Isn’t it too late to concern about the financial stability of the US banks?

2013 is going to be a challenging year for the global economy. Set US obligations to reduce the growth of budget deficit during 2013 and 2021 years and termination of the reduced taxes from 2013 may weaken consumption and cause double dip recession in the US with the contingency effect on global economy. Moreover, isn’t it too late to concern about the financial stability of the US banks due to approaching fiscal cliff?

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 which was passed by the US Congress and signed by President Barack Obama on December in 2010 terminates a two year extension of reduced income taxes known as the “Bush tax cut” in 2013. It also terminates extension of several other measures such as unemployment benefits and reduction of social security and medical care taxes. Moreover, according to the approved Budget Control Act of 2011, US was able to increase debt ceiling to $16.4 trillion in exchange for mandatory $1.2 trillion cuts of budget expenditures during the period from 2013 till 2021.

According to the analysis of the Congressional Budget Office – Fiscal Tightening in 2013 and Its Economic Consequences, published on August 22, 2012, a sharp reduction in the federal budget deficit will cause economy to contract but also put federal debt on more sustainable way. If current laws remain unchanged those lead to the tax increase and spending cuts the federal budget deficit will be reduced by $487 billion in 2013 and federal budget deficit will be $ 641 billion in 2013. According to this scenario it is expected that economic growth will contract to -0.5 % in the 4^th quarter of 2013 compared to the 4^th quarter of 2012. In case the lawmakers extend most tax cuts and other forms of tax relief and prevent automatic certain spending reductions, the federal budget deficit may be reduced by $91 billion in 2013 and federal budget deficit is projected to be $1,037 billion in 2013. According to the alternative fiscal scenario, it is expected the economy to growth by 1.7% in the 4^th quarter of 2013 compared to the 4^th quarter of 2012.
 

It is likely that in the anticipation of the worst case scenario and sharp economic contraction in 2013, the Federal Open Market Committee (FOMC) of the US Federal Reserve decided to continue monetary stimulus with third round of large-scale asset purchases. According to the statement of the FOMC meeting released in September 13, 2012 the Committee agreed to purchase additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also decided to continue through the end of the year its programme to extend the average maturity of its holdings of securities and to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. It was expected to increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year and put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The continued monetary stimulus programme lifted equity markets; however, will capital gains from the equity price increase be substantial to meet investors’ in the US markets expectations related to the increased taxes on capital gains in 2013. Additionally, will the future economic environment promise more business growth opportunities and policies of higher dividends, so that gains from the dividends were substantial to meet investors’ expectations including increased taxes on dividends in 2013? Moreover, the fiscal policy of higher taxes creates more incentives for corporations to fund development through borrowing due to tax shield which leads to more lending opportunities for banks and increased financial risks related to higher leverage of corporations.

Sold gold reserves held in the IMF may realise frozen capital for economic development

The annual meetings of the World Bank Group and the International Monetary Fund hosted in Tokyo, October 9-14, once again engaged high level representatives from financial organizations and academic communities into the economic growth and financial stability issues. The events started with a brief presentation of the World Economic Outlook (WEO) which emphasised threats of high debts and sluggish economic growth mainly due to weaker demands in advanced economies. Similarly, the press briefing on Global Financial Stability Report (GFSR) highlighted actions restoring market confidence through monetary interventions and financial system reforms related to financial buffers, high-quality capital and sufficient liquidity in advanced economies as well as fiscal discipline in Europe, Japan and the United States. So are there particular circumstances those affect the future economic outlook?

Several events during the last and upcoming month have set more challenges and uncertainties regarding the future economic development. Slowing global economic growth and upcoming leadership changes encourage aggressive economic growth strategies and implementation of short term financial stability measures such as monetary easing measures to relieve credit crunch and market pressure. Approaching the US presidential elections in November 6 may change public debt management policies and measures for reduction of fiscal cliff, set new economy growth and employment programmes, and even affect monetary decisions. China’s slowing economic growth and territorial dispute with Japan, which may weaken economic cooperation between Asian countries, also coincide with the date of the 18th Party Congress on November 8, the date of formal unveiling of China’s new leaders and development policies. Moreover, despite of the measures prepared by European leaders to provide necessary financial support, Europe’s peripheral countries faces internal unrest due to exercised austerity measures, high unemployment and weak economic recovery.

Investment in gold products are seen as a save heaven in the environment of high uncertainties. So could growing gold prices create economic distortions? Expectations of investors that gold may rise to $2,000 an ounce could encourage investment in gold and may freeze capital for economic development.

Even the role of the gold has been reduced in the international monetary system, the IMF remains one of the largest official holders of gold in the world. According to the factsheet on Gold in the IMF published on 24 August, 2012, the IMF held 90.5 million ounces (2,814.1 metric tons) of gold at designated depositories at mid-August 2012. The IMF’s total gold holdings are valued on its balance sheet at SDR 3.2 billion (about $4.8 billion) on the basis of historical cost. As of August 17, 2012, the IMF's holdings amounted to $146.1 billion at current market prices. So, sold gold reserves held in the IMF at market prices could realize frozen capital for economic development.