Wednesday, September 30, 2009

Why Not Eliminate the Cap-Gains Tax for Everyone?

The Case-Shiller home-price index increased yesterday for the third month in a row. That’s terrific news. After a 40 to 50 percent drop in home prices in recent years, sales are picking up, because prices are way down. That’s also great. Markets work.

But here’s what I don’t like about this story: Big, central-planning, government-directed tax preferences for housing, like the $8,000 dollar tax credit for new buyers. Or even the popular mortgage interest deduction. And let’s not forget perhaps the biggest one of all: Home sales are basically capital-gains-tax free. That passed back in 1997. Many people (including myself) believe it helped create the bubble.

Why not eliminate the capital-gains tax for everyone and all sectors, including investors and stocks and bonds? Why direct it only to housing? Let’s abolish the capital-gains tax altogether. Let’s quit double-taxing investment, which is what capital gains does. But let’s do it for everyone and everything — not just housing. While we’re giving all these preferences to housing, what about manufacturing? What about transportation? Or health care? Or any other sector in the economy for that matter?

We also could be cutting business tax rates across-the-board for companies big and small.

And for all individuals and businesses, why not a simple, low, flat-rate tax? Somewhere between 15 and 20 percent? Get rid of all of the special preferences and deductions in the code. Stop favoring one sector at the expense of the others. Incidentally, this would stop the corruption of K-Street lobbyists who love to get these preferences in there.

Let’s make the tax code simple, fair, and pro-growth, to unleash prosperity. Let’s stop the political direction of the economy, and let’s substitute a market direction of the economy. A true flat tax would do it.

If you get to keep more of what you earn and invest at the lower tax rate — if you tax something less — you’ll get more of it. If you tax the whole economy less — not just housing, but the entire economy — you will get a much more prosperous and healthier economy. At a time when we’re all worried about economic growth, we ought to be thinking hard about this.

Boehner and Hutchison on Kudlow Report Tonight

We've got two very special guests on the Kudlow Report tonight.

Joining us will be House Minority Leader John Boehner (R-Ohio), who will share his thoughts on healthcare, tax hikes and the economy, as well as the future of the Republican Party. Could we be looking at a bigtime GOP victory in next year's midterm election?

Plus, speaking of elections, Sen. Kay Bailey Hutchison (R-Texas) will also be aboard. She's trying to become the next Governor of Texas. She'll share why she's looking to leave the Senate, and whether the move is a sign of a future presidential bid.

Pleas join us on CNBC tonight at 7pm ET.

An Interview with Jon Kyl on the Public Option

Is the public option really dead?

Last night I interviewed John Kyl of Arizona, the Senate’s Republican whip, to get his take on the matter. Kyl — who also serves on the Senate Finance Committee — voted to reject the public option. He calls it “a solution looking for a problem,” and thinks it will ultimately come up short. He also believes there will be some substitute for the public option that most Democrats will rally around once it fails.

Tuesday, September 29, 2009

Tonight on The Kudlow Report

This evening at 7pm ET:

Plus a look at "regime change" in Iran.

Joining us to discuss will be Senate Minority Whip Jon Kyl (R-Ariz.)



*Steve Moore, Senior Economics Writer for the Wall Street Journal Editorial Board; "The End of Prosperity" Co-Author
*Robert Reich, Fmr. Labor Secretary; "Supercapitalism" author; CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy

What’s the impact on the banks?

CNBC’s Mary Thompson reports.

Joining us to discuss will be Bill Isaac, Fmr. FDIC Chairman; Chairman of The Secura Group of LECG.


*Authur Laffer, Chief Investment Officer, Laffer Investments; Fmr. Reagan Economic Advisor
*Robert McTeer, CNBC Contributor; Fmr. Dallas Federal Reserve Bank Pres. & CEO - Dallas

Joining us with his perspective will be Lord & Taylor CEO Brendan Hoffman.

Please join us. The Kudlow Report. 7pm ET. CNBC.

An Interview with World Bank President Robert Zoellick

Last night I had the pleasure of interviewing distinguished World Bank President Robert Zoellick. Mr. Zoellick told me not to take dollar supremacy for granted. He blasted the Federal Reserve for bungling the asset price bubbles. He believes that Treasury - not the Fed - ought to be our uber-systemic risk regulator. And he says the United States has huge policy choices in front of it.

Here's the transcript from our interview.

KUDLOW: World Bank President Bob Zoellick, thanks for coming back on Kudlow Report, sir.

Mr. ZOELLICK: Glad to be with you, Larry.

KUDLOW: Let me just begin with some news. We've had a terrific rally up here on Wall Street. Dow's up about 150 points as of this conversation. And as you know, in the last six months world stock markets, emerging stock markets, have had a tremendous rally. Is this a signal that the global recession is over and world recovery is upon us?

Mr. ZOELLICK: I think it's a signal that the governments have broken the fall in financial markets and that there's a lot of liquidity out there. But there's still a big question about whether the real economy will kick in.

KUDLOW: What are the economics, people at the World Bank--you've got a splendid staff, you've got a large staff. What are they saying about forecasts for, let's say, 2010, next year?

Mr. ZOELLICK: In general they see a cautious and gradual recovery; concern that there's not enough demand because the US consumer won't play the role that it has in the past, so a possibility that developing countries could step in with the right financing. But also some big risks. So for example, if you look at China's recovery, which has been strong, it's been fueled by a huge increase in credit that's now starting to get turned back. So later in 2010 we face additional risks.

KUDLOW: Let me go to your speech today. You gave a very strong speech before the Johns Hopkins International School. And at the beginning, right up top, "US would be mistaken to take for granted the dollar's place as the world's predominant currency." We would be mistaken to take for granted. Let me ask you to clarify, what do you mean by that?

Mr. ZOELLICK: Well, it's something I feel really strongly about, Larry, and I think you do as well. You know, on the one hand, I don't believe all the stuff about that the dollar isn't the key reserve currency. It is. You could see people turn to it today because--in the crisis because of a flight to security. But my point is Americans do not recognize that, you know, countries over--all over the world would die for the ability to be able to print money, to issue bonds as freely as the United States has. And as you look at out years, that's not something we can take for granted. So what that means is coming out of this crisis, the Fed's policies in terms of making sure we have a recovery without inflation, making sure that you got a good, strong value for the dollar, having a sense that the financial markets, yes, they need to improve the safety and soundness, but they have the depth and liquidity they've historically had, those are not going to be easy issues, but they're going to be absolutely critically for the United States for decades to come.

KUDLOW: If the US dollar continues to decline--I mean, by and large for about eight years, under Republican and now Democratic administrations, the dollar has been weak. If the dollar continues its chronic decline, would that stop world economic recovery?

Mr. ZOELLICK: Well, you know, it depends on what else is going on and it depends, you know, how far of a decline and it depends on some of the effects that it has on interest rates. But my point really goes more to the direct interests of the United States. And I took a historical reference with Prime Minister Pitt of Britain saying that while people talk about the great campaigns that won the Napoleonic wars, it was the fact that he restored Britain's credit that allowed them to fight a 20-year war and pay for a coalition. Now, the larger point there is the United States has been in a unique position in terms of being able to have the dollar accepted as the predominant reserve currency. The euro did a good performance in this crisis, it will be an alternative. I don't think China's renminbi is going to move to an open capital account soon. But in the speech I outline why over the next 10 years, 10, 20 years, it will also move to be more of an international role. So my message is whether it's budget deficits or whether it's the monetary policies, don't take the dollar for granted.

KUDLOW: Well, are you inferring a criticism here? I mean, are these self-inflicted wounds by the USA in terms of overspending or overborrowing or over money printing?

