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Depressing Thoughts from Raghuram Rajan

Raghuram Rajan has grabbed headlines around the world with his warning of another great depression. What, exactly, is the point he is making?

RBI Governor Raghuram Rajan has said that the world might be slipping into a Great Depression, say the headlines. To anyone who is familiar with what the Great Depression actually did to the world, that sounds like a terrifying idea. During the Great Depression, global GDP fell by 15 per cent, world trade fell to half and many countries had unemployment of 30 to 40 per cent or even higher. And while the credit for ending the depression is often given to World War II, it's also true that during his rise, Hitler may never have got the political traction he did without the depression. So the war that led to 8.5 crore deaths may also have been caused by the Great Depression.

Surely, Rajan can't be foreseeing death, disruption and suffering on this scale. What he did say was that, "I do worry that we are slowly slipping into the kind of problems that we had in the thirties in attempts to activate growth." That's a limited point, but still quite pertinent. During the 1930s, as countries tried to climb out of the depression, one of the things they did was to devalue their currency so that they would be more competitive in global trade. Of course, this led to competitive devaluation further hardship without solving anyone's problems.

Rajan was drawing a parallel between the competitive devaluation of the 1930s with the competitive monetary easing that has become the norm since the 2008-09 financial crisis. In an effort to keep growth going, the developed economies' central banks have kept interest rates very low and have poured huge amounts of money (quantitative easing) into their economies. Rajan has long complained about the side-effects on emerging economies like India. This is what Rajan was referring to when he said "The question is are we now moving into the territory in trying to produce growth out of nowhere we are in fact shifting growth from each other, rather than creating growth."

While we won't have anything like the actual Great Depression, Rajan is perhaps again destined to play the role of the prophet that he did for the 2008 crisis.