With the Dow hitting an all-time high last Friday, markets played a beautiful coda to a trading week which defied vacuous discussions of the U.S. central bank's (Fed) alleged failures to effectively communicate its monetary policies.
Ignoring the chatter, markets cut straight to the key drivers: liquidity and the belief that cheap and abundant credit will continue to support economic activity, job creation and incomes of firms and households.
When in the next few years analysts begin to look again at their rear view mirrors, this past week will most probably be taken as a signal that markets' collective wisdom correctly anticipated the accelerating growth of the U.S. economy.
And then the usual cohorts of Fed's critics will also note that the bulls on the Big Board ran wild at the time when, following the IMF, America's monetary authorities sharply downgraded economic growth for this year to 2.1-2.3 percent (from their 2.8-3.0 percent forecast last March). One more instance of Fed's wrong analysis, they will say.
I am talking here about a refrain I heard so many times in the past.
I also believe that the current pessimism about America's noninflationary growth potential will eventually give way to a more thoughtful analysis of the economy's ability to expand in an environment of reasonably stable prices.
Indeed, with steadily improving employment prospects, the civilian labor force could soon reach its long-term trend growth of 1.1-1.2 percent. Adding to that the average labor efficiency gains of 1.4 percent over the last four years would give a potential growth rate of the economy somewhere between 2.5 percent and 3.0 percent.
If these conditions were to prevail, monetary policy would have more room to maintain an accommodative stance. The Fed would also have more time to correct the excesses created with extraordinary efforts to support the gravely damaged financial system and to prop up an economy struggling to recover from the Great Recession.
Restrictive fiscal policy will help, too, by providing additional space for monetary flexibility. This year, the expected federal budget deficit of 2.8 percent of gross domestic product (GDP) would be one-third less than the shortfall in the previous year and would fall below the 3.1 percent average over the last 40 years.
Don't rain on bulls' parade
That is a significant achievement, but further efforts will be necessary to stop and reverse the growth of America's gross public debt. At this writing, the U.S. National Debt Clock stood at $17.5 trillion, or 102.3 percent of the nominal GDP, based on the economy's first quarter numbers.