Destroying King Dollar Is Not the Solution -- Pro-Growth Fiscal Action Is
A Commentary By Lawrence Kudlow
Fed head Ben Bernanke and the FOMC dropped a new policy bomb at their meeting this week. Now they say inflation is too low. That's the real problem. And the solution? Punch up the money supply and punch down the dollar -- or what I used to call King Dollar. No more.
In the 24 hours following the Fed announcement, gold rocketed up toward $1,300, a new record high. And the dollar plunged. It's a big vote against the central bank and its constant tinkering and fine-tuning.
The Fed actually has opened the door even wider for more money-creating, balance-sheet-expanding, Treasury-bond-buying actions at its next scheduled meeting, which will come the day after the midterm elections on Nov. 3. That's when QE2 may sail. "Quantitative easing" is what they call it. I call it dollar whack-a-mole.
Here's a currency-trader quote from The Wall Street Journal: "Quantitative easing is broadly viewed to be corrosive to a currency's value." Right on, brother. Even though Bernanke doesn't get it, the weaker dollar will rev up inflation mighty fast.
But right now, the reflation trade is king, not the dollar. Gold, commodities, some stocks and foreign currencies are the place to be.
And do we really need more inflation? And should the Fed sacrifice the value of the dollar to get it?
Wall Street economist John Ryding doesn't think so. He notes that over the past four-and-a-half decades, the consumer price index (CPI) has increased six-fold. So Ryding believes it's absurd for the Fed to worry about a low inflation rate over the past year or so. Ryding is right.
Regarding the so-called too-low inflation rate, here are some facts: The CPI over the past year is up 1.1 percent. Producer prices paid by businesses are up 3.1 percent. And import prices are rising 4.1 percent. So it's not as though all these indexes are actually plunging. And to the extent that the CPI and the personal consumption deflator (1.5 percent) are rising only a bit, well, that should be a good thing.
But here's what the Fed is really missing, or ignoring: All of these price indicators are backward-looking. Sensitive, forward-looking inflation proxies -- like gold and the CRB spot raw-materials index -- are surging upward. And the dollar downward.
One of the cornerstones of economic growth in a free-market model is domestic price stability and a stable, reliable dollar. This is crucial for confidence and capital formation. In fact, Nobelist Robert Mundell always argued for low tax rates to spur growth and a steady dollar linked to gold to ensure price stability.
But now we are moving deeper into monetary Keynesian fine-tuning to control the economy. That, plus an overspending Keynesian fiscal policy, may be combined with higher tax rates and an ever-weakening dollar. (t's totally wrong. It's exactly the reverse of Mundell's thesis. Sinking the greenback and pumping more money into the system while raising tax rates and overspending is, over time, a prescription for stagflation: too much money chasing too few goods.
Now think of this: With all the Fed's pump-priming since late 2008, there is still $1 trillion of excess bank reserves sitting on deposit at the central bank. This massive cash hoard suggests that liquidity is not the problem for the financial system or the economy. And putting another $1 trillion into excess reserves only doubles the problem.
A much better idea would be a fiscal freeze on spending, tax rates and regulations. This is apparently what the tea-party-driven Republican congressional leaders intend for their election platform.
Such a freeze would go a long way toward reducing the massive overhang of uncertainty that has plagued the economy and stifled the animal spirits. The Fed can print money, but it can't print new jobs or growth. On the other hand, a rollback of the big-government obstacles to growth would get folks to put money to work -- not only the $1 trillion in excess bank reserves, but the massive corporate cash hoard, estimated at roughly $2 trillion.
And a lot of that corporate cash is lodged overseas to avoid punitive U.S. taxation. So, in addition to freezing tax rates at home, why not move to a 5 percent tax-rate holiday on repatriated foreign corporate profits? The result would be $300 billion to $400 billion flowing back into the U.S. economy for investment and job-creating purposes.
In other words, pro-growthi fiscal action is the solution, not wrecking the value of the dollar or somehow boosting the future domestic inflation rate.
Historically, nothing good has ever come to our economy from a steadily rising gold price. Doesn't anybody around here have enough common horse sense to see that? Maybe that's what this midterm election is going to be all about.
COPYRIGHT 2010 CREATORS SYNDICATE INC.
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