Goldman Fires Another Warning Shot Across Bernanke's Bow

Tyler Durden's picture

Following up his earlier note laying out expectations (translated as: "you better or else") for the outcome of the FOMC meeting tomorrow, Goldman's chief economist Jan Hatzius produces another 'concerning' research note tonight providing just enough evidence for  a growing downside risk to the firm's 2% GDP growth estimate for 2012. We assume the failure of the market to hold onto dramatic losses (easier to justify more easing) or dramatic gains (can't disappoint a Pavlovian public waiting for the FOMC bell to ring) in the last few days prompted the 'nudge' from the policy-makers-elect. It appears weak stocks, a strengthening dollar, and the European crisis were not what the doctor ordered.

From Goldman US Daily : A More Downbeat Message from Our Financial Balances Model (Hatzius/Stehn)

An update of our "financial balances" model, introduced three months ago, points to below-trend growth in 2012. Although the model still suggests that the net impulse from changes in the private and foreign balance will be slightly positive, this is overwhelmed by a negative impulse from fiscal retrenchment. Overall, the results imply some downside risk to our current forecast of slightly below-trend growth next year.


Since the late 1990s, we have repeatedly looked at the US economic outlook via the “financial balances” framework championed by the late Cambridge economist Wynne Godley. It starts from the accounting identity that one person’s spending is always another person’s income. This means that in the economy as a whole, total income must equal total spending, and the financial balances—the gaps between income and spending—of the different sectors of the economy must add up to zero. In turn, this means that the financial balance of the US private sector plus the financial balance of the US public sector must equal the US current account balance (the financial balance of the rest of the world vis-à-vis the US).


But while this identity must always hold ex post in terms of national income accounting, it need not hold ex ante in terms of the spending intentions of the different sectors of the economy. If all sectors taken together try to reduce their financial balance—i.e. increase spending more than income and finance the difference by borrowing more or running down their cash balances—the economy will tend to grow above potential. Conversely, if all sectors taken together try to increase their financial balance—i.e. increase spending less than income and use the difference to accumulate cash or pay down debt—the economy will tend to grow below potential.


This suggests that we may be able to predict the ups and downs of the business cycle if we can predict the ups and downs of the ex ante financial balances of the different sectors. In particular, if there is good reason to expect a tendency toward declines in the aggregate financial balance—i.e., spending growth that runs ahead of income growth in the economy as a whole—we should expect above-trend growth in GDP, and vice versa.


A few months ago, we constructed a model to quantify these linkages (see "Private Boost, Public Restraint," US Economics Analyst, 11/25, June 24, 2011). We explain the different components of the private sector balance—household saving, household investment, and the nonfinancial corporate financing gap—as well as the external balance with economic fundamentals such as household wealth, interest rates, house prices, exchange rates, and lending standards. Using assumptions for the evolution of economic fundamentals, we then project the underlying balances into the future, focusing on the overall impulse to aggregate demand. Finally, we compare this impulse with the likely drag from public sector retrenchment and discuss the implications for overall GDP growth.


Our conclusion at the time was that the overall financial balance was still likely to show an ex ante decline—i.e. a drop in personal saving, a rise in residential investment, a decline in corporate net saving, and a decline in the US trade deficit. Although a retrenchment in the public sector was likely to cut the other way, the implication was still for modestly above-trend growth in 2011-2012, at least excluding the negative impact from the increase in oil prices this year.


Three months on, the picture has deteriorated. This is illustrated in the chart below, which plots the private sector boost, public sector drag, and the net effect of the two taken together. To be sure, we still obtain a positive impulse from a predicted decline in the private sector balance. However, the impulse is now only +0.2 percentage point compared with 1-1.5 percentage point three months ago.



The reasons for the reduced impulse lie in the drop in equity prices, a somewhat weaker outlook for credit standards, and an appreciation of the trade-weighted dollar over the past few months. This minor positive impulse now no longer looks large enough to offset the drag from public sector retrenchment. As a result, our model now implies a net impulse from all sectors taken together of -0.6 percentage point in 2012. (The impulse in 2011 is positive, but note that the chart does not include the impact from the sharp increase in real energy prices, which has probably taken as much as 1 percentage point from growth in the first half of 2011; see "Subpar Growth Brings the Fed Back into Play," US Economics Analyst, 11/31, August 5, 2011.)


Financial Balances Model Now Points to Restraint for 2012

On its own, this seems consistent with our real GDP growth forecast of 2% on an annual-average basis. However, the risks to this forecast are tilted to the downside. First, the financial balances impulse excludes the drag from a tighter commodity constraint, which still looks significant. Although energy prices have eased a bit in recent months, the growth impulse in 2012 is still likely to be somewhat negative in 2012 given the lags in the relationship between energy prices and growth, as well as our commodity strategists' view that prices are likely to resume their upward trend. Second, sub-trend growth has historically been an unstable place to be for the United States; there has never been an increase in the unemployment rate of more than 35 basis points (on a 3-month average basis) that has not resulted in a recession. And third, of course, the risk is that the tightening of financial and lending conditions that has caused the message from our financial balances model to become less friendly continues in the wake of the European crisis.

