 on the growth illusion. Have central banks broken the link between financial markets and the real economy. You know something fundamental has changed when the tax man asks people to hold off paying what they owe. But that's exactly what happened in the Canton of Zug just outside Zurich recently. Why? Because the authorities are worried they might end up paying negative interest rates on the cash that they get in early. It's the topsy-turvy world of extreme monetary policy where quantitative easing and negative interest rates from central banks have broken taboos, pushed up asset prices, devalued currencies, but so far failed to drive the strong, consistent economic growth that they were looking for. Good afternoon. My name's Thorold Barker from the Wall Street Journal and I'm delighted to welcome our esteemed panel to discuss how successful these central bank policies have been so far and in the light of sharp selloffs around the world in markets today and in recent days, what is likely to happen next. First of all, Raghuram Rajan is governor of the Reserve Bank of India. Previously, as chief economist of the International Monetary Fund from 2003 to 2007, Mr. Rajan became known for his prescient warnings about the dangers posed by complicated credit instruments and warped incentives during the US housing boom. Axel Weber is chairman of Swiss Banking Giant UBS. Previously, as president of Germany's Bundesbank, he famously resigned in 2011, despite being favorite to succeed as head of the European Central Bank, in part because of his questions around quantitative easing. Mary Ados is one of the most powerful women on Wall Street, where she has worked for 25 years in various roles. She was appointed chief executive of JP Morgan Asset Management in 2009 and oversees more than $2.5 trillion of assets around the world on behalf of her clients. And last but not least, Anthony Scaramucci joined Wall Street along with Mary in 1989 and has worked at Goldman Sachs and Lehman Brothers. She's a lot younger than me. I just want to point that out, but go ahead. Thank you. He founded Skybridge, an alternative asset manager in 2005 and has $13 billion under management. He also runs the very popular SALT hedge fund conference, which, strange enough, happens in Las Vegas. So welcome to our fantastic panel. Just to kick off, Governor Rajen, Central Banks stabilized the financial system in the world economy after the crisis with their massive response. With this new term on in markets around the world, are we beginning to see the darker side of that intervention? Perhaps. I think that, first, let's remember they did a wonderful job post-crisis. We would be staring at the Great Depression or we would be in the midst of it if they hadn't done what they did. And I think people like Axel, Ben Bernanke, they pulled out all stops, they got us back on track. The real problem is that there has been no other game in town since then. And with many central banks with their foot firmly pressed on the accelerator and with a variety of new aggressive monetary policies, it's not clear that we've really benefited tremendously. And to some extent, we may have reduced room for other policies or reduce the incentive for others to take policies. The net effect of all this is we have a variety of asset prices where we really don't know whether they're at fundamental levels or not. Certainly bond prices where we've intervened a lot. But once you change long-term interest rates, you also affect equity pricing. Eventually you affect exchange rates also. So we're in a world where we're not quite sure what the fundamental value of any asset is. And I would suspect that this is part of what is going on today. That as there is some anticipation that central banks will start reducing the accommodation, asset prices are trying to find an appropriate level. And given all that's happened so far, I think some volatility was to be expected. And actually, I mean, you obviously had some concerns about quantitative easing when all this was happening at the first time round. What is your sense of that? Has that disconnect that fact that we're not quite sure what assets would be? How does that affect people's ability to trust markets to deploy capital effectively? And to what extent is it holding back proper capitalist recovery? My concern at the time was much less about expanding the balance sheet of the central bank or moving rates to zero, which is what we did. And I was all in favor of doing that. My concern was more about the specific tools to be used in a bank-based system like Europe. I felt long-term repos where you would try and finance through the banks who basically are the credit providers in Europe and they are the ones that fund most of the investment was a better and more sustainable avenue and you were the lender of last resort to the banks than being the buyer of first resort, in particular in a targeted fashion of assets that the market did not wanna pick up at current prices. And so my concern was more about the early purchases and doing that without attaching any program conditionality. It was just basically solving a problem of supply to the market where the market didn't wanna pick it up at price, so that was my concern. I've always been hesitant to subscribe to long targeted augmentations of central bank's balance sheet where you basically change the risk reward calculus in financial markets. The whole QE is aimed at basically distorting prices and incentivating investors to go into riskier assets. And at a point in time when you do that, I think it might be warranted, but the longer you keep that medication up, the more distortions you produce in more and more markets. Remember at the start for until 2000 and I would say 12, exchange rates stayed pretty stable throughout that process because the world in itself was applying similar policies. Then central bank started very targeted and massive augmentations of central bank balance sheets sometimes dubbed as competitive easing which is started to affect exchange rates. And whilst interest rate policies have also redistributive effects, they're largely there domestically where if you focus on competitive easing, you have international effects and you basically impact on trade, on international investments, and therefore you better have a consensus around doing that and that consensus was. And is that what we're seeing at the moment with some of these big flows we saw, I think today that in emerging markets last year, there was 700 and I think it was 35 billion that flowed out of emerging markets last year. Is that what we're seeing here? Is competitive devaluation shifting assets around the world in destabilizing ways? Look, investment was easy in the world of QE because the countries that massively expanded their balance sheet were the ones that basically caused fixed income to not yield any reasonable return and therefore people move and rotate it into equity. When countries did that for a long period of time, then basically the market more and more fostered a strong equity market. The US had a three years bull market in equities. Now, when the Fed hinted at tightening policy and first of all stopped, slowed down the purchases, so the tapering and then started talking about raising rates for the first time, other countries like Europe and Japan were massively adding more stimulus and that's where policy started to divert. And I think the issue is the current policy divergence which I think is striving some of this international volatility. My view is this cannot last for long because we've never