Goldman Sees An "Unusually Uncertain" Future And Another Debt Ceiling Hike Just In Time For The Presidential Election

Tyler Durden's picture

Even if the European Lack of Union does, miraculously, come up with some short-term resolution of a mathematically unsolvable crisis (at its core, the problem is that there is simply far more debt than there are assets, let alone cash flow, period, end of story) suddenly the market's will refocus its attention on the question of our own intractable math: i.e., how will America, suddenly once again the "neo-decoupled" source of global growth (don't look now but the Shanghai Composite is at multi-year lows even post the bank bailout from two weeks ago so the "dynamo" sure won't be Beijing), proceed to lead the world out of its latest slump? The answer is simple - it won't. At least not according to Goldman Sachs, which once again focuses on what everyone so conveniently chooses to ignore - the complete fiasco that is America's fiscal situation. Here is a reminder: "The fiscal policy outlook is unusually uncertain, and this uncertainty will persist even after the “super committee” reaches a decision by its deadline roughly one month from today." The European math is not the only one that does not work: "Even if reforms are agreed to next month, further legislation will need to be passed next year to address the expiring 2001/2003 tax cuts and the potential constraint of the statutory debt limit (again). Some lawmakers may also want to intervene to alter the automatic spending cuts that would take effect in early 2013 if the super committee fails to reach its $1.2 trillion deficit reduction target." For those who enjoy solving insolvable problems: you take your 2.0% (tops) Q3 GDP, and cut it by 2.5%, and that's the growth rate in 2012. Why? "In FY2011, several temporary provisions added to the budget deficit. These included the payroll tax cut; emergency unemployment compensation; spending from the American Recovery and Reinvestment Act of 2009 (ARRA), and expensing for corporate investment. Together, these account for almost 2.5 percentage points of GDP in FY2011." With the GOP dead set on making the president seem like an economic disaster, you can kiss these "temporary" boosts goodbye. And, the kicker, as far as the president is concerned, is that as Steve Jobs predicted, he most likely will not have a second run for one simple reason. "Based on our FY2012 deficit forecast along with non-deficit financing needs and accumulation of Treasuries in federal trust funds (which count toward the debt limit) borrowing authority might be exhausted by November or December of 2012, not long after the presidential election." Or, not long before the presidential election if the US continues to spend at the current rate. In which case, Jobs will be once again 100% spot on.

Full Goldman note on America's unsolvable math problem:

The Super Committee and the Fiscal Cliff

  • The fiscal policy outlook is unusually uncertain, and this uncertainty will persist even after the “super committee” reaches a decision by its deadline roughly one month from today.
  • Even if reforms are agreed to next month, further legislation will need to be passed next year to address the expiring 2001/2003 tax cuts and the potential constraint of the statutory debt limit (again). Some lawmakers may also want to intervene to alter the automatic spending cuts that would take effect in early 2013 if the super committee fails to reach its $1.2 trillion deficit reduction target.
  • The imbalance that lawmakers must address is large. Our budget forecast for FY 2012 anticipates a structural imbalance, excluding temporary policies, of roughly 4% of GDP. We expect the headline FY2012 deficit to be roughly twice that large.
  • A pullback in discretionary fiscal policy appears likely in calendar year 2012 and particularly in 2013. However, the economic outlook warrants the opposite: a more expansive fiscal policy in the near term, coupled with a credible longer term deficit reduction plan on a much larger scale than the super committee’s target that provides for more substantial structural reform than appears likely to be enacted this year.
  • Fed speeches this week suggest a significant constituency for further monetary easing, or at least communicating more clearly the Fed’s expectations that policy will stay very easy for a very long time. We see a good chance that the FOMC will provide substantially more information about its own expectations for monetary policy in the future. A relatively aggressive option would be the publication of “central tendency” projections for the federal funds rate.

The fiscal policy outlook is unusually uncertain, and this will continue even after the congressional debt “super committee” reaches a decision this fall. Even if some reforms are agreed to, further legislation is likely to be considered late next year to address the expiring tax cuts and the potential constraint of the statutory debt limit (again). Some lawmakers may also want to intervene to alter the automatic spending cuts that would take effect in early 2013 if the super committee fails to reach its $1.2 trillion deficit reduction target.