Mr. ZOELLICK: Well, I think across different administrations, across different times, you know, we haven't been able to get the discipline over the budget deficit across parties, different Congresses, different parties. And given the fact that we're going to have a budget deficit as a percentage of GDP of over 10 percent, that is now fundamental to get on top of. You've seen the projections in terms of US debt as a--as a percentage of GDP. You know, for years it hovered in a range that was manageable. But the types of numbers that people are talking about move it into a whole different league. And that's the type of thing, combined with monetary policy, that should be a priority for people across the political spectrum.

KUDLOW: China has talked about this, numerous Chinese officials; Maria Bartiromo interviewed President Lula of Brazil and he talked about it. I didn't hear anything specific from the G-20 on the dollar's status, Bob. Did you? I mean, was there something, you know, in the back scenes, in the back rooms, in between the lines, because this is a question people on Wall Street and investors are asking.

Mr. ZOELLICK: I think it showed up more in the discussion about the nature of having a sustainable recovery. And obviously part of that is monetary policy. You'll see a lot of references to imbalances. That partly, of course, relates to the different trade imbalances, but it also relates to the need for countries to be able to pay their bills and get control and discipline over their spending. So it wasn't so much focused on currency and exchange rates, but that hovers in the background.

KUDLOW: All right. Moving on here, you have another topic in the speech that I think is controversial. You take some shots at central banks and, by implication, the Fed. Let me just read one of the money paragraphs and get you to respond. "Central banks fail to address risks in the new economy. They seemingly mastered product inflation in the '80s, but most decided that asset bubbles were difficult to identify and restrain with monetary policy. They argue that the damage to the economy from jobs, production and savings and consumption could be contained once bubbles burst through aggressive easing of interest rates." And then you say, flatly and declaratively, "They turned out to be wrong." Now, I'm just quoting from your speech. What are you saying here? What'd you have in mind?

Mr. ZOELLICK: Well, it's not all central banks. If you will also see in the speech, I actually compliment the European Central Bank. I think Jean-Claude Trichet did a pretty good job coming into the crisis and managing it. And while I didn't get into this level of detail, Canada's central bank, for example, has tried to look at some of the asset price inflation. And I think--to be fair, I think the Federal Reserve and all the other central banks did a good job once the crisis hit. But I--the key point of that paragraph was what I said about asset price inflation. Central banks felt that that was something they couldn't manage, shouldn't manage, they could deal with it through other means, and they learned a lesson, as we all have to learn out of this crisis, that that didn't work.

Now, the other point, though, I make about the central banks is less trying to cast blame, it's more a question of political economy in the United States. As you know, Larry, we didn't have a Federal Reserve until 1913. I mean, you go back to Alexander Hamilton, Congress and banks and bankers are--that's always been a rather acidic mix. And so--and it's going to be a big challenge to say that the Federal Reserve, which with its independence, which I think is appropriate for monetary policy, should be given additional role in the bank regulatory area. And I think you can see that in the debates in Congress. And frankly, my reading of the different reports and seeing at the time was one of the real challenges was whether the Treasury Department had enough authority to pull the regulators together. So it's going to depend on each economy. So with central banks, part of this deals with political history and kind of attitudes towards the role of independent central banks. My view is the Fed's going to have a big enough challenge concentrating on the monetary policy getting out of this crisis. That's what I think should be the prime focus. I personally think the Treasury needs a little bit more authority on the regulatory side.

KUDLOW: Well, that was my inference from reading this, that you think the Treasury should be the uber regulator of the uber banks. Let me just read. You're saying--this is your speech--"My reading of recent crisis management is that the Treasury needs greater authority to pull together a bevy of different regulators. Moreover, the Treasury is an executive department and therefore Congress and the public can more directly oversee how it uses any authority." You seem to be saying let the Treasury have the principal role and you are, sir, injecting yourself in a very controversial discussion going on in Washington. May I ask why?

Mr. ZOELLICK: Well, I'm just sharing the perspective of somebody who's been involved in this for about 25 or 30 years. And from my perspective, you know, whether it be Secretary Paulson or Secretary Geithner, you read the newspapers, you can see them trying to struggle to deal with the regulators. You've got a financial banking regulatory system that has a legacy of history of a vulcanized financial system. So if people are going to overhaul that, there's a need to try to make sure that you've got somebody responsible and accountable.

The second observation in that paragraph is I believe very much in a--in a democratic sense of responsibility. The Congress is going to be sensitive to make sure that it can exercise oversight over financial regulation, as it should. And it's much more natural to have that in an executive branch which has to get elected every four years and plays--has a--has a balance of power relationship, shared powers with the Congress, than it is in an independent central bank.

Now, different countries are going to do this differently. You see this debate in Britain, you see it in Europe. But I think for the US system, the key message is now that we're coming out of the crisis, the real danger is going to be complacency. We got to fix the regulatory supervision. In my view, I would make sure that the Treasury had the authority to play the role it should.

KUDLOW: All right. So you're saying we got to fix the regulatory system, give the Treasury a large piece. You're also saying we got to fix the dollar. Let me just ask you, are you also inferring it's time for an exit strategy from TARP, from all the spending and borrowing and from all the money printing? Are you suggesting it is time right now for the USA to protect its system and its integrity and the value of its currency for a exit--an exit strategy?

Mr. ZOELLICK: Well, I think the US--and again, the--both the Federal Reserve and the executive branch are preparing for the exit. At the same time, I think one has to be careful about trying to pull the plug of support too quickly because, as I said, I think you face a lot of uncertainties in 2010. So you've seen some of the articles that have been written in terms of Kevin Warsh and others from the Federal Reserve trying to identify some of these issues. So I think that they're doing the right thing. And I also mean to emphasize this is not going to be an easy call. But it's going to be a critical call and it's one that needs the informed debate.

KUDLOW: Last one, Bob Zoellick. Big German elections, the center-right won. Chancellor Merkel was re-elected with strong support from the Free Democratic Party. They're all pledging supply-side tax cuts, and I can't help but ask you, is supply-side tax cutting going to be coming back into vogue instead of all this Keynesian spending? Would Germany lead the way and change world economic policies?

Mr. ZOELLICK: Well, that's been the view of some of the parties in the coalition. The CSU, the Bavarian party has got a great young leader, zu Guttenberg, but also the Free Democrats. I think they're going to have to balance it with their own budget issues. And, you know, while--Larry, while I support lower taxes, I also support paying for what you spend. So that's going to be their decision on how they manage the spending and the--and their overall revenues. It is an interesting commentary, though, about I think something you feel more generally out there, which is that while there are different ideas about stimulus and the role that it played, I think people want to make sure that they pay their country's bills, and that's a good thing.

KUDLOW: All right, World Bank President Robert Zoellick, we appreciate your time, we appreciate your controversial speech. Thanks for coming back on Kudlow.

Mr. ZOELLICK: You bet, Larry.

KUDLOW: All right.


Monday, September 28, 2009

Tonight on The Kudlow Report

This evening at 7pm ET:


-Treasury as uber-regulator?
-King Dollar
-World economic health
-Merkel’s German election victory

Robert Zoellick, World Bank President will join us for an exclusive interview.

Was this straight from the supply-side?

*Jimmy Pethokoukis, Money & Politics Columnist with Reuters
*Robert Reich, Fmr. Labor Secretary; Author, "Supercapitalism"; CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy

An eye on markets and the economy.

*Robert Froehlich, Chairman of the Investment Committee for the University of Dayton", a $500 Million endowment; "A Bull For All Seasons" Author
*Jason Trennert, Strategas Research Partners, Chief Investment Strategist & Managing Partner
*Joe Battipaglia, Stifel Nicolaus Market Strategist

Please join us. The Kudlow Report. 7pm ET. CNBC.