seen a decoupling. The only way this could last was for the US to completely uncouple from the rest of the world. We're more coupled than we ever were. Both for good markets, the US moved from 8% to almost 15% openness. They're much more linked to the rest of the world through the dollar. So if the US were to stay course, the dollar would continue to rise and I think that would recouple the economies and so at some point you're gonna see the impact of current policies are starting to mitigate. And in the end, the question is what we'll give. The market seems to not put a lot of credibility in the Fed's announcement that they'll continue to raise rates and seems to think that the Fed eventually will abandon that course. Mary, what do you think as somebody who oversees this large amount of money on behalf of clients, how do you see that playing out? Will the Fed be able to continue to decouple? Well, there's, you know, what Axel said, it's just really, there's a really important point embedded in there, which is all the central banks in the world broadcast that they wanted to raise asset prices in order to have wealth effect so that people would spend more money. And that worked and it worked very successfully and they did their job mission accomplished. Somewhere in about 2012, when things started to change, there was a law of diminishing returns on the psychological effect of that happening. And so the transfer mechanism of asset prices going up and you wanting to save less and spend more stopped. Why? We had the 10-year US Treasury hit 150. And the world said, what is that telling me? What is that telling me more that I don't understand the markets generally know more than what's actually happening? And so there you lost that connection and yet asset prices were already forecasting and continued spending. So now you're in a position where you're unwinding some of that or giving time for spending and asset values to catch up. So you've had a lot of money go into a lot of the same places. A lot of crowded trades, the IMF tracks where like-to-like transactions are going and you've seen people who were in cash went to bonds. People who were in bonds went to high yield. People who were in high yield added a little more emerging markets. People who were in developed markets equities wanted emerging markets equities. People who wanted public equities started adding pre-IPO positions into their portfolio. It happened everywhere and almost every asset class. And that's okay if you're aware of what's happening and you understand the process by which that may find pieces of times of illiquidity. And that's what you're finding. And so you've got everyone in those crowded trades and if they want to all come out at the same time, that's what we've got. Add to that a lack of liquidity that used to be provided by the investment banks. And you've got a mixture of things that are just trying to find their prices and that's been the first two and a half weeks of this year. But that sounds like a recipe for a slightly bigger correction than we've seen so far if there's that many areas where people really have pushed the boundaries. Well, all of those areas have pushed the boundaries, but don't forget how much excess cash there is in the world. There is cash in almost every pocket of the world that is waiting for the confidence to be able to go back into the marketplace. So you ask about the Fed, there's a lot to what the Fed is doing and it's trying to telecast that it is not trying to tighten, it is trying to normalize. And it just needs to get back to a position of normalization. And to the extent it can normalize, it can send a signal of confidence to the world. Because if you look at the U.S. consumer, J.B. Morgan Chase banks about half the households in the United States of America. And you look at their debt levels, there's still about 18% below where they were at their highs in 2007. You look at their debt servicing levels, their all-time lows back 35 years at only 10% of their disposable income. You look at consumer confidence at the 93.5 level that it just came in and it's much higher than the 85 average that you've seen. You look at mortgages and you look at new home spending and that hasn't even gotten back to the levels that it is. And you look at overall household wealth. Household wealth in the United States of America is 59% higher than it was post the crisis and 29% higher than it was pre the crisis. So there's a lot there that can be put to work when there's confidence back in the system. So Anthony, on that, do you think that the economy can grow into asset prices or do you think asset prices can, can you have to adjust down to meet the economy? I just want to touch more on what Mary's saying. I actually think the Fed gets an A plus on asset restoration, asset reflation, but they have an incomplete on the consumer side of the economy because most of the middle class and the lower middle class do not hold assets. And so those assets did not go up in value. And Mary will probably second me on this. At the low, 27 million American homes were underwater, meaning that their mortgages were above where the price of the asset was actually trading. So they couldn't refinance. They couldn't experience the effect of those lower interest rates and put more cash flow in their pocket. And so that's one of the main reasons why the United States is not growing as fast as it could be. Now that number, 27 million, is down to about 14 million. And so I think we're gonna be okay because of what Mary is saying, that there is pent up consumption about to get unleashed on America and perhaps the rest of the world. There's also pent up capital investments. You mentioned 2.4 trillion that JP Morgan is running in terms of his assets, but there's about 2.4 trillion dollars of cash on the balance sheet of the S&P 500. If we get the right policies, and this is a big problem for the world, we've been overly reliant on monetary policy, but we've had no tax reform in the United States, no real meaningful regulatory reform, no massive incentive from the government and our policymakers to unleash the capital investments that we need to create the multiplier effect. But that's gonna happen. I just believe that over the next 12 to 36 months. And so we'll get out of whatever this downturn is right now. So I'm sort of fascinated that everybody sort of acknowledges the assets and mispriced, or at least there's a lot of dislocation, but no one seems particularly concerned about that. I think what Mary said and I wanna add to that one aspect is we were concerned last year that there is such a consensus trade in the market that everyone was going into the same asset classes at the same time. Unwinding a consensus trade has much bigger pricing impact than unwinding diverse investment strategies. What is reassuring for me, and I think that's why I have a much more positive outlook than some of the sentiment around the meetings here, is there is no new consensus trade. People actually differ on whether the Fed will continue to see through what they said they would do or whether they would go away from that. People actually do not believe that central banks or fiscal authorities have a lot of room to maneuver left. So it will be up to other policies, structural policies and fixing our economies that after these eight years of holding out will have to pick in. And that will basically be mastered by different countries with a different degree of success. The world is normalizing. And we used to be in an upside down world where gross was led by emerging