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Money & Politics with Larry Kudlow

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  Tuesday, 22 Dec 2009 | 8:43 AM ET

Democratic Health Care Deals 'Sleazy': GOP Senator

Posted By: AP

A Republican senator who has opposed President Barack Obama's health overhaul effort said Tuesday that the deals Democratic leaders have cut to round up the votes they need to push the measure through the Senate have been "sleazy."

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  Monday, 21 Dec 2009 | 10:15 AM ET

Without Bipartisan Support, Bernanke Should Withdraw

Posted By: Larry Kudlow
Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Feb. 14, 2007, before the Senate Banking Committee hearing on monetary policy. (AP Photo/Dennis Cook)
Dennis Cook
Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Feb. 14, 2007, before the Senate Banking Committee hearing on monetary policy. (AP Photo/Dennis Cook)

Helicopter Ben Bernanke passed his reconfirmation vote in the Senate Banking Committee last week.

But he passed by 16 to 7. Most of the Republicans voted against Bernanke, as did one Democrat, Sen. Jeff Merkley of Oregon. The reconfirmation now goes to the floor of the Senate, where it’s going to be held up for a while. (Sen. Jim DeMint and others are insisting that a vote on the Government Accounting Office’s audit of the Fed occur first.) But when the final vote happens, I think Bernanke could be in trouble.

Mirroring the Banking Committee vote, most of the 40 Senate Republicans may vote against Bernanke, and they will be joined by a number of Democrats. If Bernanke were to be opposed by as many as 35 or 40 votes, it would substantially undermine his credibility.

Whether it’s his past inflationary-bubble monetary performance, or the bank bailouts, or the AIG bailout, or the end to secrecy at the Fed, senators on both sides of the aisle are blaming Bernanke, fingering him as the wrong guy at the wrong time. And somewhere in that mix of opposition — led by senators Richard Shelby, Jim DeMint, Jim Bunning, and others — Republicans are gradually moving back to a Ronald Reagan–type, King Dollar, hard-money position that is in strong contrast to Bernanke’s dollar declinism.

Aside from the fact that Bernanke doesn’t look at gold or the dollar as price signals to guide his policy, we have witnessed a complete reversal of the Fed’s intellectual framework. By that I mean, for 20 years or so, first under Paul Volcker and then during Alan Greenspan’s first three terms, the Fed argued that the tax-cut effects of low inflation would spur economic growth and low unemployment. This period lasted roughly from the early 1980s until the end of the century. But since Bernanke came on the scene, the sound-money, stable-dollar argument has disappeared.

For most of this decade, the Fed has been fighting unemployment by pumping in easy money. And it keeps telling us this will not cause inflation. With the CPI hitting nearly 5 percent in 2006 and almost 6 percent in 2008, Bernanke was dead wrong. And the fact remains that more money creation from the Fed produces inflation — not jobs or long-term economic growth. The housing and oil bubble, which led to the Great Recession, corroborates this.

Bernanke sees deflation and depression threats everywhere. That’s one of his biggest problems. He cut his academic teeth on studying the Depression, which seems to have blinded him from the modern use of sophisticated financial-market signals in our new, globalized, high-tech, rapid-information world.

The mostly free-market economy has made its adjustments for better business profitability and consumer-balance-sheet corrections. Because of that — and along with close to $4 trillion in new capital gains from the massive stock market rally as well as the Fed’s ultra-easy free-money policy — economic recovery is picking up steam. GDP growth will surprise on the upside in the quarters ahead.

But Bernanke’s zero-interest-rate policy and continued money creation through the expansion of the Fed’s balance sheet continues to fight an emergency that ended this past spring. Given the end of the emergency and the onset of recovery, a still easy 1 or 2 percent federal funds rate would be more appropriate than zero.

According to Rasmussen, the public doesn’t trust Bernanke anymore. Only 21 percent of Americans favor his reappointment as Fed chair, while over 40 percent want a new face at the helm of the central bank. If that sentiment is echoed in the Senate, and if Bernanke receives 35 or more votes against him in the floor vote, it will not have been a truly bipartisan reconfirmation. And without that, I don’t see how he can effectively govern as Fed chairman.

