Wednesday, October 6, 2010

Stiglitz So Wrong that He Reaches the Right Conclusion

This is truly amazing, Nobel Prize-winning economist Joseph Stiglitz's analysis is so far off base that he comes full circle and reaches the right conclusion.

He told Bloomberg Television that the Federal Reserve’s policy of cutting interest rates to a record low has had repercussions worldwide, including currency misalignments and the risk of asset price bubbles.

Interest rates really have dropped because of fear in the economy. The demand to hold cash, and near cash, has resulted in the low rates. The money the Fed has pumped in has mostly ended up as excess reserves where it is not impacting interest rates or the economy.

“Fed policy was supposed to reignite the American economy, but it’s not doing that,” Stiglitz said in the interview. This part is true, but Stiglitz goes on, “The flood of liquidity is going abroad and causing problems all over the world.”  I have no idea how he gets this. The trillion dollars is setting as excess reserves. It isn't impacting anything.

“The worry is that the flood of liquidity is going to cause what is sometimes being referred to as an emerging-market bubble,” Stiglitz said. “Money is going in, and the worry is it will cause a real estate bubble in one developing country or another.”

Here's where he comes back to reality a little. The flood of liquidity could cause a bubble, but it is the flood of liquidity that the Fed is about to add to the system after the elections--not any past Fed money injections.

As far as his concerns about the bubble being an emerging market real estate bubble, there can be plenty of other bubbles beyond real estate. And any emerging market bubbles are the result of domestic monetary policies, such as China's where they printed huge amounts of money to prop up the dollar.

Bottom line: Stiglitz is all over the place with his analysis. But his warning about a "flood of liqiudity" is spot on, but not because of what the Fed has done to date, but because of the money printing it is about to do.


  1. I think Stiglitz is trying to explian (although he does a horrible job) that the devaluating effect that the Fed actions has had on the dollar (the market anticipating inflation) its what has pushed other countries to inflate their currencies to keep the exchange rate with the dollar benefitial for their exports (currency war) and that is what is causing bubbles in their countries.

  2. Stiglitz isn't a bad guy at all...
    Frame of reference is different...he's always looked at down to earth stuff and seen things for what they are.
    Read his pre-housing bubble writing.

  3. How has/if the pomo purchases over the past week changed the curve?

    new to the site, not sure if this has been touched upon.