A whopping $825 billion stimulus plan is just enough for Goldman Sachs. But $2 trillion might be. Here a bit of what GS is saying (bold is mine):
The US economy urgently needs a large dose of fiscal stimulus to counter a sharp retrenchment in private-sector spending. ... To fill this hole in demand, the federal government should become the spender of last resort, as monetary easing cannot do the job alone.
We reckon that the appropriate level of stimulus is $600 billion (bn) at an annual rate, or 4% of GDP, with the remaining 2% filled by a narrowing in the current account deficit. Moreover, with prospects for cyclical recovery in the private sector looking dim, this stimulus should stay in place through 2010 and be withdrawn only gradually thereafter. The bill recently introduced in Congress, priced at $825bn over two years, is a major step in the right direction but is apt to prove insufficient if our estimates are correct. On the five-year view customarily used to score such programs, we could justify stimulus totaling $2 trillion.
Likewise, much of the prospective surge in federal debt that terrifies many market participants is already baked in the recessionary cake. While stimulus will aggravate this increase, the United States starts from a fairly comfortable federal debt ratio of just over 40% of GDP at the end of fiscal 2008, lower than the G7 average.
Assuming that the final package is in the range now under consideration, we estimate that the federal deficit will reach $1.425 trillion in FY 2009, or 10% of GDP (based on CBO’s accounting for TARP and GSEs). While the scale of the package driving this change has risen sharply in recent months, so has the rate at which the economy is losing momentum.
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Bill of NJ 4:46PM January 24, 2009
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