Skewering Muppets

Jan Hatzius of Goldman Sachs is calling a major recovery after 2013:

What can we expect in coming years? If our estimates and assumptions are correct, 2013 is likely to be a more extreme version of 2010-2012, with a bigger positive private sector impulse that is offset by a bigger negative public sector impulse but still leaves growth around trend. But we expect the net impulse to turn positive in subsequent years, assuming that 2013 marks the peak rate of fiscal contraction. By 2014-2015, the decline in the ex ante private sector balance should be contributing around 11⁄2 percentage points to the overall growth impulse, but we currently assume that fiscal policy will subtract only 1⁄2- 1 percentage point, for a net impulse of 1⁄2-1 point. This ought to be a recipe for clearly above-trend growth.

His forecast looks like this:


His model is one of sectoral balances.


He writes:

…an update of our financial balances model suggests that growth is likely to improve starting in the second half of 2013. Homebuilding looks set to recover strongly, the corporate sector should start to spend a larger share of its cash flow, and the personal saving rate will probably edge down a little further.

In very simple language, Hatzius is forecasting a recovery because he believes that the current trend is away from private sector deleveraging toward releveraging.

This approach is deeply, deeply flawed. Why? Total debt as a percentage of GDP is still ridiculously elevated. There has been very little deleveraging in total:


How can the private sector releverage from here? The costs of a high debt load make growth very difficult, as Irving Fisher and later Hyman Minsky showed. This huge outgrowth of debt is totally unsustainable. It has taken trillions of quantitative easing and bailouts to just sustain the present bloated debt load. And Hatzius’ model is predicting that we will soon be growing from taking on more?

This is transparent bullshit (unless you’re either a sucker or a shill), and I am sure Goldman’s traders will reap great reward betting against this advice just as they reaped great reward betting against worthless subprime junk last time round (another reason why banks that trade should never be in the business of advising clients, but that absurd conflict of interest is another story for another day). Win on the way up, win on the way down, and take a bailout if you lose.

The economy is stuck in a Catch-22. The high debt load is strangling growth, but growth is the one thing that can significantly reduce the size of the debt load. Right now, we are experiencing a slow deleveraging of a fragile economy as opposed to the quick and brutal deleveraging we would have seen had the market been allowed to clear in 2008.

There will be no return to the kind of debt-driven growth Hatzius is forecasting before the unsustainable debt is either liquidated, forgiven or (hyper-)inflated away. Until then, it is Japan all the way for America.