GDP in the first quarter of 2010 will be lower than last quarter, but that’s a good thing according to an article written by Kathleen Madigan in The Wall Street Journal. The expected number is between 2% and 2.5% vs. the 5.7% recently seen.

Q4 2009 GDP was driven to a large degree by an inventory rebuild (3.88 percentage points of the 5.7% jump in GDP last quarter), something that doesn’t look to be repeated now. But that’s a good thing because the numbers will show that demand is leading the way, something that will be interpreted as evidence of sustained growth.

Core sales — a measure that goes directly into GDP calculations and which exclude autos, building materials, and gasoline — jumped 0.9%. The uptrend in core sales suggests real consumer spending is growing close to 2.5% this quarter, better than the 2% rate he was expecting before the February retail data were released, she writes.

The February data indicates that consumers are back. And even though the headline number will be lower, the number will look better because final demand creates a more sustainable recovery due to increased spending will start the cycle of more orders, production and hiring, leading to more spending.

China-There’s Nothing To Fear But Fear itself

Nobel prize-winning economist and New York Times columnist Paul Krugman says that the U.S. has no reason to fear China.

“What you have to ask is, what would happen if China tried to sell a large share of its U.S. assets? Would interest rates soar? Short-term U.S. interest rates wouldn’t change: they’re being kept near zero by the Fed, which won’t raise rates until the unemployment rate comes down. Long-term rates might rise slightly, but they’re mainly determined by market expectations of future short-term rates. Also, the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds.

It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around. So we have no reason to fear China.”

It all comes back to that famous quote by economist John Maynard Keynes: “Owe your banker £1,000 and you are at his mercy; owe him £1 million and the position is reversed.”

China’s position as the largest foreign holder of U.S. debt means that if they were to dump their holdings, their price will necessarily decline, thus imposing a potentially large capital loss on themselves.

The fear is that if the Chinese stop buying our bonds it will raise interest rates on Treasury securities. That’s probably why the Treasury never presses the Chinese too hard on this issue. However, economist Gary Burtless of the Brookings Institution believes that the increase in U.S. growth resulting from a decline in the trade deficit, which subtracts from GDP, would more than compensate for the increase in interest rates.

According to former Treasury Department economist Bruce Bartiett, “As long as the U.S. national debt is entirely denominated in dollars, there is no risk that we will run into the sort of financial crisis that small countries often run into. What gets them into trouble isn’t the debt per se, but an inability to acquire sufficient foreign exchange with their own currency to service it. While the U.S. Treasury has never issued bonds denominated in foreign currencies, it is conceivable that it could be forced to do so if the dollar falls sharply and foreign demand for U.S. bonds wanes. That will be the point at which our debt problem becomes more than theoretical and we are really on the road to national bankruptcy.”