The American Consumer is Not Okay

Stephen S. Roach

31 May 2013

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NEW HAVENThe spin-doctors are hard at work talking up America’s subpar economic recovery. All eyes are on households. Thanks to falling unemployment, rising home values, and record stock prices, an emerging consensus of forecasters, market participants, and policymakers has now concluded that the American consumer is finally back.
Don’t believe it. First, consider the facts: Over the 21 quarters since the beginning of 2008, real (inflation-adjusted) personal consumption has risen at an average annual rate of just 0.9%. That is by far the most protracted period of weakness in real US consumer demand since the end of World War II – and a massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.
With household consumption accounting for about 70% of the US economy, that 2.7-percentage-point gap between pre-crisis and post-crisis trends has been enough to knock 1.9 percentage points off the post-crisis trend in real GDP growth. Look no further for the cause of unacceptably high US unemployment.
To appreciate fully the unique character of this consumer-demand shortfall, trends over the past 21 quarters need to be broken down into two distinct sub-periods. First, there was a 2.2% annualized decline from the first quarter of 2008 through the second quarter of 2009. This was crisis-driven carnage, highlighted by a 4.5% annualized collapse in the final two quarters of 2008.
Second, this six-quarter plunge was followed, from mid-2009 through early 2013, by 15 quarters of annualized consumption growth averaging just 2% – an upturn that pales in comparison with what would have been expected based on past consumer-spending cycles.
That key point appears all but lost on the consumer-recovery crowd. In recent speeches and discussions with current and former central bankers, I have been criticized for focusing too much on the 0.9% trend of the past 21 quarters and paying too little attention to the 2% recovery phase of the post-crisis period. At least it’s a recovery, they claim, and a sign of healing that can be attributed mainly to the heroic, unconventional efforts of the US Federal Reserve.
This brings us to the second part of the argument against optimism: analytics. One of the first concepts to which an economics student is exposed in a basic macro course is “pent-upconsumer demand. Discretionary consumption is typically deferred during recessions, especially for long-lasting durable goods such as motor vehicles, furniture, and appliances. Once the recession ends and recovery begins, a “stock-adjustmentresponse takes hold, as households compensate for foregone replacement and update their aging durable goods.
Over most of the postwar period, this post-recession release of pent-up consumer demand has been a powerful source of support for economic recovery. In the eight recoveries since the early 1950’s (excluding the brief pop following the credit-controls-induced slump in the 1980’s), the stock-adjustment response lifted real consumption growth by 6.1%, on average, for five quarters following business-cycle downturns; spurts of 7-8% growth were not uncommon for a quarter or two.
By contrast, the release of pent-up demand in the current cycle amounted to just 3% annualized growth in the five quarters from early 2010 to early 2011. Moreover, the strongest quarterly gain was a 4.1% increase in the fourth quarter of 2010.
This is a stunning result. The worst consumer recession in modern history, featuring a record collapse in durable-goods expenditures in 2008-2009, should have triggered an outsize surge of pent-up demand. Yet it did anything but that. Instead, the release of pent-up consumer demand was literally half that of previous business cycles.
The third point is more diagnostic: The shockingly anemic pattern of post-crisis US consumer demand has resulted from a deep Japan-like balance-sheet recession. With the benefit of hindsight, we now know that the 12-year pre-crisis US consumer-spending binge was built on a precarious foundation of asset and credit bubbles. When those bubbles burst, consumers were left with a massive overhang of excess debt and subpar saving.
The post-bubble aversion to spending, and the related focus on balance-sheet repair, reflects what Nomura Research Institute economist Richard Koo has called a powerfuldebt rejectionsyndrome.
While Koo applied this framework to Japanese firms in Japan’s first lost decade of the 1990’s, it rings true for America’s crisis-battered consumers, who are still struggling with the lingering pressures of excessive debt loads, underwater mortgages, and woefully inadequate personal saving.
Through its unconventional monetary easing, the Fed is attempting to create a shortcut around the imperative of household sector balance-sheet repair. This is where the wealth effects of now-rebounding housing prices and a surging stock market come into play. But are these newfound wealth effects really all that they are made out to be?
Yes, the stock market is now at an all-time high – but only in current dollars. In real terms, the S&P 500 is still 20% below its January 2000 peak. Similarly, while the Case-Shiller index of US home prices is now up 10.2% over the year ending March 2013, it remains 28% below its 2006 peak.
Wealth creation matters, but not until it recoups the wealth destruction that preceded it. Sadly, most American households are still far from recovery on the asset side of their balance sheets.
Moreover, though the US unemployment rate has fallen, this largely reflects an alarming decline in labor-force participation, with more than 6.5 million Americans since 2006 having given up looking for work. At the same time, while consumer confidence is on the mend, it remains well below pre-crisis readings.
In short, the American consumer’s nightmare is far from over. Spin and frothy markets aside, the healing has only just begun.

