GOLDMAN SACHS SAYS GREAT STAGNATION LIES AHEAD

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‘Great Stagnation’ Looms as Confidence Lags, Goldman Says

September 30, 2011, 5:20 AM EDT

By Aki Ito and Jennifer Ryan

(Updates with Chinese, German data in eighth paragraph.)

Sept. 30 (Bloomberg) — The U.S. and Europe face about a 40 percent likelihood of a prolonged period of economic stagnation should policy makers fail to restore confidence, according to analysts at Goldman Sachs Group Inc.

“The prospect of a long period of stagnant growth is a plausible risk and a legitimate concern for the major developed economies,” Jose Ursua, a Goldman economist in New York, wrote in a report. “Whether these countries manage to avoid a ‘Great Stagnation’ by a pick-up in the recovery is likely to depend on policy being able to restore confidence and putting in place reforms that can decisively jolt growth.”

The U.S. and Europe are already exhibiting signs that would be typical of stagnations, characterized by “high and sticky” unemployment, an average 0.5 percent growth rate in per capita gross domestic product and stock markets that underperform historical averages, Ursua wrote after analyzing 93 episodes of the condition in the past 150 years. Economies face a higher probability of such periods after market crashes “precisely of the type observed during 2008-2009,” the report said.

Constraints on monetary policy today are “tighter” than in 2008 for developed economies to avoid lengthy periods of stalled growth, according to the report, dated Sept. 28. Central bankers may begin to consider “truly unconventional ‘unconventional’” policies as a result, Ursua wrote.

‘Bad News’

“The bad news is that it is still far from clear whether enough has been done to jolt economic growth upwards and outside the zone where prolonged stagnation is a serious risk,” he said. “The good news is that policy makers are more aware” of the damage wrought by stagnation.

The U.S. Federal Reserve is replacing $400 billion of short-term government debt with bonds of longer maturity in a bid to lower borrowing costs and bolster the economic recovery. Most Bank of England policy makers said this month it’s “increasingly probable” more asset purchases will be needed to support growth, while European Central Bank officials are likely to debate restarting their covered-bond purchases and further measures to ease monetary conditions.

The U.S. economy will expand 1.8 percent in the third quarter according to a Bloomberg survey of economists conducted Sept. 2 to Sept. 7, down from a 2.1 percent estimate in an August survey.

China Manufacturing

A report today showed Chinese manufacturing shrank for a third month in September, and German retail sales fell the most in more than four years in August. Two years into the euro-area debt crisis and with investor concern growing that Greece will be unable to avoid default, the U.S. is urging European governments to go further and show more urgency. German lawmakers yesterday approved an expansion of the European Financial Stability Fund, and the overhauled rescue package may be in place by mid-October.

Ursua wrote that the chances an emerging economy will stagnate are “much lower” than for developed nations, and its research put China, Russia and India at the bottom of the scale. For all countries, the unemployment rate rises an average of 3 percentage points from the period before the bout of stagnation.

Income levels for a country saddled with a decade of stagnation would be 20 percent lower than if it expanded at the average rate since the end of World War II, Ursua said. Inflation also is usually “much lower and flatter.”

“This reflects demand pullbacks that may be difficult to correct if they persist for a sufficiently long period of time,” the report said. “It also underscores the importance of policy efforts focused on averting deflation.”

–Editors: Chris Anstey, Fergal O’Brien

To contact the reporters on this story: Aki Ito in Tokyo at aito16@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

9 Responses

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  2. THERE ARE 4 NEW LAWSUITS—AGAINST THE USUAL SUSPECTS-CHASE, BOA, BAC, COUNTRYWIDE, MOZILO, BEAR STEARNS, BARCLAYS etc etc etc

    JPMorgan Chase & Co and Bank of America Corp were hit with new lawsuits by investors claiming losses on $4.5 billion of soured mortgage debt, adding to litigation targeting the two largest U.S. banks

    http://www.scribd.com/doc/67107120/READ-LAWSUITS-HERE-JPMorgan-Bank-of-America-WAMU-Countrywide-Bear-Stearns-more-hit-with-new-investor-fraud-lawsuits-Sept-2011

  3. well jan van eck,

    god forbid, but there is always that little pill one could drop in the master’s kool aide to make sleep easier, or longer, and longer, and longer.

    don’t tell the thought police.

  4. Amen, Enraged.

  5. great point, VanEck. And if the “rentiers” (read “ruling class”) acquire most of the gold, the paper money becomes irrelevant. Only “tangibles” or “hard assets” (ie land, gold, food, fuel) will have value.

  6. You may anticipate that the result of “stagnation” will be asset deflation. The parallel result will be that labor will become cheap and docile. For the super-rich, life becomes pleasant: plenty of cheap labor as personal servants, for cooks, car-washers and chauffeurs, maids, nannies, even cheap pilots and yacht captains. This is classic Depression Economics: jobs are so hard to obtain that the labor force still working will do nothing to get fired and replaced, so people work as servants for nothing and keep their mouths shut. Nice for the new rentier class. Not so nice for the new servant class. Although the assets of the rich also deflate, their cash assets do not, so cash becomes effectively more valuable.

  7. Why are we dignifying anything Goldman Sachs have to say? Now that they destroyed world economies, they have to demoralize everyone into thinking that we are doomed and there is no hope.

    Neil, unless it is to learn that Goldman Sachs has folded and all its directors have been jailed, I suggest we stop paying attention to them… I’m still choking on the 3.8 billions Paulson made out of the bailout. By the way, if you’re ever curious about JDB and how they came to life, check their sites and their directors: many of them come from Goldman Sachs! I guess they really learned how to become rich being absolutely unproductive. They learned how to sell and collect money. Don’t know how to do anything with their hands but selling money? You bet!

    There is hope. Michael Moore is right, in my views. I saw him with O’Donnell and I do believe that slowly but surely, more and more people will join the ranks of the protestors. What better way to occupy your time when your job was taken away from you, the likelihood of finding another one is remote as hell, you lost your house, your kids have debts they can never repay? And kuddo to O’Donnell for (finally) giving a voice to the demonstrators.

  8. Stagflation will be bad after EU’s bailout plans to act as QE3 to blood money all over the world… Commodity prices will go up and hurt the consumers and producers to be squeezed.

    Do not count on their (GS) words. Do you remember the hearings at the Financial Crisis Inquiries Hearing? The CEO does not have any hesitation to speak up about “CONflicts of Interest”. They do not think that not telling/disclosing the truth to their clients and shorting at the same time are their company’s strategies… This is to me is BS.

  9. “We reward people for making money off money, and moving money around and dividing up mortgages a thousand times over, selling it to China…and it becomes this shell game.”
    Of the current state of the America: “None of the major religions, in fact they all, say it’s one of the worst sins you could commit, is to take such a large piece of the pie while others suffer.” And of the Wall Street protests: “It’s starting. It’s down there right now on Wall Street. It starts with the young people…it’s going to spread across the country.”

    http://piersmorgan.blogs.cnn.com/2011/09/26/michael-moore-of-wall-street-protests-its-going-to-spread-across-the-country/?hpt=pm_t1

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