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.