The risk that exchange-rate battles will harm the fragile global economy was the top policy concern as world finance ministers begin a multiday meeting this week.
It's an issue that pits the United States prominently against China, but that also is stirring anxiety among other nations in the Group of 20, which gathered for talks Thursday in Gyeongju, South Korea.
A key problem is that many G20 nations view exports as a central strategy for growing jobs amid a tepid world economy. If nations nudge their currencies to weaken, or try to avoid a sharp currency rise, then their exports become more attractive on world markets.
But this widely held strategy may be running up against its limits. US Treasury Secretary Timothy Geithner said this week an imbalanced pattern of global trade must become more "sustainable," in contrast to the current pattern in which the US runs large trade deficits while Asian nations push export-led growth strategies.
But Mr. Stiglitz says leaders in Beijing have some legitimate reasons for caution. "They worry an abrupt change could push many Chinese firms into bankruptcy," a challenge that could be destabilizing for both China and the broader world economy.
In an interview with The Wall Street Journal this week, Secretary Geithner called for a global accord on "norms" for currency and trade policy, including a numerical ceiling on trade surpluses as a share of a nation's overall economic output. It's an idea he's brought to the G20 meeting.
But Geithner's push at the G20 meeting for a new accord faces difficult hurdles. China and other export-fueled emerging economies aren't eager to commit to a rapid currency rise. "If China knew that if it moved more rapidly, other emerging markets would move with them, it would be easier for them to move," Geithner said.
In "Freefall," a recently published book on the US and world economies, Stiglitz argues that what's needed is a new global reserve currency, which nations could hold instead of dollars or euros. This step, he says, would make the world economy more stable and also make it easier for the US to solve its trade-deficit problem.
"Countries have discovered that they need large amounts of reserves [typically dollars] in order to protect themselves against this risk of instability," he says in a phone interview. If those reserves are a stash of dollars or euros, "that is money that's not being spent. It weakens the global economy."
Instead, he advocates a system in which nations would get an annual dispersal of a global currency unit, which could be issued by the International Monetary Fund. The system could be designed, he says in his book, so that nations that most need reserves get a larger allotment – but also so the allotment would shrink if a nation runs a large trade surplus.
The result could be that emerging nations become less intent on piling up US dollars, because they'd hold the new currency in reserve for emergencies, such as Asia's financial crisis in the late 1990s. Trade itself would still be conducted in the world's other currencies.
One alternative policy, pushed by many members of the US Congress, is to attempt to impose sanctions on China if it doesn't allow the yuan to rise substantially. One bill approved recently by the House of Representatives would label the yuan's current value as an export subsidy, and would impose countervailing duties on US imports from China if Beijing doesn't act.
It's unclear, however, whether the move would survive a Chinese appeal to the World Trade Organization. And such a move might tilt the global economy from currency wars into an even more damaging "trade war" of tariffs and import quotas.