The rise in world commodity prices, especially Dr. Copper -- a metal that has a PhD in economic forecasting -- bolsters this bullish view. So does a steeply upward-sloping yield curve in the U.S. Treasury market. And so does the very bullish action in corporate bond prices, where declining yields have narrowed the interest-rate differences with Treasuries all the way back to pre-Lehman-AIG-credit-collapse levels. This is yet another sign that business credit and profits are improving.
Most demand-side strategists fail to understand that businesses, not consumers, are at the heart of the economic story. People forget Say’s Law of Markets, which argues that we produce in order to consume. So if industrial and service production levels are poised to rise -- because of an improvement in profits -- then consumer and family incomes also will rise to provide the spending stimulus.
And the recent rise in consumer savings is a good thing. Keynes was very wrong about this. Nowadays, higher consumer savings are channeled through the financial system into business investment, which translates to the purchase of computers and heavy equipment that will spur economic growth. Economist Jerry Bowyer keeps reminding me of this, and I try to convince my demand-side friends that they are barking up the wrong tree when they trash consumer-savings rates.
And we can’t forget monetary policy. During a recent town hall meeting, Federal Reserve chief Ben Bernanke noted that the Fed “put the metal to the pedal” in order to avoid a second Great Depression. So there’s an enormous volume of newly created money out there that’s ready to be put to work through economic spending and investing. Down the road there’s an inflation threat from this money, but not now.
Bernanke himself is predicting 1 percent growth in the second half of 2009, however he may be too cautious. It could be 2 or 3 percent growth -- which is subpar for a recovery, but ain’t chopped liver either. That’s what stock markets are signaling.
Sen. DeMint told me during our interview that the economy is getting better mainly because of the corrective forces of free-market capitalism in the private free-enterprise sector, and not from all this government spending and borrowing. Abstracting from the Fed’s big stimulus effort, he’s right.
But the White House is going to take credit for economic recovery anyway, and that’s the newest political challenge for the GOP.