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HSBC bullish over gold

The U.S. economy hasn’t completely recovered from its last recession – what some have called the biggest since the Great Depression – but another one could be just around the corner, according to one economist.


In an opinion piece in the Financial Times, Monday, HSBC chief economist Stephen King said that historical trends shows that recessions hit every eight or nine years and the last one in the U.S. ended six years ago. If history is any indication, the U.S. could be facing another recession in the next three years. What’s worse, he said, is that policy makers don’t appear to have the ammunition needed to fight another one.


King noted that there could be several triggers for the next recession; a collapse in “overvalued equity markets,” leading to an “implosion of demand;” a sizeable slowdown in the Chinese economy; systemic failures across the pension fund and life-insurance industries; even a premature tightening of interest rates from the Federal Reserve.


“Whatever the likely cause of the next recession, the recovery seen so far has not enabled policymakers to replenish their ammunition; growth has returned but policy has not “normalized,” he said in his op-ed. “The U.S. economy is like a ship sailing across the ocean without lifeboats. Other nations are following in convoy behind. For all their sakes, we must hope to avoid recessionary icebergs.”


King did note that the government and the Federal Reserve are not without options; however, none seemed very appealing.


He said the Federal Reserve would have to restart its quantitative easing program. “That, however, might lead to yet another unsustainable asset price bubble and, thereafter, to an even bigger bust,” he said.


The government could introduce bigger budget deficits and create “Roosevelt-esque stimulus measures.” However, he added that in the 1930’s the government didn’t have to worry about pre-existing spending commitments and increased government spending now could create a pension and healthcare-fuelled debt spiral.


Another option would be for the Federal Reserve to start hiking interest rates as soon as possible to “replenish” its ammunition. But King added “[s]ustainably higher interest rates are only possible if the underlying economic forces — beyond the control of central banks — will let them go higher.”


Finally another option would be to raise the age of retirement.


“This would, at a stroke, reduce the need for high retirement savings because people would expect to work longer and, thus, live off wage income for longer. Lower savings would mean higher levels of consumption, stronger demand and, hence, higher levels of investment,” he said.


However, he added that this is not likely to happen as senior would probably push back against this type of proposal.


Therefore, with no clear solution to a looming problem King concluded, “We will, therefore, carry on sailing across the ocean in a ship with a serious shortage of lifeboats.”


In reaction to King’s op-ed piece, HSBC precious metals analysts said, that any of these scenarios would be positive for the gold market.




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