Goldman On The Not-So-Good, The Bad, And The Ugly Fiscal Cliff Scenarios That Remain

Tyler Durden's picture

Even if both the Bush tax cuts and emergency unemployment insurance are extended, the 'sequester' is mostly postponed, and the fresh fiscal drag is confined to the expiration of the payroll tax cut and the new taxes to pay for Obamacare, Goldman estimates suggest that fiscal policy would shave nearly 1.5% from real GDP growth in early 2013. While it seems the 'market' believes that some compromise will be enough to lift the market to new stratospheric heights; we believe, as does Goldman, that the risks are almost exclusively on the downside of this 'not so good' fiscal scenario.


Via Goldman Sachs:

We forecast a renewed slowdown in growth to 1½% in Q1, despite the healing in the private sector and renewed monetary easing.

In addition, the risks are almost exclusively on the downside of this “not so good” fiscal scenario. The probability that the upper-income Bush tax cuts and emergency unemployment legislation will expire, as well as that of a temporary hit from the entire cliff, has clearly risen in recent months. Adding these sources of restraint would take the overall fiscal drag to nearly 2 percentage points in early 2013, and more if the uncertainty effects are large. A sharper slowdown in GDP growth to 1% or less would likely result.

The tail risk is that Congress will fail to agree on any type of resolution for a more extended period, and the economy is hit with both the sequester and much bigger tax increases. While the impact of such a failure—especially those related to confidence and financial conditions—is harder to quantify, just the direct fiscal effect would imply a GDP growth hit of around 4 percentage points in early 2013, and likely a recession.

The Not So Good: Our Base Case

Our base case is that the fiscal cliff is (just barely) resolved by year end, most likely with a temporary extension of the 2001 and 2003 tax cuts, a continued phase down of Emergency Unemployment Compensation (EUC) and a temporary delay of the spending cuts under sequestration. Under our central assumption we assume that the $120bn payroll tax cut expires at year end and that new taxes that were enacted as part of the Affordable Care Act (ACA) are implemented on schedule.

The Bad: A Temporary Lapse; Upper Income Tax Cuts and Jobless Benefits Also Expire

A second possible scenario is that lawmakers will allow the upper income portions of the 2001/2003 tax cuts (defined as income over $250,000) and EUC to expire, in addition to the fiscal restraint in our base case. While it is possible that Congress could vote prior to year end to “decouple” the upper income tax cuts from the rest of the Bush tax cuts, it is more likely in our view that this would happen after year end due to fundamental disagreement between the political parties.

The White House has indicated on several occasions that the President would veto a further extension of the upper-income provisions, while Congressional Republicans have indicated they would not support decoupling them from the rest of the 2001/2003 tax cuts.

While there are possible compromises between these two positions—raising rates only on income over $1 million, for instance—reaching an agreement on this in the few weeks lawmakers will have before year end seems to us to be a significant political challenge. A deal on this question could also be made easier once taxes have risen, since lawmakers could claim that setting tax rates and/or revenue levels higher than 2012 would nevertheless constitute a “tax cut” compared with the policies that would be in effect in January 2013.

We assume that if the upper income tax cuts are allowed to expire, emergency jobless benefits would expire as well. In light of the continued phase down in eligibility since the start of the year, the expiration would not have as great of an effect as it would have had a couple of years ago, but would still represent an incremental drag on growth compared with our base case.

Such a scenario would likely result in growth below our forecast for 2013, particularly in the first half of the year, especially if some of the 2001/2003 tax cuts and EUC were allowed to expire. That said, there are at least three reasons to think that while negative, a temporary lapse would not hit growth by nearly as much as implied in the worst-case scenario:

