The Future Of Fiscal And Monetary Policy Through The Lens Of Goldman Sachs

Tyler Durden's picture

Still confused by the last two days of Ben Bernanke testimony which in under 24 hours had elements of glaring contradiction? A) You are not alone and B) Judging by the market's response to the Congressional and Senatorial portions of Bernanke's testimony, not even he knows what monetary message he was trying to convey. And since all of his decisions are ultimately predicated by Goldman Sachs (either in the form of current GS employee Jan Hatzius, or former GS employee Bill Dudley) here is Goldman's take on the "Q&A on the Monetary and Fiscal Policy Outlook" based on Alec Phillips and Sven Jari Stehn's take of Humphrey Hawkins events in the past two days.

From Goldman Sachs

Following Chairman Bernanke’s Congressional testimony, the June 12 release of the June Federal Open Market Committee (FOMC) meeting and the ongoing discussions surrounding the fiscal outlook and the debt-limit, we devote today’s comment to discussing recent changes to the monetary and fiscal policy outlook in a Q&A format.

Q: Has the Fed’s assessment of the economic outlook changed?

A: Chairman Bernanke’s remarks on the outlook contained no meaningful surprises. He noted moderate growth in the recovery to date, held back by the household sector in particular, and said that the latest employment report attested to the weakness in the labor market. As in other recent remarks, he continued to point out that some factors holding back growth will likely prove temporary, and that the committee still expects acceleration in the second half.

The FOMC meeting minutes revealed some color on the risks to the outlook. These included further declines in housing activity and spillovers from Europe. Moreover, both Chairman Bernanke and the minutes noted concern about the potential failure to raise the debt ceiling "in a timely manner". Specifically, Bernanke painted a grim picture of the potential contraction in activity from a debt ceiling impasse—implying it could be of similar magnitude to the late-2008/early-2009 downturn. Also, he cautioned several times that Congress should avoid sharp budget cuts in the near-term that could damage an already fragile recovery.

Q: Have we moved closer to renewed monetary easing?

A: Chairman Bernanke delivered a balanced assessment of the policy outlook, saying that the economy could evolve in a way that would “warrant a move toward less-accommodative policy”, but that persistent weakness in activity and renewed deflationary risks would “imply a need for additional policy support”. Moreover, the prepared remarks included a list of potential easing options. These include (1) more explicit forward guidance on the funds rate and/or the size of the Fed's balance sheet, (2) a cut in the interest rate on excess reserves, (3) and additional security purchases or increases in the average maturity of the Fed’s holdings.

The balanced nature of Chairman Bernanke’s policy discussion suggests that Fed officials continue to see a high bar for either monetary tightening or easing. That said, we think that Bernanke’s remarks signal an upgrade of the seriousness of the easing discussion within the committee. Although Bernanke already listed these easing options in response to a question during the press conference on June 22, and the minutes to the June FOMC meeting likewise discussed the possibility of further easing in two places, we see their inclusion into the prepared remarks as a moderate dovish surprise. Although the likelihood of action remains low, we believe the probability of easing over the next six to nine months is now higher than the probability of tightening.

Q: What have we learned about the Fed’s exit strategy?

A: The minutes revealed that "all but one" FOMC participant agreed on the following exit strategy sequence. The first step would be to "cease reinvesting some or all payments of principal on the securities holdings in the SOMA." It is noteworthy that the minutes made no distinction between Treasury and agency securities here. Second, "at the same time or sometime thereafter, the Committee will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations." Third, raise the funds rate target which "from that point on…will be the primary means of adjusting the stance of monetary policy." Finally, sales of agency securities "will likely commence sometime after" with intent to eliminate agency holdings over three to five years and normalize SOMA portfolio size over two to three years. This sequencing of the exit strategy is in line with previous speeches and comments on this topic, although it is unlikely to be of near-term relevance given the recent weakness in the economic data.

Q: How important is Moody’s decision today to put the US on review for possible downgrade?

A: The Moody’s move was well telegraphed and does not significantly increase the likelihood of a downgrade in our view. In early June, Moody’s announced that it would assess the state of discussions in “mid-July” and would place the rating on review unless “meaningful progress” had been made in negotiations to raise the limit. Moody’s statement today indicated that they viewed the probability of default as “low” but no longer “de minimis.” However, the move does not imply a downgrade unless a default actually occurs. As we have noted in the past (see for example “The Federal Debt Limit: More Risk to Spending than to Treasuries,” US Daily, May 18, 2011), we believe that the fundamental risk to Treasury interest and principal payments is low, in light of the ability to prioritize spending and the level of incoming revenues. Although we don't believe the Moody's announcement substantially raises the probability of a downgrade, it signals the possibility that the US rating will remain on negative outlook for some time. Specifically, Moody's states that in order to retain a stable outlook, the upcoming agreement should imply a "deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years."