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CrashisOptimistic's picture

Will you look at this monumental bullshit?

Public impulse this and private impulse that.  What crap.  Brent tacks on $10 or loses $10 and all this sillness is rendered trashable.

Hell, it's trashable now.

macholatte's picture

Fight Club Wall St.


1st RULE: You always talk to the media about FIGHT CLUB.
2nd RULE: You ALWAYS talk to politicians about FIGHT CLUB.
3rd RULE: If someone says "stop" or goes limp, taps out, the fight is just getting started.
4th RULE: Only two guys to start a fight. Then it's gang warfare.
5th RULE: One fight at a time.
6th RULE: You must wear a white shirt, dark leather shoes, a dark suit and carry a cool brief case. Never sweat. 
7th RULE: Fights will go on as long as they have to.
8th RULE: If this is your first night at FIGHT CLUB, you have already lost.
Smiddywesson's picture

The methodology makes sense but to think such massive forces can be measured to within a percentage point of accuracy?  Yes, it's bullshit.  It's another example of hocus pocus from Economists who want to show they are scientists too.

espirit's picture

Squid is losing control of the markets without freebies from the Fed.

Anarchy, Bitchez.

DeadFred's picture

The squid lost control when the tsunami hit and they haven't regained it yet. Try as hard as they can the short interest is still out there, Europe is FUBAR and what will the Chinese do? Not a good time at Goldman.

XRAYD's picture

Here is an appropriate story of squids and "same sex sex" -


Amorous Squid Seeks Partner: Any Sex Will Do

Id fight Gandhi's picture

It's scary that BS bernake holds so much power. Hope they do nothing tomorrow. We can't afford the asset inflation.

DeadFred's picture

I may be showing my ignorance but what are the chances that what just <didn't> happen with the yen is a shot across Bernanke's bow from another corner of the world. The yen was approaching all time highs when what looked like an ordinary BOJ intervention started, but it failed. While the yen was being devalued there was something was quickly moving it back. My first thought was China flexing some muscle to tell Bernanke not to screw around with the dollar. Forex is above my pay grade though.

xtop23's picture

 Japan has its own problems. Rising Yen = diminished exports which they can ill afford right now.

zorba THE GREEK's picture

ROCK          Bernanke        HARD PLACE

rocker's picture

I like that. Let's find a boulder to bury the Bernanke under.

Zero Govt's picture

No need, Bernank has a shovel and has been digging his own grave ...putz learnt all the wrong lessons from his 'study' of the 1929 Depression can bank on peanut brained academic and political brains getting it wrong ...only commercial brains work

Eireann go Brach's picture

Satan aka Goldman always gets to fire the last bullet at Bernanke!

Mactheknife's picture

Doing God's work is never done... so long as there is at least a few smart-asses out there running around without debt up to their eyeballs. Heaven forbid.

Syrin's picture

I assume everyone here understands how truly fraudluent the GDP number is? for those who want more detail and for a more honest number

espirit's picture

GDP is a fraud?  Wha?  Oh No. Can't be. Well maybe. Ok.  So what?  Rotflmao.

CapitalistRock's picture

I still have some fiat dollars that need to be sold for gold. Bernanke better sit on his hands tomorrow and not trash my dollars more than they already are.

Belarus's picture

I think Hunter S. Thompson might have been wrong, re: The Death of the American Dream. According to Thompson, the day Nixon entered office (which roughly coincided with the end Bretton Woods agreement) was the day America died. Thinking this over, I think the Death of the American Dream might have been the day Goldman went public. While the history books will ultimately decide that fate, we have indeed become a nation of off the worst kind of junkies: greedy smack addicts. 

Res ipsa loquitar.

Id fight Gandhi's picture

Those movies are so hard to follow. Just saw where the buffalo roam a few months back, saw fear and loathing in the movies.

Belarus's picture

Thompson was completely underated for his political views:

It would be easy to say that we owe it all to the Bush family from Texas, but that would be too simplistic. Trhey are only errand boys for the vengeful, bloodthirsty cartel of raving Jesus-freaks and super-rich money mongers who have ruled this country for at least the last 20 years, and arguably for teh past 200. They take orders well, and they don't ask too many questions (obama?).

The real power in America is held by a fast-emerging new Oligarchy of pimps and preachers who see no need for Democracy or fairness or even trees, except maybe the ones in their own yards, and they don't mind admitting it. They worship money and power and death. Their ideal solution to all the nation's problems would be another 100 Year War.

Coming of age in a fascist police state will not be a barrel of fun for anybody, much less for people like me, who are not inclined to suffer Nazis gladly and feel only contempt for teh cowardly flag-suckers who would gladly give up their outdated freedom to live for the mess of pottage tey have conned into believing will be freedom from fear.

Ho ho ho. Let's not get carried away here. Freedom was yesterday in this country. Its value has been discounted. The only freedom we truly crave today is freedom from Dumbness. Nothing else matters.



legal eagle's picture

Changing the subject, sorry. I just want to say I have been meeting with the IRS for ten days now, in 3 different cases. Our government really has become the Gestapo, and does whatever it wNts ignoring the rule of law, I am sickened by what I see and cannot wait to move out if this fucking dictatorship in 3 months. Fuck America and what it gas become.

