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Rational Exuberance

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Former Fed Chairman Alan Greenspan once chided Wall Street for what he termed "irrational exuberance," in a time when stock prices were clearly racing ahead of reality, but I believe the exuberance we have seen this week is both rational and long overdue.

Today's employment report was simply the icing on the cake for a week of good news as the November unemployment rate dropped to 8.6 percent and we created 140,000 new private sector jobs.

Stock markets surged on Wednesday in response to a broad-based currency intervention by the world's central banks, led by the Federal Reserve, to ameliorate the credit crunch by providing cheaper dollar liquidity to the European banking system. The European banks were flirting with a Lehman-style credit implosion because they could not get sufficient dollar liquidity based on Euro assets -- all part of the continuing drama surrounding the fiscal stability of several Euro nations.

The central bank action amounts to quantitative easing on a global scale. The Fed and other central banks too are providing dollars at a cheaper rate than they would have under normal conditions. As we saw with the earlier Fed Quantitative Easing in the United States, this action provides economic nourishment that equity and commodity markets love.

At the same time, and also of great importance, China made a determination that slow growth is its number one problem, not inflation. Consequently, China cut its bank reserve requirement by .5 percentage points. This action also provides major liquidity for China and the rest of the global economy, complementing the action by the Fed and Europe's central banks.

As we suggested in our Thanksgiving note, there is substantial good news out there indicating that U.S. economic growth is likely to be higher than anticipated, at least in the near term. The ISM manufacturing report rose from 50.8 to 52.7 in November. Auto sales in November were up 14 percent. And other surveys confirm that consumer confidence is on the rebound.

None of this indicates we are out of the woods by any means. The central banks' action does nothing to mitigate the European sovereign debt problem, or for that matter the U.S. fiscal impasse. We still face a sharply slower economic growth picture in the first quarter of 2012, especially if we don't extend the payroll tax and enact some other tax measures that seem to enjoy bipartisan support. But in the overall scheme of things, there is nothing like a good solid dose of economic growth to reduce deficits, create jobs and foster holiday cheer!

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.