Goldman Giddy At Government Generosity

Tyler Durden's picture

It was just this Sunday that Jan Hatzius was apologizing for this hike in 2011 GDP to 2.7%. It appears that once respected economist has now joined the legions of momentum chasers and will "revise" his forecast going forward every time there is an event. To wit: following last night's complete abdication of fiscal prudence by both democrats and republicans, Goldman now says it's 2011 GDP will likely be boosted from 2.7% to 3.7%. In the all out defense of the ponzi, old-school concepts such as even remote credibility are getting thrown out with the bathwater. Wall Street needs one more year of record bonuses or else the MAD card will be played. And of course, who cares about the costs... Perhaps one should play a simple thought experiment at this point: why not just issue one quadrillion in debt and fix the economy once and for all. After all why worry: rates will be forever at zero, Bernanke will buy all deficit funding bonds ever, and nobody will ever sell their rates holdings.

From Jan Hatzius:

BOTTOM LINE: The “framework” that President Obama and congressional Republican leaders have agreed to, if enacted, could boost growth above our recently revised forecast for 2011. While the details of the agreement are not yet entirely clear and some political uncertainty remains, our rough estimate is that this package could add 0.5 to 1.0 pp to growth in 2011.  We will await details on the specifics of the fiscal package, as well as additional clarity on the likely legislative outcome before deciding on any changes to our forecast.

Key Points: 

1.  The fiscal package as presented last night by President Obama as an agreement between the White House and congressional Republicans should substantially reduce the drag on growth from federal fiscal policy in 2011.  We already assumed that the 2001/2003 tax cuts would be extended in their entirety, and that emergency unemployment benefits would be extended for an additional three months. However, the payroll tax reduction, an extension of unemployment benefits through the end of 2011, and the extension of other personal tax breaks included in last year’s stimulus package add an incremental $185 billion (1.2% of GDP) in stimulus above and beyond what we currently have built into our assumptions. Since this will be spread out over the course of the year, and the various provisions will each have different effects on spending behavior, the effect on real GDP growth in 2011 is likely to be a boost of somewhere between ½ and 1 percentage point relative to our current forecast, depending on the specific timing of provisions and other assumptions.  This effect rests heavily on our starting fiscal assumptions; other forecasters may assume larger or smaller effects due to differences in their assumptions of fiscal policy in 2011 prior to the announcement.

2. Details of the package may still change slightly. While the president announced the broad outlines of the package last night, no cost estimate has been provided yet, and some details remain unclear.  So while we are reasonably confident of the magnitude of the large pieces, it is too early to quantify the effect of the entire package.  Moreover, some congressional Democrats have expressed interest in changing the agreement; major changes don’t look very likely, but small changes are conceivable.

3. The legislative outlook is not yet clear, but the risk that tax cuts expire remains low.  As we noted in last night’s Skinny, many Democrats have voiced concerns with the proposal while many Republicans have expressed support. Given this unusual political dynamic, the legislative outlook is somewhat uncertain, though we are still confident that one way or another, the expiring tax cuts will be extended by the end of the year. We expect additional clarity over the next 24 hours, as members of each party caucus privately to discuss the agreement, and congressional leaders work on a strategy to move the bill forward. Action this week is possible, though the deal is unlikely to be finalized by the House and Senate until next week at earliest. Congress hopes to adjourn for the year on December 17, though this date could be pushed back if work on the fiscal package has not been completed.

4. The package obviously has implications for the deficit that we will also work out once more details are known. Our latest estimates, $1.25trn for FY 2011 and $1trn for FY 2012, were already under review for adjustments to accommodate our stronger growth forecast. On balance, we would expect the FY 2011 figure to rise, but probably not by much more than $100bn, while the net implications of these changes for the FY 2012 deficit are less clear. We would not expect significant increases in coupon issuance as a result, as the Treasury Department had stopped cutting the sizes of these auctions before it needed to. Our current thinking is that most, if not all, of any increased borrowing is apt to occur in bills.