Exclusive: Zoellick on Kudlow Report

We've got a big, exclusive interview with World Bank President Robert Zoellick on this evening's Kudlow Report.

Mr. Zoellick is making headlines today questioning the wisdom of giving the Federal Reserve more power over the banks. He believes that Treasury, which is more accountable to Congress, should be given this authority. He's also raising big red flags over the dollar's reserve currency status.


Friday, September 25, 2009

Kevin Warsh Is On The Money

Attendees of the G-20 meeting in Pittsburgh and members of the Federal Reserve Board in Washington should carefully read a Wall Street Journal op-ed by Fed governor Kevin Warsh. In a piece titled “The Fed’s Job Is Only Half Over,” the former Wall Street investment banker sends a shot across the global economic bow. He says the Fed’s job will not be done until it removes the easy-money policies put in place over the past year. In other words, an exit strategy.

Warsh writes that “policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary.” He’s saying the Fed must be tougher, and act sooner, if it is to avoid an inflationary bubble reminiscent of the 2002-06 period, or for that matter the 1970s.

Appointed by President George W. Bush in 2006, Warsh may be the only real supply-sider at the central bank. And while he doesn’t explicitly talk about the profligate surge of fiscal spending and borrowing by the Obama administration and its international counterparts, it’s not hard to infer that he’s talking about that as well.

But back to monetary policy. Warsh says the Fed should not obsess about backward-looking indicators, like GDP and yesterday’s inflation readings. Instead, he argues that the central bank should track forward-looking signs of growth and inflation by paying careful attention to financial markets, asset prices, and risk premiums. In essence, Warsh is opting for a market-price rule that presumably tracks commodities (including gold), bond markets, the dollar exchange rate, and various credit-risk spreads in the fixed-income area. He’s moving away from the Philips Curve and the idea that the Fed should target an unemployment-inflation tradeoff -- which is all Ben Bernanke ever seems to talk about.

Since the unemployment rate is a hopelessly lagging indicator, the inflation forces will be well out of the barn by the time it starts dropping significantly. But Warsh knows that markets flash signs of the future. So rather than drive by watching the rearview mirror, he wants the central bank to look through the front windshield.

Warsh was a senior White House official under President Bush, and he had a hand in the supply-side tax cuts on investment that were enacted in 2003. But it sounds like he learned a lot about the Fed’s cheap-money policies at the time. Those policies drove down the dollar for years and resurrected inflation, and they’re what killed the incentive effects of the Bush tax cuts and their positive effects on economic growth.

The subsequent housing and commodity bubbles -- including the massive energy shock -- utterly doomed the economy. The Fed took tiny, one-quarter-of-a-point steps over a period of four years in an attempt to reclaim anti-inflation normalcy. But the policy failed dismally. So now Warsh seems to be saying: Let’s not make the same mistake again. Let’s take strong, large steps to raise the target rate and drain excess cash from the economy.

I’m willing to bet that the rise in gold and commodity prices, along with the drop of the dollar, has Warsh thinking the Fed’s tightening time is not far off.

Of course, this same dollar turbulence should be a fulcrum for the G-20 nations. If the U.S. greenback keeps sinking, a monkey wrench will be thrown into the global recovery. Dollar depreciation can export U.S. inflation worldwide, and drive up interest rates at home and abroad, if we force our trading partners to print too much money by buying too many dollars in a futile attempt to absorb dollar-excess.

So instead of bashing banker pay, the G-20 members should undertake a worldwide dollar-rescue-and-stabilization program. That would strike a blow for currency stability everywhere and promote global economic growth.

Alas, I don’t see any growth policies coming out of the G-20 nations right now. And with phrases like “peer review” being thrown around, I fear a U.S. exercise in financial and economic multi-literalism. Just as President Obama seems to suggest that American foreign policy will be run through the U.N., I’m wondering if U.S. economic and financial policies will be passed through the G-20 -- a one-world financial regulator that will handcuff the American system.

At the moment there are no supply-side tax cuts on the table. There’s no clear trade liberalization. And there’s no focused attention on the currency problem known as the dollar. Brazil and China are talking about a new world reserve currency, which is one reason why gold has been rising. But the dollar dilemma will rein supreme unless the G-20 does something about it.

Kevin Warsh doesn’t go this far in his Journal piece, but his attention to financial-market price signals is something all the big shots in Pittsburgh should be thinking about.

Tonight on The Kudlow Report

This evening at 7pm ET:

CNBC chief Washington John Harwood joins us live from Pittsburgh with all the details.

NBC's investigative reporter Jonathan Dienst has the story.

Steve Emerson, NBC terrorism analyst & author of "Jihad Incorporated: A Guide to Militant Islam in the US," will offer insight.

NBC’s Ann Curry reports.

On to discuss:

*Lawrence Eagleburger, former Secretary of State
*Mort Zuckerman, N.Y. Daily News Publisher; U.S. News & World Report Chairman & Editor-in-Chief


*Tony Fratto, CNBC Contributor; former White House Deputy Press Secretary
*Christian Weller, Center For American Progress

CNBC’s Phil Lebeau reports.

CNBC’s Matt Nesto will join us.


*Richard Hoey, Bank of New York Mellon Chief Economist
*Dan Fitzpatrick, President & CEO, Senior Contributor,

Please join us. The Kudlow Report. 7pm ET. CNBC.

Thursday, September 24, 2009

A Supply-Sider in the California Governor’s Race

There’s a lot of interest in the California midterm elections because of two well-known business ladies, Meg Whitman (former-CEO of eBay) and Carly Fiorina (former-CEO of Hewlett-Packard). Of course, California’s economy and fiscal position are in a death march. All kinds of capitalists and entrepreneurs are running away from the state’s high taxes and over-regulations. (Among other palaces, they’re headed to Texas.) But Whitman and Fiorina -- because they are women and former big-business honchos -- lend some glamour and renewed interest to California Republicans.

I have not interviewed Carly Fiorina recently -- that’s on the schedule. (Fiorina hopes to beat Barbara Boxer in the U.S. Senate race.) But I did interview Meg Whitman, along with her Republican gubernatorial primary opponent, Steve Poizner, a statewide-elected GOP official who is himself a very wealthy and successful high-tech entrepreneur.

Being of relatively sound mind and chock full of sense and sensibility, I am not taking a position on the Whitman-Poizner primary. But I will say this: Mr. Poizner has a very strong, across-the-board, 10 percent tax-rate-reduction plan for personal income, sales taxes, and business taxes, and a 50 percent reduction plan for the state’s capital-gains tax. He cited Arthur Laffer in my interview with him, and essentially declared himself a pro-growth supply-sider.

Ms. Whitman was vague on tax policy. When asked if she would support a 5 to 6 percent flat-tax rate, she said she’d look at it. But her top priority is to cut state spending -- a very important mission. She wants to lower taxes down the road, but nothing specific yet.

Both Whitman and Poizner favor heavy use of the governor’s line-item veto, and both want tort reform to reduce business costs. Ms. Whitman would somewhat roll back California’s onerous cap-and-trade policy, while Poizner would freeze the whole plan.

Most observers believe Meg Whitman has the greater star power in the race. However, both candidates are going to spend a lot of money. As I said, I’m not choosing sides right now. But it was interesting to hear Mr. Poizner’s almost pure, supply-side, Laffer Curve-driven, tax-cut rhetoric. I can’t help but wonder if Meg Whitman won’t jump on this bandwagon before it’s all said and done.

It will be a Republican year in 2010, and the GOP could pick off the California statehouse and use it as a tax-cutting, limited-government model with national impact -- in ways that Gov. Arnold Schwarzenegger never did.

