Money & Politics with Larry Kudlow

A Short-Sighted Cheer for Easy Money

Wall Street loves easy money. That’s what I conclude from today’s 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.

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

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. 

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