Goldman: "Neither Democrats Nor Republicans Look Inclined To Budge On The Fiscal Cliff"

Tyler Durden's picture

The market appears convinced that it now has nothing to worry about when it comes to the fiscal cliff. After all, if all fails, Bernanke can just step in and fix it again. Oh wait, this is fiscal policy, and the impact of QE3 according to some is 0.75% of GDP. So to offset the 4% drop in GDP as a result of the Fiscal Cliff Bernanke would have to do over 5 more QEs just to kick the can that much longer. Turns out the market has quite a bit to worry about as Goldman's Jan Hatzius explains (and as we showed most recently here). To wit: "our worry about the size of the fiscal cliff has grown, as neither Democrats nor Republicans look inclined to budge on the issue of the expiring upper-income Bush tax cuts. This has increased the risk of at least a short-term hit from a temporary expiration of all of the fiscal cliff provisions, as well as a permanent expiration of the upper-income tax cuts and/or the availability of emergency unemployment benefits." This does not even touch on the just as sensitive topic of the debt ceiling, where if history is any precedent, Boehner will be expected to fold once more, only this time this is very much unlikely to happen. In other words, we are once again on the August 2011 precipice, where everything is priced in, and where politicians will do nothing until the market wakes them from their stupor by doing the only thing it knows how to do when it has to show who is in charge: plunge.

From Goldman:

The Risks to Our View

  • Despite the Fed's aggressive easing move at last month's meeting and the slightly better-than-expected economic data this week, the risks to our 1.5%-2% GDP growth forecast through mid-2013 are modestly on the downside.
  • First, our "now-cast" for growth is a bit below the 2% pace that we had expected for the second half of 2012 a few months ago, as the data have been slightly disappointing even after the most recent upside surprises on jobless claims, the ISM, and auto sales.
  • Second, our worry about the size of the fiscal cliff has grown, as neither Democrats nor Republicans look inclined to budge on the issue of the expiring upper-income Bush tax cuts. This has increased the risk of at least a short-term hit from a temporary expiration of all of the fiscal cliff provisions, as well as a permanent expiration of the upper-income tax cuts and/or the availability of emergency unemployment benefits.
  • Third, the risks to the size of the "multiplier" that translates fiscal retrenchment into economic weakness are also on the more adverse side. Much recent economic research, including our own, has demonstrated that fiscal multipliers are large when the economy is operating at the effective lower bound for nominal short-term interest rates. We have generally erred on the side of caution in building such large multipliers into our actual forecasts, but believe that the case for making more aggressive formal assumptions is strengthening.

We expect a GDP growth boost of 0.3 to 0.75 percentage points from the Fed's "double punch" of open-ended quantitative easing and reinforced forward guidance. The lower end of that range is the estimated impact we would expect from the roughly 20 basis point (bp) easing in our Goldman Sachs Financial Conditions Index that has already occurred since a few weeks before the FOMC meeting, when the consensus was still for no move to QE in September. The upper end is the estimated impact into market expectations and financial conditions from a full front-loading of the $2 trillion (trn) in asset purchases that we ultimately expect under QE3.

All of these numbers are highly approximate, but the midpoint of the range is a bit higher than the 0.25-0.5 percentage points of growth boost from renewed QE that we had been building into our forecast during most of 2012. In addition, the economic indicators this week--the manufacturing and nonmanufacturing ISM as well as September auto sales--have surprised on the upside. Does this mean that we are on the cusp of an upgrade to our relatively cautious GDP growth forecast of just over 2% through the end of 2013?

The answer is no; in fact, we currently view the risks to our growth view as modestly on the downside, at least over the next 2-3 quarters:

1. A weaker now-cast. Our Q3 GDP tracking estimate has come down from a peak of 2.4% in August to 1.8% now, in response to weaker-than-expected data on personal consumption, durable goods shipments, and nonresidential construction spending. Our Current Activity Indicator (CAI) weakened sharply in August to just 0.5%, barely above the 0.4% reading at the peak of last summer's recession scare in August 2011. The very recent data on claims, the ISMs, and auto sales imply that September should look significantly better (perhaps 2%) but on balance our assessment is still that the economy's momentum has fallen slightly short of our expectation that growth would average 2% a few months ago. That affects the "jumping-off point" for any evaluation of the growth outlook over the next few quarters.

2. Higher risk of a worse fiscal outcome. As we have discussed recently, our worry about the fiscal cliff has increased in recent months as neither Democrats nor Republicans seem inclined to budge on the most contentious issue, namely the fate of the upper-income Bush tax cuts. While we have not changed our baseline assumption of an ultimate agreement to extend most of the major provisions--with the conspicuous exception of the payroll tax cut--the risk of at least a short-term hit from all of the fiscal cliff provisions as well as a permanent expiration of the upper-income tax cuts and/or the availability of emergency unemployment benefits has clearly grown.

