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Larry Kudlow is Wrong!

Larry Kudlow is Wrong!

Larry Kudlow is predicting a strong V shaped economic recovery in 2010.  His reasons for this prediction are a steep positive yield curve and the rising stock market.  While Mr. Kudlow is a top notch economist and I appreciate his optimism, here is why I believe he is wrong.

Yield Curve

A steep positive yield curve is not necessarily a good predictor of the strength of the economy.  As seen in the chart below, the yield curve was positive and above the 80 year average throughout the 1930s and this did not portend strong economic growth.

(Source: (12/24/09), An 80-Year Yield Curve and its Implications, Shaw, Richard, “Seeking Alpha.”

In the 1970s, the yield curve was positive and above the 80 year average for much of the decade and this did not portend strong economic growth.  The 60s saw the yield curve below the 80 year average and negative twice, which did not signal weak economic growth. 

A steep positive yield curve in a free market would indicate that banks and investors are bullish on the economic prospects for the future.  This would result in banks being willing to invest in businesses.  However, in the present case the weakness of the bank’s balance sheets will make them reluctant to loan money to small businesses.  In addition, I do not believe that the steep yield curve is indicative of investors’ willingness to put money into start-up companies, but the product of the Federal Reserves manipulation of the money supply.

Stock Market

The recent run up in the stock market is highly correlated with the falling dollar.  For most foreign investors there has been no increase in value of U.S. equities denominated in their currencies.  The rise in the stock market is not a vote of confidence in the economy of the U.S., but a product of the weak dollar.


The passage of the heath care bill, the potential passage of the cap and trade bill, and never ending series of tax, spending, and regulatory proposals by the Obama administration are creating uncertainty.  This uncertainty is significantly hampering investment in the U.S.  A historical parallel is the 1930s under FDR, which had a steep positive yield curve and uncertainty produced by a president who tried to micromanage every aspect of the economy.

Invention & Investment

Since 2000 we have significantly weakened our patent laws and there are proposals in front of Congress and cases in front of the Supreme Court that may further weaken them.  This has significantly reduced the investment in technology start-up companies in the U.S.  Technology innovation is the only way to increase real per capita income.  In addition, Sarbanes Oxley continues to make it almost impossible for a technology start-up company to go public in the U.S.  This significantly reduces the potential returns for investing in these types of companies.  Without policies that promote entrepreneurial  innovation, the U.S. will see anemic economic growth at best.


While the U.S. may see a bump in economic growth due to inventory rebuilding, it is unlikely to see a vigorous V shaped recover in 2010.  In order for the U.S. to have strong sustained economic growth, we will need to strengthen the value of investing in technology start-up companies.

Dale B. Halling is the author of The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation. The book, now available on Amazon, discusses how technological innovation is the key to increasing real per capita incomes and how we have crippled this engine of economic growth with little known laws since 2000.



  1. Dale,
    Interesting piece. Can you elaborate a little bit on what yield curves represent. Kevin

  2. Kevin
    The yield curve is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest. The graph shown above plots the spread between long-term Treasury Bond rates and Treasury Bill rates over an 80 year period. An inverted yield curve, where short term rates are higher than long term interest rates, usually is a very bearish signal on the economy. Normally, you would expect long term rates to be higher than short term rates because you would expect a larger risk premium on a longer loan. A steep positive yield curve usually means there is a large demand for loans – a sign of confidence in the economy.

  3. [...] Blog « Why is the Venture Capital Model Dying? About The Book This book discusses the laws limiting entrepreneurship in America. Pages [...]

  4. DB,

    Kudlow is incorrect (always) and you are incorrect here sir in you’re recounting of the history of the Destruction Of The American Patent System (DOT-APS).

    The war against the US Patent System (DOT-APS) began around the same time that the USA rebounded from the doldrums of the 1980′s economic slump and began to re-invent itself with micro-computers and the internet. It was shortly after that when the Patent Acts of 1995 and 1999 were pushed through.

    The persons and/or foreign nations who stand behind the push to take down our patent system remain illusive and in the shadows. But there is no doubt that the outcome of DOT-APS has persistently been to weaken the rights of the individual inventor.

  5. Step back,

    You are correct that the war against the U.S. patent system began with 1994 and 1999 patent legislation. However, it really gained steam around 2000. A complete history of the ups and downs of the patent system in the U.S. (discussed in my book), would show that the first attack on the patent system coincides with the rise of anti-trust legislation. The intellectual rise of anti-trust legislation coincides with a sharp decline in the rate of patenting. However, two pro-patent periods were the passage of the 1952 Patent Act and the patent legislation that created the CAFC in 1982.

    Since the passage of anti-trust legislation in the 1890s, the Supreme Court has been generally been hostile to patents except for a short period around the 80s.

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