After the news broke of an agreement between U.S. lawmakers to extend the Bush tax breaks, some people concluded that the fiscal stimulus could reduce the pressure on the Fed from needing to do more QE. We disagree. We believe the tax breaks will mean even more QE and the bond market seems to agree with us. This weeks poorly bid U.S. Treasury auctions says that while investors agree that tax breaks are good for encouraging economic growth, they also drive government deficits higher. Bond offerings from the U.S. Treasury are going to go up, and the Fed had better buy the Treasury s bonds, because it is apparent investors don t want them. QE is here to stay.
Ripping Off The Band-Aid In Iceland
Our good friend, Larry Jeddeloh of The Institutional Strategist recently brought to light the differences in the way Iceland dealt with its financial crisis and the way the rest of the Western World has chosen to deal with theirs. In 2006, Iceland s central bankers miscalculated and thought everything was stable . Larry points out that highly educated, capable central bankers may believe they have things under control, yet they can still make mistakes. In his Market Intelligence Report, Larry goes on to discuss Iceland s response to their financial crisis; they took some bitter medicine, let banks fail, let depositors lose money, and let their currency fall.
In the large Western democracies, there is no political will to make the hard decisions needed to fix their ailing financial system, and policymakers appear to be opting for the Japanese method of prolonging the agony. Larry writes,
bailout fever has a firm grip on the U.S. and is spreading quickly in Europe, evidence is emerging that our monetary policy chiefs are wrong again. Take Iceland. The country let its banks fail, it didn t use taxpayer money to bail them out, and the country and its currency have paid a heavy price. However, Iceland s budget deficit just a couple years past the crash will be 6.3% this year, and 0% next year. Contrast this with Ireland, which will have a 32% deficit, as estimated by the EC. How long will this debt burden the economy? How long will banks be frozen up, leading to stagnation? If Japan is any guide, it could be decades.
U.S. State Finances Are Going To Have To Be Addressed
We have discussed the risks to the so-called conservative municipal bond market in recent months. Nothing has been done to address the fiscal crisis in many states, counties, and municipalities across the U.S. who owe trillions of dollars to bondholders and are seeing their tax receipts shrink rapidly. This is another reason we believe that QE is going to continue for a long time.
Much has been written and reported about the European debt crisis, but if you look at the chart below, the capital markets are starting to anticipate defaults among some over-levered U.S. states.
Ripping Off The Band-Aid In Iceland
Our good friend, Larry Jeddeloh of The Institutional Strategist recently brought to light the differences in the way Iceland dealt with its financial crisis and the way the rest of the Western World has chosen to deal with theirs. In 2006, Iceland s central bankers miscalculated and thought everything was stable . Larry points out that highly educated, capable central bankers may believe they have things under control, yet they can still make mistakes. In his Market Intelligence Report, Larry goes on to discuss Iceland s response to their financial crisis; they took some bitter medicine, let banks fail, let depositors lose money, and let their currency fall.
In the large Western democracies, there is no political will to make the hard decisions needed to fix their ailing financial system, and policymakers appear to be opting for the Japanese method of prolonging the agony. Larry writes,
bailout fever has a firm grip on the U.S. and is spreading quickly in Europe, evidence is emerging that our monetary policy chiefs are wrong again. Take Iceland. The country let its banks fail, it didn t use taxpayer money to bail them out, and the country and its currency have paid a heavy price. However, Iceland s budget deficit just a couple years past the crash will be 6.3% this year, and 0% next year. Contrast this with Ireland, which will have a 32% deficit, as estimated by the EC. How long will this debt burden the economy? How long will banks be frozen up, leading to stagnation? If Japan is any guide, it could be decades.
U.S. State Finances Are Going To Have To Be Addressed
We have discussed the risks to the so-called conservative municipal bond market in recent months. Nothing has been done to address the fiscal crisis in many states, counties, and municipalities across the U.S. who owe trillions of dollars to bondholders and are seeing their tax receipts shrink rapidly. This is another reason we believe that QE is going to continue for a long time.
Much has been written and reported about the European debt crisis, but if you look at the chart below, the capital markets are starting to anticipate defaults among some over-levered U.S. states.
