Saturday, November 22, 2008

Goldman: Acceptable Forecast, Warped Perspective

Goldman Sachs has revised its economic growth forecast. It has been characterized as gloomy, and putting the blame on bad public policy. But let's dissect it.

At quarterly rates, GDP growth, they say, will fall 5/4%, 3/4%, and 1/4% from 2008Q3-Q4, 2008Q4-2009Q1, and 2009Q2. That's a cumulative decline of 2.3% 2008Q3 - 2009Q2, or $200 billion, or about $700 per person.

Yes, I typed that correctly. Measured in 2008 dollars, GDP is $14.4 trillion per year, or $3.61 trillion per quarter. Based on the annual percentage rates they publicized, we know that Goldman is predicting $3.56 trillion for 2008Q4, $3.54 trillion for 2009Q1 and $3.53 trillion for 2009Q2 (there may be a bit of rounding error here). The cumulative difference between that forecast and zero growth is merely $200 billion, or about $700 per person.

I am considered to be the optimistic one, but even I explained last month that GDP could fall more than this in the short term. Our economy can recover quickly from an event like that. The 1930s were entirely different: GDP fell a lot more and the recovery was terribly long. But apparently Goldman and others think that today it is worth spending trillions of taxpayer dollars (thousands of dollars per person) merely to avoid the economy's losing $700 per person.

It is a known fact that Goldman Sachs is an investment bank, with a large number of its employees working on Wall Street. It's a known fact that, over the past few months, Wall Street's experience has been far more unpleasant than most other places in America. So it's no surprise that Goldman Sachs would be the gloomy ones, and have a perspective that is not America's.

What's more disturbing is that Goldman is both feeding at the Treasury trough and has been successful at promoting an exaggerated state of alarm.

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