The negative fiscal impulse looks likely to top 1% of GDP in each of the next two years. However, the outlook still warrants a more expansive fiscal policy in the near term, coupled with a credible longer-term deficit reduction plan that exceeds the super committee’s target, but enacting legislation to bring this about looks challenging on both counts.

How Big Is the Imbalance?

Fiscal year 2011 came to an end a few weeks ago, turning in a deficit of $1.299 trillion, slightly above our estimate of $1.275 trillion. This is essentially unchanged in nominal terms from the FY2010 deficit of $1.294 trillion, as well as our estimate for FY2012 of $1.250 trillion. While the deficit has remained roughly constant in nominal terms—as a share of GDP it has declined slightly to 8.2% of GDP in FY2011—the source of the deficit has shifted among three factors:

1. Cyclical effects. Economic weakness likely accounts for about one quarter of the total 8.2% of GDP deficit reported for FY2011, which ended September 30 (see Exhibit 1). For FY2012, CBO assumes that below-potential output will contribute 2.2 percentage points of GDP to the budget deficit, and our estimates imply a similar effect.

2. “Temporary” policies. In FY2011, several temporary provisions added to the budget deficit. These included the payroll tax cut; emergency unemployment compensation; spending from the American Recovery and Reinvestment Act of 2009 (ARRA), and expensing for corporate investment. Together, these account for almost 2.5 percentage points of GDP in FY2011.

3. Structural imbalance. Taking out the cyclical influence as well as the temporary factors from the budget balance leaves a structural imbalance in FY2011 of roughly 4% of GDP. At present, this works out to just over 1% of GDP in interest expense, and roughly 2.5% in “primary” imbalance not due to cyclical factors or temporary policies. Gradual elimination of the primary deficit should be the highest priority for lawmakers.

We have extended our preliminary deficit estimate out to FY2014, pending the outcome of the super committee. The estimate, shown in Exhibit 1, reflects recent revisions to our economic forecast as well as recent policy developments. While our deficit estimate of $1.25 trillion for FY2012 still looks on target, we expect somewhat larger deficits than we had projected in February for the following two fiscal years, as a result of two factors working in opposite directions.

1. Lower growth. Our recent forecast revision downgraded growth expectations for Q4 2011 and the first three quarters of 2012. This makes for a lower starting point for revenues going into FY2013.

2. Policy changes. Working in the other direction, the debt limit agreement reached in early August, formally known as the Budget Control Act of 2011 (BCA), sets a nominal cap on congressional appropriations over the next ten years. This reduces the deficit compared with our prior estimates, which had assumed that congressional appropriations rise with real GDP over the long run, with a gradual phase down of spending on overseas military operations. We assume that relief from the alternative minimum tax (AMT) and the tax cuts enacted in 2001 and 2003 will be extended once again as they were in 2010, along with a one-year extension of the 2 percentage point payroll tax cut through 2012, and business tax incentives.

A Super Committee Agreement Seems Likely

Congress took the first step in reducing the long-term imbalance with the BCA, which in addition to spending caps instructs the super committee to identify another $1.2 trillion in deficit reduction measures (this figure includes associated interest savings). Under the BCA, any shortfall in the super committee’s package relative to its $1.2 trillion deficit reduction target must be made up through automatic spending cuts starting in 2013, a process known as “sequestration.”

Given scant information coming out of the super committee discussions and the broad range of topics being considered, the outcome could go a number of ways. That said, we still see an agreement of some type as the most likely scenario, probably involving a reduction in spending of a few to several hundred billion, coupled with a much smaller amount of new revenue. The former would come from a variety of policy changes related to Medicare, Medicaid, and non-healthcare mandatory programs. The latter would most likely come from increased fees, one-time revenues from spectrum auctions and other federal sales, as well as the elimination of a few targeted corporate tax preferences.

Of course, other scenarios are possible. The approaching election and fundamental policy differences could render an agreement impossible. But congressional approval ratings are near record lows, while the public’s focus on fiscal issues is the highest it has been since the 1990s (Exhibit 2). We think that this, along with the threat of defense spending cuts that would take place absent a deal and the possibility of using the super committee to enact economic stimulus measures, will lead a majority of lawmakers to support an agreement.