Stephen S. Roach was Chairman of Morgan Stanley Asia and the firm's Chief Economist, and currently is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. His most recent book is The Next Asia.

It's Going to be Another Interesting Summer

May 31, 2013

by Doug Noland

Global de-risking/de-leveraging starts to gain some traction.

Legendary Fed Chairman Paul Volcker spoke again this week before the New York Economics Club. I’ve included large portions from his talk below. As a member of the Federal Reserve going back to the early 1950s’, Mr. Volcker offers incomparable experience and insight. The comments from this honorable statesman are always worthy of careful consideration.

Mr. Volcker has myriad issues with contemporary central banking and is no fan of the Fed’s dual mandate. When asked for his preferred central bank mandate, he referred to the Bundesbank and monetary stability before providing the following: “A central bank is in charge of the currency. And the responsibility is for a stable currency.”

Well, we live in an era where global central banks prefer weak currencies to stable ones. Almost in unison, today’s monetary policy doctrines push currency devaluation. It’s essentially this period’sbeggar thy neighborcloaked in analytical elegance and sophistication. The Bernanke Fed’s loose policies have weakened the dollar for years now. Monetary stimulus went to unprecedented extremes after the bursting of the mortgage finance Bubble, an inflationary course that was fatefully ramped significantly higher last summer with the move to open-ended QE. More recently, the Bank of Japan embarked on an extraordinary (and similarly fateful) monetary experiment to weaken the yen and inflate the price level.

It seems rather obvious that years of aggressive synchronized monetary stimulus have indeed fueled the greatest Bubble in history. More than four years ago, I presented the “global government finance Bubblethesis. The “developingmarkets and economies have been integral to my Macro Credit and Bubble Analysis. The conventional bullish view has held that China, Asia, Latin America and Eastern Europe were the “global locomotive” that was to pull the struggling developed economies out of the muck. I’ve taken a much dimmer view. Unprecedented monetary excess from the Fed and others helped push already overheateddevelopingCredit systems and economies into dangerousterminal phaseCredit Bubble Excess.

There are always unintended reflationary consequences. The Fed’s $85bn monthly QE has spurred a powerful Bubble throughout U.S. securities and asset markets. The unintended include the reemergence of “king dollardynamics and the magnetic pull of speculative finance from the “developingmarkets. The Bank of Japan has succeeded in weakening the yen, but at the expense of South Korea and “developingAsia. The weak yen has further bolsteredking dollar,” placing additional pressure on commodities markets, economies and currencies.

From Bloomberg: “China’s economy is proving less responsive to credit, escalating pressure on Premier Li Keqiang to strengthen the role of private enterprise. The government’s broadest measure of credit rose 58% to a record 6.16 trillion yuan ($1 trillion) in January-to-March, when gross domestic product gained 7.7%, compared with 8.1% a year earlier. Each $1 in credit firepower added the equivalent of 17 cents in GDP, down from 29 cents last year and 83 cents in 2007, when global money markets began to freeze…”

Other headlines of note this week: “India’s Economic Growth Slowest in a Decade;” “India’s Bonds Complete Worst Week Since March…;”“Brazil Faces 1970s Stagflation as Resource Boom Wilts;” “Latin America Disappoints After Squandering Commodity-Boom Era;” “BRIC-Worst Growth Sinking [Brazil’s] Corporate Debt Market;” “China Slowdown Drives Asia Bond Risk Above Peers;” “Mexico Bond Yields Rise to Highest Since January; Peso Declines;” “Turkey’s Trade Gap Balloons in April Sending Bonds, Lira Lower;” “Biggest Selloff Since 2011 Hammers [South African] Bonds;” and “Russia Yields Surge Most in Month… as Ruble Slides.”