  1. A lapse would probably be reversed quickly. It is likely that if Congress were to fail to address this issue before the end of the year, lawmakers would return inJanuary and reach an agreement fairly quickly. The debt limit, which Congress must raise no later than early March according to our projections, might serve as a deadline for action on the fiscal cliff if public pressure hasn’t already forced an agreement. If, for example, an agreement were reached in January, we assume it would reinstate most policies retroactively, meaning that much of the effect would be reversed before the end of the quarter, reducing the overall economic effect.
  2. The Administration may have some flexibility in implementing tax hikes and spending cuts. Beyond the likelihood that Congress would revisit the fiscal cliff fairly quickly if these provisions were to expire, there is a possibility that the Treasury and other federal agencies could delay implementation of the scheduled fiscal tightening if the lapse was expected to be temporary. On the tax side, the Treasury may have some flexibility in determining tax withholding. It is possible that if Congress were expected to extend the tax cuts retroactively, the Treasury could maintain tax withholding at current levels in anticipation of an agreement. This would cushion the effect of a short lapse, but would be ineffective in addressing a prolonged lapse in the 2001/2003 tax cuts. It is possible that the phase-in of the sequester could also be made more gradual if the cuts were expected to be reversed early in 2013.
  3. Uncertainty effects would depend on why a lapse occurs. It is difficult to assess how consumers or businesses would react in the face of a temporary tax increase. If a retroactive extension of most or all of the policies is widely expected, it is quite possible that some consumers would “look through” a temporary reduction in after-tax income. That said, we suspect that if Congress fails to address the fiscal cliff at year-end it will be due to a political stalemate, so there could be at least short-term uncertainty effects.

The Ugly: Congress Fails to Address the Fiscal Cliff

In light of the recent fiscal debates and the disagreements between the political parties, one cannot completely rule out the possibility that lawmakers simply fail to reach agreement on the fiscal cliff due to continued disagreement over the most controversial tax and spending issues, which hold up agreement on other less controversial provisions.

That said, we view this as a low probability event not only because lawmakers will ultimately want to avoid inducing a recession, but also because they are apt to respond to the inevitable pressure to address the situation that would come from the public, businesses, financial markets. Moreover, a broad swath of lawmakers support averting at least half of the policy changes set to take effect at year end, so even in the worst-case scenario it is unlikely that Congress and the President would allow a permanent lapse in the full range of provisions that make up the fiscal cliff.

Updating our Estimates of Fiscal Drag

We have updated our estimates of the expected effect of fiscal policy on growth. We have incorporated the most recent estimates from the Congressional Budget Office and Joint Tax Committee on the budgetary effects of each of the various components of the fiscal cliff (exhibit 1). These are very similar to prior projections, though the estimated revenue effect of the 2001/2003 tax cuts has grown slightly from estimates earlier this year, while the projected spending cut due to the sequester has declined slightly (Exhibit 1). We have also included “second round” effects on growth in subsequent quarters that result from the direct hit to growth due to fiscal changes.


Estimates of the three scenarios noted above are shown in Exhibit 2. Under the baseline “not so good” scenario, fiscal policy would shave nearly 1½ percentage points from real GDP growth in early 2013, compared with ¾ points in 2012. In this case, we expect a renewed moderate GDP growth slowdown to a 1½% pace in early 2013.

Under the alternative “bad” scenario, the fiscal drag would rise to nearly 2 percentage points in early 2013. This bigger hit, combined with the possible greater uncertainty if an agreement proves elusive for a few weeks in early 2013, would probably cause a sharper slowdown in GDP growth to 1% or less.

Finally, there is the tail risk scenario that Congress fails to agree on any type of resolution for a more extended period, and the economy is hit with both the sequester and much bigger tax increases. While the impact of such a failure—especially those related to confidence and financial conditions—are harder to quantify, just the direct fiscal impact would imply a GDP growth hit of around 4 percentage points in early 2013, and likely a recession.


There is inherent uncertainty in these estimates due not only to unpredictability of the political debate on the fiscal cliff, but also to uncertainty surrounding the effect on growth of different types of fiscal policy changes. Exhibit 3 shows the range of multipliers estimated by the Congressional Budget Office (CBO) for several types of fiscal policy changes. Our own multiplier estimates are in the upper half of the ranges provided by the CBO. We believe that this is reasonable. 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.


