November 16, 2004,
Is there too much panic about the so-called dollar decline? You bet there is.
Most of the recent drop in the U.S. currency has come against the euro. But Europe has dug itself into a deflationary hole in recent years. The volume of euros is way too scarce, and taxes, government spending, regulations, and unemployment are way too high. Why anyone would want to invest in Old Europe’s socialist policies is beyond me. Surely it isn’t worth deflating the U.S. economic recovery, or the dollar, just to play Europe’s perverse game.
The dollar, in actuality, isn’t really weak. A broader dollar index of 26 currencies published by the Federal Reserve paints a much stronger picture. Since February 2002, the dollar has fallen 14 percent from a greatly overvalued position that deflated the U.S. economy into recession. However, over the last 10 years, this broad-dollar index is basically unchanged. The dollar is at nearly the same point today as it was in 1994. During this period the average inflation rate in the U.S. was 1.8 percent.
For even more perspective, since 1980 when the U.S. embarked on “cowboy capitalism” meaning Ronald Reagan’s policies of low tax rates, deregulation, free trade, price stability, and massive entrepreneurship that lead to Schumpeterian gales of creative destruction the widest profit margins in the world have attracted investment inflows from the four corners of the globe. Consequently, the dollar has appreciated 200 percent over the past 24 years.
Adjusted for inflation, the price of gold during this period has dropped from $1,264 an ounce to today’s $430, a decline of 66 percent for the yellow metal. So much for inflation. As for wealth-creation and the health of American business, the S&P 500 stock market average increased 950 percent during this long period.
With the reelection of President George W. Bush, cowboy capitalism will continue and then some. Pro-growth policies on tax reform, Social Security reform, tort reform, and energy reform will all keep the capital in capitalism. Watch the U.S economy continue to outperform the other large industrial countries by a wide margin, as it has since Reagan.
Which brings us back to the dollar. In order to get a piece of Bush’s ownership-society vision, foreign investors are going to have to buy dollars, not sell them. Whether the socialists of Old Europe continue to resist capitalism remains to be seen, but that’s their problem, not ours. They have no power over the U.S. dollar, or the free-market American economy, or the president’s visionary efforts to bring democracy and free elections to Arabia and the Middle East.
In narrower terms, the current guardian of dollar value is Maestro Alan Greenspan. He has spent a distinguished career at the Fed protecting greenback purchasing power and holding down domestic inflation. For those proliferating dollar bears on Wall Street, including a number of supply-siders who have turned into inflationist worrywarts, do you really think Greenspan is about to reverse his long-held convictions? Only a few years ago the rap against Sir Alan was deflation. Having corrected that mistake, do you really think he’s embarked on a massive inflation? Highly doubtful.
As Mike Churchill, an insightful supply-side analyst, recently put it, Greenspan’s “key reference point for valuing the dollar is the gold price . . . if gold is rising because some investors think the Fed will back away from interest rate hikes, this view is probably misguided.”
In other words, the Fed will gradually remove the excess dollars they appropriately created following the dreadful 9/11 attacks on the U.S. As they remove this emergency liquidity and as pro-growth tax cuts are made permanent in Bush’s second-term tax-reform program, the future value of the U.S. dollar is likely to rise, not fall.
Since the presidential election total shareholder wealth has increased $430 billion, or nearly 4 percent. Investor wealth is now at its highest level since early 2001, according to Daniel Clifton, the executive director of the American Shareholder’s Association. This is because pro-investment tax cuts will be made permanent, not repealed, as a result of Bush’s victory (and the increased number of pro-growth senators joining him in Washington for his second term).
The liberal chattering pundits of the old established media will continue to prattle on about budget deficits, trade deficits, a weak dollar, higher inflation, and a jobless recovery. But America’s economic future is vastly more optimistic than these negativists would have us believe. Both politics and policy are pointing toward non-inflationary prosperity. The U.S. dollar will share in this bounty.
Larry Kudlow, NRO's Economics Editor, is CEO of Kudlow & Co. and host with Jim Cramer of CNBC's Kudlow & Cramer.