Sunday, August 30, 2009

Nobel Economist: Dollar Not Good Store of Value, Has High Degree of Risk

Nobel Prize-winning economist Joseph Stiglitz recently voiced his rather pessimistic view of the US currency, saying, “The dollar is not a good store of value," and "anybody looking at the dollar has to say there’s a high degree of risk.”

Stiglitz, a Columbia University economics professor, also told a conference in Bangkok this month that he is concerned about the growing specter of inflation.

Under the leadership of Ben Bernanke, over the past year the Fed cut its benchmark lending rate to as low as zero while creating an additional $1.1 trillion in credit that was subsequently unleashed into the economy.

“As the balance sheet of the Fed has blown up, as the deficit of the U.S. and the debt has increased, people have asked the obvious question: will there be inflation in the future? Right now we’re facing deflation, but some time in the future, there will be consequences," said Stiglitz.

He is not alone in this view. Curtis Mewbourne, a portfolio manager at Pacific Investment Management Co., the world’s biggest manager of bond funds, says the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his August Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote.

China, the world’s largest holder of foreign-currency reserves, and Russia have both called for a new global currency to replace the dollar as the dominant place to store reserves.

Stiglitz concurs.

“There is a need for a global reserve system,” Stiglitz told the Bangkok conference. "The current reserve system is in the process of fraying.”

Mewbourne has a similar view, writing, “While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative.”

Proposals for a new global currency are based on a weighted basket of international currencies, plus gold. Economists argue that such an alternative could be a less volatile alternative than the U.S. dollar. At present, other nations are affected by the dollar's vulnerability to swings in the U.S. economy and changes in U.S. fiscal and monetary policy.

Bill Gross, Mewbourne's PIMCO colleague, is also warning that the U.S. currency will fall. In June, Gross urged holders of dollars to diversify before central banks and sovereign wealth funds do the same because of concerns that government budget deficits will deepen.

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