3. Potentially larger fiscal multipliers. Related to the prior point, the risks to the potential consequences of fiscal restraint are also tilted to the higher side, even if Congress does extend most of the fiscal cliff provisions. Much recent economic research has demonstrated that fiscal multipliers are relatively large in a depressed economy that is operating at the effective lower bound for nominal short-term interest rates. For example, some studies have used cross-state variation in spending and taxes to isolate the impacts in a situation in which there is no monetary policy offset, and they have generally found rather large multipliers. Our own work using cross-country data and "shutting down" the monetary policy offset to fiscal contraction via statistical analysis has come to similar conclusions. We have generally erred on the side of caution in building such large multipliers into our actual forecasts, but believe that the case for doing so is strengthening.

The upshot is that we see a larger chance of downward than upward revisions to our forecast at this point. Any additional disappointments would presumably result in even more monetary easing than we have built into our baseline, so there would be some natural offset. That said, one lesson from the experience of the past few years is that the ability of monetary policymakers to provide support at the zero lower bound is relatively limited, barring a shift to even more aggressive measures than we have seen up to now

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
LawsofPhysics's picture

Sweet, fucking bring it!

Economic BASE jumping.

Funny coming from Goldman, the puppet master behind both "candidates".

DoChenRollingBearing's picture

Maybe jumping off the Fiscal Cliff might be better than other alternatives...  Hard assets will be a safe haven.

smlbizman's picture

imo, i think they will let it happen and blame each other...either way a fool and his money will continue to part ways..

Newsboy's picture

I completely agree.

It's the plan they set in action when the arranged the "sequesters" that nobody wants.

"Both sides" will blame each other and complain bitterly about the unforeseeable predicament.

They both escape specific culpability, because they made a time bomb that nobody expected to go off.

It's the only political way to begin austerity in America.

Only austerity will reduce oil consumption, and only reduced consumption can really make the US "energy independent" for a little while.

It's post peak oil world entry time, step #2.


MiltonFriedmansNightmare's picture

Not to worry, there is nearly 1T in student loans ready for Fed purchase.

Problem solved.

youngman's picture

Its time for the 47% to pay something....

cxl9's picture

Yes. My thought is that eventually currency dilution will push up nominal wages to the point that some of the 47% ends up in a positive tax bracket. For some people, it will be a novel experience filling out a 1040 and signing the front of a check.

"What you mean I can't pay my taxes with my SNAP card?!"


Panafrican Funktron Robot's picture

Like alcohol/tobacco taxes?  Gas tax?  Sales tax?  Or, you know, inflation, which is a tax that affects you more the less you have in income.  

mayhem_korner's picture

The upshot is that we see a larger chance of downward than upward revisions to our forecast at this point.


Why do they waste ink to say anything else...? 

Alea Iactaest's picture

Not ink. Pixels.

No animals or trees were harmed in generating this response.

CrashisOptimistic's picture

The one thing that is getting no attention in the fiscal cliff talk is the debt ceiling.

The Tea Party got 2 Trillion in cuts-from-baseline in the 2011 debt ceiling standoff, with 1 Trillion of those the upcoming Sequester.  There is FAR too much talk of Bush tax cuts when the Sequester total is much bigger.  It is stretched out 10 yrs, but tax changes are stretched out forever.  The Sequester will empty cubicles immediately.  

The point being, Boehner has said nothing has changed.  If there is to be another increase in the debt ceiling, and there must be, it must have a dollar for dollar match with more spending cuts.

Another development is the payroll Social Security tax cut expiring is now guaranteed.  The Democrats have withdrawn support for extension.  That is $160 billion and 0.6% of next year's GDP -- which when subtracted from the most recent read (no Q3 or Q4 numbers yet) of 1.25% 2012 Q2 leaves just 0.65% before negative.

Before negotiations have even begun, GDP loses 0.6%.

LawsofPhysics's picture

by my calculations real GDP is already negative and that include the 30% or so that is simply paper-pushing bullshit.


CrashisOptimistic's picture

LoPDood, GDP is reported "real".  

They do not use CPI, btw, to get the "real" result.  They use the GDP price deflator.  It's probably also a tad inaccurate, but better than CPI.

LawsofPhysics's picture

sorry "dude", I count all energy and commodity costs.  You don't want to know what my diesel costs are.

Thisson's picture

Why don't you use an alternative to diesel?  Like an Agripower unit or something?

CrashisOptimistic's picture

Correction, it's $120 billion and 0.6%, not $160 billion and 0.6%.

The 0.6% is the relevant number.

BooMushroom's picture

The Social Security Tax is one of the best ways to make the 47% pay.

