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King Dollar and Drill, Drill, Drill

Right now, with oil trading through $71 a barrel, Treasury bonds closing in on 4 percent, and commodity indexes up 25 percent year-to-date, inflation fears are circulating through the markets.

There’s a way to nip this in the bud: First, the Treasury and Fed should work together to protect the value of the dollar. Here’s how they do it. At the Fed’s June meeting in two weeks, Ben Bernanke should put in the FOMC minutes a clear reference to an exit strategy that will curb the massive money creation that Art Laffer wrote about in today’s Wall Street Journal.

Next, at its September meeting, the Fed should raise its target rate — which is now 0.0 to 0.25 percent — pulling it up to 25 basis points, the upper end of the current range. That’s a small, even tiny, move that would represent about a 12 basis-point hike. But the move would at least send a signal that the Fed has an exit strategy from excess money that it intends to implement. Just that tiny move would go a long way towards protecting the dollar and knocking down inflation fears.

At the same time, the Treasury should purchase dollars in the open market to reinforce the much-neglected King Dollar scenario. In the long-run, Treasury interventions won’t work. But in the short-run, when combined with a Fed exit strategy, a dollar intervention will work.

Moving together, these two agencies can resurrect King Dollar and snuff out inflation fears. These fears have helped boost the price of oil and retail gas at the pump. But there’s a second factor at work in energy. The U.S. and world economies are starting to rise. This leads to drill, drill, drill. Onshore and offshore drilling restrictions for oil and natural gas have to be removed. Deregulate the energy sector. Open the door to nuclear power. Drill the shale regions for natural gas.

Exploration has dried up in the new Obama environment, which is so very anti-fossil-fuel and anti-nuke. If we are going to power our way to economic growth, fossil fuels and nuclear energy have to play key roles. Alternative-fuel technologies may grow up, but that’s gonna take several decades.

Right now they’re about 2 percent of our power. That’s all. And the idea that cap-and-trade can be implemented without taking a huge toll on the economy is an Obama hallucination. Cap-and-trade would severely limit economic growth by knocking out fossil fuels. Right now, the jump in retail gas prices could really hurt the nascent economic recovery.

In short, King Dollar and drill, drill, drill would be major pro-growth measures. Why not show the rest of the world that the U.S. can move from a position of strength rather than weakness?

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

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