Tags: QE2 | larry | kudlow | fed | bernanke

QE2 May Sail into a Better Economy

Tuesday, 19 Oct 2010 06:38 AM

By Larry Kudlow

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As we all know, Ben Bernanke believes the unemployment rate is too high and the inflation rate is too low. He’s certainly right about the former.

However, regarding inflation, booming gold and commodity prices and the sinking dollar suggest that U.S. inflation will be rising in about a year, not falling.

Does the Fed head look at market-driven prices? Surely he does. But it’s equally certain that this will not deter him from pump-priming QE2 (Quantitative Easing). Underneath it all, Bernanke believes in the false Phillips Curve tradeoff between inflation and unemployment.

But an interesting question is: How weak is the economy? There’s a lot of pessimism about this, but Friday’s report on retail sales was very strong. Retail sales are up three straight months for a 7.4 percent annualized rate. Year-to-year retail sales have increased 7.3 percent. That’s a strong showing.

Monday’s report on industrial production showed a surprise drop of two-tenths of 1 percent. However, the 12-month change for production is 5.4 percent, a healthy pace. Inside the report, the production of business equipment continued to rise, and registered a 10.1 percent yearly increase. That is very strong. Business equipment is a key indicator of capital-goods spending and investment, which is crucial to the economy.

And in the last available factory-orders report for August, orders for non-defense capital goods (excluding aircraft) came in 20.2 percent above year-ago levels, with shipments registering a 13 percent gain. Even backlogs are up 4.1 percent year-on-year. This strongly suggests that despite the tax and regulatory threats, highly profitable businesses are in fact expanding -- even while they are not yet hiring all that much.

Another indicator of potential economic strength can be gleaned from the money supply measures. M1, which is transaction money, has grown 10.2 percent at an annual rate for the three months through September. This tracks the pickup in retail sales. Broader money, called M2, has increased 6.7 percent annually over the past five months. During the first five months of 2010, M2 declined 2.2 percent at an annual rate.

So the pickup in money demand could be signaling a better economy after the spring and summer slowdown. Perhaps consumers are moving to beat the tax man who could come crashing down January 1, 2011, unless the Bush tax cuts are extended. Perhaps strong business profits are stimulating growth more than we think. And despite tepid job creation, personal incomes are rising.

Think of it, Mr. Bernanke.

© Creators Syndicate Inc.

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