On Tonight's Kudlow Report

This evening at 7pm ET:


-Volcker testifies…calls for restoration of Glass-Steagall
-IG Neil Barofsky says taxpayers won't get their TARP back

CNBC’s Hampton Pearson reports.



*Robert Reich, Fmr. Labor Secretary; Author, "Supercapitalism"; CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy
*Steve Moore, Senior Economics Writer for the Wall Street Journal Editorial Board ; "The End of Prosperity" Co-Author

Growth in Brazil; currency; banking

CNBC’s Maria Bartiromo has the story.

CNBC chief Washington correspondent John Harwood will join us from Pittsburgh, PA.

-Farewell to dollar supremacy?
-What matters to the markets?
-Plus a look at Washington money politics.

*Robert Doll, Vice Chairman & Global CIO of Equities at BlackRock
*Ed Yardeni, Yardeni Research President


NBC’s Pete Williams will be aboard along with NBC News Terrorism Analyst Roger Cressey.

Please join us. The Kudlow Report. 7pm ET. CNBC.

Bunning Talks Bernanke & The Fed

Sen. Jim Bunning (R-KY) joined me on last night's Kudlow Report to offer his take on Federal Reserve chairman Ben Bernanke and the role of the Fed in the current economic crisis. Among other things, we discussed whether there's an orchestrated policy by the Treasury and the Fed to let King Dollar fall.

Wednesday, September 23, 2009

On Tonight's Kudlow Report

This evening at 7pm ET:



*Steve Liesman, CNBC senior economics reporter
*CNBC's Rick Santelli
*Michael Pento, chief economist for Delta Global Advisors

NBC’s Steve Handlesman reports.


On to debate:

*Joshua Cooper Ramo, author of "The Age of the Unthinkable"
*Dick Armey, former US House Majority Leader

CNBC’s Phil LeBeau reports.

Plus a look at Geithner & regulatory reform


*Jim Chanos, legendary short-seller and founder of Kynikos Associates
*Bob Crandall, former AMR Chairman and CEO
*Jim Paulsen, chief investment strategist at Wells Capital Management

Please join us. The Kudlow Report. 7pm ET. CNBC.

Another Fed Meeting, More Helicopter Ben

Today’s FOMC policy announcement from the Federal Reserve basically sends a message that Bernanke & Co. doesn’t care one wit about the sinking dollar or the rising gold price. In fact, the latest policy directive removes last month’s reference to commodity-price increases, while there is no reference to the greenback at all. The central bank is going to keep buying mortgages and adding to its balance sheet of high-powered money creation.

A Bloomberg story last night said the Fed has been talking to government bond dealers about something called “reverse repos,” which simply means the Fed would sell Treasury bills to Wall Street and withdraw cash liquidity from the financial system. But there’s no mention of this exit strategy in today’s policy memo.

Essentially, the whole reverse-repo business has to do with the Treasury’s debt-ceiling limitations and the fact that the U.S. government is taking back $200 billion of cash sitting at the central bank. So the Fed could absorb some of that $200 billion through the reverse RPs, or simply let excess reserves held on deposit at the Fed go up another $200 billion. Whatever, it’s a technical matter.

The bottom line is that the Fed is going to continue to create an excess supply of new dollars, which is why the dollar exchange rate is likely to keep falling while gold and other commodities keep rising. Today’s incipient inflation will become much more pronounced in the next year or two. Helicopter Ben is not turning into King Dollar Ben.

Actually, I believe the Fed and the Treasury want to nurture a cheaper dollar to boost U.S. exports as a means of fine-tuning stronger economic growth through the international channel. But there is no exit strategy from dollar creation. That’s gonna wait well into next year.

It’s ironic that today’s policy announcement sounded much more optimistic in terms of the economy. And in view of this great monetarist experiment — which really is Friedmanism run amok — the Fed and everyone else may be surprised by a barnburner of an economic recovery over the next four to six quarters. Anticipating this, the stock market has had a tremendous run, and will probably continue on its upward path.

Trading has been lackluster following the Feds’ statement, with the Dow up only 20 points as of this writing, somewhat lower than the pre-Fed level. Reflation investments in industrials and commodities are clearly the place to be with the Fed strategy.

But heading into the G20 meeting, the U.S. has no exit strategy for fiscal or monetary policy. That could well create more problems, including more chatter from China and others about the dollar’s status as the world’s reserve currency.

The Obama-Geithner-Bernanke dollar-depreciation strategy is fraught with risk.

Tuesday, September 22, 2009

On Tonight's Kudlow Report

This evening at 7pm ET:


*Gary Shilling, president of A. Gary Shilling & Co
*Brian Wesbury, chief economist, First Trust Advisors


*Jim Paulsen, chief investment strategist at Wells Capital Management
*Quentin Hardy, Forbes National Editor

John Derrick, director of research, U.S. Global Investors will offer his perspective.

*John Tamny, RealClearMarkets editor
*Lyle Gramley, former Fed governor

Bob Murray, founder and CEO of Murray Energy will join us with energy perspective.

Please join us. The Kudlow Report. 7pm ET. CNBC.

Art Laffer’s Four Prosperity Killers

Right now is as good a time as any to revisit my old friend Art Laffer’s four prosperity killers. You can put a check mark next to each one.

1. Rising tax rates
2. Inflationary money
3. Trade protectionism
4. Government control/re-regulation

And while we’re on the subject, make sure to check out Art's terrific op-ed in today’s Wall Street Journal.

He argues that while Fed policy was undoubtedly important, it was ultimately tariffs, rising taxes, and currency devaluation which ruined the 1930s. According to Art, we face the same dangers today.

He’s dead right.

Monday, September 21, 2009

On Tonight's Kudlow Report

This evening at 7pm ET:



*Art Laffer, chief investment officer of Laffer Investments; former Reagan Economic Advisor
*Dean Baker, co-director at the Center for Economic and Policy Research
*Steve Auth, Global CIO of Equities; Federated Investors
*Andy Busch, BMO Capital Markets; CNBC Contributor

Also joining us...former Fed governor Wayne Angell and Vince Reinhart, AEI Resident Scholar; former director of the Fed's Division of Monetary Affairs.

Chris Guttman-McCabe, vice president of regulatory affairs at CTIA, a wireless trade group will offer his take.


*Peter Schiff, chief global strategist at Euro Pacific Capital
*Jeffrey Kleintop, chief market strategist at LPL Financial Services

Please join us. The Kudlow Report. 7pm ET. CNBC.

Saturday, September 19, 2009

Cleaning Up California's Mess: An Interview with Gubernatorial Candidate Steve Poizner

Last night I had the chance to speak with California Insurance Commissioner and gubernatorial candidate, Steve Poizner. Mr. Poizner delivered a tremendous Laffer-like supply-side growth message. He was much sharper and more on-target than his competitor Meg Whitman who I interviewed the prior evening.

Poizner supports an across-the-board reduction in marginal tax rates for individuals, corporations and capital gains. In addition, he favors a suspension of California's version of cap-and-trade. Plus a no-tax pledge. He was really impressive.

Friday, September 18, 2009

On Tonight's Kudlow Report

This evening at 7pm ET:

The Fed eyes banker compensation curbs.

CNBC’s Mary Thompson has a report on the latest financial regulation.


*Jerry Bowyer, CNBC Contributor; Syndicated Columnist
* Peter Morici, Univ of Maryland Business Professor; U.S. International Trade Commission Fmr. Chief Economist

CNBC’s Phil LeBeau reports.


*Robert Froehlich, Chairman of the Investment Committee for the University of Dayton"; "A Bull For All Seasons" Author
*Steve Moore, Sr Economics Writer for the Wall Street Journal Editorial Board; "The End of Prosperity" Co-Author
*Michael Farr, CNBC Contributor - Farr, Miller & Washington President

Higher taxes are coming. Are you prepared?