The more analysts dig into the analysis the less they like what they see. For the week, the South African rand dropped 5.1%. The Brazilian real sank 4.2%, the Chilean peso declined 2.5%, the Malaysian ringgit 2.0%, the Hungarian forint 2.0%, the Peruvian new sol 2.0%, the Mexican peso 2.1%, the Russian ruble 1.6%, the Philippine peso 1.6%, the Turkish lira 1.5% and the India rupee 1.5%.

Despite a surprise 50 bps increase in rates, the Brazilian real traded to a four year low this week. It is worth nothing that Brazil’s local 10-year government yields jumped just over 100 bps during May to 10.48%. Mexico’s 10-year local yields rose almost 100 bps to 5.45%. Russian yields were up about 80 bps for the month to 7.28% and Turkey’s yields were up 70 bps to 6.71%. May was similarly unkind to manydeveloping” equities markets. Brazilian and Mexican stocks were down 3.6% and 1.6%. Argentine stocks (Merval) were down 9.3%, Peru 7.5%, and Chile 2.4%. Eastern Europe was generally mixed, while developing Asia was mostly positive for the month. Most commodities suffered a difficult May. The CRB Commodities index declined 2.1%. Lumber was down 9.7%, Cocoa 9.3%, Natural Gas 7.9%, Coffee 5.5%, Sugar 4.5%, Silver 4.6%, Gold 3.7%, Cotton 3.3% and corn fell 2.9%.

U.S. equities for the most part enjoyed a carefree May. The S&P500 rose 2.1%. The average stock (Value Line Index) jumped 3.9%. The small cap Russell 2000 gained 3.9% and the S&P400 Mid-Cap Index rose 2.1%. And the more speculative the better. The Nasdaq Composite rose 3.8%. The Nasdaq Telecom index gained 6.2%, the Interactive Week Internet index advanced 4.8%, the Philadelphia Semiconductor (SOX) index gained 5.5%, and the Nasdaq Biotech index jumped 4.1%. The KWB Bank index surged 8.3% and the NYSE Securities Broker/Dealer index jumped 9.6%. The Goldman Sachs Most Short Index gained 5.1% during May (up 23.2% y-t-d).

Curiously, Financial Euphoria took hold in U.S. risk markets just as “developingmarkets began indicating mounting fragility. Considering the degree of exuberance that has taken hold here at home, we should not be surprised that our markets have dismissed the relevance of heightened currency, commodity and “developingmarket weakness. Actually, as the U.S. equity market has succumbed to speculative dynamics, global macro concerns have only worked to provide additional fuel for the “melt-up.” May was a big short squeeze month, and those shorting the U.S. markets were repeatedly forced to cover as the market lurched higher.

Financial Euphoria also helped see the backup in U.S. market yields in positive light. May saw 10-year Treasury yields jump 46 bps. Notably, benchmark Fannie Mae MBS yields surged 61 bps. With the Fed on deck to buy large quantities of Treasuries and MBS for months to come, it was easy not to take the backup in yields too seriously. Actually, most viewed higher yields as confirmation of their bullish thesis.

There’s an alternative bearish view worth contemplating: In the midst of all the Euphoria, the globalsystemactually commenced another de-risking and de-leveraging cycle. Huge amounts of leverage have accumulated in highly speculative global markets over the past four years – from global currencycarry trades,” to commodities, “developing market debt, and even U.S. corporates and MBS. Seemingly annual bouts of impending market tumult have been held at bay by aggressive central bank intervention. This one has started in the midst of unprecedented monetary stimulus from the Fed, BOJ and others.

I’m of the view that the so-calledglobal reflation trade” became one enormous speculative bet on unending dollar devaluation, China/Asia expansion, commodities inflation and Latin American growth. Yet on almost all fronts, this scenario is increasingly challenged. “King dollardynamics have overwhelmed Bernanke Fed dollar devaluation. China, in particular, and “developingeconomies more generally suffer from myriad ill-effects of years of rampant Credit expansion and attendant imbalances and fragilities. Moreover, additional easy money and stimulus would only worsen the situation. Commodities markets have weakened, partially as a result of deteriorating China/Asian/“developing”/global growth dynamics. Furthermore, commodities prices tend to come under pressure in anticipation of more aggressive exports by the increasingly vulnerablecommoditieseconomies. Recall how the collapse of the soviet empire (and then Russia) pressured the price of about everything those countries had to sell?

