STIGLITZ: WHY THE CURRENT FED POLICY IS MAKING THINGS WORSE
Nobel Prize winner Joseph Stiglitz explains why the global imbalances will continue to cause problems in the global economy and why the Fed’s policy of dollar devaluation will have unintended consequences. Ultimately, he sees the Fed making matters worse:
Stiglitz’s thoughts on a possible trade war:
“I think there is this concern. The interesting thing is the United States was one of the first countries to say that of the sources of our recovery would be exports. The problem is that the unintended consequences of economic turmoil, bad economic policies, is what we’re seeing.”
“When the U.S. lowers interest rates, when the U.S. floods the world with liquidity, the effect of it is to try to lower the dollar and cause other countries currencies to appreciate.”
On whether Stiglitz would blame the U.S. for causing other countries’ currencies to appreciate:
“I don’t know if I want to blame [the U.S.] It’s the unintended consequence. But it is the consequence of our policies. What is happening now is this curious thing is that Fed policy was supposed to re-ignite the American economy, but it’s not doing that. And so the flood of liquidity is going abroad and causing problems all over the world.”
Stiglitz on his previous comments that Germany should abandon the euro and that the euro should be devalued:
“There’s a lot of currency misalignments. There are large surpluses on the part of Germany, for instance, and those have to be corrected. There are two problems going on. One of them is a problem of a flood of liquidity that’s causing bubbles, causing turmoil in many of the more successful emerging markets. And then there’s the other problem of the global imbalances. They’re related. But they are really two distinct problems.”
“The worry is that the flood of liquidity is going to cause what is sometimes being referred to an emerging market bubble. Money is going in. The orry is that it will cause a real estate bubble, in one developing country or another.”
“The problem is very easy to understand. There’s a flood of money into the financial sector. It’s asking, Where is the best place in the world to go? In a world of globalization, the answer is not in the United States. So U.S. Fed policy is causing an excess inflow into countries all over the world.”
On the Fed’s quantitative easing policy:
“I think this is going to get worse. And the countries are anticipating that. And I’ve talked to a number of countries around the world and you can hear their fear. What they see is, it’s not a question of their exporting their way into recovery. What they see is economic turmoil being brought to their country by this flood of liquidity.”
On whether the Chinese should increase the value of the yuan:
“Yes, clearly the world has gotten to a situation where the yuan is misaligned. And there needs to be an adjustment. But we should understand that that will not solve the problem of America’s trade deficit. It might help a little bit, but we will just start importing textiles and apparel from Sri Lanka and Bangladesh, not from China.”
Source: Bloomberg
Glad to see that we’re not the only ones worried about this. Even if the government comes up with another trillion to inject domestically, one will wonder about the sustainability once money is spent. It seems that Keynesian-ism works outside asset bubbles, but can only amortize the shock on the way down in these conditions.
It’s hard to believe the stock market is up that much – even Goldman Sachs today has increased its odds of a recession in the next 6 months and analysts are still forecasting record $90+ earnings for next year. Gotta love finance…
Stiglitz seems to be a reasonably rational academic, I’m surprised.
Is there a mechanism for this flood of liquidity to enter other markets due to QE?
Or is this another perception issue only?
QE not only lowers the yield of outstanding US Treasuries, it also reduces the amount of US Treasury securities available for sale to foreign central banks. Unable or unwilling to buy US Treasuries, the central banks sell dollar-denominated foreign currency reserves to buy currencies in countries where sovereign debt securities are available and/or offer higher yields. Alternatively, foreign central banks may channel forex reserves to to their national Sovereign Wealth Fund whose investments are not limited to sovereign debt instruments. Total foreign exchange reserves currently exceed USD 9.0 trillion, while outstanding marketable US Treasuries total about USD 8.0 trillion, of which roughly half are already owned by foreign entities–mostly foreign central banks.
QE is bearish the dollar, bullish USTs and bullish–at least in the short term–US equities.
Why can’t these interviewers ever STFU and allow their guests to finish a sentence? This is why I don’t watch TV “news” or any business stations. A bunch of annoying, ignorant, people chosen for their annunciation and good looks rather than their business knowledge, asking stupid/simple questions of experts and well-informed people – so long as the answer will fit into a 10 second space.
Germany leaving the Euro zone ? That won’t happen until the advantages of leaving outweigh the disadvantages.
Debasing the USD has been the strategy of the FED since the FED opened its doors in 1913 !
If Germany leaves the Euro zone today then the Netherlands would follow tomorrow and then the Euro becomes a third world currency overnight.
Stiglitz is a moron. Like the rest of them.
Krugman is a muppet, Blackswan is a pseudo intellectual, Roubini is also a world-class perma-bear. He was telling everyone to short the market last spring. He should go back to eating pasta and leave the rest of us alone.
If you follow any economist or commentator, you will eventually lose your shirt.
The only way to make money is by aligning yourself with the trend and by correctly interpreting raw data and indicators. Conviction is good but stubborn conviction ends up killing you.
All this economic arguments are meaningless, what matters is how much cash u make trading the markets! Nobody ever got rich discussing or trading economies!