Longtime CNN anchor and commentator Lou Dobbs joined me on last night’s Kudlow Report to discuss Obamanomics, Tim Geithner, the demise of the dollar, the threat of American declinism, immigration, trade policy, and other hot-button issues.
Last night I spoke with one of the Senate’s brightest lights — Sen. Tom Coburn (R., Okla.), who also happens to be one of only two physicians in the chamber. We discussed where the Democrats’ behemoth government health-care takeover bill is heading, as well as his plan to read the 2,000-plus page bill in its entirety on the Senate floor.
Is Government-Run Health Care Going to Pass? [Larry Kudlow]
Is big government, command-and-control of health care and the economy going to pass the Senate, and then the entire Congress, to become law? Last night I spoke with terribly smart Republican Sen. Judd Gregg of New Hampshire. Gregg’s a budget expert and member of the Senate Health Committee. He isn’t too optimistic right now. He thinks the House version will basically become law. Very scary stuff.
The Congressional Assault on Fed Independence [Larry Kudlow]
Investors and political analysts should keep a sharp eye on the congressional assault on Federal Reserve independence. This is a transparent effort by members of Congress to use the financial-reregulation bills as a means of applying political leverage to stop the Fed from any 2010 midterm-election-year exit strategies that might raise the federal funds target rate, stop the purchases of mortgage-backed bonds, and drain cash from the economy.
The Chris Dodd bill unveiled this week spells it all out. The White House would appoint the chairmen of the regional Federal Reserve banks (New York, Dallas, Richmond, etc.), subject to confirmation by the Senate. In addition, the Federal Reserve Board in Washington would appoint all the directors of these regional Fed banks. Right now, the local member banks appoint two-thirds of the directors, with the remaining one-third appointed by the Fed board in Washington.
These would be the biggest changes to the unique public-private composition of the Federal Reserve System since 1913, when the Fed was created under Woodrow Wilson.
Remember, the local Fed boards now appoint the reserve-bank presidents, who then vote on policy at Federal Open Market Committee (FOMC) meetings. So this is a transparent effort to influence Fed policy through the FOMC voting members by changing the people who vote on these members. Think of Barney Frank. The House Financial Committee chairman has often remarked that the hawks on the FOMC always seem to be the reserve-bank presidents. He wants doves.
Now, I’m not going to defend the Fed’s actual policy. As I have written many times, the Fed should be targeting financial and commodity-price indicators, which today are all signaling that the Fed is too loose and that it is creating far too many new dollars. Gold keeps hitting new record highs in nominal terms. The greenback has become the U.S. peso. Instead, the Fed has been targeting the unemployment rate and GDP. In terms of preventing any new bubbles, this really is the biggest problem.
However, I will defend Fed independence. If the Congress, backed by the White House, runs monetary policy, the inflationary tilt will be even greater.
In an interview with CNBC’s Maria Bartiromo yesterday, Richmond Fed president Jeffrey Lacker refused to offer any clear sign as to when the central bank might finally end its zero-bound policy and begin raising rates. When asked whether he was worried about future inflation, Lacker said he thinks “we’re in a good place with inflation right now.” And when asked whether the U.S. would move to lift rates in 2010, he said, “It could take longer than that.”
Look, I would have asked Lacker if the Fed will tighten policy in my lifetime. He wouldn’t even commit to 2010.
Meanwhile, Lacker never once mentioned the dollar, which continues its decline virtually on a daily basis. Nor did he mention record gold prices. Nor did he mention rising commodity prices, including oil. Even the Treasury bond-market TIPS inflation spread has moved from zero to 220 basis points this year.
Lacker instead seems to be focused exclusively on GDP. But GDP is a lagging indicator. Lacker and Fed policymakers should be focusing on forward-looking leading indicators, like inflation-sensitive market prices.
Unfortunately, all of this sounds eerily familiar to the Fed’s big mistake seven years ago — the one that unleashed an inflationary bubble that eventually destroyed the economy.
Here’s something worth considering: What happens if the economy recovers faster and sooner than the Fed thinks? What happens if the unemployment rate comes down faster and sooner than the Fed thinks? If the Fed suddenly turns the spigot off because the economy is more V-shaped — raising rates and withdrawing cash — the stock market may very well get walloped.
Or what if the dollar- and gold-market vigilantes force the Fed to take action? Bernanke & Co. cannot ignore the currency- and gold-market rebellion forever.
What’s the bottom line here? If you use the wrong model of inflation as your guide, you’re going to get the wrong results.
A Red-Ink Train Wreck: The Real Fiscal Cost of Government-Run Healthcare [Larry Kudlow]
My friend Dan Mitchell explains in this CF&P Foundation video why Washington’s health-care proposals will result in bloated government and higher deficits. It exposes the pervasive inaccuracy of congressional forecasts and lists 12 reasons why Obamacare will be a budget buster.
A Short-Sighted Cheer for Easy Money [Larry Kudlow]
Wall Street loves easy money. That’s what I conclude from today’s 200-point stock market rally, which started early and gathered force, pushing the Dow back over 10,000 at the close of trading.
Oddly enough, stocks roared at yesterday’s opening by nearly 150 points, a response to the GOP sweep in New Jersey and Virginia. The government’s health-insurance takeover plan looks dead after the elections. Nancy Pelosi is walking off a cliff with her Saturday vote in the House. I don’t think she’s got the numbers. Post-election, Blue Dog Democrats are going to have a hard time voting for big tax hikes, big spending, big government, and a $500 billion Medicare cut. Independents, seniors, and affluent suburbanites all moved to the GOP column on Tuesday, a negative referendum on the Democrats’ big-government scheme.
For whatever reason, stocks sold off yesterday afternoon — right after the Fed signaled easy money for as far as the eye can see. To quote the Fed: “exceptionally low levels of the federal funds rate for an extended period.” Today, however, it looks like stocks took another read of the zero interest rate and the exploding Fed balance sheet and decided that there will be at least another six months of pump-priming and dollar-creation from the central bank.
Of course, gold keeps rising. It’s now $1,090. But the Fed doesn’t care about gold — or the declining dollar, or rising commodity prices, or even the higher inflation expectations that are being built into the Treasury bond market.
Fed head Ben Bernanke is targeting the unemployment rate and something called “substantial resource slack.” He is ignoring the financial and commodity-price indicators which are all signaling that the target rate is too low and the rate of money-creation is too high.
Back in mid-2008, after the dollar plunged and oil prices exploded, the CPI inflation rate peaked at nearly 6 percent — this, despite the fact that the U.S. economy was already in recession and slack resources were by then suffering from recessionary underutilization. Oil prices already have jumped to $80 a barrel in response to today’s cheap dollar, and retail gas prices at the pump have moved up nationwide from $1.80 to close to $2.70. That’s a tax hike on consumers and the rest of the economy. It’s one of the many consequences of dollar neglect.
So while the stock market is cheering easy money, the cheering is very short-sighted. I wouldn’t buck the tape, but I regard the Fed’s policy as a storm cloud over stocks and the future economy. The financial-market emergency and deep recession are over, but you wouldn’t know it from the Fed’s behavior. Even a 2 percent fed funds rate would be accommodative today, as Andrew Bary of Barron’s has written. But the Fed will have to hit the breaks a lot harder in the future if it continues its bubble headed policy at present.
One more thought. The highly volatile go-stop-go-stop Fed policy of the last ten years is exactly what has wreaked so much havoc. The Volcker-Greenspan Fed of the early 1980s to the late 1990s was much more stable and pro-growth. But over the last decade the Fed’s pillar-to-post policies and Phillips Curve obsession with unemployment rather than inflation has caused nothing but trouble.
This is one of many reasons why I think the Republican party should return to its Reagan roots as the hard-money party. Hard money will protect consumers and businesses, and would complement a low-tax-rate fiscal approach. A steady King Dollar is a strong incentive for investment, production, and employment, and of course price stability.
But in the meantime, investors are riding the easy money wave to higher share prices.
Stocks loved last night’s election returns. President Obama and Nancy Pelosi got their ears pinned back over big spending, taxes, the health-care takeover, cap-and-trade, and well, the fact that government is getting too darned big under this crowd in Washington.
The health-care insurance companies roared right up from the open. Investors are making a bet that the government-insurance option is in even bigger trouble after last night’s Republican victories. A Wall Street Journal news story also suggests that the big health-care bill won’t get done this year, and that it will be pushed into next year’s midterm calendar. Blue Dogs everywhere (and especially in Virginia) can read the election returns as accurately as any pundit. And they are not going to vote to jack up taxes, slash Medicare, and launch even more government spending and deficits.
While it’s true that the GOP didn’t take all three races last night, NY-23 was darn close for an outsider like Doug Hoffman. Jon Corzine lost in New Jersey despite multiple Obama trips to the state, and Virginia’s Bob McDonnell is emerging as a new Republican star.
But these big state races were about economic and fiscal discontent among the voters. That’s a theme that will last a long time — especially if Team Obama and Nancy Pelosi are stubborn in pressing forward with their government-control agenda. The investor class doesn’t like government interference, and neither does the stock market.
So the GOP now has an opportunity to rebuild and rebirth Reagan-like libertarianism with a strong free-market message that Washington should just leave us alone. Social issues didn’t play a role in New Jersey and Virginia. It was all about the threat of socialism lite. The social issues will emerge next year in certain districts, and as a pro-lifer I’m glad of it. But the overarching theme to rebuild the Republican party right now has to be about free-market economics and hopefully a supply-side message of lower tax rates to spur jobs and strong economic growth.
And it would be a shame if the GOP doesn’t take up the issue of the declining dollar. This is becoming an economic symbol of America’s decline. Rabid big-government spending and borrowing is a principal cause of the greenback’s fall. And the policy statement from today’s Federal Reserve meeting shows that the doves won again, while the hawks lost big-time. This speaks to continued dollar decline and new record highs in the nominal gold price.
A few weeks ago, Barron’s columnist Andrew Bary had it exactly right: The financial-meltdown emergency is over. Yet the Fed persists in running an emergency money-creating policy with a zero target rate that is completely inappropriate as the economy moves into a mild recovery. The Fed seems to think that too many people working is inflationary, and that with today’s high unemployment it’s okay to keep priming the money pump. This is nuts.
Inflation is caused by bad money as the result of excess money-creation — that is, the creation of dollars that the global markets do not want, just as we’re creating government bonds that the same markets don’t want. Financial, currency, and commodity-price signals are telling the Fed that they are way off course. But Bernanke won’t listen.
The weakening fate of the dollar is a good political issue, and Republican’s should not overlook it. It links back to big-government overspending. Reagan knew this. Today’s GOP should relearn it.
The Economics of a Three-Race GOP Sweep [Larry Kudlow]
Against the backdrop of high unemployment and a public revolt against a Democratic health-care bill — which would significantly increase taxes, slash Medicare spending, and massively raise health-care spending elsewhere in a government takeover of our leading growth sector — a three-race sweep by Republicans is very much in play this Election Day.
The Intrade pay-to-play betting/investment parlor shows big wins for Bob McDonnell in Virginia and Doug Hoffman in upstate New York’s 23rd congressional district. The New Jersey race for governor is too close to call, with the probabilities swinging wildly. Late last night, Chris Christie’s victory probability was 56-46 over Jon Corzine, a 16-point gain for the Republican. This morning, Christie showed a 55 percent chance of victory, with Corzine at 47.
It’s interesting that early signs of economic recovery are not helping the Obama Democrats. This is largely because of the 9.8 percent unemployment rate, which is expected to move higher. Even the crazy jobs-saved-or-created campaign is having no discernable impact while the Obamacons try to fight the unemployment rate.
If you go to recovery.gov, the official stimulus website, you’ll find that there has been $207 billion in stimulus spending through October 30, 2009 — including $84 billion in tax benefits, $52 billion in contract grants and loans, and $71 billion in entitlements. So even if we give my friend Jared Bernstein his highly flawed “one million jobs saved or created,” that’s $207,000 per job in an economy where the average wage is about $46,000. Not good. Wasteful and ineffectual spending. (In reality, tax credits are spending. For incentivizing, you need marginal tax-rate cuts.)
Mike Flynn of Breitbart’s biggovernment.com notes that the government pumped $170 billion into the third-quarter economy. But GDP grew by only $150 billion. As I said, ineffectual spending.
That doesn’t mean the economy isn’t rebounding. It is. Glitches and all, third-quarter GDP popped up 3.5 percent at an annual rate after inflation. Statistically, the recession is over. That’s good. And it corroborates the big stock market rally over the past seven months. This is going to be a business-led recovery as self-correcting firms build profits on top of huge cash flows.
Yesterday’s ISM manufacturing report for October also confirms the growth trend with a recovery reading of 55.7, the strongest since April 2006. And this morning’s factory orders for September also show a stronger-than-expected gain. Even car sales are expected to rise in October by more than ten million, at least one million better than September. Ford, which refused to take TARP bailout money, reported a surprise increase in profits.
But the depreciating dollar remains a storm cloud over recovery. So are scheduled tax-rate increases and health-care legislation that will slam individuals and firms with higher tax burdens and higher tax costs for job creation.
And then there’s the Federal Reserve. With gold up another $25 — setting a new nominal record of $1,079 — the Fed will release a policy statement tomorrow, one that is likely to continue a program of massive money-pumping and a zero interest rate.
This whole Obama policy mix of huge government spending and a depreciating greenback is all wrong. It’s pro-inflation, not pro-growth. For a true economic recovery, we need a stable King Dollar and lower marginal tax rates to incentivize job creation.
Jimmy Pethokoukis and others have noted that the first recovery quarter under Reagan was better than 8 percent, not 3.5 percent. In fact, the average real GDP growth rate for the first quarter of the ten post-war recoveries is 7.3 percent.
So the economic-recovery story, and even the stock market rally, won’t bail out the Obamacons today, although it remains to be seen whether a free-market, anti-tax-and-spend message will emerge from a three-election sweep by the GOP. If so, it could doom the so-called health-care reform that has become a symbol of the leftward-tilting, big-government, economic-control policies emanating from Washington.
GDP Up, Dollar Down, Troubles Remain [Larry Kudlow]
Today’s report of 3.5 percent GDP growth for the third quarter ending in September signals the end of the long recession. Although there are glitches in the GDP story — including the one-time impact of Cash for Clunkers and the erratic bouncing around of disposable income from quarter to quarter (largely a result of government handouts), the fact remains that the economy is improving and that the big stock market rally is confirmed.
Wall Street economists like Joe LaVorgna and Michael Darda expect 4 percent growth in the quarters ahead. My own view is that this will be a business-led recovery, not only in terms of capital-spending investment, but also business-to-business transactions. Corporate cash flows are very strong and profits are improving. Economy-wide productivity is very high. And let’s not forget the Fed’s highly expansionary policies, with a zero target rate, a steep Treasury curve, and a growing balance sheet.
All of which raises an important policy point. As the economy recovers, where’s the exit strategy for all this stimulus? To protect the dollar, the Fed should be raising its target rate, or at the very least hint at raising it by changing the wording of next week’s policy statement.
Gold roared up today as the greenback fell again. Stocks are mounting a huge 200-point rally as of this writing. World markets are anticipating an inflationary recovery in the United States. And never-ending federal debt creation from more and more government spending adds to the greenback’s woes.
Restoration of King Dollar would be a tax cut for the whole economy. Think of it in oil terms: Crude oil jumped $2.40 today to $80 a barrel. If the dollar keeps sliding, oil is going to keep rising. And that’s a tax hike for the economy. It would block recovery. But if King Dollar were restored to its thrown, oil and other commodities would stay put, amounting to a de facto tax cut — a spur to growth.
President Obama had a tepid response to today’s GDP report, as the administration contemplates more spending for a second stimulus package. That’s exactly what currency markets do not want to see.
Meanwhile, Treasury man Geithner talks about ending the too-big-to-fail policy for banks. But his idea sounds suspiciously like TARP in perpetuity — where the government would take over failed banks, mostly at taxpayer expense, with some of it paid for by other bank insurance assessments. But TARP in perpetuity, stimulus in perpetuity, and easy-money in perpetuity is a fiscal/monetary overload that will reduce our potential to grow.
It is a great thing that the financial meltdown is over and the Great Recession has come to an end. But profligate policies will surely undermine the private free-enterprise economy’s valiant efforts to recover.
Supply-Side Health-Care Solutions with Sen. Mitch McConnell [Larry Kudlow]
Last night I had the pleasure of speaking with distinguished Senate Minority Leader Mitch McConnell on whether this high-tax, high-premium, deficit-ridden government takeover of the U.S. economy can be stopped.
An Interview with Jon Kyl on the Back-from-the-Dead Public Option [Larry Kudlow]
Here’s my interview from last night with Arizona senator and Republican Whip Jon Kyl. Kyl, one of the soundest thinkers in the Senate, takes apart Harry Reid’s new-fangled government-insurance option.
David Goldman: The Dollar Is Toast and It Won’t Help the Stock Market [Larry Kudlow]
Market commenter David Goldman was on the show last night, explaining the bubble that’s formed in toxic, low-rated tranches of commercial real estate, as well as the rapid march by Asian nations to get out from under the dollar trap. Joining him were CNBC’s Rick Santelli and Politico’s Eamon Javers.
Here’s a question: If unemployment is the problem, then why aren’t supply-side tax cuts, along with tougher government budgetary restraints, a possible solution?
Top Obama economic advisor Christy Romer delivered a very gloomy forecast to Congress late last week. She said that unemployment will remain at a “severely elevated level” and that the U.S. jobs market will stay painfully weak next year. She was just being honest. Romer even said the Obama stimulus plan will not contribute much to economic growth next year.
So the administration is searching for a jobs-recovery plan, just like the rest of the country. Meanwhile, big-government spending and temporary tax credits have not worked, by the administration’s own admission. That’s basically what Ms. Romer was saying.
So why not try something different? Why not go for lower tax rates across-the-board on individuals, businesses, and investors? Why not go for permanent tax cuts that will create new growth incentives? To paraphrase economist Art Laffer, if it pays more, after tax, to work, produce, and invest, folks will work, produce, and invest more. It’s worked in the past. And I believe it will work again.
Incidentally, this idea of cutting spending and cutting tax rates is attracting a lot of attention in many of the key state races right now — like the governor’s race in New Jersey, where unemployment is also hovering around 10 percent. The idea is also looming large in Virginia, as well as in some of the early skirmishing in California.
If it’s happening in the states, when will Washington finally get the message?
Is the government’s insurance plan back from the dead?
Here’s my interview with Kay Bailey Hutchison, Texas Republican senator and gubernatorial candidate, on the government’s attempt to takeover the U.S. health-care system.
Kemp’s Keys to Growth and Exceptionalism [Larry Kudlow]
I believe that free-market capitalism — on the supply-side and along with King Dollar — is the best path to prosperity. That’s the model my late dear friend Jack Kemp successfully espoused to President Reagan more than 30 years ago. It’s the incentive model of economic growth. It conquered the inflation of the Carter years, and launched a 20-year prosperity that saw the creation of 45 million new jobs and a twelve-fold stock market increase. It’s the model that expanded the investor class to 100 million strong through the Clinton 1990s.
I spoke this week at the launch of the Jack Kemp Foundation in Washington, and I emphasized this model along with the universal, timeless economic principles on which it is based. Today this model seems all but forgotten in the nation’s capital, but I firmly believe it is just what we need to reignite American economic growth and exceptionalism.
Here are the model’s critical components:
First, a sound dollar — King Dollar.
Second, low and flat tax rates to incentivize positive economic behavior by making it pay more, after-tax, to work, invest, and take risks.
Third, free trade.
Fourth, limited government.
Fifth, market-driven solutions to ameliorate poverty and provide everyone with new opportunities to climb the ladder of success.
Jack Kemp believed in growing the economic pie, not redistributing it. And he believed in growing it large. He would have hated today’s notion of a “new normal” — of 2 percent growth and high unemployment.
He also disagreed with raising top marginal tax rates, and he certainly would have opposed the extravagant spending-and-borrowing schemes that we’re saddled with today. We’ve clearly gone off the supply-side path — off the winning path that Jack helped build.
Growth, empowerment, opportunity, and incentives — those were Jack’s key words. Now, more than ever, these principles must be revived. They are essential to America’s greatness. To her boundless optimism. To her prosperity and success.
Last night I had the pleasure of speaking with Larry Lindsey, the former director of the White House Economic Council, about the state of the supply-side revolution, as well as the steady decline of King Dollar.
An Interview with Gov. Tim Pawlenty [Larry Kudlow]
Is the dollar’s demise a sign of global declinism for America? Will this decline blow up the bull-market economic recovery?
Joining me to discuss this last night was distinguished Minnesota Republican Gov. Tim Pawlenty. Mr. Pawlenty also happens to be a leading GOP presidential contender for 2012.
