Kudlow's Corner

Dear Wall Street: Stop whining about the dollar!

Dado Ruvic | Reuters

Despite conventional criticisms from the financial commentariat, both theory and evidence argue for a strong, stable, and reliable dollar as a crucial channel to prosperity.

Just think of the reverse: If a country could devalue its way into prosperity, Argentina would be the crown jewel of the world economy.

Yet lately, a loud and growing chorus is blaming the rising U.S. greenback for just about everything. The refrains are endless: "Multinational profits will suffer." "Imports and trade deficits will hammer the economy." "Stocks will fall." "Recession looms."

Wall Street insists that is bad. It is wrong.

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This falsehood is a near cousin to the idea that falling energy prices will wreck the economy. Also wrong. The energy sector will slow, but the rest of the economy will benefit.

In fact, the rising dollar, a key factor in the oil-price plunge, provides a double tax cut for the economy. Both will also promote a world recovery. Over the past year, the dollar has appreciated about 20 percent. So what happened?

The is up 11 percent and the American economy has actually improved. While the underlying economic-growth rate is still a soft 2.5 percent, real gross domestic product was up 3.5 percent or more in four of the last six quarters. Meanwhile, nonfarm payrolls have increased 3.3 million in the past 12 months—much better than the 2.2 million jobs gain of the prior period.

And the inflation rate is nil. The consumer price deflator is flat. Import prices for the 12 months ending in February are down 9.4 percent. And finished-goods producer prices have slumped 3.4 percent.

What's happening? The dollar is up and oil prices are down. The economy, jobs, and stocks are up, and inflation is down. How could this be bad?

So let me dust off some of my golden oldies: 'King Dollar' is a very good thing. King Dollar has far-reaching benefits that way offset any temporary small costs. King Dollar is pro-growth.

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If investors gain confidence that King Dollar will stay firm, global capital will flow into U.S. markets. That means, according to investment strategist Jason Trennert, a strengthening dollar pays for a bit lower profits with stock-multiple expansion.

Modest currency-conversion costs of U.S. corporate income earned abroad may temporarily translate into slower profits—at least in GAAP-accounting terms. But this is small stuff.

Actually, most of that money stays overseas to benefit from lower taxation. Many companies, especially technology firms, have demonstrated shrewd hedging acumen to take advantage of the King Dollar trend.

The benefits pile up

All eyes on the dollar
All eyes on the dollar

Anyway, as a result of the strong dollar, every import that American companies use for their products—be it autos, computers, or mobile phones—is vastly cheaper. When products are finished in the USA, figuring in lower domestic-wage demands and interest rates, cheaper U.S. products will lead to stronger exports because of a sound dollar.

In fact, the King Dollar/plunging-energy-price combination has substantially reduced the cost structure of American businesses, making them more competitive. And at the same time, the buying power of consumers is significantly increased as prices for energy, food, and virtually all goods and services have dropped.

As economic editor John Tamny puts it, "When investors invest, they're hoping to get back the dollars they invested, plus an additional dollar return." Tomorrow's dollar should be worth the same as today. That's the confidence value of currency stability.

How about some more history?

Between 1982 and 2000, as the dollar skyrocketed 178 percent, King Dollar (with lower tax rates and lighter regulation) presided over a stock market gain of 1,099 percent, a jobs increase near 40 million, and 3.5 percent average annual real GDP.

During the recent dollar decline period, from 2001 to 2011, as the dollar fell 25 percent, jobs increased a paltry 2.3 million, real GDP growth averaged less than 2 percent, and the S&P gained a measly 15 percent.

And don't forget the dreadful 1970s: The dollar plunged, the economy suffered through years of stagflation, and the real value of stocks fell significantly.

Yes, the world's currency system is in disarray. Europe and Japan are depreciating (won't work) and the U.S. is appreciating (nurturing growth). Yes, we need a new monetary system. Yes, we need better currency and policy coordination.

In any event, as the Federal Reserve slows its accommodation, and with pro-growth corporate tax reform is in the air, King Dollar will stay on the rise.

Stop whining, folks. It's a good thing.

Clarification: An earlier version mentioned the rate of Japan's yen in the 1970s and 80s. That paragraph has been removed in the latest version.

Commentary by Larry Kudlow, a senior contributor at CNBC and economics editor of the National Review. Follow him on Twitter@Larry_Kudlow.