*Steve Moore, Sr. Economics Writer for the Wall Street Journal Editorial Board; "The End of Prosperity" Co-Author

California unemployment now stands at 12.2%

Joining us will be Steve Poizner, California Gubenatorial Candidate; California Insurance Commissioner.

Please join us. The Kudlow Report. 7pm ET. CNBC.

Can Meg Whitman Save California?

Last night I had the pleasure of interviewing California gubernatorial candidate and former eBay CEO, Meg Whitman, on her plans to rescue the moribund Golden Sate. California is one big fiscal and economic nightmare. She's got her work cut for her if she wins. I wish her all the best of luck.

Thursday, September 17, 2009

On Tonight's Kudlow Report

This evening at 7pm ET:


John Taylor will join us to discuss his op-ed in today’s Wall Street Journal. Mr. Taylor is an economics professor at Stanford and a Hoover senior fellow, as well as the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis."

Joining in the debate will be Steve Liesman, CNBC senior economics reporter.

Whitman's plan for California

California Gubernatorial Candidate and former eBay CEO Meg Whitman will join us for an exclusive interview.



*Michael Leeden, author,"The Iranian Time Bomb"
*Larry Korb, Assistant Secy. of Defense in the Reagan Admin.; Center for American Progress Sr. Fellow

CNBC’s Rebecca Jarvis reports.

CNBC chief Washington correspondent John Harwood reports.

Dr. Mario Motta, President Massachusetts Medical Society will discuss.

Please join us. The Kudlow Report. 7pm ET. CNBC.

What the Doctors Think

Will Americans soon be too sick to work, produce, invest, and generate new prosperity? That’s one conclusion you can draw from a new series by Investor’s Business Daily, which reveals that doctors are overwhelmingly opposed to a government takeover of health care (including the Baucus plan). Just as important, IBD reports that any government-based health-care overhaul will exacerbate the growing shortage of doctors in this country.

IBD/TIPP found that 71 percent of physicians believe that government cannot cover 47 million more people without significant rationing of health care. And nearly half of the doctors polled say they would retire early if Congress passes the proposed overhaul.

IBD/TIPP surveyed nearly 1,400 physicians for its series. In written responses, doctors have pointed to lower pay, increased government mandates, and less freedom to practice as reasons for the physician shortage. In particular, Medicare and Medicaid, which essentially are running half of our health-care system, continue to pay below-market reimbursement rates that are putting doctors out of business.

Primary-care physicians are the worst off. The American Academy of Family physicians reports that primary-care doctors need a 30 percent pay raise in order to survive. They’re not going to get it under Obamacare, or Obamacare Lite. In fact, physician payments will move lower should any of the various House and Senate plans pass.

The Massachusetts Medical Society, operating in a state that has implemented a Washington-like universal-overage plan, reports that primary-care doctors are in short supply for a fourth straight year, that the percentage of primary-care practices closed to new patients is the highest ever recorded, and that seven of 18 specialties — dermatology, neurology, urology, vascular surgery, and obstetrics-gynecology, in addition to family and internal medicine — are all in short supply.

On top of all that, enrollment in medical schools is already declining. By some estimates, the nation will have 159,000 fewer doctors than it needs by 2025.

So what exactly are we supposed to do about this doctor shortage? The easy answer is to create incentives for new doctors. And for that matter nurses. And for that matter hospital space. We should expand and grow the entire free-market health-care system, which up until recently was America’s greatest growth industry.

But these government plans will do just the opposite. They will shrink private care and private insurance. They will reduce jobs. And they may well undermine American health and wellness.

Everyone should read the IBD series and consider the health-care debate from the standpoint of the doctors. That’s something that hasn’t been done yet. But it’s darn important.

Exclusive Interview with Meg Whitman

Make sure to tune into the Kudlow Report tonight for my interview with California gubernatorial candidate and former eBay CEO, Meg Whitman. It ought to be very interesting. She is running hard for Governor of the Golden State.


Wednesday, September 16, 2009

On Tonight's Kudlow Report

This evening at 7pm ET:

Plus the Rockefeller tax hike accusation.

CNBC’s Hampton Pearson reports.


*Sen. Ron Wyden (D-OR)
*Sen. John Barrasso, MD (R-WY)


*Rep. Tom Price,MD (R-GA) (Financial Services Cmte)
*Rep. Vic Snyder, MD (D-AR)

Eye on Gold & the Dollar: Does inflation loom?

*Joe LaVorgna, Deutsche Bank Chief U.S. Economist
*David Malpass, President, Encima Global; Deputy Asst Secy of Treasury Under Reagan '86-'89

Also…Should you invest in healthcare?

*Laszlo Birinyi, President, Birinyi Associates
*Steve Auth, Global CIO of Equities; Federated Investors

Please join us. The Kudlow Report. 7pm ET. CNBC.

Royce on Defunding ACORN

Congressman Ed Royce (R., Calif.), co-sponsor of the Defund ACORN Act, joined me last night to discuss the investigation and possible defunding of ACORN. The Senate just voted 83-7 to defund ACORN. The question now becomes whether the House will follow suit.

The interview begins at the 2:01 mark.

Tuesday, September 15, 2009

On CNBC's Kudlow Report Tonight

On tonight's show at 7pm ET:

Should the SEC be abolished?

*Charlie Gasparino, CNBC On-air editor, author of “The Sellout”
*Harvey Pitt, Fmr. SEC Chairman; Kalorama Partners Founder & CEO

CNBC senior economics reporter Steve Liesman has the details.



*Bruce Kasman, JP Morgan Chief economist
*Stefan Abrams, Bryden-Abrams Investment Management Managing Partner
*Jim LaCamp, Senior VP, Portfolio Manager Macroportfolio Advisors

NBC’s Steve Handelsman has the story.


On to discuss: Steve Moore, Sr. Economics Writer for the Wall Street Journal Editorial Board; "The End of Prosperity" Co-Author

CNBC chief Washington correspondent John Harwood reports.


*Steven Law, Chief Legal Officer & General Counsel; U.S. Chamber of Commerce
*Ross Eisenbrey, Economic Policy Institute Vice President

Please join us. The Kudlow Report. 7pm ET. CNBC.

Bernanke: ‘Recession Is Very Likely Over’

Fed head Ben Bernanke declared “the recession is very likely over at this point,” adding the phrase “from a technical perspective.” He said this during a question-and-answer session at the Brookings Institution today.

Well, gee whiz golly.

While Mr. Bernanke’s forecasting prowess is somewhat suspect (we all can say that), he got some strong ammo from a blockbuster retail sales report that was way above Wall Street expectations. Overall retail sales jumped 2.7 percent at an annual rate in August. Take out the cash-for-clunkers temporary car bulge, and sales still jumped 1.1 percent. In GDP terms, core retail sales (excluding autos, gasoline, and building materials) still rose 0.8 percent for August, which comes to 2.7 percent annually over the past three months. This means consumer spending in the third quarter ending in September will rise by more than 2 percent annually.

I wonder if Mr. Bernanke isn’t underestimating the very substantial monetary stimulus that he has injected into the economy, going back about nine months. This is the Milton Friedman monetarist experiment. The Fed’s balance sheet has grown by over $1 trillion; various money-supply measures are running about 10 percent on average; the Treasury yield curve is very steep and positively sloped; and of course the target rate is near zero. Add to that $1,000 gold and a weak dollar.

We’re talking easy money here. It started last fall, and with a roughly six-to-twelve-month lag, it’s now beginning to impact the economy in a significant way.

