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Goldman Sees "Disturbing Signs" If Government Does Not Bow Down To Krugman, Reflate Monetary And Fiscal Bubbles
Last week, Goldman, in a piece unambiguously titled The Second Half Slowdown has Begun, made it all too clear that unless the US government were to succumb to yet another, and another, and another round of drunken sailor spending, the gratuitous ability of its sellside analyst to place crap companies on Conviction Buy lists may suddenly become mysteriously impaired as reality seeps through the gaps, thereby infuriating CEOs of worthless and overlevered widget makers, who know all too well their corporate earnings are about to be taxed through the nose by the Obama crack economic team, as their stock is about to plunge. Today, just in case the threat may have been missed by the cheap seats the first time around, here comes Jan Hatzius with the ominously titled "Disturbing Signs" which reads like Paul Krugman's induction essay into the Useless Economists' Society.
1. Friday’s jobs numbers were disturbing. At best, they show an economy that is growing only quickly enough to keep the unemployment rate flat near 10%. At worst, they suggest that the labor market is once again turning down. Both the manufacturing workweek (the only part of the employment report included in the index of leading indicators) and the employment/population ratio (the broadest job market measure in the household survey) dropped significantly in June. Given the noise in these series and—in the case of the workweek—the potential for substantial revisions, both fortunately fall short of a clear-cut signal that another labor market downturn has begun. But we will need to see at least a partial reversal of these declines next month.
2. This comes at a time when the end of the inventory cycle has triggered the inevitable slowdown in the manufacturing sector. With inventory investment now again close to a normal rate, GDP growth is likely to converge to final demand growth, which has averaged only 1½% since mid-2009 and is unlikely to accelerate given the various headwinds facing the economy. The resulting slowdown in GDP growth is likely to be concentrated in the goods-producing sector, which previously received the largest boost from the inventory cycle. Hence, further declines in the ISM index following last Thursday’s drop to 56.2 are likely; our GDP forecast implies a decline to around 50 by early 2011.
3. The weak labor market implies not only a great deal of hardship for workers, but also a growing risk of deflation. Although the last couple of core CPI/PCE releases were a bit higher than those earlier in 2010, the trend still seems to be downward and other measures such as wage growth and inflation expectations have been declining. In particular, the 5-year 5-year forward breakeven inflation rate in the TIPS market has fallen 75bp since April and now stands at 2% for on-the-run securities, the lowest level since mid-2009.4. Our recently released Global Economics Paper No. 200 entitled “No Rush for the Exit” argues that policymakers should react to the combination of a sluggish recovery and declining inflation with additional policy easing, either via a return to unconventional monetary policy or via further fiscal stimulus. The obvious counterargument is that monetary and fiscal easing carries long-term costs in the form of, respectively, a risk of a renewed asset bubble and a higher public debt burden. But our study shows that these costs look far from prohibitive at present. On the monetary side, US financial markets are nowhere close to bubble territory. On the fiscal side, it is difficult to argue that the US government has reached the limits of its debt capacity when long-term bond yields are low and falling, and when federal interest payments stand at just 1½% of GDP. When compared with the risk of a renewed economic downturn and/or a descent into deflation, the cost of additional stimulus seems to be well worth paying.
5. So what is to be done? On the monetary side, the possibilities include additional purchases of Treasuries and mortgage-backed securities, as well as TALF-like structures—i.e., special purpose vehicles that lend to nonbanks using equity provided by the Treasury and debt provided by the Fed. Whether these will happen anytime soon is another matter. Additional purchases of Treasuries and/or MBS mortgages do not yet seem to command a sufficient majority on the FOMC. This might change if growth and/or inflation ease further. But even then it is unclear just how effective they would be. After all, Treasury purchases did not seem to have much impact in 2009, and MBS spreads are already quite compressed, limiting the potential for further narrowing. A TALF-like structure could be more powerful, but it would need the Treasury’s cooperation and the Fed’s authorization under article 13.3 of the Federal Reserve Act, i.e. the Fed would need to invoke “unusual and exigent circumstances.” This is a very high hurdle. [TD: please Jan, have you met the criminals who run this country? The "very high hurdle" is about $100,000 per fat, bald and corrupt politician]
6. On the fiscal side, we hope that Congress passes the extension of emergency unemployment insurance, continued aid to state and local governments, and at least a temporary extension of the bulk of the 2001/2003 tax cuts beyond the end of 2010. If some of the tax cuts are left to expire, then this should be offset by temporary fiscal easing elsewhere. The point is that a tightening of the overall fiscal stance at a time when the economy is already struggling to maintain the current, unacceptably low level of resource utilization is a bad idea. In fact, we favor additional deficit-financed stimulus, coupled with a commitment to cut the longer-term deficit more aggressively than currently envisaged in the administration’s 10-year plan. The consolidation could include cuts in discretionary expenditures, slower growth in entitlement spending, and gradual hikes in both direct and indirect taxes. The precise mix is a matter of political preferences, and reasonable people can disagree about the pros and cons of different measures. But the need for long-term budget restraint should not stand in the way of a near-term boost when the economy clearly needs it.
