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As Goes America . . .
. . . so goes the world.


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Larry Kudlow

Not one in a thousand media commentators recognize that the big-bang bond sell-off in the U.S. is actually an international phenomenon, one that signifies the potential for an economic growth recovery throughout the world. The price of the bellwether 10-year Treasury bond has come crashing down since mid-June as the bond yield, or interest rate on the bond, has increased about 1 1/4 percent. Some observers believe this is the worst Treasury slump since 1987.

But other big nations have experienced a similar bond slump. In Britain, the rate on the 10-year gilt has increased well over a half percent. In Germany, bund yields have jumped almost exactly the same. And in Japan, the yield on the 10-year JGB has risen about a half percent.

But the mirror image of the worldwide bond slump is the global stock market rally.

From the lows of March 12, the German Dax has risen from the ashes by 54 percent. Britain’s FT 100 index is up 27 percent and Japan’s Nikkei 225 is up 20 percent. At home, the S&P 500 is up 22 percent.

And why have people been selling bonds and buying stocks worldwide? They are anticipating recovery in global profits and economic growth. Bonds outperform during recessions, while stocks are the play in recoveries.

Of course, special situations apply to every nation — we’re no different. Hedging activity in the widely-traded mortgage-backed bond market in the U.S. causes Treasury rates to overshoot on the way up or down. But no other nation has such a highly developed mortgage-backed bond market. Also in the U.S., Federal Reserve chairman Alan Greenspan misled bond dealers with the false promise that the central bank would scoop up a large volume of 10-year Treasuries as a way of pumping cash into the economy. Bond traders stocked up on this news but soon found themselves overinventoried in a plummeting market.

But the big picture is more important. The prospect of growth is beginning to replace recessionary pessimism almost everywhere.

In China, for example, both modernization and the increasing spread of free markets have contributed to strong growth in recent years. In the Southern Cone of South America, both Brazil and Argentina are implementing fiscal and monetary reforms that have already produced some early growth. The Asian Tigers, bit by a currency collapse in the late 1990s, are also rebounding.

Perhaps most important, U.S. policies of easier money and lower tax rates are leading the world charge to economic recovery.

On the monetary end, because U.S. greenbacks are used in so many places around the globe, recent actions by the Fed to reduce dollar interest rates and expand the dollar money supply have added significant new liquidity to dollar holders worldwide. Japan, meanwhile, is finally taking steps to properly expand its money supply and reform its dysfunctional banking system.

On the fiscal end, the broad-based Bush tax cuts passed in May have emboldened many nations to follow suit. Lower tax rates are being enacted in France, Germany, Poland, Hungary, and Slovakia, while Russia and the Baltic countries are completing flat-tax reforms. Outside of Europe, lower tax rates in Thailand, the Philippines, Taiwan, Singapore, Australia, and elsewhere in the Pac Rim are being put in place.

All this proves that American leadership in the world economy is just as vital as it is in foreign affairs. When the U.S. is willing to take actions that export its liberty-loving principles of free speech, free elections, and free enterprise, the rest of the world benefits enormously.

Mr. Kudlow is CEO of Kudlow & Co.



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