Belarus's picture

If you land a job at Goldman, the IRS will soon forget all about you.

xtop23's picture

America quit the masses friend. I too, have been considering moving to a much less intrusive locale.

Perhaps Costa Rica

Kali's picture

I am watching all markets like a hawk tonight.  You know there is gonna be leakage somewhere. BB, what a schmuck.  It's obviously getting scary to do his master's bidding.   I wonder who he is more scared of?  His master or the growing political and public anger.  Did they promise him plastic surgery and a nice hidey hole somewhere?   


junkyardjack's picture

The fact that commodities have been so quiet tells me that its not going to happen.  Someone would have gotten the nod in oil to start buying, most of the commodities are slightly down. I think they are going to push it off for yet another month, they'd rather Europe to be at least somewhat fixed before pulling out their only gun.  Once QE is announced, if markets go back down we'll be sacraficing first borns to stop the fall.  

rocker's picture

 Geezzzzz, Extend and Pretend live on.  Hmmmm.   What If.........

 There is one entity that can screw this all up because they do not play with the same rules as our banking cartel.

   "Europe and Germany", they actually care about inflation.   We do not.

Caviar Emptor's picture

Creative ways to say nothing while trying to sound brilliant 

twotraps's picture

Very true.  And we thought it was stupid in the 80's to see who was standing next to whom at the parades in front of the Kremlin.  Now we decipher crafted phrases from the Fed.....transitory my ass.

onlooker's picture

Reading this tells me not to do business with these people. bogus guys

sasebo's picture

So why isn't the real economy growing & unemployment going down? Because the dumb ass federal guvmunt has given the RIGHT to print paper money to a bunch of pompous, obnoxious, greedy assholes instead of letting the "free market" (such as it is) print the money. Easy as that.

The "free market", even with all the guvmunt intervention, does a great job of producing everything else that we need. Why not the money needed to exchange all the stuff they produce?

GS is full of esoteric crap. That's why the real economy isn't growing.   

Trimmed Hedge's picture

Time to fire some shots at Goldman

johngaltfla's picture

Goldman IS the FED. They are the 2nd largest shareholder behind JPM. But I think GS is telegraphing the action and results from the FOMC meeting as they have all year long.

Mactheknife's picture

The same people who own the Bank of England, the ECB and every other central bank on the planet. Only five central banks in the world are not owned by them.

espirit's picture

Goldman may have just fired a warning shot at Bernanke, but two guided torpedos have already locked on to the squid. In 3..2..1..

LongSoupLine's picture

here's how this reads:

blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, the drop in equity prices, appreciation of the dollar, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, more QE bonus pool crack or we'll hang you by your balls.

FU goldman!

LeonardoFibonacci's picture

Our chairman who art at Goldman
Blankfein be thy name
Thy rally’s come, God’s work be done
In the Dow as it is in the Nasdaq
Give us this day our daily gain
And forgive us our frontruning, as we punish those who frontrun against us
And bring us not under indictment
But deliver us from regulators
For thine is the cashflow, and the power, and the bonuses, forever and ever. Amen

chump666's picture

Goldman are losers, rich losers, but losers...

twotraps's picture

Can he get away with no news at this point?  Is an 'extended period of low rates' no news because he already said that, so no news is bad news meaning stocks break? Sad we are still trying to use reason, rules an dhistorical precedent  to come up with scenarios....being reasonable is getting expensive.   Pathetic.

EB's picture

Finally, MMT goes full quant/PhD.  Linear regression, meet misleading and meaningless economic definitions.  Guess what?  Tautologies are always true (including this one).

TraderMark's picture

I prefer when the Fed and GS communicate in secret, rather than out in the open like this.   Cmon Squid...

Sambo's picture

You think they don't communicate in secret? what gets communicated to the public is carefully crafted sheeple-feed meant to keep them occupied in the wrong place.

Have you seen how african lions hunt?

Robslob's picture



I played with my PMs tonight...I do not give a shit what that maniac asshole does anymore.


Print, my PMs up.

Don't print my short positions look ok

Do nothing then print..btfd in PMs


monopoly's picture

Like I said earlier, going to be interesting.


Good Night all.

Miles Kendig's picture

If all sectors taken together try to reduce their financial balance—i.e. increase spending more than income and finance the difference by borrowing more or running down their cash balances—the economy will tend to grow above potential - Jan Hatzius

Provided the cost of carry that additional borrowing does not itself create too powerful a drag to growth.  As the folks here off South Main Street USA know all too well with the Money Tree centered economy this drag is consequential and soon overcomes the ability of that particular segment to derive anything but retrenchment.  This retrenchment is NEVER counter cyclical on a micro level and this phenomenon now appears to be the operative condition at the macro level.

Thunder_Downunder's picture

Another great model by GS.


Love how it's got nearly as much historical data (2 years) as it does... future data? 


If anyone reading this is a disallusioned GS client, I can sell you my own proprietary 'future' datafeed. It's garuanteed to be 110% more accurate than that used by GS.....