Thursday, August 28, 2008


US economic growth last quarter was 3.3%. That is a real number after deducting inflation.

Final sales were up 4.8%. The indication being that even the adjustment to 3.3% understates the strength in the economy.

Over in the UK, high short rates have brought economic growth to a standstill, but these high short rates have also induced a massive rally in long term bonds. The rally has shifted to financial stocks. Companies such as Lloyd's of London have bounced.

In the old days, the economy of the USA was so big, relative to the rest of the world, that our policies moved the markets. Today, high short rates in the "rest of the world" are killing the demand for resources and setting up a dramatic fall in inflation rates.

It is very easy to get the cart before the horse on this one, changes in long term bond rates provides the most accurate forecast of e inflation. It is easy to flip this around, saying that inflation will cause higher bond rates. Central bankers can manipulate the tail of this dog but the dog will sniff out the trail of inflation.

Wow! A stronger economy with tamer inflation. The prospects for future real growth could hardly be better!