While also possible, it is much harder to see an agreement reaching or exceeding the $1.2 trillion target. As best we can tell, personal income tax increases are off the table, along with benefit or eligibility reductions in Medicare and Social Security. The remaining areas of the budget are probably too small to produce the necessary savings without disruptions to programs that might be politically unacceptable.

The super committee has until November 23 to vote on its recommendations. The logistics of the process will probably mean that an informal agreement will need to have been reached the prior week, to allow time for cost estimates and legislative drafting. If we assume that the required simple majority of the 12 super committee members end up voting in the favor of a deficit reduction package of some kind, the effects are likely to be judged along four lines:

1. Timing of cuts. Deficit reduction from the super committee is likely to be more backloaded than the automatic spending cuts that would take place absent an agreement. For illustrative purposes, Exhibit 3 shows the effect on the federal deficit of the various proposals dealing with health and other mandatory spending compared to the automatic cut. The President’s proposal, for instance, would actually increase spending slightly in FY2012, even when excluding his jobs proposals. In FY2013, the proposals range from 0.1% of GDP to 0.3% of GDP, all implying less restraint than the sequester.

2. Forward looking process. The super committee package might also establish a process for Congress to address tax reform and possibly entitlement reform. This would potentially involve instructions to the tax-writing committees to pass legislation by a given deadline that achieves a given amount of deficit reduction. But what the deadline would be—2013 seems realistic, 2012 less so—is unclear, as is what the targeted amount of savings would be, and the penalty for failing to reach it. Without a binding deadline that carries penalties for inaction, we suspect that markets will view such a process as an interesting political marker but would not meaningfully increase the likelihood assigned to those reforms taking place.

3. Stimulus measures. Our forecast assumes an extension of the payroll tax cut currently in place, as well as hiring- or business-focused tax incentives, but we do not assume extension of emergency unemployment compensation (EUC). The most likely path for these measures seems to be inclusion in the super committee package, but whether this happens will depend on the size and composition of the deficit reduction recommendations. Fitting $100bn to $150bn in stimulus into the super committee bill will be much easier if the overall package is at least halfway toward its $1.2 trillion goal, but there may not be room in a deal that saves only a few hundred billion.

The composition of savings also matters; the President’s proposals have support mainly from Democratic members of Congress, so the savings to pay for them would need to come predominately from items Republicans support, such as deeper reductions in spending on “mandatory” programs. Although there is some risk that the tax-based measures we expect might not be extended, there is also a fair chance that Congress will end up extending EUC for another year, as many Republicans have signaled some openness to renewing benefits if accompanied by reforms. As such, we see the risks in this area as roughly balanced. Exhibit 4 shows the effect of extending none of these provisions, only the payroll tax cut and business-focused incentives, and the President’s entire proposal, including extension of EUC.

4. Rating agency reaction. Further sovereign downgrades remain a significant risk. Two of the three major agencies have assigned a negative outlook to their rating and all three cite the need for greater fiscal consolidation efforts, as summarized in Exhibit 5. Slippage in current deficit reduction plans—such as super committee failure combined with intervention in the automatic spending cuts—could result in negative ratings action, though the consequences of the S&P downgrade proved to be modest, as expected.

The End of the Beginning

The super committee’s legislative package may be the last major fiscal legislation enacted before the upcoming presidential election (November 2012). However, the need to address additional issues by year-end 2012 and the likelihood of an attempt at broader structural reforms in 2013 imply that this year’s reforms are the beginning of a multi-year fiscal reform process. In 2012, we see three potential issues Congress will consider:

1. The spending “sequester” for 2013. As noted above, the super committee faces a target of $1.2 trillion in savings over ten years. If it fails to reach that goal, spending cuts take effect in January 2013 to make up the difference between whatever savings have been achieved and the $1.2 trillion target. Our super committee scenario implies automatic cuts of at least a few hundred billion over ten years. If this proves correct, some lawmakers may attempt to modify or reduce the automatic cuts, particularly related to defense. As noted earlier, slippage in this year’s fiscal agreement would be closely scrutinized by rating agencies.

