Kudlow on King Dollar: Not Enough
- Joshua M Brown
- June 15th, 2012
If you've been anywhere near a TV tuned to CNBC circa 7 to 8pm over the last year or so, you've likely heard Larry Kudlow pounding the table for a stronger US dollar as the solution to America's decline. The reality of the dollar is that it bottomed over three years ago and over the past 6 months it's been on fire (relative to a certain collapsing demi-currency that shall not be named).
The US Dollar Index this past year as a reference point:
But even though Larry's gotten his "King Dollar" at long last, it's still not doing the trick in terms of helping the economy. Here's what he thinks is missing (via CNBC):
I can think of two major reasons for the latest economic stall—even inside an overall recovery rate that’s only half the normal pace of post-WW II recoveries. First is the deflationary impact of a sharp, nearly 10 percent rise in the exchange value of the dollar relative to the euro.
That’s imparting a deflationary influence on the economy, where both import and producer prices have recently turned negative. The good side of commodity deflation is that oil and retail gas prices have fallen considerably; the bad side is that manufacturers may hold back production and that debtors have to climb out of deeper holes.
As someone who always touts the merits of a strong King Dollar, why am I complaining now that we have one? That’s my second reason for the latest economic stall: King Dollar is not being accompanied by lower tax rates.
The original supply-side growth model argued for a strong dollar and lower taxes, where the former keeps prices stable and the latter provides fresh growth incentives. But instead of easier taxes, a huge tax-hike cliff looms. Big problem. Wrong model. Anti-growth.
Obviously the problem isn't current low tax rates, it's the perception that tax rates are undoubtedly about to go higher in the future - regardless of who gets elected, I'm afraid.
One minor rebuke to Larry's point is that under Clinton, we had high taxes, low interest rates and a solid dollar (with the accompanying disinflation in oil, food costs etc) - and that seemed to work out just fine. I'm not suggesting we can go back to that environment - the world is a different place now 15 to 20 years later.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.