7. A failure to enact additional stimulus—at a minimum, extended unemployment benefits, state fiscal assistance, and extension of the bulk of the 2001/2003 tax cuts—would imply a downside risk to our GDP and employment forecasts, specifically for 2011. Right now, we are showing a gradual reacceleration to 3% on a Q4/Q4 basis in 2011, but we worry that this might end up being too optimistic. We will evaluate developments both on the policy front and in the US economic data closely over the next few weeks to see whether any adjustments are warranted.
And what is unsaid: should GDP downside risk materialize, you can kiss all those Buy Rated companies goodbye, as Goldman moves to a conviction sell on everything that moves, thus wiping out about $5 trillion in stock market value. Obama: you have been warned - how will your corporate sponsors feel that for once you did what is in the interest of the people of this country, instead of the 100,000 richest folks, who just happen to pay 80% of all taxes, and proceeded to destroy the bulk of their equity values. Oh yes, and that whole thing about the Fed buying up your debt via the Goldman/JPM-led group of Primary Dealers... you can kiss that goodbye too.
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Unfortunately, no one can be told what the Matrix is. You have to see it for yourself.
then the banks and goverment should forgive all the credit card debt and mortgages for low income people to save them. Why not that stimulus program, instead of giving it to the banks.
If that sounds ludicrous, then how about saving them by not enabling them. Get the debt monkey off their back. It will be painful at first but it will allow them to recover and live a healthier, longer life.
Incorrect.
Low income people have very little debt, because they had no fucking money in the first place. Any debt they did have was minimal and most likely at a very high interest rate. If they default, then the bank should rightfully get a charge-off.
The poor and downtrodden are not the problem in this country. The problem stems from a select group of rich and powerful individuals, corporations and politicians that control our money, gamble with it, and have systematically fleeced this country.
It is the height of arrogance for the educated rich to blame the lazy poor for all the problems in this country. This country is not imploding because of the number of food stamps issued, or the number of people living off of $1500 unemployment checks.
I once had a relatively average employee come in my office one day and quit. She was very happy about it. It seems that her fourth child had been determined by the school to have ADHD. The little bugger just couldn't seem to calm down in his 1st grade class, much like his older brother and sisters. So, why did she quit? She was making more money from the aid for her stricken children than she could make on her job.
It's not the $1500, it's the attitude and the obvious gaming of the system.
Got ya beat:
Woman is hysterical because Child Support Enforcement Unit (CSEU) just took "her" new Cadillac.
Why?
Well, it turns out that she and her 3 kids each get SSI, food stamps, medicaid, etc.
She had gotten an inheritance from her grandmother, and she wanted to buy a new car with the money.
If she titled it to herself, she would lose eligibility for some of these freebies since it would become an asset. PROBLEM! (for her gaming the system)
SOLUTION? Buy the Cadillac and title it to her boyfriend so she can keep on collecting all her freebies AND have a brand new Cadillac.
BUT WAIT! Turns out boyfriend owed over $40k in back child support she was unaware.
So, since the brand new 40k Cadillac was titled to her boyfriend, the DMV alerted CSEU and they showed up one day and took the Cadillac and sold it and applied the proceeds to his unpaid child support.
She comes to see me about getting the car back, suing CSEU, etc. etc. etc.
Of course I advised her that she faced jail time for theft of government benefits.
She never came back.
Your whole premise is wrong. The country would be better of getting out of debt. The whole stimulus thing is nor working, but your advocating more to the exact same people that you deride "the powerful individuals". Who do you think those powerful individuals are? The banks including the Fed of course. Why give them more money to gamble with. It didn't work; time to try a different approach. Got to get the debt monkey off their back so they can face reality without crack stimulus.
