Opinion

Chrystia Freeland

Stiglitz says Fed policy is competitive devaluation

By Chrystia Freeland
October 7, 2010

U.S. monetary policy is flooding the world with cheap liquidity, Nobel Prize-winning economist Joseph Stiglitz said at the Canadian Consulate’s “Invest in Canada” luncheon yesterday. Our current policy, he explained, acts as a competitive devaluation against emerging-market currencies. Stiglitz added that he is worried about the prospect of a currency war but conceded that there’s not anything we can do about it.

Stiglitz went on to say that what the Fed is doing is not so different from China’s interventions in the foreign-exchange markets and accused the U.S. central bank of undermining global financial market integration and only acting out of a sense of guilt:

The Fed, having created the problem in the first place, feels guilty and says, ‘We should do something to get us out of the mess.’ [...]   [Emerging markets] see this as competitive devaluation of the United States.  We say, ‘No, no.  We’re not engaged in competitive devaluation.  That’s something China does.  We don’t do those kinds of things.  We don’t manipulate our currency.  All we do is ordinary monetary policy.’  But the consequence of ordinary monetary policy is competitive devaluation.

Appearing alongside Stiglitz was BMO chief economist Sherry Cooper, who forecasted that the U.S. would see moderate growth of 2-2.5 percent in the second half of 2010. She was encouraged by recent indications that the deleveraging process for households and businesses is beginning to slow, but noted that that would not be enough to restore job growth. “Fiscal stimulus is essential,” Cooper said. She thought no new government spending in the U.S. would be passed, though, as deficits have become the focal concern of Washington, even as the Treasury is able to borrow at rock-bottom rates.

Stiglitz weighed in that it was a “total mystery” to him why the Democrats are not pursuing fiscal stimulus. “I am disappointed,” in President Obama, he said. In his view the Republicans’ invoking the language of deficits “captured the public’s mind.” Ultimately, he thinks that efforts to downsize the government by reducing deficits will backfire as the slower growth will shrink tax revenues and necessitate more government borrowing to keep basic services running.

Comments
18 comments so far | RSS Comments RSS

The USA should act more responsibly in face of the present economic situation and not simply find a scapegoat in order to please US voters.
The media should be more broad-minded; it should also free itself from any prejudice against any country and it should report facts truely and fairly.
Finally, international institutions should not act as agents of any particular country.

Posted by Jeanmichel | Report as abusive
 

USA Inc. is bankrupt, that’s the short and long of it. It’s following the route of a lot of other has-been empires.

Does Afghanistan contain some kind of political or economic virus, that the moment a great power sets foot in it – the great power starts to die?

And the media is very broad minded. It is so broad minded it will willingly accept payment to lie for the vested interests.

It’s all fin de siecle decay happening about ten years late.

Posted by paintcan | Report as abusive
 

What Siglitz is saying is what I tried to capture earlier this week when Geithner tried to go public with demand – against a sovereign state – to force mainland China to revalue Yuan.

Wen (PM) told the Brussels summit that Yuan will eventually stabalize at a higher rate. But it will be China that will decide when and how it revalues Yuan.

BOJ…and now Fed are simply manipulating the FX market to destabalize emerging market currencies. IMF is forced, I suggest, to use Geithner’s talking points and it will not paly favourably with G-20.

Either Fed/Bernake has guts to admit he is enforcing currency devaluation or jounalists must get smart and unlock this stupid FX warfare which will not go too far.

Posted by hariknaidu | Report as abusive
 

Gaithner has a unique outlook that clouds his judgement… apparently he bought a house in 2004 for $1.7million with a loan of $1.1m and he is now underwater. He seems to think that because he has suffered a deflationary event that everyone in the US has too. I don’t know why Brenanke has joined this opinion. Gaithner is the wrong man for the wrong job.

The now almost inevitable fed policy of QE2 is going to uncork the genie of monetary devaluation and attendant inflation. This is shades of Nixon/Carter in the late 1970′s which resulted in 15.5% mortgage rates by 1981…

Dollar alternatives will appreciate, political unrest will follow financial stumbling… It is not a hopeful scenario.

Posted by PhilGrimm | Report as abusive
 

Knowing US currency kept going down relative to basket of other currencies, who would buy US Treasury? Who would trust the US government on the safety of investor’s principal?

Posted by bkhjon | Report as abusive
 

Ben’s policy is:

Ease, Print, Hope, Pray!

Posted by XRayD | Report as abusive
 

Those who are crying deficit now, will be the first to be out into the streets, once the basic services, that they are used to, begin to disappear.

The rich will not have a lot to worry about. They can hedge their investment towards expansion, or contraction. They can invest long term, or short some stock, if they find it more profitable.

It is those hollow heads of the tea and other beverage parties, who no nothing about economics, who will feel the most injustice at the end.

They are being led by people who are trying to make money for themselves, and generate publicity for their brand. The fact that it is a house of cards, will escape all the sheep, who understand little, and are emotional enough, to be led to the slaughter house.

The U.S fiscal policy is no more. We do not have a common country to fight for. We have political parties, prejudices, and self interests.

It is the individual who matters, they crow.

A nation is not an individual.

But the sheep just want to eat some grass.

Posted by nabilnaser | Report as abusive
 

IOUSA!

