Below Thursday’s Headline

Thursday’s big 200 point rally of the Dow was ignited by the surprisingly strong GDP report for the third quarter. It was a healthy 3.5%, which was substantially stronger than the 3.2% that was widely expected. Of course, when the market realized that number was “juiced-up “on steroids from the stimulus, the market dropped almost 250 points the next day.

But, nobody noticed some other good news on Thursday. For the week, the Federal government had to sell a whooping $123 billion in Treasury bonds to cover continuing large deficits. Normally, the bids for such bonds are twice as much as the amount offered. This week, there was three times as much. With all the concern about whether the U.S. could continue to finance its huge deficits, this was very good news. Even better, 75% of that demand for Treasury bonds came from Americans, not foreigners. Can you handle even more good news? Historically, commercial banks have kept about 20% of their assets in Treasuries. Today, it is only about 14%, which means they will be buying more of our Treasuries as they heal.

The nightmare scenario is that we are unable to sell our bonds, either because the credit of the US government is questionable or because the strength of the US dollar is questionable. The first does not appear reasonable, as our bonds are selling nicely. The second is more worrisome. Long term, the dollar must depreciate, to help our exports and to help create the inflation needed to manage our heavy debt burden, by “inflating it away”. But, it must be done slowly!

Finally....Real Progress

During the 1990s, our trade deficit averaged about 2% of GDP but started rising in 2000. In December of 2006, I wrote this was not sustainable and possibly dangerous, as it approached 5% of GDP. The latest figures show it has decreased to only 3% of GDP and hopefully still dropping.

One reason is the weakening dollar makes our imports more expensive and our exports cheaper for foreigners to buy from us. Another reason is that China’s trade surplus has decreased from 10% of GDP to only 6.5%. That’s progress . . . real progress!

We’re watching a fundamental realignment of the global economy. It will be bumpy, but the worst is behind us . . . and, that’s also real progress!

Sobering Reminder

That’s how the President referred to yesterday’s unemployment release that another 263 thousand Americans lost their jobs. Since the recession began in December of 2007, over 7.2 million people have lost their jobs. Even 54 thousand government jobs disappeared last month! And, we are many months away from any good news. Unemployment improves only after the economy improves. If this is a “double-dip” recession, jobs could continue to disappear for another two years, which would be a political debacle for the current administration. Unfortunately, there is little they or anybody else can do about it.

Economists often talk about U6 unemployment, which is the number of unemployed people plus the number of people working part-time who want to work full-time, plus those people who have given up looking for work. There are now 17 million people who want to contribute to the GDP but cannot. That is a valuable national resource being wasted.