×

Busch: Positive US Cycle Accelerating

By now, you have seen that late last night the US House passed President Obama’s tax and spending bill. Despite the hyperbole from the left, lame duck Democrats joined Republicans to ensure the US economy avoid a disastrous hike in tax rates. Most economists are calling for the measure to add 0.5-1.0% to GDP and taking the US economy up to 3.0-4.0% growth for 2011.

In turn, this has triggered a fascinating development in the financial markets. US interest rates have soared with the yield on the US Treasury 10 year noterising over 100 basis points to 3.55%. While some may point to a concern over inflation as the cause, this is not consistent with the drop in the price of gold. As I said on CNBC’s Kudlow Report on Wednesday, I see rates moving up as a good sign because it shows demand for money is going up.

We see demand picking up in places like the Fed’s Senior Loan Officer Survey and the improvement in the NFIB Small Business Optimism index. As everyone knows, the one thing that has been missing in the US recovery has been jobs. The majority of new job growth gets generated by small to medium sized firms. These firms have not had either access to loans nor has their demand for these loans increased until recently.

Year-End Investing Tax Tips  -  A CNBC Special Report
Year-End Investing Tax Tips  -  A CNBC Special Report

This is why I’m not concerned about the move up in US interest rates.

First, we have just gone through a refi boom for those that are credit worthy and that has helped put more money in their pockets. Second, long term interest rates are still below where they were in April and therefore will not be choking off any recovery. Third, 2010 will see mergers and acquisitions rise for the first time since 2007 tells you things are looking up and appetite for risk is increasing. The fact that PIMCO is betting on bank debt rallying in 2011 is an example of this optimism.

I believe that higher US interest rates coupled with a strong stock market and lower gold prices should mean that money is starting to flow back into more productive uses and away from safe haven investments. It’s good for job growth, good for economic growth and ultimately good the US dollar.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.