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Friday, 3 August 2007

US subprime turbulence may be contagious -Stiglitz

SINGAPORE, Aug 2 - The turbulence in the U.S. subprime mortgage market could spread to other sectors of the economy, especially as growth momentum is already weak, Joseph Stiglitz, former chief economist of the World Bank, said on Thursday.

Financial markets have been volatile in recent weeks amid jitters about the fallout from the problems with U.S. subprime mortgages, but Stiglitz said the turmoil was no surprise to him.

The risks could spread to sectors "wider than the subprime, but how wide is difficult to tell. It's a broad problem", Stiglitz, a Nobel laureate economist and Columbia University professor, told Reuters in Singapore.

"It's very hard to predict the stock markets, but in terms of the underlying weakness of the U.S. economy, that's going to continue for an extended period of time," he said.

"It's a constant source of wonder to me how the market is irrational about certain things that seem so forecastable."

Stiglitz told a financial forum that a stronger Chinese yuan would not resolve the huge U.S. trade deficit, because the world's largest economy would buy consumer goods from other emerging countries if Chinese exports lost their competitiveness.

"You cannot blame America's problem on China. In fact, it's not going to affect the U.S. trade deficit at all if China appreciates its currency," he said.

While shipping cheap goods to the United States, China has been financing the U.S. trade gap by investing most of its foreign exchange reserves in U.S. Treasuries, which in turn helps keep U.S. interest rates low and supports the U.S. economy.

A rapid rise in the yuan's value would make imported farm products cheaper and hit Chinese farmers, he said.

"That's one of the reasons that Chinese leaders have been very resistant to rapid appreciation of their currency."

He said the weakness of the dollar against major currencies might persuade some developing countries to channel more of their reserves into the euro.

Stiglitz, a long-time critic of the failures of globalisation, said many developing countries in Africa and Latin America had failed to benefit from the process of economic integration.

" East Asia took advantage of globalisation and made globalisation in their own terms and that led to successes."


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Anonymous said...

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