Kudlow Konfusion

Sometimes he is hot, sometimes he is not.

Larry Kudkow is out with a blog post, Save the Greenback, Mr. President.

He writes:

We know that gold is soaring. And we know the dollar is slumping. But, did you know that year-to-date, while the S&P 500 is up 18 percent—a great showing no doubt—gold is up even more. The precious metal is up 21 percent. In other words, measured in true, gold-backed purchasing power, stocks have really done nothing this year. Zip. It is most disappointing.

I try to be optimistic about better earnings, a stock market rally and economic recovery. And I’m sticking to my guns. But what we’re seeing right now is pretty darn close to what we witnessed in the 1970s—the rise in gold and inflation really cuts into the stock market.

So what’s the way out?

Well for starters, we need a stable dollar to stop inflationary pressures. And we also need lower tax rates to spur the economy, help it grow, and reduce unemployment. I’ve been calling this the Mundell-Laffer supply-side solution, after Nobel Prize winning economist Robert Mundell and my mentor, former Reagan advisor Arthur Laffer. It was put to work with great success nearly thirty years ago to stop stagflation. It also launched a twenty year bull market recovery.

Put simply, the Mundell-Laffer model exercises monetary restraint to save the dollar—and low marginal tax rates for economic growth incentives that benefit investors, risk takers, small businesses and workers. Right now, for therapy, the Fed should begin moving excess cash from the economy and they should raise their target rate. Take a page from the Reserve Bank of Australia’s playbook and move rates higher.

In addition, the Treasury ought to get out there and buy these unwanted dollars in the marketplace. Just go out there and bid for them. And they need to stop printing so much debt from Congress. All this massive spending and borrowing is killing us. We need to be slashing tax rates on large and small businesses. There’s just no better place to begin job creation. And leave the Bush tax cuts in place for heaven’s sake.

This supply-side shock therapy would save the dollar. And it would put real long-term torque into the recovery.

Although a strong dollar would not be a bad thing, Kudlow has many things confused.

First, the Fed right now is not printing any money. This is not a repeat of the 1970's.

When Kudlow talks about interest rates, he is confusing monetary policy with interest rates. Until the Fed gets out of the money and interest rate manipulation game, there is no way anyone knows what the true free market interest rate would be. Kudlow's call for higher rates to reverse the current Fed low rate policy is dangerous.It is simply replacing a low rate Fed manipulation with a high rate manipulation. How high should the Fed go? Do you really want to choke off the entire economy with rates that are too high? Why not just leave the rate up to the markets to decide?

As for the Treasury buying up dollars, the question becomes how big an impact will they have given the current foreign currency reserves they have. Again, it's best to just leave the trading up to the markets. If Bernanke continues his no money growth policy, the dollar will eventually stabilize in the markets.

I'm with Kudlow on cutting taxes and spending, and also for his call for the Fed to exercise monetary restraint. He just doesn't realize that, for whatever reason, Bernanke as been exercising monetary restraint. This policy could ultimately lead to a strong dollar and the collapse of gold. The only thing, of course, from my not making this a 100% (or anywhere close) prediction on this is the international dollar overhang that could come flying back at us at anytime.