Q: So has the outlook for reaching an agreement on the debt limit actually changed?

A: Not as much as the headlines would imply. It was only a week ago that the possibility of a $4 trillion “grand bargain” on deficit reduction dominated media reports. At that point, there seemed to be an expectation among many market participants that a deal was close at hand, with the possibility of a larger than expected deficit reduction package. A week later, the likelihood of a $4 trillion deficit reduction agreement looks low. However, the likelihood of reaching a smaller deficit reduction agreement coupled with a debt limit increase, or at least a temporary extension of the debt limit, has not changed nearly as much. There still appears to be agreement on well over $1 trillion in spending cuts, with spending cuts on the table in the Biden talks of potentially as much as $1.7 trillion. The debate continues to hinge on whether a deficit reduction agreement should include reductions in Medicare and Medicaid spending (which many Democrats oppose) and increases in tax revenues (which many Republicans oppose).

Q: What have we learned about the composition of a potential agreement?

A: Some new details have emerged, which support the view that near-term fiscal contraction would be modest. Yesterday House Majority Leader Cantor’s office released details of the various proposals that had been discussed during the fiscal talks led by Vice President Biden. In general, the items on the table conform fairly closely to our own expectations for the package, and confirm our view that near term fiscal tightening would be reasonably modest. We recently noted that the total spending reduction from a hypothetical $2.4 trillion deficit reduction package would reduce outlays in 2012 by only something like $50bn (or approximately 0.3% of GDP). Some of the policies differ from the hypothetical package we estimated but the broad strokes are similar and we would expect a similar overall fiscal effect. Although the extension of the payroll tax cut, which is scheduled to expire at year end 2011, was not mentioned in the outline released by Rep. Cantor, we do not see its omission as a strong signal and still expect it to be extended through next year, probably as part of a debt limit agreement.

Q: Is there a “Plan B” if Congress fails to reach an agreement by the deadline?

A: New plans are emerging, but there is not yet any agreement on a "Plan B" either. Senate Majority Leader McConnell (R-KY) has proposed increasing the debt limit by $2.4 trillion in increments. Under this plan, the president would be required to propose an equal amount of spending cuts to Congress to activate each increment of increase. Congress could then vote on a measure to disapprove of the increase. If passed, it would be expected to be vetoed by the president. Since it takes a two-thirds vote in both chambers to override a veto, the debt limit would effectively be increased under the proposal without an affirmative vote in Congress. The challenge for the proposal is that although the incremental debt limit increases would occur without separate legislation, Congress would still need to enact a law to establish the process in the first place. While some members of Congress might prefer a debt limit increase that implies unspecified spending cuts at some point in the future, there are many members of Congress, particularly in the House, who would prefer to enact binding spending cuts along with a debt limit increase.

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zorba THE GREEK's picture

 Obama doesn't want debt ceiling agreement. He wants to grab more power

 by waiting until last minute and declaring emergency and raise ceiling by

 executive order. Seniors and military personnel will receive checks on

 time and see Obama as hero. Obama gets re-elected. End of story.

IEVI's picture

I think you might be right..this could all be about consolidation of power. The POTUS no longer bothers getting congressional approval to go to war, so why should he bother getting congressional approval to raise the debt ceiling.

Michael's picture

I love how we knocked out the third leg of the global government stool by laying to waste their Carbon Tax scam.

Goldman hates that and I know they squirm about it.

Too bad the Aussies didn't get the message down under.

Gillard confronted about lies by voter (ABC News)

Hard Times Hit Carbon-Trading Markets

"Once seen as a potential bonanza by governments, investment bankers, and alternative energy proponents, carbon dioxide credits have become close to worthless in trading exchanges and are now being shunned by investors."

Give this lady an Order of Australia medal

km4's picture

who cares about the lens of Goldman Sachs

Kucinich nails it !
Debt Political Theater Diverts Attention While Americans’ Wealth is Stolen

his best nuggets
1) Mark my words — Wall Street cashes in whether we have a default or not….

2) These are symptoms of a government which has lost its way, and they are a challenge to the legitimacy of the two-party system.

