Henry Paulson, former CEO of Goldman Sachs Group (NYSE: GS) and current Treasury Secretary, has been spouting pablum about how he's never seen such a strong global economy. He's just following in the footsteps of cheerleader-in-chief, George W. Bush.
But Paulson is no dummy. He knows that his words have a tremendous impact on investors around the world who are nervous about the recent rapid market break. The key question is whether he knows enough to keep all the economic imbalances in the global markets from making his optimistic comments look foolish.
I'd like to hear how he would keep the massive debt load which the U.S. economy is carrying from creating a sharp economic reversal. Specifically, if the economy is so strong, I'd like to hear Paulson explain away these questions:
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If inflation is under control as you claim, why is U.S. productivity down from 3% to 1.6% and why are labor costs up 6.6%?
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If the economy is doing so well, why did spending on new home building tumble 19.1% -- faster than it has at any point since 1991?
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If the economy is so strong, why was U.S. GDP growth revised downward from 3.5% to 2.2%?
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If demand is so robust, why did durable goods orders tumble 8.7%?
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If the markets are working so effectively, why did the Dow lose 3% of its value after an 8.8% drop in the tiny Shanghai stock market last week?
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If everything is fine, why are companies revising downward their first quarter earnings forecasts from 8.7% to 3.9%, to the slowest growth since 2002?
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If workers are doing well, why was the 2006 savings rate, at -0.7%, the worst since 1933 -- the middle of the Great Depression?
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With record debt -- $8.8 trillion federal, $480 billion corporate buyout, $286 billion stock margin, and $2.4 trillion consumer -- what will happen if the Fed raises rates to tame that 6.6% labor cost increase?
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With a negative savings rate, where will the U.S. get the new debt it needs to keep growing if banks are tightening their lending standards?
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With General Motors (NYSE: GM) expecting to take a $1 billion subprime hit and foreclosures up 42% to 1.2 million nationwide, why are you comfortable that the collapse of the $1.3 trillion subprime mortgage market won't hurt the rest of the economy?
Unlike Robert Rubin, another Goldman alum in the Treasury Secretary's position, Paulson looks to be far from cultivating a reputation as the best Treasury Secretary since Alexander Hamilton. Like his boss, he seems to be a pretty good cheerleader. But that can wear thin when reality pokes up its ugly head.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter He has no financial interest in Goldman Sachs or General Motors.
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Reader Comments (Page 1 of 1)
3-08-2007 @ 12:00PM
jill said...
Just wanted to pass along this article that ties right in with your post:
http://econotech.blogspot.com/2007/03/35-potential-larger-implications-of.html
3-08-2007 @ 2:39PM
Jerry Bluhm said...
My first question is when was the last time the percentage of un-employment in this country was lower? If a time exist, how was the economy doing? Second, during the last recession, what kind of pull-back did we have in the manufacturing sector? Third, What was the average income of our people during the past recession? Four, where were we in terms of a slow down in housing during the past recession? Last, where were interest rates at the last time before a recession occurred? Since the world economy certainly affects our economy, one may ask one other question. The other major economies, where are they right now economically compared to where they were economically right before the last recession?