markets that had great inflows of capital. And some of them use that capital well, India's one example, others like Brazil found it hard to make good use of these capital inflows. And now that we're seeing the capital flows reversals because the US is normalizing as well, we're seeing the US back at the lead table in the front. Gross is driven out of industrial countries. The forced industrial revolution will largely benefit developed countries because it's tech driven. It's driven by connectivity. It requires big infrastructures to exist to be utilized. And emerging markets will benefit less from that. Again, that used to be the case with the first, second, and third industrial revolution. It's the case also with the force. Can I just, turning to emerging markets, that's a fairly positive view on Europe and the US. What we've seen in some developing markets has been pretty tough. Brazil has had a very, very tough time. China is clearly slowing down. Other emerging markets have seen a lot of outflows, big currency depreciations, big asset corrections. But what's your sense running the central bank of one of the big emerging markets of how much pain will be felt in those emerging markets and how much will spread back into the development world? Well, certainly there's been a lot of flows into the emerging markets. And as Axel said, we've used them to different extents properly, and some of it is flowing out. I think we need to focus on the fundamentals. Really, we're in a world of make-believe. And your question of whether asset prices move to fundamentals or fundamentals move to asset prices. Well, what really are the fundamentals? What's interesting in the world that is likely to pick up over time? And clearly the tech revolution is important. Where is it showing up? Not yet. We don't see it in the productivity numbers. Why is it not showing up? A variety of reasons. Perhaps it takes time for it to show up in business practice, and we're on the verge. That's the new age that we're looking forward to. Perhaps we haven't monetized it yet. We don't see movies anymore in the theater. We see it on our computer. But we don't pay as much for seeing it on the computer. So it's a question of monetizing it. And perhaps we're not measuring it. It's really high quality stuff that we get today in terms of service. But it's counted as the same old service. Today we can pick a hotel in a remote place because of the reviews that we see on it. We couldn't do it in the past. But we don't adjust for the fact that now the hotel we can pick is a better hotel and quality adjusted. We have a better life. So there are all these things happening. I would disagree a little bit with Axel on whether this applies to emerging markets also. The tremendous changes happening in emerging markets. Take India itself. In third tier towns, small towns, today you can buy from the net and you can get delivery through new logistics systems that are emerging. These are massive online marketplaces which allow some housewife or a stay at home husband in a small village or a town to be able to buy anything. And with the price of real estate in India, this is a massive development because you don't have to have the physical location where houses are fine and you can get pretty much everything that way. But it also helps the merchant. The small carpet maker in Srinagar can now set up a website and across the world he can sell his carpets. He eliminates the middleman who used to take a lot and prevent the kind of investment that used to take place. So lots of changes happening. I think a lot for the good and technology will really be the emerging market solution to some of the old problems they had including logistics, including corruption. So you think this is more of a markets problem than a real economy problem? I think it's a markets problem. Of course, markets problems can infect the real economy if they persist for a long time. But I think we have to continue focusing on how we get the real economy up and matching the expectations from the asset price increases. So, Mary, can you just talk to this quickly? So China has been dominating markets recently. You know, when China sells off or has a low growth number or whatever, markets across the world have now reacted quite significantly to those situations. Just quickly, what is your take on the Chinese situation? We sadly lost our China expert who wasn't able to make it here today. But what is our collective view on China and what impact that's gonna have? But the focus and for those of us who have been here at the WEF for the last 24 hours, the comments are all about China and oil and what's gonna happen and will that affect the world? And the answer is that those two things alone are not gonna cause some kind of global disruption, recession unless something that is really a left-tail event happens. And I don't think that anyone foresees that and I don't think that the policy makers in China are gonna let that happen. They're working very hard to do that. There's a lot of them here who are explaining a lot of the moves and the things that are happening. They, you know, sort of the ball got fumbled as we came out of the gates in the beginning of the year, but there's so much there and you talk to the people from the region who are here and their excitement about what's happening in the world, their excitement about the capital markets developments within their country and their excitement about, you know, population growth there. We can't forget the dynamics that are gonna happen that are gonna be different than the last 30 years of the one child policy. All of those lead to different dynamics. There was a rumor out there this morning that oil was gonna trade at a negative level, I guess, like interest rates. I mean, just, there's a lot of exaggerated points out there and you have to bring it back to reality, which is you've got a lot of good fundamentals. You've got a lot of cash on the sideline and you have a lot of people who want to invest. Talk about emerging markets. If you look at the major sovereign wealth funds, central banks and really wealthy people in the world, they're continuing to invest to invest in India. They're continuing to invest in China. They wanna look at Japan, that's very interesting to them. They're taking a much more focused look at Mexico and things like the United States and Europe when you have wholesale selling, you've got very, very good indiscriminately sold companies that are now at values that they shouldn't be because they had to be sold for liquidity purposes. So purposeful stock selecting and a lot of long short investing, a lot of what Anthony does, a lot of what our hedge fund investors do, that's where people are saying now is the time where they're gonna be able to make much greater returns for the clients because you get these stretched out valuations and resets. Anthony, some of your colleagues on Wall Street and hedge funds have been charting the rise of ghost cities in China for many years now. To what extent do you think that this, where we started, which is that assets aren't necessarily reflecting fundamentals? I mean, has that created significant malinvestment around the world? And do you think that's gonna cause a big problem? China's probably the one that people focus on most. Well, I mean, look, there's a cabal in the community that's negative on China and they cite the ghost cities and things like that. But I think the mainstream view that Mary is sharing is gonna be the correct view that China, like every other economy will go through some level of