Goldman Sachs (NYSE: GS) CEO Warns of Fiscal Cliff Impacts
Lloyd Blankfein, Chief Executive of the Goldman Sachs Group Inc (NYSE: GS) recently sounded off on the prospect of a fiscal cliff in the United States, and the damaging effect such brinkmanship would bring to the economy. Blankein feels that the United States’ credit rating and status as the world’s reserve country would be threatened if the federal government doesn’t resolve the “fiscal cliff” before automatic spending cuts and tax hikes kick in at the end of the year.
Blankfein commented “There’s a substantial risk that we don’t get action, and it will be very, very bad for the rating. “ While speaking on a panel at the Clinton Global Initiative annual meeting here, he further noted “And it won’t be just because of our credit. It will be because of the dysfunctionality of the government, and we will deserve to be graded as a dysfunctional government.” Despite this, Blankfein is optimistic, as most observers are, the cooler heads will ultimately prevail and a compromise will be reached that will allow the US to avoid the fallout of such conditions. If unresolved, the cost could be an estimated 4% of gross domestic product, he said.
The low cost of borrowing that the US government enjoys allows it to finance its deficit at a very cheap cost – that cost could rise dramatically if a deal is not reached, and the government could have to reshape itself dramatically. Continued government inaction would make U.S. government debt less desirable, he said. “And why should we be the reserve currency of the world if we can’t manage the health of the economy and therefore the value of the currency?” asked Blankfein, who is also Goldman’s chairman.
“The U.S. is an amazing beneficiary of being the reserve currency. I think people should start realizing that’s the real ticking time bomb,” he said. Due to the disaster underway in Europe for the past few years, attention has been diverted from the calamity in the US. As Europe eventually stabilizes though, attention could squarely be turned to the United States, leaving a precarious situation.
In a sprawling discussion that touched on politics and financial regulation, Blankfein defended Ben S. Bernanke, chairman of the Federal Reserve, for the central bank’s latest monetary stimulus aimed at lowering interest rates and spurring growth. Many critics have decried Bernanke’s measures, but Blankfein feels the Fed had no choice but to use those powers. “There’s no inflation on the horizon — of course there’s inflationary fears in the long run,” Blankfein said. “But you have a clear and present danger of a deflationary position.”