MercoPress. South Atlantic News Agency

Fed and ECB “flood of liquidity” plunging the world into “chaos” warns Stiglitz

Economics Nobel Prize Stiglitz: Brazil and Japan reacted correctly

The policies of extremely low interest rates maintained by the Federal Reserve and the European Central Bank are plunging the world into chaos instead of helping with the recovery of the global economy, the winner of the Nobel Prize in economics, 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% against a basket of major currencies 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 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%.

The Bank of Japan also pledged to buy 5 trillion Yen (60 billion USD) 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

“In the U.S., and in some other countries, will the policy of quantitative easing suffice to solve the problems of inadequate global aggregate demand? The answer clearly is not. Lowering the interest rates may help a little bit, but it’s much too weak to address the problems facing the U.S. and Europe. So the answer is, and that is the point Soros made as well, we need fiscal stimulus.”