sick locality and their policymakers will do prudent things to make that economy have a softer landing or perhaps slower than the growth that they were traditionally getting over the last 10 or 15 years. So I'm pretty optimistic on China in general. I don't see China falling off the cliff in those super negative scenarios that you hear in the hedge fund community but there's something interesting going on in the world right now and you're watching it over the last two weeks. As the Federal Reserve starts to normalize its interest rate policy, you're gonna see price discovery enter the markets and markets are gonna start to mean revert back to where their natural price earnings ratios are, where natural return on assets are, what is expected in terms of return on your invested capital in China in places like India. What Mary discussed earlier, I think it's true, there was an artificiality to what was going on as people pushed themselves further and further out on the risk curve. And so for us at Skybridge, we wrote consistently, stay away from long short managers, stay away from macro managers during this period of quantitative easing because it's impossible for these guys to do their jobs appropriately. And now we're entering an age of more normalization where my prediction is long short managers and macro managers will do way better over the next 10 years than they did in the prior 10 years. But to think that the world is falling off a cliff, when you see the cash levels that are out there, where you see the reserves that China has and where you see the tolls that we have on the fiscal side, not one of us on the panel has mentioned the fiscal side. There was a gigantic opportunity for the American government to borrow a 50 year bond, $10 trillion, it would have cost them $100 billion a year and they could have rebuilt the entire infrastructure of the United States. Now they couldn't do that because that deficit, so to speak, ends up on our balance sheet. It confuses people and makes them think that we're spending recklessly. But we had the opportunity to do that. There will be another opportunity over the next two or three years to reform taxes, get better, more proficient regulatory reform. Maybe we can start doing capital expenditures and deducting it in the first year, which will accelerate the opportunity for growth. And so that's all in front of us if policymakers and corporate CEOs handle it. So we'll get to that in one second, but just on China quickly, is there a, I mean, people are very nervous about the financial market spillovers, less demand from China if you're an exporter, this sort of thing. I mean, is there a bull case out of China that we have seen this dramatic sell-off in commodities, oil specifically, I think it's down about 70% since 2014, people are, currently that's a bit of a negative, it's causing problems in the high yield market in the US, in equity prices. Why haven't we seen a bigger positive impact for particularly Europe where the cost of energy has plummeted? It's not just Europe, it's China as well. China is a major beneficiary of that as well. So I think what you're seeing at the moment is in addition to the spillovers we had to the emerging markets, we're seeing the spillbacks now to the industrial world. And we're very positive on China. Medium to long-term, I think the adjustment that is happening at the moment, it is a hard adjustment, but ultimately it'll move things in the right direction. China was living of basically adding low-skill labor to the global production, and basically as you have the forced industrial revolution, the return on low-skill labor, artificial intelligence, extreme optimization, this will become less. So in that sense, Raghu, I think there is a risk for emerging markets whose global proposition is low-skill labor is actually, is already affecting the mid-skill labor. High-skill labor will benefit hugely from that. And countries like India, who have good education system, who have a quality and quantity of demographics will benefit because you have skilled labor in abundance to people. And China is on the same track. People look at the industrial production numbers and say China is doing bad. Look at services. Services in China grew at 8.5% in the third quarter. China is moving from being an industrial-based economy that produces mass-consumer products for the rest of the world to basically increasing service sectors and the domestic market. That is a much more sustainable and balanced business model, and I think it will be one that is actually for the benefit. Second, China had an investment rate that was close to 50% of GDP. No country can profitably invest domestically such huge amounts for a foreseeable future. So the rebalancing and the opening up and allowing Chinese citizens to invest abroad will be a big part where they add income. Plus, they're a huge consumer of energy and of commodity. So the current correction is actually benefiting mass income there. And that's why I think the seeds for a recovery, in addition to the need for a better and more direct policy response, and they've got ample room left over to respond, will, in my view, improve things as we go through this year. So I'm not at all concerned, and actually, we just don't say it. We just announced that we will double the jobs that we have in mainland China over the next five years because we think China is a business case and being in the business we're in, it's absolutely necessary to be in markets like China. Just a slightly different question on China. There seems to be a general sense that there'll be more of a policy response in China to sort out some of the things going on right now. As Axel said earlier, is it possible that you're gonna see Japan remaining very aggressive, China becoming more aggressive, Europe probably more aggressive, and the US is the only country out there that is really starting to normalize raise interest rates, the impact that has on the dollar continuing to strengthen. I mean, is that conceivable that that will continue, or will the Fed have to put the brakes on, do you think? First, I think that Chinese have said again and again that their intent is not to create a massive depreciation in the renminbi, and I think we should take those statements at their value because clearly they worry about their place in the world and the spillover effects to other countries, which could be pretty significant if in fact China embarks on this path because they have sufficient capacity to actually go some way on this. We have been in the world in a process of adjusting models. The pre-financial crisis model which involved a lot of debt fuel growth didn't work, came to an end. I think China for some time continued along its path while shifting models, but trying to keep the old way of growth going, and in that process has built up a substantial amount of debt. So one of the big concerns about China, of course, which the Chinese authorities have, is how they deal with that debt. But I think the good news across the world is that we realize that monetary policy is not gonna fix the problems that the change in the models have to happen. Across Europe, you're seeing structural reforms, you're seeing China move towards this consumption-led path. Certainly in my country, we are moving towards a more structure where the government is not so much about directing, but about enabling, about creating the underlying frameworks for growth. And that I think will sustain us long-term and create growth over 10, 15, 20 years rather than over the next few quarters. So my sense