2. The scheduled expiration of the 2001 and 2003 tax cuts. The personal income tax cuts that were enacted in 2001 and 2003 and extended for two years at the end of 2010 must once again be addressed by Congress. To let them expire in their entirety would result in a sharp reduction in disposable income on the order of 1.8% of GDP. Our budget deficit estimates assume that they will be extended in their entirety at the end of 2012, since (1) the weak economy drove Congress to extend them at the end of 2010 and our forecast implies a similar economic situation in 2012, and (2) Democrats, many of whom oppose extending the upper income tax cuts, are unlikely to have greater control following the next election than they did at the time of the last extension.

3. Another increase in the debt limit. Unfortunately, it appears that at the same time lawmakers are confronted with these other two issues, they will also once again need to raise the statutory debt limit. Based on our FY2012 deficit forecast along with non-deficit financing needs and accumulation of Treasuries in federal trust funds (which count toward the debt limit) borrowing authority might be exhausted by November or December of 2012, not long after the presidential election. Exhibit 6 shows the projected level of debt subject to limit, against (1) the debt limit of $16.394 trillion, (2) that limit increased by $230bn (the amount of extra borrowing authority the Treasury might be able to tap by disinvesting certain government trust funds) and (3) that amount, increased by another $300bn, which represents the higher debt limit that would be established if the super committee were able to reach an agreement of at least $1.5 trillion.

Peering over the Edge of the Fiscal Cliff

While our baseline assumption is a negative impulse of around 1 percentage point in 2012 and 2013, there is a small possibility of a much larger amount of fiscal restraint. Exhibit 7 shows the year-over-year legislated changes in tax and spending policies in each of the next several fiscal years. This is calculated by adding the estimated change in the CBO’s baseline due to legislation over each forecast revision that covers the year in question. This method allows us to incorporate the effects of a variety of legislation not incorporated in the bottom-up method used in Exhibit 4. The results of the two methods are similar, and show substantial fiscal retrenchment over the next few years, even assuming extension of the payroll tax cut for one additional year through 2012, extension of the 2001/2003 tax cuts throughout the period, and subtracting the effect of the automatic spending cuts set to take effect in 2013 if the super committee does not agree on $1.2 trillion in savings. This would work out to slightly more than 1% of GDP in 2012, and nearly 1.5% in 2013.

Given the trajectory of federal debt over the longer term, Congress will clearly need to look at additional fiscal consolidation measures to stabilize and ultimately reduce the debt level. That said, enacting more long-term deficit reduction—particularly structural reforms to entitlement programs and the tax code—in return for less restraint in the next year still appears to be a trade-off worth making.

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X.inf.capt's picture

and where the hell have they been....

oh, yeah, extracting wealth....

whats the matter, squid,....

running out of victims....?

AldousHuxley's picture

Unusually uncertain about their bonuses unless main st. bail them out

tarsubil's picture

I don't know what it is about this headline that made me start laughing out loud uncontrollably. Things have just gotten so ridiculous. Yayhoo, muthertruckers!

Hman's picture

How the hell are they going to fund social security and medicare without a deficit! 

binky's picture

The deficit is mostly funded without social security and medicare. Enact "take an axe to work" day at the pentagon and the problem is solved.

AldousHuxley's picture

cut defense spending. nearly half of your taxes go here.

tarsubil's picture

SS is a tax. There is no trustfund. Defense is 1/3. Don't fool yourself into thinking that is all that needs to be cut.

Pool Shark's picture

"cut defense spending. nearly half of your taxes go here."

Uh, no:

Congress could eliminate the entire defense budget, and it wouldn't even cover half of this year's budget deficit.

Not saying we shouldn't cut defense spending, but that alone is only a small part of the solution.

Math is a bitch...

LawsofPhysics's picture is thermodynamics.  The question is whether or not both of these subjects continue to be ignored.

chubbar's picture

Obama is without a doubt the most vile, corrupt and disingenuous president we have ever had and that's saying something after shrub and clinton.

Here's some of his latest handiwork which isn't really covered anywhere. There are dozens of examples equally egregious domestically but we are all continually amazed at his total disregard for international law, so that seems to dominate most coverage of the alternative media (the msm won't cover any of it)

"The report also states, "The design of the patch with the U.S. eagle image superimposed seems to imply a hierarchy in which the U.S. 5th Army exerts its military command under the authority of USNORTHCOM, with its domain defined as all North America, including the U.S., Mexico and Canada, for the United Nations, as implied in the orange and blue motif."

