Stocks loved last night’s election returns.

President Obama and Nancy Pelosi got their ears pounded 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.

On CNBC.com now:

• Slideshow: Biggest Holders of US Gov't Debt
• Slideshow: How Your Tax Dollars Are Spent

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