In addition to these quantifiable drags, we would also expect a negative impact on growth via deterioration in market, business, and consumer confidence. Some of this impact might already occur before the end of the year, as the uncertainty builds. While such an “uncertainty shock” could reverse quickly, providing a large amount of support in a short period of time if a deal is struck, the ride for both the financial markets and the real economy would undoubtedly be rocky.

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Dr. Engali's picture

The fiscal cliff... another scary sounding meme to spook the sheep. " government must act to save us or the economy will fall off the cliff". It's a damn fine thing we have them there making messes so they have something to clean up later. I don't know what we would do without them.

knukles's picture

Not like them fuckers had anything to do with the cliff, closeness to the cliff, speed of approach, depth of the abyss, lack of ambulances and rescue crew....

It's Nature and Nature's God they gotta be rescuing us from, saving us, the common man whose gonna get the shit beaten out of him... if "WE" go over that cliff


Same as daylight savings time.
Who but a fucking politician would claim to be "saving daylight"?

CPL's picture

The fiscal "unending, annoying slide into the ditch" doesn't have the same media impact.

odatruf's picture

Only the government NOT acting will save us.  Let it all happen.  Let the income tax cuts expire, let the payroll tax cuts expire, let the unemployment extensions expire, and let the sequester forced spending cuts happen. I'll take a big GDP hit in order to stop borrowing from the future.

max2205's picture

The event horizon Add Iran war, china selling treasuries , consumer spending strike, oil spike, market crash, rate spike.... TVIX @$1,000 from 1.40 now. Fuck I love it when congress fails

Dr. Engali's picture

Crazy times that's for sure. I'm not a big end times person, but sometimes I have to wonder.....

knukles's picture

I answered the phone today and was one of Mrs K's bridge partners... Got chit chating and she asks if'n these times don't sound like stuff out of the Book of Revelations.

Odd comment....


Haager's picture

Oil spike...

Now, you name it. Oil and stocks dropping whilst things got uglier in the ME, does that mean China on the dump-button to cause pain to the west?

CPL's picture

Sure, eventually they, Russia and India will just dump both the Euro and USD and forbid it in transactions outright.

CPL's picture

Sure, eventually they, Russia and India will just dump both the Euro and USD and forbid it in transactions outright.

Aquarius's picture

State of the Nation and it's "leadership", whoever gets the Presidency:

phat ho's picture

hmmmm.... things may just get zany enough for them to declare to go cashless, eh what

TeddyBear's picture



 And the GOP is leading that cashless!!



Louisiana Bans Using Cash for Sales of Second Hand Goods -


Louisiana residents buying used goods such as clothing, furniture and household items can no longer do so with cash, under a new state law signed by Governor Bobby Jindal (Republican Party)on July 1.   State representative Rickey Hardy, who co-authored the legislation, said the intention is to make it easier for law enforcement to catch criminals who steal items and sell them at second-hand stores. -   Some business owners are upset over the new restriction, saying that they’re being unfairly targeted by the government.
  Attorney Thad Ackel Jr. says the legislation infringes on economic freedom.   . “This legislation amounts to a public taking of private property without due process or compensation,” . .  Ackel wrote. “Regardless of whether or not the transaction information is connected with, or law enforcement is investigating a crime, individuals and businesses are forced to report routine business activity to the police.”  . . Those impacted by the law include Goodwill stores, flea markets and anyone who holds a garage sale. Pawn shops have been exempted and can continue accepting cash from customers. - - .   .   Is the Republican Party for small business?   . .

