Gold continues to trade above and below $1,500 amid further indications that the anemic economic recovery in the US is faltering. The Philly Fed's Q2 Survey of Professional Forecasters reflects expectations of slower growth over the next 4-years. The trimming of expectations from the group surveyed by the Philly Fed comes on the heels of Commerce Department data released late last month that showed real Q1 GDP has slowed to 1.8%, down significantly from a 3.1% pace in Q4-10.
The Philly Fed survey participants see growth slowing to 2.7% in 2011, down from 3.2% in the previous survey. They also lowered their estimates of 2012 growth slightly to 3% and in 2013 to 2.8%. These outlooks are consistent with recent downgrades to growth forecasts from Goldman Sachs and Morgan Stanley, among others. Obviously, GDP straddling the 3% level over the next several years does not bode well for job creation, nor for any kind of improvement in the housing market. We may in fact already be entrenched in our own "lost decade," much like Japan has been for the past couple of decades.
With market participants increasingly resolving themselves to anemic growth, recent expectations that the Fed would at least begin dabbling at tighter monetary policy have begun to erode. While the Fed continues to profess that QE2 will end on schedule in June, quantitative easing in the form of reinvestment of maturing Treasuries will continue into H2, so-called QE-lite, and speculation about a QE3 simply refuses to go away.
Paul Krugman, the Nobel prize winning economist at the NY Times and a unabashed Keynesian recently said, "I would be doing a QE3 that would be both larger and broader-based than QE2." In other words, Krugman and other economists of his ilk believe the economy is languishing because the government and central bank simply haven't done enough. More stimulus, more bailout for individuals and corporations and more quantitative easing may indeed increase demand, but at the expense of further discouraging saving, moral hazard, inflation and more asset bubbles that lead to heightened systemic risks. Then of course, the massive debt that is wrung-up in such an environment must eventually be paid back.
With Treasury Secretary Geithner recently saying that he can push back the day of reckoning associated with our current $14.3 trillion debt ceiling until August, any momentum on reconciling our fiscal disaster seems to have evaporated. The mindset in Washington all too often seems to be, 'why deal with a problem today that can be put off until tomorrow?' What they seem to consistently ignore is; that's a sure-fire way to allow manageable problems to grow into catastrophic problems -- as our debt arguably has become.
Obviously there are still considerable political wranglings going on behind the scenes, but both sides seem to be digging in their heels. The Republicans want to wrest big spending concessions from the Democrats. Meanwhile, the Democrats would like to see higher taxes on corporations and wealthy individuals, or at least demonize the wealthy and corporations in he eyes of the rest of the country. In the end, the absence of any semblance of sound fiscal policy will continue to foist the responsibility on the Fed, who will maintain their über-loose monetary policy stance. The dollar will continue to deteriorate and we all suffer.
Historically, the government and the Fed have always viewed risks to growth as being a far greater threat than price risks. Inflation be damned; in an economy that is driven by consumption, quite literally -- and frequently against our own personal best interests -- we must be cajoled into spending our money, lest the economy whither and die. In that respect, inflation is a useful tool, people are more inclined to buy now if they think the price will be higher tomorrow. In holding interest rates down below the real rate of inflation, there is little incentive to put ones money in a money market account or CD because their real yield is a negative one. Savers are actually losing money.
And so there is an ever-growing cadre of those who choose to save in gold. Steadily and constantly converting excess dollars to gold, positioning themselves to weather any storm that might be brewing beyond the horizon: inflation, deflation, stagflation, systemic collapse, political turmoil to name just the most obvious.
Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.
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