is countries are realizing that stimulus doesn't cut it as much anymore. Certainly monetary stimulus has largely run its course and we have to move to creating the sustainable basis for long-term. So on that basis, the central banks are beginning to realize that those structural reforms, those investments by governments, are a key part to getting back to productivity-led growth. Do you think, and just quickly from all of you, I just want to, just a clear answer, do you think the Fed will be willing to look through market turmoil this time round and continue, I think they're expecting for interest rate rises this year on their own models? And do you think they can actually push that through quick answer? See, I can't comment on the Fed. I'll leave that to you. Okay, fair enough. I expect U.S. gross to continue to strengthen and as that happens, the Fed will continue its monetary policy. The Fed will not raise rates if gross slumps, but that's not my outlook. But if markets continue to have volatility and growth is okay, they will continue to raise. Markets are markets, they're nervous. So they all see through that, in your view? The Fed is not concerned outside these tail events about volatility in the market. If you look at the VIX, the one thing that has gone up is volatility in the market. But we're at a turning point globally of monetary policy and volatility usually comes at these turning points. So I don't think the Fed will be concerned by volatility per se. They will be concerned if tail risks materialize and those tail risks impact. So from where you said at the moment, still on track for four raises this year? Absolutely, we still, that's our outlook. Mary? Axel is absolutely right. First of all, the Fed is on record and consistent that they will make decisions based on data dependency. The data dependency is not market volatility dependent, but they need to factor in market volatility if it is going to lead to anticipated data that's gonna end up being weaker than they expected. So that's where they have to factor it in. They're not sitting there worrying about where the stock market's gonna be at any one given point in time. I'm sure, but to your point earlier, if they were focused on the wealth effect creating growth the first time around, surely asset falls have a drag effect on growth by their own logic? That is for sure. But the question that they are asking themselves and it's the right question to ask is, are these policy moves going to instill confidence in the rest of the world that the US is on solid footing with all the statistics I gave you on the US consumer? It is, and that's the most important thing. It is not to tighten monetary policy, it is to normalize monetary policy. And by the way, could you just give your sense also of what that means for the dollar if you agree with these two? Yeah, sorry, the dollar is already strengthened or probably stay where it is, but I don't think it's gonna go much higher, but on the Fed I'm probably slightly different than the others where I think they'll probably do three raises instead of four will be at probably 75 basis points by this time next year. But I think what the Fed is thinking about, and I really believe this having met with some of the officials there, is that they have to create some room because over the modern era, our economy, the United States needs about 300 basis points of stimulus to keep on track, to keep itself out of steep recessions. And so the Fed is looking at that right now and saying, okay, we've gotta get the overnight rates back up to like 150, 175, so that when we do eventually have a downturn, there's some bullets in the chamber that we can use. And so I know they're focused on that as well. I think they're less market focused, and as long as you get jobs over 200,000, if those jobs keep printing at 200,000 plus per month, the Fed will more or less stay on track. I might just add that you're looking, we're all looking at it from a zero basis and saying how many moves is gonna take us. It's important to remember, if you look at all the past Fed tightnings, on average each year has about 250 basis points of tightening. So we're talking about anywhere from a quarter to a half of that this year. Okay, before we throw up into questions, I'd just like to ask one more thing of the panel, which is we've got used to some of the policies that have happened in recent years. In Europe, as I started with, we are at negative interest rates. That's having some strange impacts on the economy, whether it's housing markets in Scandinavia, whether it's effect on the banking system, long-term saving, things. Axel, how long can you take these emergency measures and then make them normality without causing real dislocations? Well, so Europe is not yet at a stage where the central banks are likely to take these measures off, because European gross is coming in stronger. We expect US gross at 2.8, European gross maybe on average at 1.8, which is not bad, but they're clearly not in the same labor market situation that the US is in. So I think we're gonna see more of these policies. I don't have a scenario where they, in my main outlook, will add to the current policy measures. I think they'll keep in place monetary policy for as long as they said. And unless the economy performs less favorably, they're not gonna add further stimulus. They're just gonna see that through. And then they're gonna slightly take it off in a careful way. Even the Fed and Mary said that the Fed is being very muted and very considerate in the way they're taking interest rates up, data dependent. And so I don't expect negative surprises from the Fed. But the real issue is whether sort of Europe and Japan will continue as aggressively as they have in the past. And I think if the objective was to reflate economies back to 2% inflation rate, that objective will not be met in the current environment over the next two years. And so I think the central banks will be less monolithically focused purely on the inflation target, but they'll look at the broader picture of the economy, which is picking up speed, but it's very hard to reflate economies in the current commodity and downturn. And they'll look through these short-term volatilities and have a more medium term. But what I'm trying to get at is what are the dangers? I mean, I think it's minus 0.75 in Switzerland right now and minus 0.3 in the Eurozone. What is the danger of having these negative rates in place for extended periods of time? Be it for the financial system, be it for the way people behave in terms of saving other things? It's just an extreme form of the same different incentives we saw at low or zero rates because it basically incentivizes debt. We are not in a situation where I think increasing debt will bring us out of the current conundrum. So I think the incentives we're seeing are the wrong incentives. And you can do that for a short period, but I don't think you should let it last too long. And therefore, and we've heard some news from the Swiss National Bank and others that there will be a point at which they'll take these very negative interest rates off and move more to neutral or closer. Lager, what's your... The problem is monetary policy gets into all the cracks, as Jeremy Stein said. And the risks do build up with a sustained, aggressive monetary policy stance. And we don't always see where they build up. I mean, we realize that high-yield bonds in the U.S. had more risk. And it suddenly came and hit us through oil prices. But I have no doubt that there are asset prices that are getting way