Republican Party wants to change this - "this note is legal tender for all debts, public and private".   .    
 More government means less freedom.....  . .   Aug 30, 2012 – Rubio actually said in his speech "we choose more government & less freedom". Wow, I'm sure that's not what he meant to say, but  ... .
.   Both sides want less freedom :(    

disabledvet's picture

what we do know for a fact and therefore can be excluded is a Government that is what caused the downgrade the last time. So it really does present just a few simple a fairly straightforward scenarios now that we have QEternity (thus solving that mystery): either a massive consolidation of the Feral...i mean Federal Workforce (ending of the Bailout Regimes, subsuming of the Postal Service into DHS, Department of Defense renamed Department of the Army, State, Justice, DOT, DOE and Interior Department combined into "single unifying command structure with authority over all Planet Earth including Japan and Germany and the outlying regions like France and England) with some....Gernalissimo..."Engaging the Entity"). still, try as we might i'm not sure we can defeat them. our best hope in my view is "the Great Decamping" where the bulk of the North American population "the various regions throughout subsector D complex 56.") until this i fear the following is all we have to look forward to:

optimator's picture

Con gress will take their Christmas bread with out doing anything but promising to fix it all in January.  Then they'll wait for the new, or old, President before doing anything.  Then they just won't be able to agree on anything.  An then the solution to the problem.  Ben will simply print twice as much money, problem solved.

q99x2's picture

How does anyone know if GDP will be reduced by 1.5% if the numbers are fraudulent to begin with. If GS is the fraudster par excellance then what right do they have to be taken seriously. They are crimminals that have not been shut down yet. Think of the sovereign nations where there are unelected ex-GS scum sitting in the driver's seat. What is this article really about. Who are they attempting to manipulate and for what reason? In that alone there is meaning to the posting.

Fiscal cliff sound bite by scumbags. That is all. I got day of the market's last jump up perfectly by guessing the opposite of what GS was telling its "invertors." As if they have any willing "investor" clients still.

Goldman Suck. Bad.

toomanyfakeconservatives's picture

Fraudulent stats and a strong stock market are the only reason the Kenyan is still in the race. When it comes to criminals who have not been shut down YET, it makes me think of the ending scene in the movie "Boiler Room" when the paddy wagons and prison buses pull up to JT Marlin headquarters to arrest all the financial criminals. If we are to survive, we need large scale MASS ARRESTS like that for Wall St. and the halls of government...

Monedas's picture

I'm OK .... you're so so .... he's not so good .... he's bad .... he's ugly !

Insideher Trading's picture

Credit crisis is too spooky now I suppose.

But isn't that what this is? Another fucking credit crisis.

Some cunty fucker had to get creative and repackage the fear...fiscal cliff; fiscal cliff my as. This is another credit crisis. 

America can't tax it's way out of this problem, and it can't cut spending it's way out of this problem, it can't even get out of this problem with a combination of the two.

A  slothful, ignorant and gluttonous country fixated on borrow, borrow, borrow, is now once again faced with a hangover and tab it can't pay. It's any wonder why Bernanke announced open ended QE; expect "The Ugly"


Schmuck Raker's picture

The purposely omitted "Good" outcome probably requires numerous guillotines be erected near wall street, and the federal triangle.

blindman's picture

The Peril of Obama’s “Man Crush” on Geithner is exposed by the Debate

Posted on October 5, 2012 by Devin Smith
.."Note the depth of their contempt for the American people. The American people did not want any executions of banksters, much less their murder in “a dark alley.” Geithner, Clinton, and the author cannot even consider the compelling evidence that accounting control frauds led by the banksters drove the crisis. They have no understanding of accounting fraud, justice, or the damage caused to a nation when elite frauds can grow wealthy (and massively destructive) through fraud. They have no conception of what any competent regulator, economist, criminologist, or attorney would understand about a “Gresham’s” dynamic. If cheaters prosper, then bad ethics drives good ethics out of the marketplace and fraud can become endemic.

The “price” that results from allowing elite frauds to become wealthy with impunity is endemic fraud, recurrent financial crises, grotesque economic inefficiency, and the perversion of markets and democracy through the descent into crony capitalism. Geithner will not bear this “price” – America and Americans will. We were not informed of this price or asked whether we were willing to bear it. There was no legitimate need for us to bear the price because Geithner’s grant of impunity to the elite frauds was unjust and harmed the economy and nation. The banksters are the most undeserving recipients of a U.S. government bailout in history. The odds are strong that the banksters will eventually share a portion of the massive bounty they received from the U.S. due to Geithner’s policy recommendations with Geithner. They may hire him, arrange for him to run an international organization, or give him Larry Summers-level (massive) fees for speeches on the wonders of faux “stress tests.” There are numerous ways for a senior government official to cash in.

