Economics & Finance
July Fri 20, 2012
The topical event for the markets this week was Bernanke's speech to the House Financial Service Committee. In particular, attention was trained on any references to further measures to inject liquidity and, even more particularly, to quantitative easing 3. We can reveal right away that no mention was made of quantitative easing 3, and that Bernanke “limited himself” to the expressing that the Fed stands ready to take further action to promote a stronger economic recovery. Bernanke's speech, however, contains other elements that are definitely worth underlining if only because of their source.According to the chairman of the Fed, the U.S. recovery is hampered by rigid financial conditions for households and businesses and by the brakes coming from tax policies and their uncertainties. On the first point, there is not much to add except that the main cause is, according to Bernanke, the debt crisis in Europe having a negative impact on financial conditions in the rest of the world, including of course the United States. It would be difficult to argue that this is the only cause of stress on financial markets (What about the losses on the derivatives of the very American JP Morgan? What about the Libor scandal?), but it is clear that the uncertainties about the Euro and the thousands of billions of assets are predominant and are having obvious negative effects on global growth at this time.On the second point, instead, the opinion of the Fed chairman is far more interesting: “As is well known, U.S. fiscal policies are on an unsustainable path and the development of a credible medium-term plan for controlling deficits should be a high priority”. Imagine, given the proper proportions, what would happen if the same statements were made tomorrow by the President of the Bank of Italy regarding the Italian deficit. Then compare the financial reality of the United States as it is presented by a person who it would be difficult to include on the side of the detractors with the yield the treasury now offers. This is one observation that should at least crack the belief that high debt and high deficits necessarily justify a high cost of the debt.
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