Thanks for adding to the discussion today. It is very much appreciated.
It is demonically ironic that the same firm that is being investigated for financial corruption by the goverment is asking the goverment for more money.
Fool me once....blah, blah, blah...but Fool me all the time, and you can't because the game is rigged -GS/bank/gov
A rogue agency made a political miscalculation in an attempt to reduce the impact of a series of scandals.
Now the squid has cut off the oxygen supply of the party responsible and has requested more money from its choking lackeys. After the money comes, it will crush the trachea. Unruly slaves are worse than worthless.
So how does this fit in with QE2.0++ ?
Six Months to Go Until The Largest Tax Hikes in Historyhttp://www.atr.org/sixmonths.html?content=5171
Holy Shit
Folks, you have it right that QE 2.0 is coming, but first we have to crash markets convincing everyone things are not "right". It makes the obvious look less so. Helicopter Ben pops his asset bubble and everyone will be in terror running to Congress for stimulus. The Squid will win by helping sell the bonds. Everyone wins except the 99 % of honest Americans left.
As A jew I wold like to be the first to admit we are the source of all the worlds problems. we are also its masters and controlers. In fact the holocaust was a carefully planned event by us where we would kill 6 million of us to gain sympathy and absolute control. same with the continued pogroms in the midde east and the racism we face in eastern europe.
All the world's problems, huh? So you're the son of a bitch who makes my feet ache so? Damn you.
If the heft algo's hadn't run the market up too far and too fast it wouldn't go down. look at the charts and find a time when we had such a huge run up. the whole thing is silly.
We ran the market up too far and too fast, and now we want more money to keep the bubble. that is what goldman is saying.
The deflationists like Douchinger and all the idiots on his forum continue to ask however can we get a wage/price spiral with declining jobs and income?
Krugmoron is already bleating that the gov't should just HIRE people. Everyone. And set up makework. That's how Weimar got off to a nice start, put everyone on the dole and just have the CB buy all the debts, same shit, different day.
No, no. We all know that every historical instance of inflationary outbreak has been demand-pull, wage-price spiral driven. Greedy consumers and laborers drive all inflation. Ever.
<end sarcasm>
Every so often I repeat this basic point, then go back to snarky comments and Jethro Tull lyrics.
The cure for bad debt is writeoffs. By choosing to try to waltz out of the biggest property/asset bubble in combo with the biggest fraudulent risk laundering (MBS/CDO) operation in history WITHOUT any significant writedowns, the elites have deeply damaged the global economy.
Maybe they 'had to do it'. Operating on Krugman's blog and Naked Capitalism during the first heat of the crisis, a working theory was developed that if bonds were written down on a large scale, the pension, life and health insurance industries would be severely impacted and the health care system (remember that little bill they were trying to pass?) might just collapse as all the premium cash was found to have vanished. Game over....maybe a good enough reason to take the Japan-Zombie slow train to Hell instead of the Bullet to the Head Express.
First of all, they should stop lying to us if that is the deal.
Second, they need to show that they have at least a rudimentary understanding of the Depression, in its early phases of Crash and Slump prior to the Depression proper (cf any economics history textbook). Krugman is forever damned for simply ignoring the crash and slump periods and eagerly rushing forward to the depression phase, since the policy prescriptions there are simple to understand and more glamorous (i.e. elite power-enhancing). In fact, they have completely blown it by wasting the stimulus too early and ignoring the small business bank strike. Depression phase is not yet here and will be considerably worse because of bad policy based on simply incompetent analysis.
Meanwhile, with the Squid still hungry for super-sized returns despite the need to pay down the mutated, grotesque fake profits forced upon the system by insane interest rate policies under both 'parties' and Greenspan, they want more candy.
Zombie junkies. Why even publish their pathetic whining?
What happens next? Let's write the history, not observe it. If there's one thing you can do it's get any money or assets out of the DC-NY cabal's hands NOW. Refinance to a local credit union, cut up any credit cards with the Evildoers. Frugal, frugal, frugal. The government needs to lose at least 25% of its budget, structurally, also NOW. Any politician who can't offer an immediate 25% cut in their own most ideologically favored programs, whether that's border fences or food stamps, deserves to be fired.
Enough. Did anyone else notice the Financial Times article that European banks are putting up their gold reserves in exchange for liquidity? End times indeed.
Peace n love in the macro ghetto....
What's the best way to kill a zombie?
