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6 Oct, 2010 21:32

Goldman: US economy to become “fairly bad” or “very bad”

Goldman analysts predicted two possible scenarios; one where the US unemployment rate rises moderately to 10 percent and the other in which the economy returns to an outright recession.

Atul Singh, the founder and editor of Fair Observer, said whether we like or hate Goldman they are the dominant financial institution globally and their words do carry weight.

Maybe their record isn’t as great of their words, but their words carry weight simply because they have the power to move markets in an instant,” he said.

Mike Norman, the chief economist at John Thomas Financial asked; “Why is anybody listening to Goldman Sachs at this point?

They have had a terrible forecasting record. Of the nine recommendations they gave to their clients at the beginning of this year, seven of them completely lost money,” said Norman. He added; “I don’t know how any credible economist could make a longer term forecast without knowing the outcome of the November elections because everything is going to be dependent upon policy. Right now everything is politics.”

Norman argued that once there is a more clear view of what policies might be implemented economists will be able to make longer term forecasts.

I think it’s totally the firm positioning itself, as it always does. Again, I’ll repeat, its recommendations for clients have been terrible,” said Norman.

Singh agreed that Goldman is positioning itself, that their predictions have been off the mark and that the elections must be considered when making economic predictions. He added however there is much more to consider.

You have to take into account the global scenario. So, what happens if, let’s say, Chinese demand, which has been growing a little bit, that tanks? What happens if the developing economies run out of slack? What happens if Europe slumps?” said Singh.

He said Goldman is just “hedging their bets” by using loose terms like “fairly bad” or “very bad” and that this is nothing new in banking.

US President Barack Obama has continually argued that the economy is due to his inheritance of a broken system. Further, a growing number of Obama’s economic teams have begun leaving their posts.

Their abandoning a sinking ship”, said Norman. “Are these things outside of our control? Absolutely not. When you think about it there’s nothing wrong with the US economy.”

He explained the US has all the tools required to create wealth and prosperity, but the US is not implementing the right policies.

We have a new president, who promised change, I think people were astounded that what they saw was the status quo, it was the same thing. He surrounded himself with insiders from the fields of economics, fields of government, and we really didn’t have very much change at all,” said Norman.

Norman pointed out that there are some positive notes.

We see personal income picking up, we see exports picking up, and the weak dollar, although I don’t like to see it, it is helping our industry, it is helping to grow exports,” he said.

Singh agreed that Obama has continued the failed economic policies from Bush administration. However, he said simple policy changes will not solve all US economic problems.

The problems of the US economy are long term and structural,” he said. “At the end of the day the US been consuming way too much and living beyond its means way too long. The productive capacity of the US has shrunk and it’s facing increased competition. And somewhere it has overleveraged. Down the road, it has to pay it back. And it has to tighten its belt. It has to be a long process of adjustment. So, I really don’t think you can just beat up on the policymakers. This will take time.

Norman contended that the economy is suffering from one simple thing, “an acute fall of in demand”.

We can address that through policy, there’s no question about it,” he said.

Policy changes can fix the economy, he argued, saying inequality, jobs and other factors can be addressed by the government.

Singh argued however that the government cannot simply solve this problem without long term structural changes.