Paul Volcker suffered 16 nay votes in his reconfirmation in 1983. But Bernanke could get hit by more than twice that number. This has never happened before in history.

I don’t think the Fed chairman understands just how vulnerable his political position is. So his task right now is to re-canvas senators across-the-board -- Republicans and Democrats. He’s going to have to wear down some shoe leather and make his bipartisan peace with the Senate if he expects to survive.

It’s more than Bernanke’s neck that’s at stake. Without bipartisan confidence, he will be totally ineffective as a Fed leader. And that very ineffectiveness will wear down the dollar and come at the expense of the country.

Bernanke and his advisors need to make a sober assessment of all this. If Bernanke cannot garner truly bipartisan support, he should spare the country a lot of agony and withdraw his name from consideration.

On CNBC.com

Questions? Comments, send your emails to: lkudlow@kudlow.com

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  Friday, 18 Dec 2009 | 10:34 AM ET

Deficits Are Bad, But the Real Problem Is Government Spending

Posted By: Larry Kudlow

My old friend Dan Mitchell, senior fellow at the Cato Institute, emailed me his latest video earlier this morning.

It's timely, informative, and definitely worth a look.

On CNBC.com

Questions? Comments, send your emails to: lkudlow@kudlow.com

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  Thursday, 17 Dec 2009 | 5:22 PM ET

Should Helicopter Ben Withdraw His Name?

Posted By: Larry Kudlow
Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Feb. 14, 2007, before the Senate Banking Committee hearing on monetary policy. (AP Photo/Dennis Cook)
Dennis Cook
Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Feb. 14, 2007, before the Senate Banking Committee hearing on monetary policy. (AP Photo/Dennis Cook)

Helicopter Ben Bernanke passed the Senate Banking Committee vote on his reconfirmation.

But he passed by 16 to 7. Most of the Republicans voted against Bernanke, as did one Democrat, Sen. Jeff Merkley of Oregon.

The reconfirmation now goes to the floor of the Senate, where it’s going to be held up for a while as Sen. Jim DeMint and others insist that the GAO Fed audit be voted on before Bernanke’s final vote.

That audit, by the way, would reveal the Fed’s FOMC policy discussions after six months, rather than the current-law five years. This is a good thing. More prompt disclosure. The public has a right to know, especially since Bernanke (as Alan Greenspan’s right-hand man) was instrumental in creating the easy-money housing and energy bubble that sank the economy, and since Bernanke (as Fed chairman) has provided unbelievable, ultra-easy, free-money, zero interest rates for too long.

Even with the recent modest corrections, rising gold and the declining dollar tell the story that Bernanke knows how to ease but not how to tighten. The emergency is long past, but he is still operating an emergency policy of ultra-easy, excess-dollar creation.

Aside from the fact that Bernanke doesn’t look at gold or the dollar as price signals to guide his policy, we have witnessed a complete reversal of the Fed’s intellectual framework. By that I mean, for 20 years or so, first under Paul Volcker and then during Alan Greenspan’s first three terms, the Fed argued that the tax-cut effects of low inflation would spur economic growth and low unemployment. This period lasted roughly from the early 1980s until the end of the century. But since Bernanke came on the scene, the sound-money, stable-dollar argument has disappeared.

For most of this decade, the Fed has been fighting unemployment by pumping in easy money. And it keeps telling us this will not cause inflation. With the CPI hitting nearly 5 percent in 2006 and almost 6 percent in 2008, Bernanke was dead wrong. And the fact remains that more money creation from the Fed produces inflation -- not jobs or long-term economic growth.

Bernanke sees deflation and depression threats everywhere. That’s one of his biggest problems. He cut his academic teeth on studying the Depression, which seems to have blinded him from the modern use of sophisticated financial-market signals in our new, globalized, high-tech, rapid-information world.