Ron Paul Exclusive: Who’s Regulating Washington?

money quote from Ron Paul….
“We have drifted because we had so much prosperity, but we can’t drift forever. We can’t live on borrowed money and printed money forever ”

America’s AAA Rating Not Worth Saving Because “We Are Insolvent”

David Stockman said last Oct : “I think the Fed is injecting high grade monetary heroin into the financial system of the world, and one of these days it is going to kill the patient”

IMO QE3 or QE4 will do it!

caconhma's picture

Regardless of what Obama does, the USA is bankrupt and its economy will collapse. It is only a question of time.

vegas's picture

All of these clowns are pieces of shit. The sole goal is to be on both sides of the ponzi. Obsfucate to the point of being able to position oneself for and against it at the same time, all the while scamming the totally stupid American public. How these asshats aren't run "out of town" continues to be a mystery to me.

TruthInSunshine's picture
by vegas
on Thu, 07/14/2011 - 23:46

All of these clowns are pieces of shit. The sole goal is to be on both sides of the ponzi. Obsfucate to the point of being able to position oneself for and against it at the same time, all the while scamming the totally stupid American public. How these asshats aren't run "out of town" continues to be a mystery to me.


It has something to do with generous welfare state benefits flowing, keeping the illusion (though now seriously fleeting - really) of Horatio Algier and the 'American Dream for All' alive, and information and entertainment, and then dividing the sheeple with marginally important but deeply socially divisive issues.

The only thing that can change the dynamics, reverse the tables, and turn the docile sheeple into enraged bears is deep, painful hunger, homelessness and the gleam in their childrens' eyes turn into sorrow.




oldman's picture

Hey Truth,

You're a voter---what do you think of a Paul/Kucinich tag team?

I might consider voting if they ran together as independents

I MIGHT consider voting because my impression is that they are as honest as anyone in the country with the CAPACITY to administrate this mess


TruthInSunshine's picture

I meant to write Horatio Alger above - not 'Algier' - no disrespect, Mr. Alger.

Oldman, I like Paul and I like Kucinich.

I don't agree with everything either one of them states or does, and Kucinich in particular runs contrary to my limited government (and especially federal government) preference.

But I like them both because they at least appear to be honest, and speak honestly, which is an exceedingly rare and precious quality amongst our legislators.

So I'm with you on that honesty issue, but I can't see larger government solving what ails us (larger government, in fact, is now walking hand in hand with the vampires and parasites, i.e. the JP Morgans, Goldman Sachs', Central Private Bank, et al., that is killing us).

oldman's picture


wow!! a record

oldman's picture

Thanks Truth,

Maybe they would respect their promises to the electorate at least before they were assassinated. I mean, I don't really see anyone else on the horizon for me to back. I also think that between the two of them there might be some agreement or compromise on how to govern as represntatives and admintrators of the public weal which would be a new way to have a 'democracy'.

You know I have no faith in doing a thing, but I could consider voting for this pair.

Thanks for your response            om

MassDecep's picture

So, your assuming your vote really counts..... 

They put into power whom they wish. Sure, they throw you some pennies now and then, but all major positions of power are already decided either by the preverbal "wolf in sheeps clothing", or manipulating vote counts through the few IT companies that handle the counts.  

Not a conspiracy, it is the truth. Do the research and get over it.

ReactionToClosedMinds's picture

I lived in Cleveland when Dennis the Menace was 'wunderkid' Mayor.   It became obvious in 2-3 years that he was in way over his head (eerily similar to Yes We Can Team Amerika 44) .  The classic was his attempt to take 'direct' control over what was a city power plant ..... Kucinich is a true crackpot and a fake ... but he loves the media attention.


Do not tar a principled person like Ron Paul with a loser such as Kucinich

oldman's picture

Hi Reaction,

I'm sorry to read your post about Kucinich.

I remember him---from when---'78 or '80 against who---Cleveland Light and Electric?

That was what impressed me with him was that he actually DID something about abused citizens

Anyway, I was in an underwriting for whatever utility it was and abandoned it because I greed with his side of the story----told my customers that I gave my shares up for that reason and only lost one customer---new guy at the time, ho-hum----

Thank you for the post because if this opportunity should come along---i'd ask Mr. K. to explain his side----nice to know there are two or more sides to a story

I have heard each of these men speak highly of the other although not in complete agreement on many issues----that's where I originally thought they might balance each other to where we might get honest government

fallst's picture

Sorry, I'm from the Land of Cleve, and was there, You Republican.

CEI, tried a powergrab, and tried to privatise the City owned power plant, Municipal Light ("Muny Light").

The 30 year old Kuncinich saved Muny Light.

Oh, and a "bank" was involved in the powergrab..."Cleveland Trust"

ReactionToClosedMinds's picture

Call me what you want (I feel terrible .... you .... you .... called me a "Republican" ... how can I live myself?) .... but somethings are clear ... Kucinich is a crackpot.

