TCS Daily

King Dollar

By Larry Kudlow - March 25, 2010 12:00 AM

The biggest story out there right now has got to be the re-emergence of King Dollar. This could be a major game changer for both Wall Street and Washington. All the dollar bears from the beginning of this year, and all the gold bulls, have been completely and utterly wrong.

Now, why is this? Is it Fed head Ben Bernanke's monetary restraint? Nope. Is it Tim Geithner's spirited dollar defense? Nope. It's Greece, Portugal, Italy, and the sinking euro, which has dropped 12 percent from early December. And there's no end in sight.

Unsurprisingly, the broad dollar DXY index is up 10 percent, reversing a 17-percent drop from March to November of last year. Gold, meanwhile, is off 12 percent.

Now you know me: I love King Dollar. You can't have a growing, healthy, free-market, supply-side, capitalist economy without a reliable currency. I learned that from Ronald Reagan. But this King Dollar story is getting a little weird. After all, the Fed is still pumping out money like there's no tomorrow. Its balance sheet is still growing. Meanwhile, tax rates are going up, not down.

But here's the key point: the euro is going down -- more. And this could wind up being a big game-changer for investors.

By the way, Ben Bernanke is being bailed out by this cheap euro, the same euro that can't seem to bailout its weakest European sisters. It's a very strange story. As I've said before, Mr. Bernanke ought to go to the Greek Parthenon and genuflect over the weak euro bailing out his super-easy money policy.

A high dollar can suppress nascent inflation pressures. And if you take a look at February, you'll see that price indexes came down. (They had been rising for several months.) So without inflation worries, a high dollar gives Mr. Bernanke a lot of zero-interest-rate running room for as far as the eye can see.

The question is whether a high dollar is in fact good for stocks and economic growth, because oftentimes a rising currency can be deflationary. A lot of people on Wall Street are shying away from the so-called "risk trade," meaning stocks, in favor of the dollar trade.

Speaking of deflation, is the Chinese renminbi going to be revalued in order to choke off inflationary pressures in China? If you think all this currency talk is confusing, join the crowd.

To sum up, as a good free-market supply-sider, I want a reliable King Dollar and low marginal tax rates to spur economic-growth incentives here at home. Now, I may get the former, but I am probably dreaming on the latter.

But then again, despite Obamacare's tax-and-spend big-government policies (which remind me of the Eurozone), we could get free-market banking reform if Sen. Chris Dodd stays with me and ends too-big-to-fail. Could we be looking at the Dodd Dollar? Think of that one.

This article first appeared on Kudlow's Money Politic$.


Excellent metaphor from your husband Joanie; thank him for me

Yeah, Kudlow is a wack-job sometimes
I think it is just how how writes stuff up and doesn't read over it to see possible problems in mis-interpreting what he means.

Either he's for a hard dollar or not. But the way he writes it, he's a wishy-washy fence sitter.

But I have seen him enough on TV and read his past writings to know that he's usually set on the hard dollar.

So, I don't know how to take what he says now. It's like reading Roy.

Larry, you said...
"Speaking of deflation, is the Chinese renminbi going to be revalued in order to choke off inflationary pressures in China? If you think all this currency talk is confusing, join the crowd."

I'm not confused one bit. The US dollar is the global standard of value and the rest of the currencies of the world move up and down against ours. As long as we don't have inflation greater than 2% the dollar is essentially flat. Neither strengthing nor weakening.

While the Chinese economy remains Keynesian their domestic inflation will continue as their underlying income-producing resource base...including raw real estate and direct labor wages...appreciate in value as they are bid up by Chinese capitalists. They can lay off some of that inflation into a strengthened renminbi (against the dollar) but they would be exporting such inflation to those of us who buy their goods.

America might be able to tolerate some of that to balance our defaltionary pressures over here...but not very much. Inflation is rough on a post-Keynesian (post-manufacturing) domestic economy. Ask the Japanese about that. Look at what Stagflation did to us froim 1970-1982.

We need to hold on tight to 2% inflation. The Fed has done a terrific job fending off deflation recently and the Fed now has a deep portfolio of assets to liquidate back into the market if inflation starts back up again. We talk about Open Market Operations to maintain inter-bank interest rate targets. But the impact of the Fed on inflation is just as important and actually more operative because the Fed Funds rate itself is normally achieved simply with an announcement declaring what that target is.

If the Chinese strengthen the renminbi then we will be paying more for what we buy from them. If we are able to hold off inflation then the Chinese will extract more of our wealth denominated in dollars that have not lost value. Chinese officials have been watching OPEC play that same game and they know they are leaving money on the table by staying pegged to the dollar.

What we would really want them to do is strengthen the renminbi after they are post-Keynesian (like we talked the Japanese into in 1985) because that will cause them to go deflationary...exporting domestic inflation faster than they can replace it because their manufacturing tasks have been outsourced.

Of course, this won't happen in China for several decades because they have such a deep, underutilized labor pool...but it will happen over there eventually. Therefore, China is already tightening up its friendships in Africa so they can exploit cheap resourses over there just as we exploited the Asians all these years.

The Chinese are learning more by understanding what we have been doing poorly than we have learned by watching what they are doing well. This is the essence of competitive dominance in the Post-Industrial Society. We all have access to the same technologies and enjoy the same opportunities. It is he who manages this process of creating wealth better than the next guy who wins the game of financial capitalism.

At the moment, your words "If you think all this currency talk is confusing, join the crowd" typifies the American understanding of our own game. For their part, the Chinese players are not confused at all.

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