So I think Bernanke’s reconfirmation could be in trouble on the Senate floor. I’m going to bet that most of the 40 Republicans will vote against him, and that they will be joined by a number of Democrats. If Bernanke were to be opposed by as many as 35 or 40 votes, it would substantially undermine his credibility.

Bernanke’s term extends to the end of January. I wonder if he realizes just how much opposition he may have. Unless he thinks he can garner a truly bipartisan vote in the weeks ahead, I wonder if he should consider withdrawing his name.

On CNBC.com

Questions? Comments, send your emails to: lkudlow@kudlow.com

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  Thursday, 17 Dec 2009 | 12:48 PM ET

Cash for Caulkers—Obamanomics At Its Worst

Posted By: Larry Kudlow

President Obama thinks insulation is sexy stuff. It saves money. But it also costs at least $23 billion dollars. And that's already on top of “Cash for Clunkers” which cost at least $3 billion dollars, though no one knows for sure.

This is Obamanomics at its worst. Spend money in order to save it? Really?

If weatherization and insulation is a good thing, then American families will make their own choices and do it alone. We the people. You see, it's our money. People seem to forget this. Let us spend it as we see fit.

Free market forces have increased energy efficiency by over 50% in the last couple of decades. This came about without the heavy hand of big government central planners, greenie-regulators and industrial policy targeters.

Here's a thought from Harvard economist Greg Mankiw in Sunday's New York Times: Tax cuts might accomplish what spending hasn't. Mankiw cites numerous studies covering 21 nations in the OECD, over 91 episodes since 1970 involving fiscal stimulus.

And I quote: "The results are striking. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending."

In other words, we the people, on the supply-side.

Never forget: It's our money.

On CNBC.com now:

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  Wednesday, 16 Dec 2009 | 8:53 AM ET

More Data Confirm that Bernanke Is Wrong

Posted By: Larry Kudlow
Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Feb. 14, 2007, before the Senate Banking Committee hearing on monetary policy. (AP Photo/Dennis Cook)
Dennis Cook
Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Feb. 14, 2007, before the Senate Banking Committee hearing on monetary policy. (AP Photo/Dennis Cook)

The Fed is fighting the wrong battle. Helicopter Ben Bernanke still believes that deflation is an economic threat. As a result, today's FOMC meeting is not likely to produce any shift in the key phrase “extended period,” which has been used by the central bank to signal a continuation of its free-money, zero-interest-rate policy.

The economic data show that Bernanke is wrong. Tuesday’s producer price report for business wholesale inflation unexpectedly jumped 1.8 percent. That leaves a 6.3 percent annual rate over the past three months and a 2.4 percent rate over the past year.

Taking out food and energy — which really shouldn’t be taken out — the PPI jumped 0.5 percent. Wholesale prices for consumer goods climbed 2.3 percent in the November report, and 0.6 percent excluding food and energy. Today's CPI report also might disappoint on the high side.

Of course, until very recently, gold has been soaring and the dollar declining. Commodity baskets also have been rising. These market-price indicators are not signaling deflation. They’re suggesting a higher inflation rate at the end of 2009 and spilling over into next year.

Meanwhile, industrial production for November surged 0.8 percent, leading to an annual rate of 5.6 percent over the past three months. This is a key economic-recovery indicator. The industrial report registered strong gains for durables, non-durables, consumer goods, business equipment, and construction supplies. There’s also the strong retail-sales report for November that came out last Friday. Business sales are rising, as are inventories.

Former Fed governor Wayne Angell, a dedicated commodity-price-rule advocate, believes that real economic growth in the next few quarters could run 5 to 7 percent, with 2 to 3 percent inflation. And he notes that with the clear warning from commodity indicators, there is simply no reason for the Fed to let inflation drift higher. He believes Bernanke should start an exit strategy immediately. That includes Wednesday’s policy meeting, where the Fed should remove the extended-period language and mark the beginning of the end of ultra-easy money.

Personally, I think the Fed’s target rate should be 0.5 percent right now, not zero. And I think the Fed should be moving toward 2 percent next year. The Fed should quit printing money by putting an end to the mortgage purchase program.