So Mr. Bernanke may be underestimating a V-shaped recovery that will extend through 2010. And don’t forget that marginal tax rates are going up in 2011. That’s likely to mean -- in supply-side-incentive terms -- that many folks will bring as much income and investment as they can into 2010 to beat the tax hike. And that could add to GDP in a significant way next year.

Another recovery indicator from my pal Mark Perry: The TED spread, which is the three-month LIBOR rate minus the three-month T-bill rate, considered to be an important indicator of credit risk in the economy, has plunged from nearly 500 basis points last October to only 16 basis points currently -- the lowest level in more than five years, going back to June 2004.

In very simple terms, money is easy and plentiful while business profits are rising. It’s a recipe for recovery.

Now let’s hope Team Obama doesn’t take over the whole economy.

The Empirical Evidence Against Big Government

Here's the latest video from my friend Dan Mitchell over at the Center for Freedom and Prosperity Foundation. It presents real-world data and research showing that the burden of government spending is far too high not only in the United States (where the Bush-Obama policies have increased the federal budget by more than 100 percent), but also in other nations where government budgets sometimes consume more than one-half of an economy's output.

If you'd like to watch Part I, click here.

Monday, September 14, 2009

Tonight on The Kudlow Report

On tonight's show at 7pm ET:

And why didn't the president go to the NYSE floor?

CNBC chief Washington correspondent John Harwood reports.


*Charlie Gasparino, Author "The Sellout"
*Steve Liesman, CNBC senior economics reporter
*Mort Zuckerman, N.Y. Daily News Publisher; U.S. News & World Report Chairman & Editor-in-Chief
*Mark Calabria, Dir. of Financial Regulation Studies, CATO; Fmr. Banking Committee Official

Rep. Jeb Hensarling (R-TX), vice ranking member on the House Budget Committee will be aboard.

CNBC’s Sharon Epperson reports.

Has the financial sector recovered?

*Ned Riley, Investment Strategist Riley Asset Management
*Joe Battipaglia, Stifel Nicolaus Market Strategist


On to debate:

*Robert Reich, Fmr. Labor Secretary, Author, "Supercapitalism", CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy
*John Tamny, RealClearMarkets Editor, Sr. Economic Advisor to HC Wainwright Economics

CNBC’s Jane Wells reports.

On to debate:

*Daniel Price, Fmr. Asst to GW Bush for Internat'l Economic Affairs
*Peter Navarro, "The Coming China Wars" Author; University Of California-Irvine Business Professor

Please join us. The Kudlow Report. 7pm ET. CNBC.

Friday, September 11, 2009

On CNBC's Kudlow Report Tonight

On tonight's show at 7pm ET:


On to discuss:

*Mort Zuckerman, N.Y. Daily News Publisher; U.S. News & World Report Chairman & Editor-in-Chief
*Bernie Kerik, Chairman & Pres., The Kerik Group, LLC & Former NYC Police Commissioner
*James Glassman, Fmr. President, World Growth Institute; Fmr. Undersecretary of State; Kiplinger's Personal Finance Columnist
*Pat Boone, "60 Plus" National Spokesman

Also on board…Richard Hoey, Chief Economist of BNY Mellon and Joe Grano, Fmr. Homeland Security Advisory Council Chmn.; CEO of Centurion Holdings.

CNBC chief Washington correspondent John Harwood reports.


On to debate:

*Robert Reich, Fmr. Labor Secretary; Author, "Supercapitalism"; CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy
*Steve Moore, Sr. Economics Writer for the Wall Street Journal Editorial Board; "The End of Prosperity" Co-Author

CNBC’s Sharon Epperson reports.


*Joe LaVorgna, Deutsche Bank Chief U.S. Economist
*David Malpass, President, Encima Global; Deputy Asst Secy of Treasury Under Reagan '86-'89

Please join us. The Kudlow Report. 7pm ET. CNBC.

Thursday, September 10, 2009

The Government-Insurance Option Is Dead

But there’s still no free-market health-care reform.

The day after President Obama’s impassioned speech for big-government health care, Wall Street bet heavily that the so-called government-insurance option he supports is dead.

In a strong stock market on Thursday -- the market’s fifth-straight daily rise (so much for the September swoon) -- health-insurer shares advanced significantly. Cigna increased 5 percent; Health Net almost 5 percent; Humana 3.5 percent; and UnitedHealth Group 1.5 percent. Hospital shares like Community Health Systems and Tenet Healthcare also rallied smartly, climbing about 5 percent each. Drug company Pfizer rose more than 1 percent.

These stocks would not have rallied if the public option looked alive. Corroborating this, the Intrade pay-to-play online betting parlor shows only a 24 percent probability of the government option passing by the end of this year. Also, of 17,308 respondents in a Politico poll, 38 percent registered thumbs-up for the president’s address while 58 percent said thumbs-down.

Obama’s speech was not a game-changer. Good delivery, bad product. And at the top of the list, the new government-insurance option, which surely is a gate-opener for the government takeover of the entire health-care sector, is a clunker. The public doesn’t like it. Moderate and conservative Democrats don’t like it. Republicans can’t stand it. And Wall Street doesn’t want it. Hence, the Dow’s 80-point rally the day after the speech.

But the free-market option is still nowhere to be found. Right now Sen. Max Baucus is working to save President Obama’s face, with a kind-of Obama Lite plan coming out of his Senate Finance Committee. But Mr. Baucus’s framework has individual and business mandates, and it surely will give the government an even stronger whip-hand on health care.

There are taxes galore for this $900 billion baby. It includes a 35 percent excise tax on high-end insurance policies, plus billions more in taxes on insurers, drug companies, and medical-device makers. Government boards will determine value, quality, and quantity for doctors, hospitals, and clinical laboratories. Folks who opt out could face a $3,800 tax (based on a family of four).

At the end of the day, thoroughgoing free-market choice and deregulation is just as missing in action under Baucus as it is under Obama. There’s a bipartisan deal to be had, one that would deregulate health insurance across state lines. It could pass the Senate. But Democratic leaders aren’t going there. For some reason they won’t put the market to work.

In other words, there’s no real market and no real choice in Democratic health reform.

Wednesday, September 09, 2009

***Special Kudlow Report Tonight

On tonight's show at 7pm ET:



*Sen. Evan Bayh (D-IN)
*Sen. Judd Gregg (R-NH)
*Sen. Mark Warner (D-VA)
*Sen. Bob Corker (R-TN)


*Sen. Ron Wyden (D-OR)
*Sen. Lamar Alexander (R-TN)
*Sen. Susan Collins (R-ME)


*Robert Reich, former Clinton Labor Secretary; Author, "Supercapitalism"; CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy
*Micheal Tanner, Director of Health & Welfare Studies, CATO

Bob Doll, Vice Chairman & Global CIO of Equities at BlackRock


*Betsy Ross McCaughey, Hudson Institute Health Policy Expert; Cmte To Reduce Infection Deaths Chairman
*David Goodfriend, former Clinton W.H. Official; "Left Jab" Co-Host; Air America Co-Founder

Please join us. The Kudlow Report. 7pm ET. CNBC.

An Interview with John Thune on Obama's Health Care Hail Mary

John Thune, South Dakota Republican senator and chairman of the Republican Policy Committee, joined me last night to offer perspective on President Obama’s Hail Mary pass before Congress this evening. He also offered some clear-eyed GOP health-care solutions of his own, including interstate-insurance deregulation and medical-malpractice reform.

Interview begins at the 3:32 mark.

Tuesday, September 08, 2009

On CNBC's Kudlow Report Tonight

On tonight's show at 7pm ET:

CNBC’s Sharon Epperson has the story.

We'll discuss talk of a new global currency.