No regulator would ever believe that leaving fraudulent CEOs in charge of banks produces economic stability. While Geithner, as President of the FRBNY, was supposed to be one of the nation’s top regulators he, by his own admission, refused to regulate. Like Clinton, Geithner was a strong proponent of the financial regulation that helped to produce (with a huge assist from Bush) the intensely criminogenic environment that caused the crisis. Geithner and Clinton would be two of the last individuals in the world that one would ever select to create an effective program of regulating or prosecuting banksters." ... wkb

[KR350] Keiser Report: Mr. Gold vs Chump ‘Economists’
We demonstrate the effects of money printing and Central Bank madness with a hyperinflationary chicken. They also discuss the Securities and Exchange Commission losing its mind as it sues the one rating agency NOT on the payroll of Wal Street. In the second half of the show, Max Keiser talks to Professor William K. Black about Deferred Prosecution Agreements, the Financial Conduct Authority and London as the capital of fraud.

Muppet Pimp's picture


That Devin Smith (actually William K Black?) article is excellent, thanks for sharing it.

That would make a good ZH post Tylers.

Bear's picture

Talking about the fiscal cliff is just like blowing smoke in a hurricane ... TPTB will not allow their wealth to be put in such jeopardy. There will a compromise and being the cynic that I am ..." the rich get richer and the rest don't" 

dariomilano's picture

the last trading suggestion from GS on EUR was correct..

Haager's picture

So, it's imbullish this time, or did the fooler of fools got one right?


orangegeek's picture

More data.  More opinion.


The bottom line is that the government is gaming the system by injecting cash like never before in history.


Japan's Nikkei reached 48,000 in 1988.  It is now about 8900.  That's 25 years later.


So much for long term growth.  And Japan's debt is about 230% of GDP.


The US government's next move is to build empty cities just like China to pump their GDP numbers.


ALL government really is the problem.



RiverRoad's picture

Does building empty cities put people to work?  Is that where the Great Depression 2 is finally headed?  They pay people in Japan to sit at their empty desks and make paper airplanes...

Just Ice's picture

Orangegeek stated:  ALL government really is the problem.

Spot on!  Actually, I do believe in having a minimal level of limited government, but the layers of government and bureaucracies is totally insane.  From extremely petty local homeowners' boards and city councils, to county or regional governments, to state bureaucracies, to national governments then international bodies.  As if adults should not be free to make any decisions for themselves but rather need layers and layers of bosses telling them what to do, how high to jump, when to sit...and all the while collecting fees and taxes for allowing ownership or transactions or for granting permission to do anything from conduct business to putting a structure on one's own property.  For the most part the only service rendered by public servants are to themselves, for themselves to be supported as royalty, reaping government paychecks and benefits on the backs of people less well off.  A parasite class indeed.  And, imo, it's local governments that are the worst as far as blood sucking through sales, property and use taxes, and directly interfering with peoples lives and business the most.

petolo's picture

Cygnus atratus is on the wing.The Re volution Announcement will not be televised.

toomanyfakeconservatives's picture

The Revolution may not be televised, but the MASS ARRESTS will be...

philosophers bone's picture

Debt ceiling will be raised due to war and national security interests. Politicians are so patriotic. Predictable and pathetic.

The Alarmist's picture

You think they all wear those little lapel pins because they want to?  It's all part of a giant mind-control scheme.  The WTC could finally come down because TPTB had finally found a way to broadcast the signals via LEO Satellites, which is why the mind-numbed robots are no longer to be found largely only in the Northeast.

polo007's picture

Neither the Democratic nominee nor his Republican challenger had anything compelling to say about the big issue of our times. How a once proud capitalistic country has become so mired in debt, so unprepared to live within its means and so reliant on the iniquitous policies of its central bank to keep it chugging along as it heads towards a financial cliff.

