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Politics : Politics for Pros- moderated -- Ignore unavailable to you. Want to Upgrade?

To: LindyBill who wrote (91815)	12/21/2004 10:32:54 PM
From: LindyBill	Read Replies (1) \| Respond to of 793843

Dollar Redux Larry Kudlow Many thanks to the excellent Glenn Reynolds for the Instalanche in response to my piece on the dollar last week. And equal thanks to the many commentators who responded to the piece. I can’t answer all the comments, but let me express a few general thoughts. First, not for one nanosecond do I believe the US is on the decline. Our relatively free economy is healthy and strong. Given the attacks on it in recent years, this is a near miracle. It attests to the benefits of economic freedom that provide the necessary resiliency and flexibility to survive numerous shocks such as wars, burst bubbles, corporate scandals, energy spikes, and the rest. We are different from Europe and Japan, where there remains over-taxation and over-regulation, and very little flexibility to move capital and labor from old, dying sectors to new dynamic ones. Ours is a Schumpeterian economy. It is fast becoming an investor-based ownership economy. I love the term “cowboy capitalism.” I am also learning to appreciate James Bennett’s Anglosphere challenge. In the next technological takeoff, the English-speaking nations will lead the way again, adding to their lead. As for economic policy, I think Bush’s ownership vision of reform is a good one. It will move us in the direction of Hayekian liberalism and strengthen the new market order put in place by Reagan (and Thatcher.) On the dollar, I continue to believe it has adjusted too far on the downside. The Fed is draining excess money, which is the ultimate determinant of currency value. The rising gold price and the slow creeping-up of inflation tell me that there are too many dollars out there in relation to world demand. So the Fed is right to gradually remove the post-9/11 monetary excess that they properly created a few years ago. Combine this Fed restraint with a healthy economy and handsome investment returns, and we have the right mix for a dollar recovery. This is what I expect. Using the Fed’s broad dollar index, the greenback today is still way, way ahead of the early 70’s, the early 80’s, and the early 90’s. Unfortunately, at the turn of the new century, a deflationary monetary policy overvalued the dollar. Then a reflationary policy undervalued it. But these are minor adjustments. For those declinists who subscribe to the twin-deficits theory of dollar weakness and US economic pessimism, I must respectfully disagree. As the US economy responded to lower tax rates incentives and reflationary money, the budget deficit is now narrowing as growth-induced tax collections rise in the aftermath of lower tax rates. This is the Laffer curve at work, a paradigm with which I fully agree. Delighted to see recent Nobelist Ed Prescott also agrees, as does Nobelist Robert Mundell (who also believes the dollar is now undervalued.) At the same time, stepped-up economic growth is causing an import surge, which widens the trade gap. So what? I fully believe in the comparative advantages of free trade and intensified global competition. Just as New York trades with New Jersey, to the mutual benefit of all involved in these private exchanges, so it is when the US trades with the rest of the world. Mr. Bush had a delightful put-down in his press appearance last week with Silvio Berlusconi. The Texan said foreign nations need only purchase more US goods to narrow the gap. This was his polite way of telling them to grow faster. To adopt a little more of US cowboy capitalism. If our biggest customers fail to grow, that is regrettable from their impoverished standpoint. But there is no funding problem. Private capital inflows as well as government purchases of US treasury bonds more than cover the trade gap. Indeed, some believe that the massive volume of foreign capital inflows, which raises US income and investment, is the cause of the trade gap. But trade imbalances do not create new dollars. Only the Fed does that. Instead, trade merely recycles dollar flows. And those dollars generally wind up back in US assets with attractive investment returns. Again, I argue “So what?” Let me add my personal suspicion that the twin deficits crowd of pessimists and declinists has no sympathy with the US, and certainly not with the current US administration. More than a few of these critics are desperately trying to resurrect quaint Keynesian notions that always and everywhere lead to the inevitable conclusion that taxes must be raised, rather than lowered. Put another way, they prefer government prosperity rather than private sector abundance. Respectfully, I totally disagree with this view. And I believe history, especially recent history, bears me out. Similarly, I agree with the boys at Powerline that the greatest fear of today’s left is that not that we will fial, but that the US will succeed in its economic policies at home and its foreign policies abroad, especially in the Middle East. The greatest fear of Bush’s critics is that free elections and democratization will succeed throughout the Middle East region, bringing light into an area which has for many centuries been living in darkness.