Skip to comments.Kudlow: A King Dollar GOP?
Posted on 02/13/2012 5:19:08 PM PST by Tolerance Sucks Rocks
Out on the campaign trail, Fed head Ben Bernanke is an unpopular guy.
Mitt Romney and Newt Gingrich have both said they would replace Bernanke, not reappoint him. Rep. Ron Paul would swap the whole Federal Reserve monetary system for a gold-linked dollar, making the yellow metal legal tender. And it was Gov. Rick Perry of Texas, before he dropped out of the race, who said more quantitative easing by the Fed would be "almost treasonous."
Republicans in Washington are equally unimpressed by Bernanke. Rep. Paul Ryan recently criticized the Fed for bankrolling our huge budget deficits and thereby accommodating a profligate fiscal policy. And former Federal Reserve Board Governor Kevin Warsh, a Bernanke intimate before he left last April, just leveled criticism at the Fed's extensive zero-interest-rate policy and its "operation twist." (Warsh, by the way, was an economic official in the George W. Bush White House.)
Finally, former Bush Treasury Under Secretary John Taylor, author of the Taylor rule that is monitored inside the Fed, recently told me that the central bank target rate should be 2 percent, not zero.
There are two key takeaways from this onslaught of Fed criticism: First, the critics worry that the ultra-easy money pumped out by the Bernanke Fed will in the future create periodic inflationary bubbles (housing and energy), such as we had in the 2000s, which contributed mightily to the ultimate financial meltdown.
Second, and very much related to the inflation worry, the Republican Party is gradually becoming the King Dollar Party. After watching the greenback collapse almost 40 percent during the Bush years, Republican leaders are moving back to a Reaganesque dollar approach whereby a great nation with the world's leading economy should have a strong and reliable currency.
The dollar soared and gold plunged during Ronald Reagan's first term, just as it did during Bill Clinton's second term. In both these eras, stocks rallied mightily and the economy grew rapidly. Supply-siders note that a good-as-gold dollar and low marginal tax rates were the ultimate prosperity tonics during these two periods.
But today we're witnessing the opposite of supply-side prosperity. The current economic malaise seems borne of a weak-dollar/high-gold monetary policy coupled with a huge tax-hike threat looming in 2013.
To be fair, Bernanke has his supporters. They're mostly from the canyons of Wall Street, where money-market economists are loathe to criticize him. Then there's NYU professor Mark Gertler, who has coauthored research with Bernanke. A recent Bloomberg story cites Gertler as saying: "Criticism about the Fed being inflationary is not fact-based. In terms of an inflation record, the facts are the Fed has been as close to impeccable as you can possibly get."
Gertler notes that during Bernanke's six-year tenure, the consumer price index rose an average of 2.4 percent, lower than the 3.1 percent average for Alan Greenspan and the 6.3 percent for Paul Volcker. (Or course, that's unfair to Volcker, who inherited 15 percent inflation and by targeting gold and the money supply brought it down to 3 percent.)
But the trouble is, after three years of zero interest rates (with more coming) and an outsized Fed balance sheet of more than $2 trillion, there's still an inflation threat out there, despite the subpar economy. Bernanke has been a massive pump primer long after the financial emergency has passed.
Over the past year, the CPI has increased 3 percent. Energy prices have grown 6.6 percent, while food is up 4.7 percent. This is a big pinch on consumer pocketbooks and a drag on the economy. Inflation expectations are steadily running at 2.5 percent to 3 percent.
In Milton Friedman terms of too much money chasing too few goods, the 10 percent M2 increase of the past year is way above the 2.5 percent economy. In classical dollar-value terms, the $1,700 gold price is an ominous portent for future inflation. The tradable DXY dollar index is hovering under 80, which is massively below its 2001 peak of 120.
At the very least, one can say there's a dollar-confidence problem in the marketplace. Over time, even though lags are long and variable, a falling greenback and a rising gold price are bound to spell higher future inflation.
So the Republican Party is absolutely right to shift toward a strong-dollar policy. (Newt Gingrich has gone so far as to propose a new gold commission, such as Reagan had, with investor Lew Lehrman and journalist James Grant as the co-chairmen.) While Bernanke was a good crisis manager, he seems to lack any conviction for a predictable rules-based policy that would create a reliable King Dollar.
Stable money is a growth incentive. And history tells us that a golden anchor for money is a key ingredient of long-term prosperity.