For months the Federal Reserve has been priming the US economy by printing money. In financial terms it's like giving a drunk more booze to wean him off last night's hangover.

In the United States it's called "quantitative easing" - a pernicious policy that is somewhat akin to global financial warfare. A "winner takes all" approach keeps the US dollar artificially low and beggars competing exporters from other economies like ours as the former New Zealand industrialist Hugh Fletcher touched on this week.

There is a real sense of frustration and anger among our own exporting community at the impact of this self-centred US policy on other nations. The US has strongly resisted suggestions that the greenback should no longer be the global reserve currency and that the commodity trade should no longer be denominated in US dollars.

Federal Reserve chairman Ben Bernanke has indicated quantitative easing will end soon. But few serious players in the financial markets believe this is a final move.

Veteran US investor Jim Rogers dismisses Bernanke as "just an Ivy League professor" who has set the US economy on a path it might never recover from with the economic patient now heading for the morgue. Rogers believes the US should not have bailed out big banks with government money; he also believes the Fed has set itself (and the US government) on the path to bankruptcy. He has been strident in taking it to US politicians over their combined failure to get their government's accounts back in order.

polo007's picture

To recap, the Fed will buy $40 billion of agency mortgage-backed securities per month. It will also continue two other programs: 1) extending the average maturity of its securities holdings (although only through the end of the year) and 2) reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. Together, these tools should increase the Fed’s balance-sheet exposure to longer-term securities by about $85 billion a month through the end of 2012. The goals are to put downward pressure on longer-term interest rates, specifically mortgage rates, and support the housing sector by encouraging home purchases and refinancing.

What makes this round of stimulus so different, and potentially more far-reaching, is that the Fed can increase asset purchases as needed, and the program is not tied to a timeline. The Fed will look to employment—more specifically the quality of employment—to gauge whether to ratchet up or down the program, and to decide when to end it. Interestingly, the Fed has implied a shift in its policy response by setting interest rates with a greater focus on unemployment and the economy, rather than inflation expectations, as it has done historically.

polo007's picture

Ken Volpert, head of Vanguard's Taxable Bond Group, oversees more than 40 index and actively managed taxable bond funds, with combined assets of more than $375 billion. Here he offers his outlook for bond investors and perspective on recent developments in this critical sector of the investment marketplace.

The current bull market for bonds began in the mid-1980s. Do you think bond investors realize the good times can't continue forever?

Ken Volpert: The Federal Reserve is forcing real interest rates into negative territory in order to reduce government and private debt burdens over the next decade. The result is that very small returns, less than 2%, are expected for Treasuries over the next few years, and slightly higher returns, about 3%–4%, for corporate bonds.

Eventually, after the deleveraging cycle has finished and the Fed stops promoting negative real rates, those bond returns will turn negative as real rates move back up to 1%–3% levels. I don't know if investors are aware of this outlook, but I would suggest they should understand the point we have reached and act accordingly. In addition, if the bull market for bonds means that investors' portfolios have developed a bond "overweight" in recent years, it may be time to consider rebalancing back to their long-term target.

nastaking's picture

On our router, we plugged in our usual ZOPO ZP500+ of PCs and media devices, while on the bridge end of the network we plugged in a couple of notebooks using their Gigabit Ethernet connections. The routers were set up initially in a best-case scenario situation, that is, within a few meters of each other in the same room. We call this our short-range test. We also tested the network over a 10m distance, with brick walls and doors as obstacles. We call this our mid-range test.

WhiteNight123129's picture

Predictions for Q1 2013.

1. Nominal GDP beats in Q1

2. Earnings suck though

3. Unemployment ebbs slowly down

4. Inflation overshoot a bit

5. 30 Years continue they move down.

6. Gold does not budge.


WhiteNight123129's picture

Yes GS is BS research. Bet on the opposite.