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Goldman’s Jan Hatzius: ‘Substantial Hangover’ in U.S. Economy

Posted by Larry Doyle on August 25, 2009 8:22 AM |

Say what you want about Goldman Sachs in its entirety, but I tip my cap to Goldman economist Jan Hatzius for an extremely forthright and aggressive interview I just watched on Bloomberg Surveillance.

In so many words, Hatzius seems very concerned about a double dip recession here in the United States in 2010. That is my assessment. Hatzius himself did not use that phrase.

Highlights of his commentary include:

>> call for a 3% GDP in both the 3rd and 4th quarters of 2009 driven by fiscal stimulus programs and inventory buildup.

>> without the benefits of the stimulus and further inventory rebound, the U.S. economy will suffer from a ‘substantial hangover’ in 2010.

>> Hatzius does not see China or other surplus nations suffering from this hangover. He is quite bullish on prospects for the Chinese economy.

What are the effects of our hangover and implications for government policy?

>> likely double digit unemployment with no quick improvement

>> Federal Reserve will likely keep the Fed Funds rate at 0-.25% for all of 2010

>> no inflationary pressures for a few years

>>¬†given lack of growth in the private sector, very real chance that the Federal Reserve will extend its quantitative easing program in which it purchases liquid assets (U.S. Treasury debt, agency debt, and mortgage-backed securities). Hatzius threw out that there is a very real possibility the size of the Fed’s balance sheet could double to $4 TRILLION. Be mindful that the Fed’s balance sheet has already doubled over the course of this crisis!!

>> substantial decline in commercial real estate has yet to occur.

>> Cash for Clunkers will likely add .3 to .4 to current quarter GDP, but some of that is certainly pulling demand forward and will be ‘paid back’ with slower growth in 2010.

>> when the economy does gain traction, he believes Bernanke (whom Obama will reappoint to another term) will raise rates aggressively.

Hatzius’ assessment is consistent with the Main Street economy which remains disconnected with Wall Street price action. While Main Street has a headache and hangover, Wall Street rocks on with easy money from Washington.

When will Main Street get in on the action?


  • Larry –

    How can we not have any inflationary pressures while the Fed continues to print money and expand their balance sheet to the moon? Do you agree with him on that? Won’t we have at least some inflation in the near future if the Fed continues to do what they’ve been doing?


  • Larry Doyle


    I think Hatzius and other economists maintain the inflationary pressures which would result from the massive amount of dollars sitting on the shelf at the Fed would be offset from the deflationary pressures that result primarily from declining wages and other assets (primarily real estate).

    The commodity markets are sending a dramatically different signal. Those markets seem to think foreign demand for commodities will cause inflation.

    Could it be that we have a cross current of inflationary and deflationary pressures combined all wrapped in an economy which has little to no growth? As a result, we end up with the worst of all possible worlds. No wage growth, increased costs, and a weak economy. OUCH.

  • Petricone456

    Hopefully Hatzius didn’t hold a ‘trading huddle’ before he published… GS was just subpoenaed by the Mass Attorney General over the practice.

  • Larry Doyle

    Interesting. I just wrote about this practice and will post my commentary shortly.

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