To find out more about Lawrence Kudlow and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com.
COPYRIGHT 2012 CREATORS.COM
Simple common sense; the government has two ways to rob you of long term capital gains: taxes and inflation. If both are expected to be low, then people will invest money for the long run (i.e. in new businesses) rather than put their money in short term speculation.
The dollar is artificially propped up from time to time, but it will generally balance with this anti-American globalist economy by falling in the long run. Or more at once, when repudiation and currency adjustment time comes. Have fun with the service/debt economy and selling off natural resources. Enjoy the slide.
I would be fine with earlier interest rate hikes and all of the consequences of those, too. Let’s dump half of the spending on all who are dependent on various levels of government for their incomes (including services dependent on government employees, tourism, etc.) and get this default process over with.
Oh, really? The only way to determine the value of the dollar is to get foreigners to buy it. If they don’t, and the dollar slides . . . look in the mirror.
Wonderful. And I’ll wager not a single one of your links addressed my point.
Good grief! I agree with Cocaine Larry! The world is surely going to End.
Cut spending radically enough to pay down the accumulated debt, and the dollar will be a less risky investment. As for setting rates higher, defaulting nations give high yields. To me, personally, either way is fine—higher rates or lower rates. The default process will go on, until spending is cut far more than politicos are willing to see.
Southern European brothels raised their yields, but they didn’t cut public spending enough or produce enough to sustain revenues for their fat governments.
apologeezes to the Beatles
Great stuff, especially the first one, “America’s Ruling Class”. If you’d like some belly laughs at the expense of political elites, I’d recommend “Radical Chic” by Tom Wolfe (1970, only 90 pages).
The subtitle was Mau-Mauing the Flak Catchers, I remember. Read some excerpts, it was very clever and an instant classic. I just didn't feel like reading about black nationalists ripping and raging at white people, while guests at tony Manhattan parties hosted by Leonard Bernstein.
To hear him getting nervous about the dollar, and by extrapolation a number of financial-asset classes valued in dollars, is a real novelty. It feels like it should be a portent of some sort -- like walls bleeding and dogs howling, and statues suddenly speaking to us in Aramaic.
Took the words right outa my keyboard. To hear this from Cocaine Larry -- who would cheerfully barbecue live puppies over hot coals if it would yank the Nasdaq up fifty points -- is certainly noteworthy.
“To hear this from Cocaine Larry — who would cheerfully barbecue live puppies over hot coals if it would yank the Nasdaq up fifty points — is certainly noteworthy.”
I recommend Stubs BBQ Sauce, spicy of course; yummmm :)
Alternatively, it looks like no one listens to or reads Kudlow. Par for the course.
The minor clerisy's preoccupation with ministering to "social problems" (and their inveterate spreading of dependency) reminds me of the "relief" racket one sees at the local drugstores, whose manufacturers concoct a dozen different labels of the same "relief", e.g. miconazole, at the same potency guaranteed not to cure, but only to relieve. And keep the customer returning for more.
That was Don Regan's policy, under Reagan's first term. Regan, as Treasury Secretary, cooperated with Paul Volcker at the Fed to stop inflation, which strengthened the dollar.
Regan's policy was undercut and abrogated by Bush intimate James A. Baker III, who'd been Reagan's chief of staff (always trying to paint Reagan into a corner, and get him to sign Bushy pig-at-the-trough stuff into law, and Reagan would just slip away and do something more, well, Reaganesque). Baker engineered the "job swap" with Regan, whereby Regan became chief of staff, and Baker went to Treasury and promptly took the dollar south, leading to the 1987 Crash when his soft-dollar initiative caused a falling-out with German central bankers, and the markets got wind of it.
Baker's premise was that U.S. businesses needed a weak dollar to help them export. His initiative dated from 1985 and, under Greenspan, Bernanke, and Treasury secretaries ever since, has carried to the present day. It represents the monetary orthodoxy of Bushonomics and Clintonomics, and its insider name is "repression": Simultaneous interest-rate holddown and deliberate inflation resulting in the slow destruction of debt (good or bad), and the stealthy depreciation of privately-held wealth in order to convert it to government purposes through inflationary overspending.
It's the exact same policy the Fed pursued in the 1950's and 1960's under "Regulation Q" that capped savers' passbook savings rate at 5%, and for the same purposes.
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