In the midst of Ben Bernanke’s reconfirmation vote — which is still up in the air in terms of its timing, with powerful voices like Senator DeMint and Senator Bunning raising serious questions about monetary policy — it is extraordinary to think that the Fed is tilting at the exact wrong windmill. Growth and inflation are going to beat the Bernanke Fed’s forecasts. And if it doesn’t change its easy-money stripes, it’s going to repeat the same easy-money mistake that has plagued the Fed for ten years. Why is it that these central bankers always err on the side of ease? And why do they seem completely disinterested in making dollars scarce?

As Wayne Angell has taught me down through the years, scarce money increases the greenback’s value. That keeps inflation near zero, and that’s a tax cut for economic growth.

Wednesday’s FOMC announcement will be at 2:15 p.m. I’m not excited about the outcome.

More on CNBC.com including:

Questions? Comments, send your emails to: lkudlow@kudlow.com

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  Monday, 14 Dec 2009 | 2:54 PM ET

Deficits Must Be Curbed or It's Disaster For Economy: Study

Posted By: AP

A bipartisan group of former lawmakers and budget officials called on Congress and President Barack Obama Monday to commit to reining in trillion-dollar plus budget deficits to avoid dragging down the economy.

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  Monday, 14 Dec 2009 | 11:40 AM ET

Senate Dems Struggle to Get Health Care on Track

Posted By: AP

Sen. Joe Lieberman strongly rebutted charges Monday that he flip-flopped to oppose the expansion of Medicare as part of health care legislation, as Democratic leaders struggled to get President Barack Obama's top domestic initiative on track for passage by Christmas.

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  Friday, 11 Dec 2009 | 4:23 PM ET

More Good Economic News (Is Helicopter Ben Listening?)

Posted By: Larry Kudlow

First the good news on the economic recovery that everybody loves to hate:

Retail sales totally beat Wall Street estimates with a huge 1.3 percent gain in November. Core retail sales have increase 5.6 percent at an annual rate over the past three months. Family net wealth has rebounded $5 trillion over the past six months. Jobless claims keep trending lower. Business sales, up 1.1 percent in October (the latest data), have jumped 10.1 percent annually over the past three months. And business inventories, led by manufacturing, also rose in October.

The data suggest that fourth-quarter real GDP could come in at 4 percent or stronger. And the powerful rise in business sales -- leveraged off big productivity gains -- suggest a very strong profits picture.

Profits are the mother’s milk of stocks and the economy -- the only true form of stimulus. Profit naysayers argue that only severe cost-cutting and downsizing have led to better earnings. But the rise in business sales spells top-line revenues, a very positive sign.

These recovery signals should put some pressure on Helicopter Ben Bernanke to stop his free-money policies at the Fed. So should November import prices, which rose 1.7 percent. Driven by the declining dollar (until recently), import prices have increased in eight of the past nine months for a 10.1 percent pace.

Economist John Ryding points out that import-price trends are closely related to consumer-price trends. The message? Inflation is going to pop up in 2010.

Of course, nobody knows if Helicopter Ben will begin tightening sooner than expected. But if he listened to market-price signals -- like the sinking dollar and soaring gold -- he’d be a smarter Fed chairman.

No, all is not rosy on the economic scene. Besides the inflation threat, tax rates are going up in January 2011.Congress wants to raise the capital-gains tax on investor partnerships and elevate the death tax for inheritance. Both will suppress capital formation and entrepreneurship. So will Democratic plans to raise the top personal tax rate as high as 45 percent. This is another attack on the capital and investment necessary to finance new and existing businesses.

President Obama wants a zero cap-gains tax rate for small-business investors. That’s good. But it’s a small incentive compared to the tax hikes on the table.

The bottom line? We’ll see a modest recovery, perhaps running around 4 percent in 2010. But it should be closer to 8 percent following the Great Recession. Job creation will pick up and unemployment will decline a bit. But the threats of higher future inflation and taxes will become increasingly troublesome.

The failure of Washington to understand that capitalism requires capital is a big dilemma. All this government spending and planning drains the investment that is necessary for a truly strong and sustainable economic recovery.