away from fundamentals the longer these policies last. So unfortunately, of course, central banks have a mandate which they have to respect. So I agree with Axel that there's not much room to change, but as this goes on longer, I think the distortions build up. Yes, wealth effects are good, but you have to figure out what happens at the end of the wealth effects. Do you get a reverse wealth effect when asset prices are just? So that's something that people have to take into account. And of course, if that is accompanied by increasing leverage, then we get circumstances which are quite unpleasant. And they also have a financial stability mandate, increasingly. And I think the issue that you raised about incentivating risk-taking and therefore for a very long period of time, this could end up in excessively priced markets, there is a financial stability concern that eventually will have to become part of the picture. And I think that will be an argument when central banks are trying to more holistically focus on the sum of these effects across markets. And just, Mary, just to finish with you before we go to questions. But I mean, this issue about risk-taking in the US, we saw record buybacks over the last few years as companies borrowed money very cheaply and bought back their stock. So to what extent was that creating a problem of just misallocation of that spending? We weren't seeing capital investment, we weren't seeing this belief in long-term spending for a long-term return building factories or other things. It was much more around how do we financially engineer? Is that a problem that could be sort of unwind nastily or is it something where you think, actually, you'll start to see with more confidence that longer-term investment coming through? It doesn't necessarily mean that they made mistakes in what they were doing, the CEOs across... I'm not suggesting they were mistakes. There was a reason why they were doing it, obviously. That was their best and highest use of cash, is what they thought that they were doing. And so a lot of people are talking about all that financial engineering as opposed to real engineering. When can we get back to real engineering? And real engineering will happen when we have confidence in what's happening going forward. And we have to remember that this is the first time we've had real yields be this low since 1830 in the United States, aside from wartime. And in wartime, we knew that you forced those yields down in order to finance the war and it would quickly revert back. The problem here is you don't know how fast it will revert back and that's the crisis of confidence that's eating into what to do from a balance sheet perspective. Brilliant. Let me throw it open to questions. Please, if you have a question you want to ask, do make it into a question with a question mark at the end, not a statement or your view of the world. Are there any questions we have? In the middle there. Can we get a microphone to the middle please? Thank you. If someone has one here, we'll come back to you in a second, please. Do you think financing war with war bonds will be more beneficial than printing? So can you say that again, Surya? Do you think financing a war, a next war with war bonds as a soul to people will be more beneficial than printing money? Financing war? Financing a war with war bonds will be more beneficial than printing money. Well, I think a war... Thank you for taking that one. A war does create the opportunity for growth, but it certainly destroys your level of GDP. So, I mean, I think most people would take a high level of GDP over the opportunity to grow for a long time from near zero levels. I don't think war is the answer. But, you know, you're indirectly raising a very serious point that we worry about in our risk calculation. This is the rising tide of nationalism. And you can look historically, I don't remember 1830, but if you could look historically, from 1815 to 1915 we had relative peace in Europe. There was few skirmishes, but it was because there was living memory of that war, the Napoleonic era. We got to 1914, we ended up in World War I, and then we had a very bad peace treaty until we ended up in World War II. We are now 71 years away from the last global conflict, and as the living memory of these wars die out, including not only the veterans, but the people that have actually experienced these wars, you are seeing a systemic rise in nationalism in Europe. People are trying to secede, break away from their countries. The UK is going to have a big issue with the EU coming up. You've got tension in Japan and China, and so one of the things that forms like this should do for the world is remind people about the real horror of war and have us try to figure out our problems in a more unified way. I don't think there was anybody living here in Europe in 1950 or 1955 that wanted to go back to war because they remember the horror of that situation. They were in a period of unification back then, but as we forget, we start to disunify, and so we've got to be super careful. The interest is to ask Axel this in Europe, which is the central bank has had to be very aggressive, and we were talking earlier about politicians coming through and making decisions that actually drive the economy forward in terms of structural reform, other things. When you look at the political situation in Europe, the pressures on the EU, the risk of Britain leaving the EU, the migration crisis in Europe, rise of populism, I mean, do you see that being a big threat to that change and something that might actually force the central bank to be more aggressive for longer? I think the central banks are focusing very much on their own remit, and they've built bridges for policymakers to step up their efforts to stabilize economies, and I think ultimately, as Ragu said, we're seeing in some of the peripheral countries that effort is gaining traction, and there are leaders and there are elections around doing reforms as a agenda for the next electoral cycle. So we're seeing some more reforms in the periphery, and that's good for everyone. The issue that really raised here was, we have a number of geopolitical risks on the doorstep of Europe, and those geopolitical risks are producing spillover effects into Europe. The refugee situation is one of them, and Europe has not had a united position on that, and I think the response of Europe to the situation so far has been one where the framework that policymakers usually use, for example, the Dublin Agreement, has been waived because of some concerns about the agreement at the time and people have moved into Europe. Now, we also have a Schengen Agreement which leads to free migration once you're in the EU, and at the moment, all of these things get mixed, and I think what Europe needs to do is rather than improvise, they need to use and develop the framework they have. It's absolutely clear to me that when Germany waived its right on the Dublin Agreement, which basically meant refugees should be dealt with in the country where they enter the EU, and Germany waived that right and allowed refugees to come to Germany. That did what, this was an upfront deliverable against the expectation that there would be a European agreement on how these refugees would be distributed and taken care of within the EU. Now, as a policymaker, you could always say never waive a right until you have the replacement treaty in place, and that is some of the debate we're seeing in Germany now, but I think ultimately it will get fixed because not fixing the issue will lead to a