There are aspects of the current environment that are reminiscent of 1998. U.S. equities were on a bull runfueled by liquidity abundance coupled with the bullish perception that global macro issues had been resolved by the IMF and global central banks. It was at the time difficult for me to believe that the markets were ignoring the unfolding Russian debacleconfident that “the West would never allow Russia to collapse.” And, importantly, the marketplace was oblivious to unfolding derivative problems that manifested in the collapse of Long Term Capital Management. Again, the view was that global central banks would not tolerate a major derivatives blowup.

Well, the global system” has had more than four years of ongoing artificially low rates, unprecedented liquidity overabundance and central bank market backstopping that would seem to ensure the accumulation of all varieties of financial excess. And as far as I’m concerned, this latest speculative run in U.S. stocks is just one more excess adding to already major global fragilities. It’s worth noting that stocks, commodities and bonds all were in retreat on Friday. At least for a day, it had the look of de-risking, de-leveraging and waning liquidity.

There’s always that thin line between fervent speculative excess along with the perception of unending liquidity abundance and a vulnerable speculative Bubble. Emerging market (EM) funds suffered their worst week of outflows since December 2011. In the nineties, the emerging markets came to be calledroach motels.” Part of the ongoing EM bull story has been the large accumulation of international reserves by these economies – that would ensure no nineties-like repeat of “hot moneyflight and attendant financial and economic dislocation. To what extent these reserve holdings enticed only larger hot moneyinflows is today a pertinent issue. Also apropos is the consequence to market liquidity if the EM central banks were forced to sell some of their reserve holdings to support their currencies against a “hot money” (de-risking/de-leveraging) run to the exits.

And we can’t forget the crowded – and potentially weak-handed - global leveraged speculating community and their ongoing struggles for decent performance. The yen gained almost 1% this week versus the dollar, as Japanese stocks were hammered. The Abe/Kuroda Bubble is suffering a credibility crisis. It’s going to be another interesting summer.

From “Central Banking at a Crossroad,” Paul Volcker, The Economic Club of New York, May 29, 2013

“In no doubt, the challenge of orderly withdrawal from today’s (vs. 1950s) broader regime of quantitative easing is far more complicated. The still growing size and composition of the Fed’s balance sheet implies the need for, at the least, an extended period of disengagement. Moreover, the extraordinary commitment of Federal Reserve resources alongside other instruments of government intervention is now totally dominating the largest sector of our capital marketsthat for residential mortgages. Indeed, I do not believe it an exaggeration to note that the Federal Reserve with assets of $3.5 Trillion and still growing is, in effect, acting as the world’s largest financial intermediator, by acquiring long-term obligations and financing short-terms, of course aided and abetted by the unique privilege to create its own liabilities.

Beneficial effects of the actual and potential monetization of public and private debt – the essence of the various QE programsappear limited and diminishing over time. The old pushing on a stringanalogy is relevant. And the risks of encouraging speculative distortions and the inflationary potential of the current approach plainly deserve attention. All of this has given rise, obviously, to debate within the Federal Reserve Board itself. In that debate, I trust sight is not lost of the merits - economically and politically - of an ultimate return to more orthodox central banking approaches.

I do not doubt the ability and the understanding of chairman Bernanke and his colleagues. They have a very considerable range of tools and instruments available to them to manage the transition. They include the novel approach of paying interest on excess reserves, potentially sterilizing their monetary impact. What is at issuewhat is always at issue – are matters of good judgment, leadership and institutional backbone. The willingness to act with conviction in the face of predictable political opposition and substantive debate is, as always, a requisite part of a central bank’s DNA.

Those are not qualities that can be learned from textbooks. Abstract economic modeling and the endless regressions of econometricians will be of little help. The new approach of “behavioraleconomics itself is recognition of the limitations of mathematical approaches, but that newscience” is in its infancy.

I think a reading of history may be more relevant. Here and elsewhere the temptation has been strong to wait and see before acting to remove stimulus and then moving toward restraint. Too often the result is to be too late, to fail to appreciate growing imbalances and inflationary pressures before they are well ingrained.