In the short run the economic news is good. In the longer run, we’re staring at a European-style socialism-lite model that places government above private investment. Hence, animal spirits may be dulled, along with Schumpeterian gales of creative destruction. A top-heavy government sector will steadily reduce the economy’s potential to grow and raise the inflation rate as too much money chases too few goods.

Yes, the dollar has improved in recent weeks on the strength of better economic data. And gold has sold off about $100. But it’s hard to expect real King Dollar–confidence unless current government-spending policies are reversed.

An important USA Today story about boom times in the Beltway underscores all this. The paper revealed this week that the number of federal workers earning six-figure salaries exploded during the recession. The number of federal pay caps eased, while pay hikes proliferated -- all while the private economy suffered massive job loses.

According to Chris Edwards at Cato, there are now 383,000 federal workers earning six-figure salaries, and 22,000 earning salaries over $170,000; the number of civil servants making $100,000 or more has jumped over 46 percent since the start of the recession; and the average federal-worker’s pay and benefits is $120,000, double the comparable $60,000 package in the private sector. Edwards also reports that Recovery Act funding has created 407,000 government-contract jobs.

All this helps explain why long-term economic growth is likely to slow to a 2 percent zone, rather than cruise in the 3.5 percent zone of the 1980s and 1990s. The primacy of government over private enterprise has been tried, and has failed dismally.

I remember when Pres. Ronald Reagan talked about “we the people,” borrowing from the Preamble to the Constitution. To the Gipper, “we the people” meant the government works for us -- we don’t work for the government. It’s our money. And we should get it back through tax cuts whenever possible.

Mr. Reagan was talking about economic freedom. Unfortunately, that freedom is becoming a scarce commodity.

ECONOMY/MISC

Questions? Comments, send your emails to: lkudlow@kudlow.com

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  Friday, 11 Dec 2009 | 8:57 AM ET

Household Healing

Posted By: Larry Kudlow

Another important sign of economic recovery came Thursday from the Fed’s release of household balance sheets in the Flow of Fundsreport for the third quarter.

Overall, household net worth rose $2.7 trillion in the third quarter. Now, we are still $12.6 trillion below the $66 trillion peak registered in the second quarter of 2007, according to Wall Street economist John Ryding. But household wealth is nearly $5 trillion above the trough registered in the first quarter of 2009. And economist Scott Grannis says that over the past six months, household debt fell by almost $60 billion, while household real-estate holdings increased by over $600 billion. Meanwhile, thanks to a strong stock market, household financial assets have jumped by $4.2 trillion since last March.

All this good news gives consumers just a bit more spending power. And the same is likely true for small businesses, which are owner-operated.

Incidentally, despite various debt warnings from Dubai, Greece, Spain, Ireland, and elsewhere, the U.S. stock market is holding close to the high ground. And believe it or not, the beleaguered U.S. dollar has stabilized -- at least for the moment.

As a footnote to the economic-repair story, bullish Wall Street economist Joe LaVorgna is now predicting up to 300,000 new jobs per month in the first quarter. He bases this on recent monthly gains in temporary work hires and a jump of more than 200,000 new jobs in the small-business household survey released last week. If LaVorgna is close to being right, the unemployment rate has in fact peaked and is likely to decline in the months ahead.

Score one for the mostly free-market economy and the healing of businesses and the stock market. Despite bearishness over the dollar, an improving jobs picture in the months ahead is more likely to raise the value of the greenback. It’s not exactly King Dollar, but then again, if the Fed would quit printing free money, King Dollar could be rethroned.

The Economy And You On CNBC

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About Money & Politics with Larry Kudlow

  • Here at Money & Politics we still believe that free market capitalism — on the supply-side — is the best path to prosperity. Here you’ll find Larry Kudlow’s thoughts and perspective on all the hot topics moving Washington and Wall Street.

Contact Money & Politics with Larry Kudlow

 

  • Lawrence Kudlow is a CNBC senior contributor. Previously, Kudlow was anchor of CNBC's prime-time program "The Kudlow Report"

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