More dollar reserve negative talk

“The current reserve system is in the process of fraying,” Stiglitz said. “The dollar is not a good store of value. Right now, the dollar is yielding almost no return and yet anybody looking at the dollar has to say there’s a high degree of risk.”

The liquidity pumped into the U.S. economy may also end up elsewhere, including in Asian property and stocks, Stiglitz said later in Bankgok.

“The liquidity is going to be spent, but not necessarily in America,” he said. Asian economies may have to “protect against an American-led asset bubbles.”

The Stiglitz comments are important on two fronts. One, there is a Nobel Prize winner who has spent important time in US and IMF policy circles telling us to fear dollar losses. This is not coming from a self-interested country that may have something to gain from a change in the mechanic of international finance. Second, Stiglitz focuses in on the bubble issue.

We my not face traditional inflation in goods. We may face asset price inflation as all of the liquidity around the world looks for a home. There is less a a need for new plant and equipment when capacity utilizations are down significantly. Capacity utilization for the US is at post WWII lows at levels less than 70%. The utilization rates are extremely low all around the world so there is less likely that good prices will have much room for growth, but there may till be need for investors to take money out of cash and place it in riskier assets in order to obtain higher returns. This may create asset bubbles especially in the few places where growth looks attractive like emerging markets. Creating new bubble may be the law o unintended consequences. The crisis started from asset bubbles based on loose monetary policy. We may again see asset bubbles from our attempt to end the crisis.