“Well, in my view, gold is not going to rise to the levels $1,500, $2,000 the gold backs argue because gold tends to sharply rise only under two conditions. Either there’s a significant increase in inflation – and in US, Europe, Japan, we worry more about deflation than inflation. Or gold rises when there is really risk aversion like after the collapse of Lehman or a year ago when the banks US looked like borderline insolvent. So we have avoided the tail risk of a near depression. So gold prices shouldn’t go higher. And for now, there is more deflation than inflation. So for the time being, I see gold in a very narrow range, not shooting up much higher than current levels.
On the current trade deficit:
“Well, first of all, the widening of the trade deficit implies that in the first quarter, net exports are going to be a negative contribution to the negative growth. It’s true that consumption growth for the first quarter might be close to 3 percent. But I still expect a growth rate for the first quarter of about 2.5 percent below trend, because if you look at the other components of aggregate demand, net exports are contracting, fixed investment is anemic because both residential and non-residential investment are still falling. CapEx spending is growing only anemically, and government spend is not going to be a significant contribution to economic growth. So when you add all the components of aggregate demand, we still get the growth rate of barely 2.5 percent. That is even below a potential growth rate of 3 percent. This at a time where the policy stimulus is still at the maximum. But the second half of the year as the policy and stimulus wanes and the restocking stops, then we’re going to have even lower economic growth, closer to 2 percent. That’s the scenario of an anemic, subpar, below trend, U shaped recovery.
On whether the Fed should craft an exit strategy:
“Well, for the time being, the Fed is saying they’re going to keep zero rates for the foreseeable future. That’s not going to change. In my view, the Fed funds are going to stay at zero until at least the first quarter, if not the second quarter, of next year, given we’re going to have anemic economic growth, and we’ll have more deflation than inflation. And the Fed might try to start mopping up some of the liquidity. But I think that actually chances are they’re going to resume further quantitative easing, because if they’re going to have a backup in mortgage rates or ten year treasuries, the last thing that the Fed can afford in an election year is having a crowding out of the recovery of housing that is already an (inaudible) recovery during an election year. So if a backup in yield were to occur and mortgage rates go higher and higher, the Fed is going to eat its own words, reverse what it said, lose some reputation, and resume further QE directly or indirectly. They could use, for example, Fannie and Freddie as a way of effectively backstopping the mortgage market. So I see zero rates and maybe more QE rather than less QE.
“Well, they’re going to do it only gradually. In the best of all worlds between 2005 and 2008, they would allow only a 6 percent appreciation of the yuan relative to the dollar when they were growing much faster and they did not have employment problems. Today they’re growing more slowly, exports fell, the recovery is anemic. Therefore, they’re going to let the maximum, in my view, 3 percent to 4 percent of their currency per year. Something that’s going to allow at least the U.S. to signal there is some movement, and prevent the U.S. from declaring China as a currency manipulator. But the pressure is on us.”
“In my view, China’s going to move at the latest by sometime in June, possibly as early in May.”
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