"Due to the Obama administration's cutting of the Social Security Tax, Social Security has been spending more money than it has been taking in for the last two years.  Prior administrations have already spent all the money that was supposed to be set aside for this program, and the piggy bank is full of IOU's.  As president, I will restore Social Security to health by repealing Obama's defunding of this program that is SO important to our seniors, and making sure it is fully funded for generations to come."

And then bully both parties into raising the employee portion to eight percent, without changing the employer portion.

blunderdog's picture

It sounds fine, but it might turn out to be counterproductive.  Everyone making under $20K is still going to have to eat and sleep somewhere. 

The Feds can take whatever they like out of the paychecks, but when the paychecks won't provide a roof, hot water, and enough food, folks'll just keep lining up for another share of the dole. 

Government will move quickly to hand out checks when the bricks start flying through the windows of City Hall.

LongSoupLine's picture

Fuck you Jan you Goldman piece of fucking slime.  Eat shit and die.

Squid Vicious's picture

bullish! cue Joseph Abby Cohen and a 1650 S&P forecast for 2013, he's always right on the money!

CrashisOptimistic's picture

It's Abby Joseph, not Joseph Abby.  She's female.

Elmer Fudd's picture

The political class spending less of other people's money?  I doubt it could happen.

foodstampbarry's picture

Screw it! It's my childrens fault anyhow.

Alea Iactaest's picture

For the children. By the children.

Could be a campaign slogan.

MiltonFriedmansNightmare's picture

Correction; For the Goldman Sachs, by the Goldman Sachs.

Alea Iactaest's picture

Of course. But we haven't lifted the kimono that far (yet).


In the meantime proxies are still useful. Plus someone has to be on the hook for all the debt.

ziggy59's picture

..and Goldman and their deciples are smiling all the way to their vaults.

Are they still a bank?

Schmuck Raker's picture

This is just Goldman teeing the can up a little higher so the congressional monkeys won't miss it.

max2205's picture

So if it hits... Will the free phone service be dterminated.....we're sorry please add money to your prepaid plan card....this phone is no longer in working order,,,,,,

earnulf's picture

Our income (taxes/fees, etc) barely cover the Mandated portion of the budget.   The Discretionary part is the other 1.4 to 1.6 Trillion dollars of "borrowed" spending that gets added each year.    For either of the "Presidential" candidates to talk about lowering the debt, they are referring only to the yearly addition, while totally ignoring (maybe it will go away) the 16.1 Trillion dollar Godzilla in the corner.

Republicans won't cut Military spending, which is 600B of that 1.6 Discretionary Spending (yeah, imagine that defense is "discretionary").   The rest involves public support programs including the SNAP, unemployment and education (just to name a few).   While there maybe up to 20% waste in the Federal Government, getting rid of all that waste (if they could even find it without headlines) would only cut the Yearly deficit to around half a Trillion dollars.   Godzilla won't grow as fast, but it will still grow.

Democrats don't want to see social programs cut (because a lot of their support does come from those programs) and aren't likely to see tax hikes, especially those that impact corporations or the upper 3%.    This despite the fact that corporate contributions to the national income are at some of their lowest levels ever when compared to the total income stream.

What is needed is a no-nonsense, non-partisan, civilian with a Battle-Ax approach that uses the simple cost/benefit analysis.    It should not cost 500K to provide 1K of benefit to someone.    There are savings to be had everywhere we look, from unused federal buildings and properties to unneccesary junkets and conventions replete with videos poking fun at taxpayers.    Congress is not going to do more than put lipstick on this pig and then run around screaming as the economy locks up yet again, pointing fingers at everyone but themselves.

Alea Iactaest's picture

Wake me when the adults show up. Until then we're just watching 2-year olds pissing on each other in the sandbox.

A Middle Child of History's picture

Anything that cannot continue, will not continue. One way or another the fiscal disaster we are racing towards, will be resolved. The writing on the wall tells me to be long on copper, lead, steel, and legumes.

BooMushroom's picture

What I'd like to see is a budget where the top line numbers are all followed by a % sign.

"We're going to spend 10% on admininstration, 10% on enforcement, 40% on military, and 40% on entitlements.  We not borrow more than 10% of revenues this year, 5% next year, and in 2015, we will only spend what we take in.  You want there to be money for entitlements?  Study the Laffer Curve, and let's set rates accordingly."

Overfed's picture

If it were up to me, I would be shitcanning alphabet-soup federal agencies like gangbusters.

RMolineaux's picture

The risks of restoring tax rates to their 1999 levels are being intentionally exagerated.   The US enjoyed a modest prosperity and approached a balanced budget under that regimen.  It can do so again.  But it will also require a breaking of the stranglehold that Israel, the pentagon and their friends have on the congress and US foreign policy.  Military imperialism is the biggest budget buster out there.