Wednesday, December 15, 2010

A Growth Bounce for Treasuries

Rising Treasury bond rates are all the buzz on Wall Street. Over the past six weeks, bond rates have moved up about 100 basis points to more than 3.5 percent.

Will this snuff out economic recovery? No.

In fact, yields are going up precisely because economic growth has quickened and real yields are rising. Some call it the growth trade. Get out of bonds and buy stocks.

A blowout retail number for November arrived this week, with retail sales up five straight months. Manufacturing from the industrial-production report is up five consecutive months. And the production of business equipment (capex) is rising 12.5 percent over the past year.

Fourth-quarter growth could be 3.5 to 4 percent. And that could spill over into the new year, especially with tax cuts coming. The Senate voted overwhelmingly to pass them, and 80 to 100 Democrats will join most Republicans to pass the tax-cut package in the House.

The tax deal isn’t pure, but it is a positive. It adds to confidence and refreshes incentives on personal-income investments. And with 100 percent cash expensing, it even adds incentives to business investment.

I can’t for the life of me understand why any conservatives would want tax rates to jump up, or would want to drain $600 billion or more from the private economy. Some of the goofy spending increases in the package -- which are probably only 5 percent of the total -- can be fixed later. Let Paul Ryan take them out. Or fund them out of the leftovers from the stimulus package, which failed so badly.

I’m glad to see that the NFIB, the Business Roundtable, the Chamber of Commerce, any number of bank economists, FreedomWorks, Americans for Tax Reform, and others agree with me. And I do not understand Mitt Romney’s opposition. He ought to know better.

And speaking of ought to know better, the jump in long-term interest rates on rising economic growth should tell the Fed to stop QE2. Capital gains and low-tax incentives for businesses large and small are real job creators. On the other hand, just printing money would be an inflation-creator over time. In fact, the rise in long-term Treasury rates is telling the Fed that short-term rates are too low and should be higher.