*David Malpass, President, Encima Global; Deputy Asst Secy of Treasury Under Reagan '86-'89
*Steve Forbes, Forbes Chairman and CEO; Forbes Editor-in-Chief; Fmr. Presidential Candidate; "Power, Ambition, Glory" Author
*David Gilmore, Foreign Exchange Analytics Partner


Joining us will be Abhay Deshpande, First Eagle Funds Portfolio Manager; manages 5-star First Eagle Gold Fund (SGGDX)

CNBC chief Washington correspondent John Harwood reports.

Rep. Peter Hoekstra (R-MI) will join us.

Also…Lawrence Bossidy, former Honeywell Chairman & CEO will be aboard.

Andy Busch, BMO Capital Markets; CNBC Contributor

Please join us. The Kudlow Report. 7pm ET. CNBC.

China Raises the Money-Printing Alarm

A hugely important story from Ambrose Evans-Pritchard of the London Telegraph that China is alarmed by U.S. money-printing has helped drive the dollar price of gold over $1,000, at least temporarily, and drive down the exchange rate of the greenback. Other commodities like oil and copper have also rallied today.

At a conference in Lake Como, Italy, a leading Chinese economic spokesman — Cheng Siwei — criticized Ben Bernanke’s loose monetary policy. “If they keep printing money to buy bonds it will lead to inflation,” said Cheng, “and after a year or two the dollar will fall hard.” Cheng went on to say that China was diversifying its roughly $700 billion of U.S. foreign-exchange reserves into gold. “Gold is definitely an alternative, but when we buy, the price goes up,” he said. “We have to do it carefully so as not to stimulate the market.”

Ambrose-Pritchard interprets this as the “Beijing Put” on gold — meaning the Chinese will buy gold on the dips, which is going to prevent the yellow metal from falling hard. It also puts upward price pressure on gold for the long term. Beijing has in fact doubled its gold reserves to 1,054 tons.

As a corollary to this, the Chinese are clearly losing confidence in the U.S. dollar. And while nobody is much paying attention to a new UN report that the global financial system needs a new reserve currency to replace the dollar, the fact is that Chinese spokesmen (and Russian and Brazilian spokesmen) have said the same thing from time to time.

Incidentally, the G20 meeting of finance ministers and central bankers in London this weekend failed to articulate a fiscal and monetary exit strategy from all their massive spending, borrowing, and money-creating to fight off the financial meltdown and the world recession. The G20 reluctance to exit from hyper-stimulus is also bullish for gold — and, for that matter, bearish for paper currencies in general.

Cheng, by the way, hinted that China is experiencing a speculative boom in stocks and property. But if the Chinese raise interest rates ahead of the Fed they will risk being flooded with hot money that will make the boom even worse. “We have to wait for them,” said Cheng. “If they raise, we raise.”

Many Wall Street traders are dissing the gold-rally story. But I think they’re missing the bigger picture of excess money-creation in the U.S. and elsewhere. As I recall, Confucius once said: Where there’s smoke, there’s fire.

Friday, September 04, 2009

The Jobless Recovery

Obama’s war against small business and paper money.

The jobless-recovery theme re-emerged on Friday with the arrival of a disappointing employment report. The daunting number was the unemployment rate, which jumped from 9.4 percent in July to 9.7 percent in August. This is a big-versus-small-business issue. Sort of the haves versus the have-nots.

The large companies are gradually recovering as a result of major cost-cutting, inventory reduction, and a lean-and-mean return to profitability and high productivity. So the payroll survey registered a 216,000 job loss, the smallest drop in over a year.

However, the household survey, which picks up small, owner-operated, LLC/S-Corp-type businesses, registered a devastating 392,000 job loss, which follows losses of 155,000 and 374,000 in the prior two months. This is the source of the unemployment-rate jump, as 466,000 newly unemployed were scored in the report.

So while the big companies are getting healthier, the smaller firms are being left in the dust. Unfortunately, small businesses provide most of the new job creation in the United States.

Veep Joe Biden is out there saying the Obama stimulus plan has saved or created 150,000 jobs in the administration’s first 100 days and another 600,000 in its second 100 days. But he sure isn’t talking about small-business jobs.

In fact, it’s hard to know what he’s talking about. Uncle Sam has borrowed $388 billion in the second quarter and is scheduled to borrow $406 billion in the third quarter and nearly $500 billion in the fourth. In order to provide $152 billion in so-called fiscal stimulus, the government is draining close to $800 billion from the private-sector savings supply -- $800 billion that will not be invested in new-business enterprises, including small businesses.

Borrowing from Peter to redistribute to Paul is not fiscal stimulus. It’s a fiscal depressant. Small businesses are having enough trouble getting their hands on credit. And now they can’t find enough capital for new start-ups. The government prospers, but the small-business sector sinks.

Then there are all the tax and regulatory threats related to health-care and energy reform. Until Mr. Obama retreats from his plan for a government takeover of the health-care sector, and a cap-and-trade program that will cripple the energy sector, the cost of hiring the new job will continue to rise.

The threat of higher payroll taxes and energy costs is more than enough to deter new hiring. Taxes on upper-end investors are going to rise, too, and there may be a health-care surtax on top of that. And don’t forget that small businesses pay the top personal tax rate, which is going up. Oh, and how about the recent minimum-wage hike? Yet another business cost.

So while the government doles out money for transfer payments and one-time temporary tax credits, the ensuing increase in the private-sector tax-and-financing burden becomes a complete deterrent to new job creation, as well as capital formation.

We’re going to recover. Improved ISM reports for manufacturing and services, along with better profitability for big corporations, suggest we’re looking at a mild, V-shaped recovery of 3 percent. But it will be a jobless recovery.

Of course, if Mr. Obama pulls the plug on his new government-insurance plan, and all the spending, taxing, borrowing, and regulating that goes along with it, the stock market will rally at least 500 points -- at least. Investors understand that an Obama retreat on government-run health care will lead to stronger economic growth for America’s vibrant health-care industry -- and small businesses in general.

With all this, why is Wall Street so shocked by the recent gold rally, with the yellow metal marching back toward $1,000 an ounce? The run into gold is a clear revolt against paper money and financial profligacy.

The Federal Reserve’s monetarist experiment to balloon the money supply will backfire with much higher future inflation unless the economy is capable of generating enough new investment and jobs to produce the goods to absorb all the new money. Indeed, this is a worldwide problem. Too much cash chasing too few goods.

The G-20 finance ministers are meeting in Pittsburgh this weekend, although nobody there has an exit strategy from the money explosion that has been aimed at solving the financial meltdown. None of the big countries have plans to reduce marginal tax rates to promote economic-growth incentives. There is no golden anchor of currency value, and no exit strategy from the potential inflation effects of the new-world monetarism.

The bottom line is that governments today have no financial discipline. And while growth will reappear, it may be a meager sort, with incipient inflation pressures plaguing the new recovery.

On CNBC's Kudlow Report Tonight

On tonight's show at 7pm ET:

CNBC senior economics reporter Steve Liesman will join us.

Jobs! Jobs! Jobs!
Labor/Card Check

*Robert Reich, former Labor Secretary, author of"Supercapitalism"; Univ. of CA., Berkeley, Prof. of Public Policy
*Steve Moore, Sr. Economics Writer for the Wall Street Journal Editorial Board; "The End of Prosperity" Co-Author

John Carney,, Managing Editor will offer perspective.

CNBC’s Mary Thompson reports.

CNBC’s Rick Santelli offers his take.

Is it time to link money back to gold?


*James Altucher, Hedge Fund Manager, First Angel Capital; Author, "Trade Like a Hedge Fund"
*Dan Fitzpatrick, President & CEO; Senior Contributor,
*Don Luskin, CNBC Contributor, Trend Macro Chief Investment Officer


NBC’s Steve Handelsman reports.

