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Robust Fiscal Consolidation is Compulsory, Not Only Monetary Itself!

|Includes: BAC, C, HSBC Holdings PLC (HSBC)

These days discover the struggles in the global economy which include debt problems, financial slowdowns, fiscal inabilities, and investor confidence. Federal Reserve has been trying to keep the emergency stemming from sub prime mortgage, but not the US government.  Fed has played with the relevant tools, principally interest rate cuts. Pumping dollar leaded to many stock markets go up in the global economy as investors risk appetite grow up. This case was not enough to take over the concrete budget over. High sovereign debt in Greece, Italy, Porteguese, Ireland, Spain, and recently, Japan emerged. Then, the focus shifted to budget deficits, debt - rescue plans, spending cuts, and tax policies. However, these governments must spend so much money to eliminate the effect of the US difficulty that there were no door left to lead! For the last few months, investors should  examine the economic role of the governments, not monetary actions. Now, countries also understand that monetary policy itself is not enough tool to overcome the worst crisis in the global economy. Further expending monetary policies may damage price stability, leading prices to go up further. That is why most central banks waited a bit  to see how regulations and fiscal plans were successful. Thus, they would further concentrate on price stability as their first must course. However, today global economy is in the struggle as fiscal policies are not sufficient to lift the economies:

- European governments have not reached a strong feasible fiscal commitment or financial restructuring to help troubled economies in itself. Packages for Greece are  only short term rescue plan, not longer periods. Other European economies are also in red line unless a sustainable solution will emerge. Structural regulations should be discussed, not temporary ones. Eurobond is worth considering, but no leader countries citizens are not responsible to pay taxes for other parts of Europe, that is what German and French leaders say.  On the other hand, ECB keeps on having Greek bonds to give the economy relief for Europe, but what if the case turned out like Lehman Brothers! 

-  U.S government debt ceiling plan also is not as sufficient as expected. The amount did not satisfy the economy. Moreover, S&P downgraded U.S credit rating, harshly criticized for not giving right rating for mortgage back securities before 2008. Now, credit rating agencies seem to be responsible for unfavourable market conditions as they cut credit ratings almost every month. It is ironic!  Of course, there may be points to be discussed for these decisions, and maybe failures for cutting credits. However, these agencies should be autonomous as much as possible to give right decisions for economies. It is also beneficial for investors to be aware of the global risks. Besides, governments can take correct fiscal actions to stimulate macroeconomic conditions. Therefore, it is somehow also suitable for rating cuts, and sustainable actions can be taken by governments in this environment, which would be put off and always hidden otherwise.

Now, it is time again for monetary policies again as fiscal stimulus failed in US as well as Europe.  There must be more responsibility for government leaders, and parliaments and fiscal agencies. Only monetary action is not enough itself for recovery. Inflationary risks, possible boost in stock markets may danger the global economy if this bubble ends up in the lack of fiscal stimulus.

 China and Japan are in red line too. China has a different case in which it deals with the inflation risk in the country. Central bank tries to keep interest rate as high as possible to keep price levels down. Chinese demand may drop! Restrictive monetary policy may go further until prices are OK. High spending may also damage Japan budget. Tsunami effects are in control now, but sovereign debt problem may emerge for also Japan.

There can not be an enjoyable time to buy Gold rather than this period. Investors are cautious about banks shares every week as they stand at the heart of a possible global crisis. Especially, BoA, Citibank, and HSBC will struggle the global risks for the upcoming weeks. Now, new regulations for the capital requirements for the banks are shaping. Since  this is no right  for credit size for the private sector, banks  oppose to these regulations.. This is of course appropriate for eliminating risks faced by banks as much as possible, but it will also lead to a smaller credit size for banks. Private sector may have difficulty in growing up in this slowdown.  Risk aversion behaviour leads to safe tools like gold. The case is different for US government bonds. A quantitative easing   will lead lower. In case of an interest rate cut, gold will move downward. Risk appetite will grow up, which leads stocks and oil to jump.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.