There is something else beyond the necessary mechanics and the timely action that is at stake: the credibility of the Federal Reserve, its commitment to maintain price stability and its ability to stand up against pressing and partisan political pressures is critical. Independence cannot be just a slogan. Nor does the language of the Federal Reserve Act itself assure protection, as was demonstrated in a period after World War II. Then, as now, the law and its protections seem clear, but then it was the Treasury for a long time that called the tune.

In the last analysis, independence rests on perceptions of high competence, of unquestioned integrity and the will to act. Clear lines of accountability to the Congress and to the public need to be honored. Moreover, maintenance of independence in a democratic society ultimately depends on something beyond those internal institutional qualities. The Federal Reserveany central bank – should not be asked to do too much – to undertake responsibilities that it cannot responsibly meet with its appropriately limited powers.

I know it’s fashionable to talk about a dual mandate – that policy should somehow be directed to two objectives of price stability and full employment. Fashionable or not, I find that mandate both operationally confusing and ultimately illusionary. Operationally confusing and in breeding incessant debate in the Fed and the markets about which way policy should lead month to month, quarter to quarter – with close inspection of every passing statistic. More important, illusionary implies a tradeoff between economic growth and price stability – a concept that I thought had been long refuted not just by Nobel prize winners but by experience.

The Federal Reserve, after all, has only one basic instrument so far as economic management is concerned managing the supply of money and liquidity. Asked to do too much - for instance to accommodate misguided fiscal policies, to deal with structural imbalances, or to square continuously the hypothetical circles of stability, growth and full employment - then it will inevitably fall short. If in the process of trying it loses sight of its basic responsibility for price stability, a matter that is within the range of its influence, then those other goals will be beyond its reach.

Back in the 1950s, after the Federal Reserve finally regained its operational independence, it decided to confine its open market operations almost entirely to the short-term money markets – the so-calledbills only doctrine.” We can’t go back to that – we can’t go home again to the simpler days of the 1950s and 1960s. Markets and institutions are much larger, far more complex. They have also proved to be more fragile, potentially subject to large, destabilizing swings in behavior. The rise of shadow banking, the relative decline of regulated commercial banks, the rapid innovation of new instruments have all challenged both central banks and other regulatory authorities.

But one simple logic remains. It is, I think, reinforced by these developments. The basic responsibility of a central bank is to maintain reasonable price stability - and by extension that means it must take account of the stability of financial markets generally. In my judgment, those functions are complimentary and they should be doable.

With or without a numerical target, the broad responsibility for price stability over time does not in any way imply an inability to conduct ordinary counter-cyclical policies. Indeed, in my judgment confidence in the ability and commitment of the Federal Reserve or any central bank to maintain price stability over time is precisely what makes it possible to act aggressively in supplying liquidity in recession or when the economy is in a prolonged period of growth well below potential.

Credibility is an enormous asset. Once earned, it must not be frittered away by yielding to the notion that a “little inflation right now” is a good thing to release animal spirits and to pep up investment. The implicit assumption behind the siren call must be that the inflation rate can be manipulated to reach economic objectivesup today, maybe a little more tomorrow, and then pulled back on command. But all experience amply demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse. Credibility is lost.

I have long argued that central bank concern for stability must range beyond prices for goods and services to the stability and strength of financial markets and institutions generally. I am afraid we collectively lost sight of the importance of banks and markets robustly able to maintain efficient and orderly functioning in time of stress. Nor has market discipline alone restrained episodes of unsustainable exuberance before the point of crisis. Too often, we were victims of theorizing that markets and institutions could and would take care of themselves.

My concerns in that respect and their relevance to central banking and the organization of regulatory authority, were more fully expressed in a speech to this Club several years ago. Congress was then beginning to consider reform legislation. It was recognized that regulatory agencies, perhaps most specifically the Federal Reserve, had exhibited a certain laxity and ineffectiveness in the period leading up to the financial breakdown, particularly with respect to the mortgage market