See the report.

As most of my faithful readers know, USNORTHCOM is a combatant command "created to respond to national emergencies in North America." Readers should also be aware that the United States and Canada signed an agreement earlier this year allowing the armed forces from one country to assist the armed forces of the other country during a "domestic civil emergency, even one that does not involve a cross-border crisis." (Emphasis added.)

Creation of a North American Union has long been the goal of the elitists at the Council on Foreign Relations (CFR) and its sister organizations. This objective is so far along now that anyone who would question it simply isn't paying attention — or has an ulterior motive for denying it."

Not only has President Obama and Attorney General (should be demoted to Attorney Corporal at best) Eric Holder openly told the American people that they are not going to enforce various federal laws such as the Marriage Act or any one of a number of immigration laws, but now government employees are being ordered to defy court orders and US federal laws.

The president of the union that represents officers of Immigration and Customs Enforcement, Chris Crane, testified before members of the House Judiciary Subcommittee on Immigration that ICE officers have been ordered not arrest any illegals that have been previously arrested, deported and then re-enter the US illegally again, even though that constitutes a federal felony. Furthermore, they have been instructed to not arrest any illegal that is a fugitive from court ordered deportation if they have no other prior criminal convictions.

Read more: Immigration Agents Ordered to Defy Court Orders | Godfather Politics



X.inf.capt's picture

and dont forget, 


northcom has the 1st brigade, 3rd infantry division under its direct control...

read up on that unit...

bradleys, abrams main battle tanks, field artillery, special troops...

for crowd control....

something BAD this way comes.....

slaughterer's picture

Say goodbye to 1% of GDP in 2012 and 1.5% in 2013.  Given low, decreasing growth rates right now, looks like a multi-year balance sheet recession to me.  Thanks O...

PulauHantu29's picture
<<Refinancing's hidden costs Mortgage rates are at record lows. But are you ready for the fees that come with a refi?>>


<<Mortgage refinancing rates are enticingly rock-bottom. But don't be hypnotized by the low percentage points when you are trying to decide whether to refinance. Consider this: There is a price to pay even above and beyond the "points" you'll be required to shell out. Make sure you factor these costs into your considerations.>>

Alex Kintner's picture

But but... O-bomb-a just ended the Iwreck war. Ok true, he just transferred most of the troops and machinery to Afukustan, so there's that. Hey gotta keep the MIC smokestacks belching. It's O's jobs strategy -- immoral as it may be.

knukles's picture

Be very very careful of any assumptions drawn from his position that the "troops will be home by Xmas" bullshit.  As per further readings, there are gonna be US military presences aplenty over there where our troops just left in the form of....  State Department Protection goons, trainers, laisons, civilian contractors, privae police and assorted mercinary armies paid for by the Good Old US of A.

Another triumph of form over substance.

PulauHantu29's picture

Massive spending and No Cuts...and lots more Record high Bonuses is what I predict.

This is an election year....there will be zero "austerity" here imo.


I am Jobe's picture

The Squid er I mean God has spoken. All take cover. Grab Guns , Bullets and gold.

PulauHantu29's picture

Excellent work Mr Tyler.

Hephasteus's picture

The only honerable thing to do is since all these debts can't possibly be repaid. Instead of just ignoring them we should enter into a debt repayment competition. Let's call it World War III.

Just remember do not target the commanders and the ranking officers. They are there to keep the soldiers who need guidance in line. Keep all the bullets and swords and stuff pointed at the lower class soldiers.

kito's picture

Do entitlement program cuts include pentagon welfare?

knukles's picture

What were you thinking?

This year's so far ballyhooed (you know, where nobody's got any money to spend) federal austerity is a +5% increase in spending.
Increase in Spending.

(One more time boys and girls)
Increase in Spending.


devo's picture

My question: would the gold/silver i own go up or down if we move to a gold/silver standard again?

americanspirit's picture

Hi Devo - hate to be a wet blanket but because you've posted that you own gold/silver, and because the gov't can easily trace your IP address and get your location, your gold/silver will actually go to the government. Don't talk, don't post, and don't keep it in a safe deposit box. In fact it wouldn't hurt to wait a while and then call the police and file a report that your home has been burgled and all your PMs were stolen. Hang in there.

devo's picture

I just wanted to sound cool and hip. I don't own any yet, but I am looking to buy on a dip.

