have to nearly double in real terms from where we are today. How will India get there?   

Raghuram Rajan: We’re seeing a bit of a cyclical pickup in India but I doubt we’re going to get anywhere near the growth rates that are required without serious reform. And unfortunately, we’re just tinkering at the margin. The most serious problem right now is in the financial sector, which needs to be cleaned up so that it has a chance to move higher. But there was very little discussion in India’s recently released budget of what needs to be done. Budgets are an occasion where India’s government can provide its vision for the economy and to show a sense of urgency. But I didn’t really see that vision and urgency reflected in the latest release. 

Katie Koch: You’ve recently published a book called The Third Pillar which talks about the role of the market and state in modern society, and why we need to include the “third pillar” of community into that discussion. Why does community matter so much?

Raghuram Rajan: Throughout much of the 20th century, the debate was about markets versus government—some people wanted more government intervention and some people wanted less. But that discussion misses out on the tremendous role the community played in preparing people for the markets. You’re essentially born into a family that teaches you values. You go to a school where you’re surrounded by friends and neighbors. And what we increasingly see is that where you’re born and where you grow up makes a huge difference in your lifetime earnings. And I think the missing piece is that we need to fix communities at the local level. Unless you have a healthier community—with a greater sense of purpose—job activity disappears, resulting a breakdown of the social fabric. This is a pattern that is replicating itself now in predominantly white communities where the largest employer leaves town. Jobs are lost, marriages fall apart, teenage pregnancies increase and drugs and alcohol move in. The opioid epidemic is, in a sense, a reflection of this hopelessness.

More broadly, from a global perspective, you’ve seen power move from the local communities, to the national and then to the global levels. If you think about Brexit’s rallying cry it was to take back control, not just from Brussels to London, but from London to Manchester and then from Manchester to the local governments. That process will start to reassert itself. In order to preserve the globalization of trade, we should look to reverse the globalization of governance and to bring it back to communities. Because without people feeling a sense of control, they’re not going to support the globalization of trade.
 

 

 

 

 

General Disclosures

This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of February 2020 and may be subject to change, they should not be construed as investment advice.

Individual portfolio management teams for GSAM may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by GSAM and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice.  These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client.  Actual data will vary and may not be reflected here.  These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes.  These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts.  Case studies and examples are for illustrative purposes only.
United Kingdom and European Economic Area (EEA):  In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority. Switzerland: For Qualified Investor use only – Not for distribution to general public. This document is provided to you by Goldman Sachs Bank AG, Zürich. Any future contractual relationships will be entered into with affiliates of Goldman Sachs Bank AG, which are domiciled outside of Switzerland. We would like to remind you that foreign (Non-Swiss) legal and regulatory systems may not provide the same level of protection in relation to client confidentiality and data protection as offered to you by Swiss law.
Asia Pacific: Please note that neither Goldman Sachs Asset Management International nor any other entities involved in the Goldman Sachs Asset Management (GSAM) business maintain any licenses, authorizations or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore and Malaysia.  This material has been issued for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited, in or from Singapore by Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H) and in or from Malaysia by Goldman Sachs (Malaysia) Sdn Berhad (880767W).  
Australia:  This material is distributed in Australia and New Zealand by Goldman Sachs Asset Management Australia Pty Ltd ABN 41 006 099 681, AFSL 228948 (’GSAMA’) and is intended for viewing only by wholesale clients in Australia for the purposes of section 761G of the Corporations Act 2001 (Cth) and to clients who either fall within any or all of the categories of investors set out in section 3(2) or sub-section 5(2CC) of the Securities Act 1978, fall within the definition of a wholesale client for the purposes of the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA) and the Financial Advisers Act 2008 (FAA),and fall within the definition of a wholesale investor under one of clause 37, clause 38, clause 39 or clause 40 of Schedule 1 of the Financial Markets Conduct Act 2013 (FMCA) of New Zealand (collectively, a “NZ Wholesale Investor”). GSAMA is not a registered financial service provider under the FSPA. GSAMA does not have a place of business in New Zealand. In New Zealand, this document, and any access to it, is intended only for a person who has first satisfied GSAMA that the person is a NZ Wholesale Investor.  This document is intended for viewing only by the intended recipient. This document may not be reproduced or distributed to any person in whole or in part without the prior written consent of GSAMA. This information discusses general market activity, industry or sector trends, or other broad based economic, market or political conditions and should not be construed as research or investment advice.  The material provided herein is for informational purposes only. This presentation does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation.
Canada:  This presentation has been communicated in Canada by GSAM LP, which is registered as a portfolio manager under securities legislation in all provinces of Canada and as a commodity trading manager under the commodity futures legislation of Ontario and as a derivatives adviser under the derivatives legislation of Quebec. GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts in Manitoba and is not offering to provide such investment advisory or portfolio management services in Manitoba by delivery of this material.
Japan:  This material has been issued or approved in Japan for the use of professional investors defined in Article 2 paragraph (31) of the Financial Instruments and Exchange Law by Goldman Sachs Asset Management Co., Ltd. 
Confidentiality

No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

Goldman Sachs & Co. LLC, member FINRA.
© 2020 Goldman Sachs. All rights reserved.
Compliance Code: 195856-OTU-1146713
 
 

Explore More Insights