Posted by minipaws | Report as abusive
 

My dear Chrystia Freeland,

Thank you for putting this up. It is nice to be able to get these little “bite-size” lectures from Dr. Stiglitz without having to endure graduate school (again). I always enjoy the way Joe Stiglitz addresses the essential issues quickly and discusses them in a straightforward and uncomplicated manner.

Well done, Chrystia!

REG CROWDER
Financial & Investment Writer
Brittany, France and London, England
http://www.RegCrowder.com

Posted by Reg_Crowder | Report as abusive
 

I don’t know what would be the final outcome of a trade war between the US and China, but I do know that if the US STARTS a trade war with China, it would be equivalent to shooting a huge gaping hole in its foot in order to get more food.

Which is pretty stupid.

And the end result would be that the currency war probably just encourages China to properly finalise its economic growth through internal consumption and development than on exports. China’s counter tariffs against the US would cause even more job losses in the US, inflation and currency weakness, a cocktail so potent that it would strike a huge blow against the US economy. Which will then accelerate and ultimately cement China’s status as a… no… THE world economic superpower over the US.

From where I am looking, I hope the US leaders are insane enough to go into the trade war (god willing, Sarah Palin will win the 2012 presidential election). It is time for China to take over the car.

Posted by TheBornLoser | Report as abusive
 

I like Stiglitz’s analysis of the international consequences of US monetary policy. Our monetary policy has been skewed to repair the insolvency of the Wall St banks. Wall St supplysiders run DC by pumping hundreds of millions into the lobbying machine. I am concerned that as global growth takes off, the banks will take money from the Federal Reserve deposits and invest them overseas, creating another global growth bubble. This will lead to stagflation in the US but I think it will be moderate in the mid single digits.

I think the whole problem is in part structural. The world is dollarized and the puts tremendous demand on our financial sector to extend credit. Look at the Fed, they are the bank of last resort to other central banks. The bankers see this is an immutable reality, even though it is a result of human consensus and human policy. Conclusion, the system will continue to operate in its own interests, which are the interests of multinational/international capital both productive and financial.

Stiglitz is right. Fiscal stimulus that gets Main St. going again is a much better (and smaller) investement than pumping trillions into the banking sector through monetary policy. Wall St. doesn’t care about America, only its narrow interests which are international capital.

Posted by Barts | Report as abusive
 

nabilnaser makes a central observation: “We do not have a common country to fight for. We have political parties, prejudices, and self interests.” (Comment made on Oct 7, 2010 at 11:15 pm EDT.)

I wonder if The Greatest Generation would have bothered had they had the slightest notion how quickly — within three generations — would squander their toil and sacrifice, focusing instead on “Me, ME! The GLORIOUS ME!!!”

And it’s not just young people — they learned from their role models, i.e. people who came of age in around the 1980′s. Who learned, to an extent, from my generation — I was born in 1951.

America is a wonderful dream, excellently epitomized by the Statue of Liberty. It’s terribly sad it’s no longer a dream, but an unattainable fantasy. There’s little for which Lady Liberty can stand, these days. . . .

Posted by MekhongKurt | Report as abusive
 

Barts wrote:

“Stiglitz is right. Fiscal stimulus that gets Main St. going again is a much better (and smaller) investement than pumping trillions into the banking sector through monetary policy. Wall St. doesn’t care about America, only its narrow interests which are international capital.”

Getting money into Main Street is very difficult to do. Getting it back from Wall Street may be easier and also healthier for a future in which people are (slowly!) becoming more honest. This is because the means of getting it back can also serve to curb the endless externalizing of financial intermediary blunders and dishonesty. As Warren Buffett once said:

“Wall Street likes to characterize the proliferation of frenzied financial games as a sophisticated pro-social activity, facilitating the fine-tuning of a complex economy. But the truth is otherwise. Short-term transactions frequently act as an invisible foot, kicking society in the shin.”

In Europe they are getting serious about addressing this “invisible shin-kicking” through a financial transactions tax (FTT). That would be a good idea if the tax were designed to discriminate rationally between derivative contracts that serve the real economy and other derivatives which merely externalize costs to the future. To learn how this can be practically done through a rationally and ethically “smart” FTT take a look at the paper at:

http://www.authentixcoaches.com/dsFCTFin Reg.html

Posted by HonestInjun | Report as abusive
 

This is a subject near to my heart thanks, do you have a Facebook group for your site?

 

Good post cheers, You must have a Facebook group for this site?

 

It would appear to be the case. Appreciate the info….

 

A subject close to my heart cheers, do you have a RSS feed I can use?

 

I think what Stiglitz is saying is fairly obvious, though I also think he is being polite to Bernanke. We are emphatically doing currency devaluation and trying to create inflation. Bernanke knows there will be riots if he says that, but he also knows there will be riots if he doesn’t do it.

The U.S. so obviously lived beyond its means. That’s what all those bonds piled up in China means. Our state governments lived beyond their means, that’s why California owes all that money. Our families lived beyond their means, they why they have that credit card debt. Since we can’t raise taxes enough to pay off those bonds, and they are going to eventually come due…

This is not Keynesian, Classical, Marxist, Ricardian, it’s Empirical. Which is what makes much of the political dialog on this so surreal.

Posted by ARJTurgot2 | Report as abusive
 

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