I assume the price would go up if we move to a gold/silver standard, since the government would reprice it at ~3x current value. Correct?

americanspirit's picture

Hi again - the real answer is nobody knows. A personal opinion is that it will depend on howidespread gold/silver ownership is. The wider the ownership, the less control the government will have of the price. Same advice - when you do buy it, buy for cash without a record, and tell nobody, ever.

devo's picture

Thanks, mate. If I do buy, where could I buy from all cash to avoid a paper trail? Seems like friends, etc would be the only way.

saulysw's picture

The "solution" of more debt to solve the debt problem, is becoming a problem. That damn can keeps re-appearing on the road, despite all the kicking!

I believe the debt ceiling will become a problem again well before the end of this year. This will wake up even more people, who have short attention spans, but not that short. If we see the same issue pop up in Feb/Mar 2012, all hell will break loose. The new solution might be to legislate the removal of the ceiling, and I think that card might be played at some stage, there were weak suggestions about this even recently. No news is good news, right?

DutchR's picture

Keyser Söze the Goldman.

Lazlo Toth's picture

Goldman needs a new Magic 8 Ball.


Damn.... We in trouble now.

knukles's picture

Did you all read that Goldman's economics and market foreacasting team was awarded the Gold Star of The Year for Great Fucking Work the other day by Larry Summers.

Fuck me.
I've done a better job forecasting than Goldman. 
And Larry Summers.

MrBinkeyWhat's picture

WOW! Lets get cynical.  Bithez!

Manthong's picture

??   What could possibly be the problem ??

After all, we ARE borrowing and spending tremendous amounts of money now are't we?

Didn't the trillions we borrowed and spent on the war on poverty and the school systems solve all of our poverty and education problems?

How could there possibly be a problem with the economy, employment and prosperity after borrowing and spending all those other trillions, not to mention assuring secure housing for everybody by borrowing and spending trillions on the housing market.

This is sure perplexing.  

Use of Weapons's picture

The moment that GS realise that their input into this equation has become transitory, and that the entire dance macabre has entered a far more serious zone than they play in...

Will be Biblical in schadenfreude.


And the Jews' passover was at hand, and Jesus went up to Jerusalem,
and found in the temple those that sold oxen and sheep and doves, and the changers of money sitting:
and when he had made a scourge of small cords, he drove them all out of the temple, and the sheep, and the oxen; and poured out the changers' money, and overthrew the tables;
and said unto them that sold doves, Take these things hence; make not my Father's house a house of merchandise.
and his disciples remembered that it was written, The zeal of thine house hath eaten me up




Coming Soon[tm]

Grand Supercycle's picture

SP500 weekly chart shows megaphone wedge and looks bullish.

Market consensus became clearer on Friday so back to the original bullish analysis and SP500 weekly chart reverts to bullish/neutral.

More info:

RoadKill's picture

As usual for Goldman - good analysis (Better then most) bad conclusion.

Just like their Euro bank recap analysis.

Euro banks need E1ttn of capital to fully deal with everything headed their way. But the summit in progress will likely come out with 10% of that (see latest Economist). Instead leveraged bond buying and gauranteed will be relied on. Maybe enough to kick can to 2013. But it won't address the lending freeze - gauranteeing a Euro recession in 2012 along with numerous bank-rupcies that will be handled by new Euro-FDIC. But no big disaster.

On US their will be NO super committee agreement. Their will be no agreement on 90% of jobs act. We will face mandatory cuts of $1.2ttn, loss of 2% GDP I'n stimulus and a new debt ceiling debacle before elections. With a big export market in decline, this spells a recession I'n US for 2012. So SPX EPS will be close to 80 not 95. At a minimum this will result I'n 20% SPX decline from here.

Of course all of this is great for Asia. :)

You read it here 1st. At 1090 we were over sold technically, not fundamentally. I've gone from 2/3rds net long (via 3x levered ETFs) to 2/3rds short. If we hit 1,350 before 1,000 it will hurt, but the odds are 3:1 I'n favor of red. Please place you're bets