If you want to 'believe' he 'saved' Cleveland fron grasping evil bankers like Cleveland Trust et al., be my guest ... go delude yourself Kucinch was on the most visible , at-first-glance, 'appealing' side of the argument demagoguing the 'cozy biz interests etc. But when you dug into it ,,, it was an amateur, meglamaniac move ... and I was a screaming lefty radical college student writing Nixon letters in red ink about Cambodia back in those days ... a natural Kucinich supporter.

There is no question when you study his mayoral terms... it was an all out disaster for Cleveland.

If he was so 'good' & 'principled' then why did Cleveland handily elect an 'evil' Republican to replace him as Mayor? Cleveland is the most union, labor liberal city in Ohio.So go tar me if it makes you feel superior ...Kucinich was a crackpot who loves the media attention ...... somethings have no other interpretation or conclusion. And the seriosuness of Paul is diminished whenone associates Kucinich with him.

Sorry Tyler do tremendous work ... unlike anything or anyone else. But if this is a place where Kucinich gets touted for national office ... not by the unaware .. that is understandable .... none of us knows exactly everything ... but by people who have some exposure first hand ... well .. I guess I am the idiot here and should just move along ...

Keep up the good work though

Oh regional Indian's picture

I say the debt ceiling will be breached. They need that degree of political drama to make some of the big moves that are in the works.

This upcoming window (15th July-15th Aug) will be long remembered.
Confused? You betcha. That is as per plan!

Global Hunter's picture

  I'm not sure I understand your posts but I like them!  The debt ceiling will be breached/childbirth breech, was that deliberate?  

Oh regional Indian's picture

Thanks Global Hunter.
And breech-stuck, breach-breakthrough.... hmmmmm


Global Hunter's picture

took the birth metaphor too far perhaps...if so it doesn't matter because I enjoyed contemplating it.

slewie the pi-rat's picture

i couldn't even understand what this meant, at the end. 

some bankster bullshit about how the legislative process works for them? 


Helena Bonham-Carter's picture

Of Satan, and of Limbo, and of Furies

slewie the pi-rat's picture

works for me, H_B-C. 
this is our money and our fuking goobermint and the only way to understand it is mythologically. 

that's reassuring!  sweet dreams...

cosmictrainwreck's picture

I ponder whether or not I'd want to meet that girl; she's so deeeep...

knukles's picture

Oh, I thought her side of the pool said "no diving".

slewie the pi-rat's picture

well, we won't push the beds together for a threesome, then.

night-night to you, too, co_tr_eck. 


Juice Box's picture

Really nice elaborate analysis but USA Today said the same thing in five sentences. 

Global Hunter's picture

This is a condescendingly bad piece.  Is the target audience school kids? Does Fisher Price, I mean Goldman Sachs think their clients have the intellects of children? 

If their best clients are reading this crap and take it serious that would explain a lot.

TruthInSunshine's picture

You think this is bad?

You should see the analysis they gave to those valued clients of theirs who they strongly urged to buy into Abacus, Timberwolf, Hudson, etc.

Fast Twitch's picture

Always the cliche " exit strategy " why can't uncle scam

knukles's picture

"Why can't Uncle Sam get along?"

And with that tidbit, I'm off to conquer my own vivid dreamland.

caerus's picture

Galileo was forced to recant his belief that the sun was the center of our solar system in 1615...he was forced to recant a truth that we all now take for granted...we are all now living in a world of false economic absurd as arguing as aristotle did that stones fall to the earth because they feel that they must...for every Aristotle there is a newton and for every Keynes ther is a Von mises...we are all trying to reach the moon with Aristotle as our does not work

jack stephan's picture

[next act] "Get yourselves a pine box, boys. Nobody follows The Killer!" 

ebworthen's picture


Plan C already in the hopper.

QE3 or 4 or call it taffy and cotton candy, it will happen.

They are trapped in their endgame, and as responsible Amerikans liquidate their IRA's and 401K's they will be 'forced' to employ more QE.

Don't forget rate hikes and draconian taxes and fees.

Notice that your bank is reaming you with no %, fees out the ass (yours) and crappy delayed service?

Yeah, like that.


I Am The Unknown Comic's picture

ZH community, I am jumping this relevant thread from a previous thread of earlier today.  I feel I need to provide Hansel with updated info, and I'm not sure he will get this post, but I want to try.  Regardless, it is good info for us all.

Hansel wrote on this thread:

"The Fed doesn't own gold.  They own gold certificates worth $11 billion.  This is according to a Treasury guy at Ron Paul's last domestic monetary policy hearing."

