If it's in the News, it's in our Polls. Public opinion polling since 2003.

 

Shutdown Threat Is Not All that Ails the Dollar

A Commentary by Lawrence Kudlow

Saturday, April 09, 2011

Washington shutdown fears are sinking the U.S. dollar, according to some news reports. Surely there's something  to this, as investor confusion rises and confidence falls, and as Washington seems to be gridlocked over a few billion dollars.

Frankly, the GOP could easily declare victory and accept a $35 billion to $40 billion spending cut for the final strokes of the 2011 continuing resolution. This kind of deal would move the domestic discretionary baseline back toward 2008. No mean feat.

Over 10 years, estimates range above $400 billion in real cuts in the level of those domestic programs. Considering where the process started -- with the failure of the Democrats to propose a budget, and then the early Democratic response of only $5 billion in CR budget cuts -- the GOP has come a long way in the absolute right direction.

So from here the GOP could move from billions in CR cuts to trillions in cuts in the Paul Ryan budget.

Yet, however this works out, the principal cause of the declining dollar is not a threatened government shutdown. It's the excess money creation of the Fed, which is falling further and further behind the international curve of currency stability.

While Bernanke & Co. have increased the adjusted monetary base by about $500 billion since late December, other central banks have been tightening policy in order to stabilize their currencies and fight inflation. The European Central Bank went for a quarter-point hike this week. And the euro is trading strong at 1.44 to the dollar.

Over the past year or so, Canada and Australia have raised rates several times. Their currencies are soaring. China and other Asian countries also have been gradually tightening policy. In all these cases, foreign central banks are rejecting the over-supply of dollars coming their way.

So, by the way, are Middle East oil producers, according to CNBC reporting. As U.S. crude-oil prices have shot up 30 percent since mid-February, the Saudis and others have been selling much of the dollar proceeds from the high-priced oil sales.

It just seems like nobody wants dollars. Over the past 10 months, the dollar index has lost 15 percent. That's because there are too many of them. And a lot of the excess dollar flow is finding its way into commodities -- including oil, but most especially gold and silver, which are traditional monetary substitutes. Right now, gold is cruising toward $1,500 an ounce. Silver has passed $40. Crude oil is more than $112, and European crude is back to $126.

In a recent survey by Reuters, one in five traders said they expect Brent oil to hit $150 this year. Gasoline prices in the states continue to surge, with the AAA national average retail price moving to $3.74. In almost 10 states, the price is hovering around $4.

Nobody knows where the energy tipping point is for the economy and stocks. And by and large, the market has held up rather well. But these spiking prices are surely a threat.

There's no question that the potential U.S. debt bomb from overspending is a backdrop fear for investors. Long run, that bomb could be just as much of a dollar destroyer as the over-easy Fed. And perhaps the debt bomb and cheap money are ultimately two sides of the same coin.

But in the short run, after the government shutdown goes away, the big problem behind the sinking dollar is a stubborn Fed with its head in the sand and with its failure to see world monetary and commodity threats closing in all around it.

COPYRIGHT 2011 CREATORS.COM

See More Commentary by Lawrence Kudlow.

See Other Political Commentary.

Views expressed in this column are those of the author, not those of Rasmussen Reports.  Comments about this content should be directed to the author or syndicate.

Rasmussen Reports is a media company specializing in the collection, publication and distribution of public opinion information.

We conduct public opinion polls on a variety of topics to inform our audience on events in the news and other topics of interest. To ensure editorial control and independence, we pay for the polls ourselves and generate revenue through the sale of subscriptions, sponsorships, and advertising. Nightly polling on politics, business and lifestyle topics provides the content to update the Rasmussen Reports web site many times each day. If it's in the news, it's in our polls. Additionally, the data drives a daily update newsletter and various media outlets across the country.

Some information, including the Rasmussen Reports daily Presidential Tracking Poll and commentaries are available for free to the general public. Subscriptions are available for $3.95 a month or 34.95 a year that provide subscribers with exclusive access to more than 20 stories per week on upcoming elections, consumer confidence, and issues that affect us all. For those who are really into the numbers, Platinum Members can review demographic crosstabs and a full history of our data.

To learn more about our methodology, click here.