Today’s report of 3.5 percent GDP growth for the third quarter ending in September signals the end of the long recession. Although there are glitches in the GDP story — including the one-time impact of Cash for Clunkers and the erratic bouncing around of disposable income from quarter to quarter (largely a result of government handouts), the fact remains that the economy is improving and that the big stock market rally is confirmed.
Wall Street economists like Joe LaVorgna and Michael Darda expect 4 percent growth in the quarters ahead. My own view is that this will be a business-led recovery, not only in terms of capital-spending investment, but also business-to-business transactions. Corporate cash flows are very strong and profits are improving. Economy-wide productivity is very high. And let’s not forget the Fed’s highly expansionary policies, with a zero target rate, a steep Treasury curve, and a growing balance sheet.
All of which raises an important policy point. As the economy recovers, where’s the exit strategy for all this stimulus? To protect the dollar, the Fed should be raising its target rate, or at the very least hint at raising it by changing the wording of next week’s policy statement.
Gold roared up today as the greenback fell again. Stocks are mounting a huge 200-point rally as of this writing. World markets are anticipating an inflationary recovery in the United States. And never-ending federal debt creation from more and more government spending adds to the greenback’s woes.
Restoration of King Dollar would be a tax cut for the whole economy. Think of it in oil terms: Crude oil jumped $2.40 today to $80 a barrel. If the dollar keeps sliding, oil is going to keep rising. And that’s a tax hike for the economy. It would block recovery. But if King Dollar were restored to its thrown, oil and other commodities would stay put, amounting to a de facto tax cut — a spur to growth.
President Obama had a tepid response to today’s GDP report, as the administration contemplates more spending for a second stimulus package. That’s exactly what currency markets do not want to see.
Meanwhile, Treasury man Geithner talks about ending the too-big-to-fail policy for banks. But his idea sounds suspiciously like TARP in perpetuity — where the government would take over failed banks, mostly at taxpayer expense, with some of it paid for by other bank insurance assessments. But TARP in perpetuity, stimulus in perpetuity, and easy-money in perpetuity is a fiscal/monetary overload that will reduce our potential to grow.
It is a great thing that the financial meltdown is over and the Great Recession has come to an end. But profligate policies will surely undermine the private free-enterprise economy’s valiant efforts to recover.