On to debate:

*Mark Walsh, "Left Jab" Host (Sirius show), Fmr. Sr. VP at America Online, Fmr. Vertical Net CEO, Founding CEO at Air America, Fmr. DNC Advisor
*Jerry Bowyer, CNBC Contributor; Syndicated Columnist

Please join us. The Kudlow Report. 7pm ET. CNBC.

An Interview with Eric Cantor On Obamacare

Will President Obama and the Democrats keep up their push for a government-run health care plan? And what will we hear from Obama in his speech before Congress on Wednesday? Helping me sift through these questions on last night's show was House Minority Whip Eric Cantor of Virginia.

Is Mr. Market's Tummy Full?

Last night we welcomed the terribly bright David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates to the Kudlow Report to discuss his stock market and economic outlook. In a past life, David was chief economist for Merrill Lynch North America.

Thursday, September 03, 2009

On CNBC's Kudlow Report Tonight

On tonight's show at 7pm ET on CNBC:

VP Biden says stimulus working..
Big Obama health care speech next week..

CNBC’s Hampton Pearson reports.


On to debate:

*Brian Riedl, The Heritage Foundation Federal Budget Analyst
*Christian Weller, Center For American Progress

CNBC’s Sharon Epperson reports.

What's a better investment now: S&P 1000 or gold $1000?

*CNBC’s Rick Santelli
*Michael Pento, Delta Global Advisors, Inc. Senior Market Strategist


Rep. Eric Cantor (R-VA) will be aboard with his outlook and perspective.

Does "Mr. Market have a full tummy?"

Joining us will be David Rosenberg, Chief Economist & Strategist Gluskin Sheff + Associates; former Merrill Lynch Chief Economist.

Pot plantations on the rise in the U.S. - cartel links suspected

CNBC’s Trish Regan reports.

Please join us. The Kudlow Report. 7pm ET. CNBC.

Coburn Talks "Kennedy-Care"

Here's the video of my recent interview with our great friend, Republican Senator from Oklahoma, Dr. Tom Coburn, on the state of the health care debate. It looks to me like Democrats are attempting to exploit the passing of Senator Kennedy.

Note: The interview begins at the 1:57 mark.

Wednesday, September 02, 2009

On CNBC's Kudlow Report Tonight

On tonight's show at 7pm ET on CNBC:

The global economy gains steam

On to debate:

*Joe Battipaglia, Stifel Nicolaus Market Strategist
*Brian Wesbury, First Trust Advisors Chief Economist

CNBC On-Air editor Charlie Gasparino, author of "The Sellout," will join us with his perspective.

CNBC’s Bertha Coombs reports.

CNBC’s Sharon Epperson reports.

Sen. Bob Casey (D-PA) will join us with his take.

CNBC’s Scott Cohn joins us from Mexico City.

Is the Tobin Tax a recipe for meltdown?

*Jimmy Pethokoukis, Reuters Money & Politics Columnist
*Michael Linden, Associate Director for Tax and Budget Policy with the Center for American Progress

Please join us. The Kudlow Report. 7pm ET. CNBC.

An Interview with the FDIC's Sheila Bair

Last night I had the privilege of discussing the state of the banking industry with distinguished FDIC chair Sheila Bair. One interesting highlight was her comment that commercial real estate loans remain a "looming problem" on banks' balance sheets. She expects this area to be a driver for bank failures through the remainder of this year and into 2010. And she remains firmly opposed to the idea of a single super regulator. Incidentally, I still think she's absolutely right about needing competition among the regulators, with various checks and balances. The Fed has not earned its uber-regulator status.

Tuesday, September 01, 2009

Hey Conservatives, We’re Recovering

Even while Obamanomics looms.

Believe it or not, sometimes good news on the economy can be bad news for stocks.

It’s a distant point, but one worth considering in view of conservative pessimism over Obama’s plans to spend, tax, borrow, and control the economy. I share these worries. But the U.S. is still a free-market economy, and it will be so at least until the health-care and energy sectors are nationalized. And free-market economies are resilient and self-correcting.

While so-called spending-and-deficit stimulus may be an economic depressant, Friedmanite monetary stimulus -- which has been substantial -- is gradually exerting a powerful impact on economic growth. At the same time, businesses have become lean and mean, with radical cost-cutting of inventories, employment, and hours worked. That’s setting up a big profits surge, which is the biggest economic stimulus of all.

Consumers also have retrenched, as is appropriate with falling home prices, a rough stock market correction, and a slowdown of incomes. But from the ashes of recession, these corrective forces lead to the next recovery.

In Hayekian and von Misean terms, bad investment and spending decisions are being remedied through the free-market corrective process. And greased by easy money, today’s market correctives may produce a much stronger V-shaped recovery than the stock market consensus expects.

That’s the message of this week’s blowout manufacturing report from the Institute of Supply Management. The ISM index rose for the eighth-straight month, climbing to 52.9 in August from 48.9 in July, with 11 of 18 industries reporting growth. (Anything over 50 is a clear recovery sign, meaning the recession almost certainly ended in June.) At this pace, there could be 4 percent growth in real GDP for the third quarter.

Within the index, new business orders soared to 64.9 (the highest level since December 2004), production jumped to 61.9, and vendor performance improved to 57.1. This last statistic is important since vendor performance tracks supplier deliveries. When economic conditions heat up, deliveries tend to slow down. Think of Amazon delivering books a day or two later when orders are rapidly rising. And with inventories now at rock-bottom levels, businesses are going to have to rehire workers in order to reignite the production process and meet new demand.

Four percent growth is a lot lower than the 7 to 8 percent growth one would expect after a deep recession. That was the robust expansion pace we witnessed in 1983-84. But 4 percent growth becomes a V in light of pessimistic forecasts of 1 or 2 percent growth, or even a double-dip recession.

Now here’s the rub for stocks: It may be that the Federal Reserve is caught flat-footed in the event of a V-shaped recovery. They may have to tighten policy sooner than planned.

Economist Brian Wesbury, who agrees with the V-shaped scenario, points out that the consumer price index is rising at a 2.4 percent annual rate for the first seven months of 2009. This is a more difficult inflation story than the 12-month change, where we are still deflating nearly 2 percent off of last year’s $150 oil shock. So overly aggressive Fed easing, combined with a weakening dollar, may be generating more inflation pressures than our central bankers think.

There’s a supply-side angle to this story, too. Top marginal tax rates are scheduled to rise in 2011, reducing incentives for future economic growth. However, investors and producers are likely to beat the tax hike by bringing income and activity forward to 2010. This could create a false prosperity next year, which will reinforce the V-shaped recovery even while economic activity is drained from 2011 (possibly setting up a quasi-double-dip). Something similar happened in 1992-93, ahead of the Clinton tax hikes.

So back to stocks. Tuesday’s sell-off -- with the Dow dropping more than 150 points -- could reflect the market’s recognition that the Fed will have to raise interest rates sooner, and withdraw excess cash more quickly, than the easy-money consensus had expected.

A lot of people disagree with this point of view, but I am putting it out there for consideration. It’s not unusual in a stock market/business-cycle recovery to have new production processes absorb excess liquidity while the Fed is withdrawing money from the financial system. That often sets up a brief stock market correction, even though the rise in profits will ultimately carry the indexes to higher levels.

Conservatives need to take note of all this. Disagreements with Obamanomics are vitally important, even in the early stages of economic recovery. But my sense is the Right is too pessimistic about today’s economy. Sometimes you have to take your political lenses out in order to clearly examine the internal corrective workings of a free-market system.

Down the road, heavy government control of the economy will diminish our potential to grow. But that doesn’t mean we must call a halt to the business cycle.