(I replied that I thought it was 42B not 11B)

Hansel replied: "No, it is $11 billion. See the Fed balance sheet,

The certificates were locked in at $42 an ounce when gold redemption was suspended.  They will never be worth more than the $42 an ounce equivalent."


This is verified on my end.  Just had dinner with a San Fran Fed (he really is a nice guy that thinks he is doing great things for the country… old friend that is totally brainwashed, but a good man nonetheless).  So, I stand corrected.  Thank you Hansel.  It is indeed gold certs valued at $42/oz and not a total of $42B. 

If I understand correctly, the cert enables The Fed to retrieve from The Treasury, gold at $42/oz.  The Fed long ago exchanged their physical gold with The Treasury in exchange for a certificate.  The price was set at $42/oz.  The Fed has the right to redeem each certificate with the US Treasury for 1 oz of gold at $42/oz.  Should the Treasury not have the gold when the Fed comes calling, well then the US taxpayers would just have to cough up the fiat and buy it at whatever price (such as $1,600 per oz).  The Fed would then take the 1 oz of gold, pay the Treasury $42, and the Treasury would get their piece of paper/gold certificate back.  Now the Fed has 1 oz of gold they paid $42 for and is worth around $1,600.  So, it is actually in the Fed's best interest on these certs to have the physical gold price high.  Seems like everything is going according to their plan, and I believe this really does give insight into their thinking.  At the end of this program the Fed has the gold and can make around a $1,550 profit on each ounce should the Fed central bank choose to sell at today's prices.        

The important point, however, is that I fully expect that there comes a point in time soon when The Fed (or GS or JPM) will create a derivative product on these certs (leverage it up, bitchez!) and this will be the new "Gold Bond: medicated powder for the economic patient on life support."  It would enable The Fed to suck mucho dollars (M2) out of the economy in exchange for a gold cert derivative, thus combating hyperinflation.  The higher the gold price, the more dollars they can pull out of supply. 

I readily admit that this is a bit over my head.  So, while junking, please explain to me why it would not make sense.  I had some great wine tonight and hope I have clearly presented my thoughts.    

Anyway, it's just a hypothesis of mine....having had exposure to these Keynesian PhD Economists and their way of thinking.  Some of these brainwashed fools actually believe they are holding the country and the entire world together. 

Of course, my Fed buddy says the certs are assets and will remain hidden in some Fed vault somewhere forever.  Even he does not know where they are kept.  Amazing.  He thinks I'm nuts.  The feeling is mutual.  He taunted me with "where are you going to buy your gold from now that Glenn Beck is off the air?"  Without skipping a beat I replied "well obviously not from you becase the Fed DOESN'T HAVE ANY!!!  You could have heard a pin drop!   

There is none so blind as those who want not to see.  I might be wrong on my thoughts above, but at least I am trying to understand.    



tarsubil's picture

Well that's just f'ing wonderful. This might be totally off the wall or kinda like what you said but could they get gold at 42 and sell it cheap like a strategic oil reserve release?

I Am The Unknown Comic's picture

That's what I was thinking they might do...another stunt like the oil release only wth gold cert derivatives, or possibly physical gold. 

indio007's picture

10. Collateral Held against Federal Reserve Notes: Federal Reserve Agents' Accounts

Millions of dollars Wednesday Federal Reserve notes and collateral Jul 13, 2011 Federal Reserve notes outstanding 1,145,902 Less: Notes held by F.R. Banks not subject to collateralization 157,617 Federal Reserve notes to be collateralized 988,285 Collateral held against Federal Reserve notes 988,285 Gold certificate account 11,037 Special drawing rights certificate account 5,200 U.S. Treasury, agency debt, and mortgage-backed securities pledged (1,2) 972,048 Other assets pledged 0 Memo: Total U.S. Treasury, agency debt, and mortgage-backed securities (1,2) 2,654,337 Less: Face value of securities under reverse repurchase agreements 59,910 U.S. Treasury, agency debt, and mortgage-backed securities eligible to be pledged 2,594,428 Note: Components may not sum to totals because of rounding. 1. Includes face value of U.S. Treasury, agency debt, and mortgage-backed securities held outright, compensation to adjust for the effect of inflation on the original face value of inflation-indexed securities, and cash value of repurchase agreements. 2. Includes securities lent to dealers under the overnight securities lending facility; refer to table 1A.Looks like the FED wil be foreclosing in a neighborhood near you soon when you consider MBS's are the probably the largest asset class the FED is using as collateral.

tradewithdave's picture

You left off a question...

Q:  What Broadway show do you feel most closely reflects the traditional values of the central banking model of carrying gold on the balance sheet as the exclusive precious metal? 

A:  There's no question... Fiddler On The Hoof.


Dave Harrison