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.