World Economy

Goldman Says US in Dire Straits

Goldman Says US in Dire StraitsGoldman Says US in Dire Straits

Goldman Sachs’ analysts delivered a weekend note on the United States’ fiscal outlook, which carries some worrisome projections looking forward.

It said: «The US fiscal outlook is not good. We project the federal deficit will increase from $825 billion (4.1% of GDP) to $1.250 trillion (5.5% of GDP) by 2021. By 2028, we expect it to rise to $2.05 trillion (7.0% of GDP) in our baseline scenario,» Forex Crunch reported.

«We believe the risks are tilted in the direction of larger deficits than projected. A recession would widen the deficit and boost the debt/GDP ratio. An expanding deficit and debt level is likely to put upward pressure on interest rates, expanding the deficit further.

«A chronic deficit in the range of 6-7% of GDP in the next decade would imply a cumulative boost of around 70 basic point over time,» it said.

Three months ago, Goldman first among the big banks warned that the US fiscal trajectory was dire, warning that «US fiscal policy is on an unusual course» with the budget deficit expected to widen over the next few years, as a result of prior imbalances and recently enacted policies—namely President Donald Trump›s dramatic fiscal stimulus—which should lead to a federal debt/GDP ratio of around 85% of GDP by 2021.

This, Goldman›s economists warned, stands in contrast to the typical relationship between the economic cycle and the budget balance, which shows that the US deficit should be small and shrinking, not large and growing at this stage in the business cycle when the unemployment rate is near its cyclical lows.

But the biggest risk by far, according to Goldman, was the rising interest expense on the federal debt, which all else equal, would send the US into banana republic «uncharted territory».

This is what Goldman warned back in February:  We project that, if congress continues to extend existing policies, including the recently enacted tax and spending legislation, federal debt will slightly exceed 100% of GDP and interest expense will rise to around 3.5% of GDP, putting the US in a worse fiscal position than the experience of the 1940s or 1990s.



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