QE2 creates risks for emerging markets: Stiglitz

The US Federal Reserve’s plan to boost purchases of bonds poses “considerable” risks by increasing capital inflows to emerging markets, Nobel Prize- winning economist Joseph Stiglitz said in Santiago today.

“All this liquidity that they’re creating is not going back to grow the American economy and is going to Asia and other emerging markets where it’s not wanted,” Stiglitz said. “Most of the countries around the world have begun to react. They put in capital controls, exchange rate interventions, taxes on these capital flows — a variety of interventions.”

The Fed will buy an additional $600 billion of Treasuries through June in a program dubbed quantitative easing two, or QE2. The program is designed to boost US economic growth, Fed Chairman Ben S Bernanke said in a November 3 opinion article for the Washington Post.

Banks will invest money provided under the Fed’s program in Asian and other emerging markets where economies have recovered faster than the US and Europe from last year’s recession, Stiglitz said at an economic seminar in the Chilean capital hosted by Banco de Credito e Inversiones.

Increased capital inflows could cause emerging market currencies to appreciate and could create asset bubbles, he said.

Net private capital flows to emerging market economies will rise 42 per cent to $825 billion in 2010 compared with $581 billion in 2009, according to an October report from the Institute of International Finance, a trade group that represents more than 400 financial institutions.

Regional response
Brazil in October raised the so-called IOF tax on foreigners’ fixed-income purchases to 6 percent — triple the level from a year earlier — to help depreciate the real, which has gained 1.5 per cent against the US dollar so far this year.