Goldman Sachs Chairman CEO Lloyd Blankfein believes the U.S. economy is a "terrific environment for growth."

Housing has bottomed out and changed from a headwind to a tailwind, said Blankfein during an interview by Investment Company Institute (ICI) CEO Paul Schott Stevens at the ICI's General Membership Meeting. Plus, Blankfein noted, lower energy costs are boosting manufacturing and borrowers have deleveraged.

"I think, and most people think, that the recovery is established, again not without risk," he said in the interview shown by CNBC. "We're going in the right direction. There's a lot of great factors" pushing for a stronger recovery.

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However, given the many favorable factors, he would have expected the economy to be performing better.

The problem, he said, is that people remain anxious and are still recovering from the trauma of the financial crisis.

"People are nervous about taking risk. Nobody agrees on the pricing of anything," he said. "Debt is very cheap, but no one is borrowing to invest in their own businesses. Do people think they can't get a return out of their own business?"

Uncertainty is a problem, but it has always been an issue, Blankfein explained. A greater issue is that business leaders now have a great fear of making a mistake, he noted, adding that the current environment is unforgiving of mistakes.

Commenting on monetary policy, Blankfein said the Federal Reserve's quantitative easing (QE) has reached a point of diminishing returns, as more rate decreases have less impact.

Deflation is now a greater risk than inflation, he said. "Inflation is insidious," but the consequences of deflation are devastating and the Fed has tools to combat inflation.

"If I was in charge of monetary policy, I would be most afraid of about the economy sliding back into a deflationary period. Psychologically, in some ways we are in a bit of a deflationary mindset."

If he was in charge of the Fed, he would also be hoping for fiscal help, but the odds of Congress pitching in are low, he added.

Blankfein's prognosis is at odds with many.

Albert Edwards, global strategist at Societe Generale, believes the economic recovery is precarious. In fact, we're just one recession away from a Japanese-style deflation, warns the renowned bear.

In recent research note, Edwards writes that most investors don't see that the West is repeating Japan's history from the 1990s.

"But the latest inflation data out of both the U.S. and eurozone should ram home the fact that we are now only one short recession away from Japanese-style outright deflation," he states, according to Business Insider. "Similarly, investors refuse to believe that equities can fall in an environment of rampant QE. They are wrong."

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth’