Wednesday, January 26, 2005

Save Iraq and Get Rich Too

Lawrence Kudlow has a wonderful post today, infused with his patented optimism and clear thinking. He weaves in the terrorist risk premium, the price of oil, the stock market, social security reform, consumer confidence, and car bombers into a great survey of the economy:

Ever since late December, the step-up in pre-election Iraqi terrorism has disrupted the post-election stock market rally in the US.Not coincidentally, a steep fall in oil prices was reversed on fears that terrorists would disrupt energy flows by bombing oil fields in Iraq, Kuwait and Saudi Arabia. As new gloom settled on trading markets, wild predictions of $70 or $80 per barrel-- a price that would damage most corporate profits, jobs and the economy-- became commonplace.Hence shares headed south on the fear factor.

Before the re-embedding of terrorists risk premiums, Pres. Bush's handily won election victory, with his pro-growth platform of tax, social security and legal settlement abuse reforms, caused the major equity indexes to roar ahead with double-digit gains. Highly growth-sensitive technology indexes advanced more than 20%. Expectations of new recruits for the investor ownership class, and a flood of newly incentivized saving and investment to fund capital formation, technology advances, productivity gains and job creation had propelled the indexes higher and buried the Kerryite pessimists in the election aftermath.

The latest batch of economic data for December shows solid growth and tame underlying inflation suggesting 3.5% to 4% growth ahead, well above the post WWII yearly trend of 3.4%. Unemployment is a low 5.4%, and Americans are saving enough to create a record $51 trillion of family wealth (net of family debt). Foreign capital inflows are rising faster than a trade gap driven mainly by rising consumer and business imports in the strong economy. At lower tax-rates, double-digit revenue gains from an expanding economy (read: Laffer curve) could bring the much overrated budget deficit down below 3% of GDP.

Read it all.