reinforcement of the Dublin Agreement, and that will mean we'll see border controls, we'll see more internal tidying up, and that's not the way forward for a liberal society like Europe. Just to be clear, you don't see some of the political challenges of Europe that I've described around the EU, whether it's Britain's relationship, other things actually having a chilling effect on the ability of governments to follow through and make the decisions that they need to make for the economy. Never waive the good crisis. The current crisis in Europe about migration, immigration, and refugees will focus politicians' mind to solving the underlying issues of Europe that have been largely unresolved for the last 10 years. Europe either needs to integrate further for those that have the Euro, and in my view become more optional for those that don't want the Euro as the single currency, unless we have this bifurcation of interests in Europe, I think Europe will continue to face challenges, and it's not a centrist construction from the start, so allowing for some flexibility in the European endeavor, in my view will be key, and negotiating further, otherwise there is a risk that the current degree of integration that Europe has achieved will set back to some degree and revert. And I think that's a very bad outcome. So I think European policy makers need to get to the table and really have a clear view on how they develop Europe forward in an institutional framework, including these treaties, like Schengen, Dublin, and others, and including how to deal with the British, who don't want the Euro and therefore have a different view of what their European endeavor will be. And I'm seeing that starting now, but like always, and you could make the point for China, they're late to the game and they're actually slow in acting, but I think the crisis will fall to the hands. No, you want to say something? Yeah, I just wanted to add, we shouldn't forget how much we should applaud the leaders and the policy makers in Europe and what they've accomplished. You look at the work that the World Economic Forum has done on the commonality of the countries within the European Union. They are as different, Germany is as different to Greece and Italy as the United States is to Mexico. And yet they've been able to pull off what they've done. So if you look at the hundred factors that the World Economic Forum looks at, it is so difficult to pull these nations together and act with some form of commonality and they've been able to do it, albeit lots and lots of challenges and they've got a lot ahead of them, but I think current crises, as Axel says, will be able to help them to continue to forge forward. Brilliant. Sorry, a question in the middle. Yeah, it's related to that. You are talking about the monetary policy and QE in Japan, the Euro, but I think the most important thing is the combination of the QE and the structural reform on each country. Each country, the structural reform contents would be different. Like Japan's agriculture issue, the medical issue and the best interest issue we have to solve. In Europe, country by country, of course Germany and Greece and France and the structural reform contents are different. Without talking about the structural reform, we couldn't attain their 2% growth only by the monetary policy. Okay, so what's the question that you... Yeah, I'd like to ask you, Mr. Weber. Well, we talked about this last time I visited you in Japan and, you know, I think the big advantage of Abenomics was that for one of the first times in a policy discussion framework, he actually posed all three policies together with the three arrows. So it was very clear fiscal and monetary are part of the package, but they cannot do it alone. The third arrow, structural reforms, was as important. I would say it didn't deserve the number three. It should have been the first arrow because once you actually fire structural reforms, and we've seen that in Germany with strutters reform, it's a slow-flying arrow. Monetary and fiscal are much quicker, but unless you start on the road of really implementing structural changes, which take long, which have a very negative upfront effect in the sense that initially, you don't see the benefits of them. They only materialize long-term, but it's just the right thing to do. And I think in Europe, the central bank and fiscal expansion has made it too easy for policy makers not to embark on the structural early on. Now, in the current situation, it's all about getting structural policies, right? Because, as we said before, monetary and fiscal have run their course and have very little to add, given the degree of expansion that they by now have assumed. Great. Any other questions? Here at the back. I'll come to you next. Paul Sheard from McGraw Hill Financial. Maybe a question for Axel and Raghuram. It seems to be the case that the natural rate of interest is in negative territory. If that is a result, not so much because of the legacy issues and the financial crisis and the Great Recession, but it turns out it's much more related to the fourth industrial revolution issues that are the focus of this Davos conference. What sort of implications do you think that has for policy frameworks and particularly for central banks with inflation targeting frameworks? Do they all have to be re-looked and maybe a new framework put in place? Well, it's a very important question. First, there is a real question. What does it mean when the natural rate of interest is negative? It's basically saying that in order to reach some sort of equilibrium, real interest rates have to be far lower than what typically is feasible. Now, there could be a number of reasons for that. One reason for a very low negative natural rate is if investment's not picking up. But there are a variety of reasons why investment doesn't pick up. Demand is one of them. Low productivity growth is one of them. And the net effect of all this could be that it looks as if the only way you can get equilibrium is by pushing interest rates really down. But it may also mean there are a whole set of structural reforms that Axel has been talking about which would elevate rates of return on investment and would actually push the natural rate a little higher than what it looks like now. So we don't really know which world we are in. We just know that things aren't working even though interest rates are so low. The real question is, should we focus on pushing them even lower or should we try and do the other things that make investment and consumption more attractive, fixing social security, raising the productivity of investment and so on? As far as the fourth industrial revolution and what it does, it's unclear right now what it does to rates of return. I mean, the first natural view would be that it increases rates of return by increasing productivity. It increases the rate of return associated with capital, we should be seeing more investment. But we're not seeing it. Why aren't we seeing more investment? Is it because we need to invest not in physical assets but in processes and in human capital? Is that where the money is going? I think there's a lot of uncertainty about how the fourth industrial revolution is playing out and where exactly it's affecting us. And I think this is worth thinking about. I don't think the natural reaction is to push interest rates further down. Great. So the question of the man and the scarf here. So could you actually use the microphone please? The question is about emerging markets. Given that a lot of the flows into emerging markets