Fed, ECB Throwing World Into 'Chaos': Joseph Stiglitz

Discussion in 'Economics' started by S2007S, Oct 5, 2010.

  1. S2007S


    Fed, ECB Throwing World Into 'Chaos': Joseph Stiglitz
    Reuters | October 05, 2010 | 06:23 PM EDT

    Ultra-loose monetary policies by the U.S. Federal Reserve and the European Central Bank are throwing the world into "chaos" rather than helping the global economic recovery, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday.

    A "flood of liquidity" from the Fed and the ECB is bringing instability to foreign-exchange markets, forcing countries such as Japan and Brazil to defend its exporters, Stiglitz told reporters in a conference at Columbia University.

    "The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy," Stiglitz said. "It's doing nothing for the American economy, but it's causing chaos over the rest of the world. It's a very strange policy that they are pursuing."

    The U.S. dollar has weakened about 6.5 percent against a basket of major currencies [ .DXY 77.797 +0.048 (+0.06%) ] since the beginning of September as prospects for further monetary easing by the Fed have led investors to seek higher returns elsewhere.

    That flow of dollars caused currencies to appreciate in many emerging market countries such as Brazil, which offers strong growth prospects. The Japanese yen [ JPY=X 83.23 +0.07 (+0.08%) ] has also hit record highs against the dollar on expectation of additional greenback weakness.

    Recent actions by those countries to curb the strength of their currency were "necessary," Stiglitz added.

    "It's natural in that context for them to say—we can't just let our exchange rates appreciate and destroy our exports," he said.

    On Monday, Brazil doubled a tax on foreign investment into local government bonds, while Japan lowered the target for its benchmark interest rate to a range between zero and 0.1 percent.

    The Bank of Japan also pledged to buy 5 trillion yen ($60 billion) worth of assets, in a strategy similar to the one adopted by the Fed to pump funds into the economy.

    But additional monetary stimulus will "clearly" not solve the problems caused by lack of global aggregate demand, Stiglitz said.

    "Lowering the interest rates may help a little bit, but that's much too weak to address the problems facing the United States and Europe," Stiglitz said. "We need fiscal stimulus."
  2. One more time: the big picture is that the Fed is fighting an actual currency war vs Asia, specifically including, but probably not exclusive to, China, Japan, and South Korea.
    The ECB, to the extent they're doing anything, are being forced into it by the parlous condition of the European banks, who are in far worse shape than even American banks were. Part of the reason is that Trichet and the rest of the ECB board has steadfastly refused to deal with reality until absolutely forced to, their constant refrain all along being that the problem mostly was a US one.
    Demand has to start coming out of Asia, and in Europe, out of Germany. Simple as that. If it doesn't, this whole situation will recur in a few years, and at that time it will be far worse than it is now.
    I doubt this stuff will succeed, but it has to be done. The reason it won't succeed is that the ECB will only participate reluctantly, and will withdraw well before the problem is solved, giving the Asian mercantile bloc vital cover.
  3. I agree with the professor. However, this is must happen in bubbleeconomics. The monetary unbalances (due to currency manipulation and excessive debt) of past decades are being painfully adjusted really fast.