Let me rephrase that for you, Apostate:
What's the best way to incapacitate a zombie?
"What happens next? Let's write the history, not observe it. If there's one thing you can do it's get any money or assets out of the DC-NY cabal's hands NOW. Refinance to a local credit union, cut up any credit cards with the Evildoers. Frugal, frugal, frugal. The government needs to lose at least 25% of its budget, structurally, also NOW. Any politician who can't offer an immediate 25% cut in their own most ideologically favored programs, whether that's border fences or food stamps, deserves to be fired."
Agreed. I too fought the urge to refi and won. Starve them.
"Every so often I repeat this basic point, then go back to snarky comments and Jethro Tull lyrics."
Pink Floyd works just as well.
http://www.youtube.com/watch?v=M00KyGpJRVYshould't this be viewed as a contrary indicator to be long right now.
One more banker BS. they use the fake method of mentioning that thigs that make them money are good for the conomy. ever notice what is good for the economy always helps their bonus pool. anyone ever see them give advice that decreases their earnings.
QE2.0, BURN IT TO A CD AND LETS GO!
If it compiles, ship it...
Great posts, thanks.
Mish today:”I am now confident the peak in Canadian housing insanity is finally in.”
Vancouver Home Sales Drop 30 Percent, Calgary 42 Percent – First Comes Volume, Then Comes Price; Canada House Peak Is Finally In.
http://globaleconomicanalysis.blogspot.com/2010/07/vancouver-home-sales-drop-30-percent.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29
A good read:
http://www.marketwatch.com/story/some-inconvenient-facts-about-fiscal-austerity-2010-07-07
Goldman's fully funded flapdoodlery is meant to keep us all in the game. Win, lose or draw. Accurate prognostication is not the point; provocation is. Think: 2am oxygen shot to the casino ventilation system. Economic shaman Krugman resembles an owl with a Van Dyke beard. But the tenuous connection to wisdom ends there. An owl makes more sense.
Krugman's is the better of all bad choices. We can all say his plan sucks. But there are not really any alternatives in the US that don't destroy the country. So my dollars turn into dimes. That was going to happen anyway. It beats clubbing people to death for a bag of cheetos in a burned out Seven Eleven, getting blood all over my last pair of assless chaps and hockey mask.
That's a false choice. Why do you assume that a collapse of the government necessarily leads to the complete destruction of society?
Even in the ruins of Detroit, the remaining inhabitants still collaborate to mow grass and prevent nature from re-conquering the territory - without government intervention.
It's going to happen sooner or later. The later it happens, the more painful the reconstruction will be.
So let me get this straight. GS is basically saying that after they together with their vulture-buddies from WallSt sucked the wealth from actual businesses and taxpayers via various FWMD (Financial Weapons of Mass Destruction) with the help of the clueless Washington sock-puppets they are now worried at the inevitable outcome. The outcome being that the bonemarrowless taxpaying crowd has almost nothing left to support not only the economy but the SquidDisco as well. In other words - no bonuses for us, boys, if you (the Bubbamint) don't do anything about it.
And if you decide not to print paper with those funny dollar signs, thus washing out whatever wealth there was left at MainSt and JoeSixPackSt, then we will short the stockmarket (nevermind that it's been in coma for more than a year now), yup we will short the motherfucker all right.
Ahh, now I get it. All I need now is some paper and green crayons.
All roads lead to failure.
For those of you old enough to remember, this foolish hope associated with QE2, Stimulus 2 is like in grade school when we did Nuclear Attack Drills. The "expert" training had us crawling under our schooldesks to protect us from a couple of gigatons of Russian-made hydrogen bombs. I used to think, "too bad Hiroshima happened on a Sunday, otherwise all those kids would have been safely in school".
Of course when the advice of the Krugman-Hatzius-Zandi Goldman Triangle fails, what we will hear is, "we waited too long to implement it". Economists always have an out.
If a person heard that the world was going to end next Tuesday, what would be the proper course of action? Would it be the time to try to develop some character? Would it make sense to just drink and fornicate til the lights go out? Certainly one could reasonably let the gym membership slide and forget about organic vs. hormone-laden, but what would be the "right" way to go off into the long night? A part of me says inflicting unspeakable horror upon those who led us into the abyss might put the Universe in balance for the duration. And it sure would feel good.
God has told Lloyd that he will no longer let him do his work unless there is QE2. Call your Congressman. Lloyd must do God's work, it's what he does!!!
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