The erosion of confidence and trust in the financial world, in the financial authorities that oversee it, and in government generally is palpable. That can’t be healthy for markets or for the regulatory community. It surely can’t be healthy for the world’s greatest democracy, now challenged in its role of political and economic leadership…”

domingo, junio 02, 2013



After the Gold Rush

Nouriel Roubini

01 June 2013

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VENICEThe run-up in gold prices in recent years – from $800 per ounce in early 2009 to above $1,900 in the fall of 2011 – had all the features of a bubble. And now, like all asset-price surges that are divorced from the fundamentals of supply and demand, the gold bubble is deflating.
At the peak, gold bugs – a combination of paranoid investors and others with a fear-based political agenda – were happily predicting gold prices going to $2,000, $3,000, and even to $5,000 in a matter of years. But prices have moved mostly downward since then. In April, gold was selling for close to $1,300 per ounce – and the price is still hovering below $1400, an almost 30% drop from the 2011 high.
There are many reasons why the bubble has burst, and why gold prices are likely to move much lower, toward $1,000 by 2015.
First, gold prices tend to spike when there are serious economic, financial, and geopolitical risks in the global economy. During the global financial crisis, even the safety of bank deposits and government bonds was in doubt for some investors. If you worry about financial Armageddon, it is indeed metaphorically the time to stock your bunker with guns, ammunition, canned food, and gold bars.
But, even in that dire scenario, gold might be a por investment. Indeed, at the peak of the global financial crisis in 2008 and 2009, gold prices fell sharply a few times. In an extreme credit crunch, leveraged purchases of gold cause forced sales, because any price correction triggers margin calls. As a result, gold can be very volatileupward and downwardat the peak of a crisis.
Second, gold performs best when there is a risk of high inflation, as its popularity as a store of value increases. But, despite very aggressive monetary policy by many central bankssuccessive rounds of “quantitative easing” have doubled, or even tripled, the money supply in most advanced economiesglobal inflation is actually low and falling further.
The reason is simple: while base money is soaring, the velocity of money has collapsed, with banks hoarding the liquidity in the form of excess reserves. Ongoing private and public debt deleveraging has kept global demand growth below that of supply.
Thus, firms have little pricing power, owing to excess capacity, while workers’ bargaining power is low, owing to high unemployment. Moreover, trade unions continue to weaken, while globalization has led to cheap production of labor-intensive goods in China and other emerging markets, depressing the wages and job prospects of unskilled workers in advanced economies.
With little wage inflation, high goods inflation is unlikely. If anything, inflation is now falling further globally as commodity prices adjust downward in response to weak global growth. And gold is following the fall in actual and expected inflation.
Third, unlike other assets, gold does not provide any income. Whereas equities have dividends, bonds have coupons, and homes provide rents, gold is solely a play on capital appreciation. Now that the global economy is recovering, other assetsequities or even revived real estate – thus provide higher returns. Indeed, US and global equities have vastly outperformed gold since the sharp rise in gold prices in early 2009.
Fourth, gold prices rose sharply when real (inflation-adjusted) interest rates became increasingly negative after successive rounds of quantitative easing. The time to buy gold is when the real returns on cash and bonds are negative and falling. But the more positive outlook about the US and the global economy implies that over time the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise, rather than fall.
Fifth, some argued that highly indebted sovereigns would push investors into gold as government bonds became more risky. But the opposite is happening now. Many of these highly indebted governments have large stocks of gold, which they may decide to dump to reduce their debts. Indeed, a report that Cyprus might sell a small fraction – some €400 million ($520 million) – of its gold reserves triggered a 13% fall in gold prices in April. Countries like Italy, which has massive gold reserves (above $130 billion), could be similarly tempted, driving down prices further.
Sixth, some extreme political conservatives, especially in the United States, hyped gold in ways that ended up being counterproductive. For this far-right fringe, gold is the only hedge against the risk posed by the government’s conspiracy to expropriate private wealth. These fanatics also believe that a return to the gold standard is inevitable as hyperinflation ensues from central banks’debasement” of paper money. But, given the absence of any conspiracy, falling inflation, and the inability to use gold as a currency, such arguments cannot be sustained.
A currency serves three functions, providing a means of payment, a unit of account, and a store of value. Gold may be a store of value for wealth, but it is not a means of payment; you cannot pay for your groceries with it. Nor is it a unit of account; prices of goods and services, and of financial assets, are not denominated in gold terms.
So gold remains John Maynard Keynes’s “barbarous relic,” with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic. Yes, all investors should have a very modest share of gold in their portfolios as a hedge against extreme tail risks. But other real assets can provide a similar hedge, and those tail riskswhile not eliminated – are certainly lower today than at the peak of the global financial crisis.
While gold prices may temporarily move higher in the next few years, they will be very volatile and will trend lower over time as the global economy mends itself. The gold rush is over.
Nouriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank