Is there a rift between the White House and the Treasury on U.S. dollar policy?
Larry Kudlow says there's only one possible solution to clean up the IRS mess — a special council.» Read More
Is there a rift between the White House and the Treasury on U.S. dollar policy?
Here’s a table showingexactly what the Fed did Tuesday,and how much they have already done.
Tuesday was the central bank's $200 billion dollar announcement. This is the Term Security Lending Facility (TSLF). Prior to this move, we had the $100 billion dollar, so-called Term Auction Facility (TAF). There's also the $100 billion dollar term RPs (roughly one-month, but it can be rolled over.) And finally, the Fed announced $36 billion in currency swaps with foreign central banks. (They may save the U.S. dollar, before we save it ourselves).
The grand total is $436 billion dollars. That’s a nice chunk of change.
Here’s the key in all this: So far as I can determine, none of this liquidity is expanding the Fed’s balance sheet. They’re actually doing this quite cleverly. They are not expanding reserve back credit. They’re not expanding the monetary base. They’ve “sterilized” part of this, and the rest of this is just a bunch of swap agreements.
Democratic Strategist Bob Shrum had strong words on last night’s show about the Hillary Clinton camp’s relentless attacks on Obama. The latest attack of course, came from Hillary-supporter Geraldine Ferraro -- Walter Mondale’s 1984 vice-presidential running mate.
Shrum thinks Democrats are courting disaster. I agree. Democrats are hopelessly divided. My take? John McCain winds up walking away with 20 percent of the Democratic vote come Election Day. (Come to think of it, 20 percent might actually be a bit too conservative.)
Here's what Mr. Shrum had to say:
“I used to work for Geraldine Ferraro. I like her a lot. But I think the comments were way off base.
"I think alternatively you could say, if Barack Obama had been born white, to a very wealthy family in this country, and had gone to Columbia and Harvard Law School, he’d be exactly where he is today. I just think all of this is a disaster for the Democratic Party.
"Race has been injected way too much in this campaign. Going all the way back to [Hillary Clinton's New Hampshire Co-Chair] Billy Shaheen in New Hampshire. Going [back to Hillary Clinton’s chief strategist] Mark Penn talking about cocaine on television.
"All of this is a disaster. It’s a disaster in terms of the loyalty of African-American voters, if Hillary Clinton wins the nomination. It’s a disaster if she loses the nomination, because she’s doing great damage to Barack Obama in the process.”
Yesterday marked the Federal Reserve’s largest liquidity injection yet to banks and brokers. The Fed announcement produced Wall Street’s best day in five years . The Dow rocketed over 400 points. Stocks rallied around the world. The key question now becomes whether or not the news is a real game-changer or a one-day wonder. Here is some interesting stock market and economic insight on all this from last night’s Kudlow & Company.
Andy Busch, global FX strategist at BMO Capital Markets:
The Fed action [Tuesday was] a very good thing. They needed to relieve part of this credit crunch in the repo market. You and I have talked about this before, it’s a very good thing. And I’m happy that the Fed did it. Obviously, the stock market is extremely happy. [But it doesn’t yet change fundamentals.]
The key structure that’s underlying these markets is home prices. That’s the key thing that hasn’t changed yet. We haven’t seen home prices stop falling. But they’re getting close. I feel that in the next 2 or 3 months, we’ll see that occur. [If we see that occur, it is bullish for stocks], absolutely. That is the key thing. For all these ABS, mortgage-backed securities, the underlying security underneath these things is home prices. And if that stabilizes, then that gives us some sure footing where we can evaluate these securities and feel confident that we know what their prices are—and therefore all the companies that own this stuff…It does alleviate a major problem.
Don Luskin, chief investment officer at Trend Macro:
Well, [the Fed] finally did the right thing. I only wish they’d done it in August…[But] they finally figured out how to do it. They finally figured out how to convert the excess supply of mortgage-backed securities that nobody wants, into T-bills that everybody wants. It’s a beautiful, risk-bearing arbitrage. The Fed has created a bridge across the chasm of risk to bring cash to people who need it. To bring T-bills to people who need it. It’s just an amazingly brilliant thing.
The only problem is, this perfect treatment is being applied to a patient that’s already about three-quarters dead. So timing is everything, but at least they finally did it.
Stefan Abrams, managing partner at Bryden-Abrams Investment Management:
I don’t believe this is time to unzip your wallet. What the Fed has done today is a terrific step…better late than never. But until we see credit default swap prices down, spreads in the corporate market, spreads in the mortgage market, spreads in the junk bond market, until we begin to see a resumption of more normal -- and I won’t say totally normal -- but more normal lending practices, the stock market is still hostage to the credit markets…I think [investors should] take a long lunch hour. There’s no need to rush here.
Recession or not, the economy is definitely in a significant slowdown. This poses a daunting challenge for the Republican Party. Not only could it make Senator McCain’s election tougher, but it’s going to affect House and Senate races as well.
The litany of economic woes continue to mount: falling jobs, decimated housing, the subprime credit virus, record gasoline prices (almost $3.20), $107 oil, a slumping dollar, and the march toward $1000 gold. Now I don’t to want create a pessimism bubble here, but standard-bearer McCain must come up with a strong, pro-growth message that has a significant reform element.
Take a look at the accompanying charts from the bond market. Inflation fears are rising, while real interest rates have fallen below zero. Prices are going up, and the economy’s going down.
This is one reason why my idea of a McCain dollar could be very important. A stronger greenback would reduce inflation. Cutting corporate taxes, as well as reforming the entire tax code, might also help. Spending restraint and earmark reform could work as well.
But the real eye-opener -- a topic no one has tackled on the campaign trail, at the White House, or in Congress -- would be the McCain dollar. Just as in President Reagan’s first term, and Bill Clinton’s second term, a strong U.S. dollar would bring down the cost of food and energy. It would also bolster real worker wages and family income purchasing power.
Right now, a simple gold/inflation forecasting model is predicting 5.7 percent CPI this year and 7.4 percent next year. This, after 4 percent in 2007. Yikes! The GOP has its work cut out for it.
What follows is a transcript of my recent interview with former Texas Senator Phil Gramm. Mr. Gramm boasts a long, distinguished, pro-growth track record. Currently a UBS investment banker, Gramm has long been a steadfast supporter of free markets, a staunch free trader, tax cutter, budget cutter, and entitlement reformer. He also happens to be GOP presidential nominee John McCain’s chief economic advisor. As a recent piece in Fortune magazine put it, [Gramm] “is the ultimate pure play in free market faith.” I remain quite confident that Mr. Gramm would help steer a McCain presidency in the right direction.
Kudlow: Senator Gramm, it is wonderful to see you. Senator McCain said a while back, “I don’t know as much about the economy as I should.” What’s he trying to tell us on that?
Gramm: Well, first of all, he’s trying to tell us that A, he’s honest, and B, he’s humble. How many people know as much about the economy as they should? Certainly I don’t. I think you can make a strong case that of the three people that are still in the race, that John McCain’s got a lot more experience on economic matters. But one thing I think that makes him a leader that I feel confident in, is that he’s the kind of person that reaches out to people, that listens to both sides of the debate, that gathers the facts, and that tries to make the best decision he can. And I think he’ll do that on economic matters.
Kudlow: Well, let me ask you this. A President McCain could inherit a tough situation. I mean, most economists believe we’re on the edge of recession, if not in one. And I’m particularly worried about the falling dollar and the rising inflation rate. Some people are mocking us Senator Gramm. The dollar keeps falling. Our enemies say it shows America’s decline. In your judgment, would Senator McCain be a currency reformer? Would he resurrect the dollar?
Gramm: Well, I think he would resurrect the dollar, but not through currency reform. I think his position would be that sound economic policies produce a sound dollar. I think he would cut taxes. I think he would institute a program of long-term fiscal restraint at the federal level. I think he would reduce the regulatory burden. And I think in the process, we would attract capital. The dollar would get stronger. The economy would recover.
And I think it’s important in looking at our economy today -- the states that have the lowest taxes, the least regulatory burden, the most pro-growth governments, are the ones that are succeeding. [But look at] the ones that are failing, Michigan for example. A lot of automobile jobs are being created in America, including the new jobs in Arlington, Texas, for the new electric car. Now, all of Toyota’s Tundra trucks are produced in San Antonio. But they’re not investing in Michigan because of high taxes and high regulations. So what we need to do is implement Texas policies in America.
Kudlow: Alright, I hear you on that. But some people are asking the following question. In the McCain economic camp, how do you all get along with each other? You got yourself -- nobody is more free market, rock-solid than you are. You got supply-siders like Steve Forbes and Jack Kemp. On the other hand, as Senator McCain travels around, he mentions some of his root-canal advisors. He’s got Pete Peterson, and he’s got Warren Rudman, who tend to be high taxers. He’s got the Concord Coalition, who’s never met a tax they didn’t want to raise, allegedly to balance the budget. It sounds like there’s a war between the growth guys, and the austerity guys, in the McCain camp. How do you resolve that?
Gramm: No, I don’t think there’s a war. But look, when we have a president who is making decisions that are going to affect the lives of real people, I want him to listen to every side of the argument. I know where he stands. I know what he believes. I know what his instincts are.
But look, I don’t think you want a president who, A), surrounds himself with “yes” people, and I don’t think you want a president who’s listening to only one side of the argument. I think there are times when supply-side economics does, and should, carry the day. But I think there are demand-side factors. I think we want a president, in these tough times, who’s going to get the best advice he can [get], who’s going to bring together the best people he can get, and then make a decision. So, look, I view it as a plus that he’s got differences of opinion.
Kudlow: …It’s very interesting to me. In both diplomatic terms, and economic terms, Hill-Bama, as I call them, have not been at all bashful in stopping out, or proposing to stop out, a very important treaty, namely NAFTA. And they don’t seem to care about the trade benefits to the United States. Where does Senator McCain come out on this crucial issue?
Gramm: Well, Senator McCain was for NAFTA. He would like to see NAFTA expanded in terms of opening up more markets for more American jobs. But let me just give you my response to this NAFTA thing. First of all, when you listen to the two Democrat candidates, what they’re really saying is we can’t compete with Canada! Well, if we can’t compete with Canada, who can we compete with? And are they proposing that we build a wall around America? Go hide under a rock somewhere? You can’t lead America and hide from the world.
Secondly, we have a treaty obligation with Canada and Mexico. And to suggest with our closet ally and friend in the world, with our neighbor, that we’re just going to unilaterally change the treaty because we’re pandering for union votes in Ohio, I think is outrageous. I think it’s dangerous. I think it’s irresponsible. NAFTA has created jobs. And it’s created the most jobs in the states that have had the best policies.
Kudlow: You know Senator Gramm…years ago, you were probably the leader in the U.S. Senate, and perhaps the Republican Congress—no, it was a Democratic Congress in 1993, 1994—in stopping [then First Lady Hillary] Clinton’s big government solutions for health care. So let me ask you this. What do you and Senator McCain hear? You hear Obama. You hear Clinton. You’re an expert on healthcare. Mr. McCain believes in consumer power for healthcare. How does this crucial issue to Americans play out in your judgment, in your mind?
Gramm: I think healthcare is going to be a big issue. And I think it’s going to be a very simple choice. The Democrats want the government to control your healthcare. Senator McCain wants your family to control your healthcare. Not the government. Not the insurance company.
The problem with healthcare is not quality. The problem is cost. And Senator McCain wants to address that problem with more competition, and more efficiency, and things like legal reform. The Democrats want the government to take over and run the healthcare system. And in every [government-run healthcare] country in the world, that [approach] has limited freedom, it’s lowered quality, and it’s tended to bankrupt the country in question.
Kudlow: Alright, we’re gonna leave it there. Senator Phil Gramm, we appreciate it very, very much.
Gramm: Thank you Larry. Take care of yourself
A Victorious McCain, the Ongoing Hill-Bama Saga, and Welch's Wisdom
So, Hillary’s got a second life after her sweep last night of Texas and Ohio. The game goes on.
The next big state showdown is in Pennsylvania on April 22nd. Indiana and North Carolina follow in early May. Hillary’s claim to having won the big states is a strong one, especially if she can take the next three.
But the real winner yesterday was John McCain. No doubt about it. Mac completed his primary victory journey in one of the greatest comebacks in American political history.
On Kudlow & Company last night, Phil Gramm, McCain’s chief economic advisor, talked about McCain's commitment to pro-growth tax reform, spending restraint, and free trade. (As bad as Hill-Bama are on trade, Mac is excellent.) The pro-growth former Texas Senator also discussed a healthcare program that is consumer-powered, not government-controlled.
However, I continue to believe that Sen. McCain should be talking up the dollar. We need a McCain dollar appreciating reform plan. We need dollar diplomacy, with the U.S. Treasury and the G7 finance ministers. We need a Reagan dollar to boost American prestige and strength throughout the world.
There is no question that a McCain presidency will be vastly better for stocks and the economy than Hill-Bama. For a considered viewpoint regarding Hill-Bama economic policies, what follows is my conversation with legendary GE Chairman & CEO Jack Welch on last night’s program. Mr. Welch pulled no punches.
* * * * * * *
Kudlow: Jack Welch, welcome back to the show, sir. We love seeing you as always. Did Senator Obama listen [to the advice you gave him on CNBC back in January] from what you now know?
Welch: He’s the smoothest guy in town, I’ll tell you. He put me under the table, and didn’t listen to a word I said.
Kudlow: That’s right. Didn’t listen to a word you said. And that’s where I want to pick up on this. Now let me ask you, first up, Warren Buffett was on the network yesterday or the day before. He thinks we’re in recession. Do you?
Welch: Well he said we’re in a practical recession. We’re certainly in a slowdown. But if I had to bet a dollar or two, I’d bet we’ll have a positive GDP in the first quarter, and the second quarter. But it’s certainly is a slowdown of enormous proportions from what we were experiencing.
Kudlow: Alright, I like your optimism very much, as always. So let me ask you, you’ve seen a lot more of Hill-Bama, as I’ve taken to calling them. Senator Clinton, Senator Obama on the campaign trail, particularly in Ohio, bashing trade, bashing businesses, bashing wealthy people, talking about income inequality. As you look at this, you’ve seen a lot of elections, you’ve been through a lot of election cycles. What’s your read here? What should people be thinking about?
Editorial in today's New York Sun :
The best advice for Senator McCain that we've read is the call in the adjacent columns, by Larry Kudlow, for the senator to lead a campaign in respect of the dollar.
Mr. Kudlow, a supply-sider of the Reagan school, reckons Mr. McCain should campaign to reverse the declining fortunes of what he calls "the Bush wartime dollar" because, as Mr. Kudlow puts it, "America's prestige is on the line."
He notes that today's dollar is worth barely a thousandth of an ounce of gold. He warns that the falling dollar "is perceived as a sign of American decline," and he comprehends that it's "a very bad sign."
...Not that the dollar itself needs to be, or should be, a political issue. It is the most ubiquitous symbol of American power and integrity, one that transcends the political parties and goes, as Mr. Kudlow so wisely points out, to our reputation as a nation.
It has always struck us as no coincidence that the period of growth and American advance that occurred in the years of Reagan was also a period when the dollar was slowly but steadily gaining value, under, as it happens, the management of Paul Volcker, on whose watch it was brought up off the lows of less than an 800th of an ounce to which it had plunged during the long inflation of the 1970s.
This is the period during which we won the Cold War and reached the height of our global credibility. It will be hard indeed for the Democrats to seize this plank given the other planks of spending and trade protection and taxes they are putting in place. Mr. McCain, however, is, as Mr. Kudlow suggests, perfectly placed to use this plank as a springboard between now and November.
We’re gearing up for a top-notch primary special on Kudlow & Company this evening. Tune in to CNBC at 7 pm ET for live up-to-the-minute primary results and much more.
We’ll have first-rate analysis from assorted Washington to Wall Street pros including former GE chairman & CEO Jack Welch; Democratic strategist Bob Shrum; former House Majority Leader Dick Armey; former Texas Senator & top McCain advisor Phil Gramm, and the rest of the Kudlow gang.
It’s your money, your vote.
Kudlow & Company. 7 pm ET. CNBC.
If Sen. John McCain wants to run as a candidate of change, and if he’s truly interested in distancing himself from President Bush, he should reverse the declining fortunes of the Bush wartime dollar. America's prestige is on the line.
Right now the greenback is in virtual freefall. It’s a disorderly drop. As a result, U.S. inflation rates are rising across the board as the global commodity boom leaks into higher domestic inflation.
Inflation is the cruelest tax of all. It robs consumer and wage-earner purchasing power. It erodes business profits. It reduces the real worth of investor portfolios.
It’s also the single biggest cause of recession, and it may well be tipping the economy into negative territory.
For the first time in a decade I’ve become genuinely worried about inflation. Over the last year and a half, inflation has climbed from 1.5 percent to nearly 4.5 percent, and in the past three to four months it has trended sharply higher.
But there’s another side of the dollar story that’s equally important. The falling U.S. greenback has become a symbol of American decline.
Folks are making fun of the dollar. Our enemies around the world are pointing to the unreliable dollar as evidence of American weakness. It’s as though the administration’s neglect of the dollar is “peso-izing” or “Latin-Americanizing” the greenback.
Something must be done to reverse this trend, and McCain is in a good spot to do it. Remember, McCain was a foot soldier in the Reagan revolution. Borrowing a page from the Gipper — who always said a great nation has a strong currency — he should argue on the campaign trail for a dollar surge.
For patriotic reasons alone it is time to reverse the decline of the dollar. A strong dollar should be emblematic of a strong America and a strong defense. Sen. McCain should insist that a President McCain will order the Treasury Department to back up its stale “strong dollar is in the nation’s interest” rhetoric with real open-market actions to boost the greenback. He should say that his Treasury will take actions to strengthen the greenback by conducting dollar diplomacy with Europe, Britain, Canada, and Japan. He should also state that a President McCain will appoint a Federal Reserve chief who will stop ignoring the dollar, as Fed Head Ben Bernanke did last week before Congress.
Sen. McCain can bolster his agent-of-change credentials by placing the U.S. dollar front-and-center in his campaign. The time has come to end the dollar’s freefall. The time has come to end the period in which the greenback has become the subject of international ridicule. The time has come to show voters on Wall Street and Main Street that $1,000 gold, $100-plus oil, and a rising inflation rate will not stand.
It is time to get behind King Dollar.