were largely due to the liquidity surge and the quantitative easing done by various central banks and now you're having a kind of a reversal. The flows are going back. What is it that is really gonna make the flows come back, come back stronger? And are we likely to see a return to the same level of flows or is it gonna be much lower? And we're gonna possibly prepare ourselves for a more lower stable rate of flows. So you're saying what will push flows back towards emerging markets? Back into emerging markets. Flows back into emerging markets. Well, I mean, I can speak from a capital allocation perspective. I think the world has to grow. And so we're in this sort of sclerosis environment right now but I think we're about to embark upon better than expected growth as we go through the medical technology revolution, the robotic technology revolution and other types of things like this. As the Western nations grow, the emerging markets will probably grow a lot faster than the Western nations. And so you'll see capital actually getting allocated into the emerging markets for really good reasons, for fundamental reasons, as opposed to just quantitative easing forcing out the risk spectrum. So I think it's gonna be a matter of growth at this point. I just, yeah, no, I would just add one of the largest institutional investors in the United States does a poll of at the very beginning of the year as to the thoughts on the best five investment ideas and the, for the one year and for the three year. And the best one year idea is to short emerging markets equities. And the best three year idea is to go long emerging markets equities. Raghi, you just, well, I was just gonna say one of the problems with capital flows is their high volatility. The one year versus the three year being an example. And the real problem, a number of emerging markets have is they don't have the systems to handle that volatility. You can't take in a huge inflow and then see it go out without it creating disruptions internally. Now, for us to handle that, the best thing we can do is have good policies. That's the first line of defense. Improve your policy framework, let people understand what they can expect. That's the first line. The second line is try and encourage more risk capital. We need risk capital. We don't need riskless capital sitting on one day money, wanting to get out the next day because it's a good return that they're getting. I mean, we can, we don't have the systems to tolerate that kind of volatility. What we would like is longer term money coming in and providing a lot of finance, a lot of equity flows have come into India which are doing a good thing. They're providing risk capital to all our businesses. That's what we really need in the longer term. The last line of defense is reserves. We, when the flow comes in, don't get deluded that they're coming in because you're great. They're coming into a whole lot of other emerging markets. At that time, build your defenses. So when they turn and say none of you look good, you can at least withstand the first outflow. After that, people think, after the first initial volatile reaction, people take stock. Where would I like to be? Can I differentiate amongst the emerging markets? You want to be prepared to let the first flow go out so that you're ready for the second when they start rethinking. And all the defense is strong enough? Certainly our defense I think is pretty good. But I never say never, we're vigilant. We're aware that things can get nasty very quickly. But I think some of the old distinctions aren't really true anymore with the forced industrial revolution. We used to talk about the industrial countries and emerging markets. And this is where before Raghu and I agreed on one argument, even so, when you use the emerging versus industrial country framework, you tend to disagree because who will benefit from the forced industrial revolution? It will be skilled labor. It will be those that will make good use of automation, extreme automation, connectivity. They're no longer solely placed in industrial countries. They are placed in industrial countries and Silicon Valley is just a paradigm for that. But it increasingly happens in other countries as well. So my view is, yes, the industrial revolution, the force might have the potential for depressing interest rates for longer. This is what Paul asked about because the dividend of this industrial revolution will accrue to those that are high skilled and invest in these industries. And they usually are already quite wealthy and have high saving rates. And we're going to continue to see high savings in that part of the population. But I think the distinction is no longer industrial countries versus the emerging, it's more high skilled jobs and connectivity and infrastructure and low skilled jobs where the major divide would be. So I think we would see an emergence and a continuation of basically diversity and between the rich and the poor and our economies will be much less homogeneous than they have been in the past. And that's an issue for politics to really take up and to kind of put in place educational incentives to really have flexible economies where you can react to these new opportunities and where you have a skilled workforce that can seize these opportunities. Interesting. We may have time for two, but I think let's do this one first, please. So prior to Lehman meltdown, we were a debt driven growth economy. Since then, there's a lot of talk about the leveraging, but the fact is that from a government point of view, from a corporate point of view, from an individual point of view, you have the same amount of leverage still left in the system and it's certainly a drag on growth. And the question I have is, so we've eased for the past bunch of years to hope for enough growth that would diminish the importance of that level of debt. But here we are, we haven't had the growth. We still have the same level of debt. What's the solution? And what's, you know, what do you do with the problem of interest rates rising? That's the amount of leverage to the bankers, I guess. Well, I'll start by saying that Barry, I think it's policy more than anything else. And so if Dr. Bernanke was up here, we say we relied on one leg of the stool, which was monetary policy, but you need to get regulatory reform in the United States and at least corporate tax reform, not personal income tax reform. And that's probably true globally. If you can get those things done, there is a lot of debt, but there's still a ton of cash as well. And you could see the restaging of a new investment cycle that would carry the world, I think, in a faster growing position than anybody has said in these salons over the last two years. And just to wrap up, this is probably the last word to Mary. I think that the US economy is showing that even with the leverage that's on the books, a lot of the corporations have done a lot of financial re-engineering. They've been able to finance themselves and take advantage of these low rates. The maturity levels are out to a place where they'll be able to invest in the future and with a little bit of confidence and a little bit of optimism, hopefully coming out of these next couple of days here. Hopefully we can get the world on the right track. Great, well, thank you all very much indeed. That was a fabulous panel and very interesting to see that people seem to have decided that, yes, central banks distorted asset markets, but they did it for good reason and that there is some optimism out there. So thank you very much indeed.