07.01.2008 0

Damned if they Don’t

  • On: 07/30/2008 12:15:49
  • In: Monetary Policy
  • As the prices of food and energy continue to rise globally and the dollar remains weak, the presidential candidates appear to be haplessly ignoring any practicable solutions which would strengthen the dollar and bring the prices of commodities down, leaving Americans in the fast lane on the Road to Perdition.

    Instead, they appear to be content campaigning on high fuel costs in order to promote their own agendas, whether that includes decreased taxation or more, less regulation or more, spending cuts or increases. None have promoted a defense of the dollar as the means of bringing down the costs of commodities, which leaves a tremendous opportunity for the candidate that first takes advantage of the issue, as recently noted by John Tamny of RealClearMarkets on Kudlow & Company, commenting on Larry Kudlow’s interview with Republican candidate John McCain (R-AZ):

    “I think we heard, once again, a lot of talk about spending cuts and balanced budgets – and a lot of discomfort in talking about tax decreases. So you know, I’ll take a tax cut wherever I can get it. I think the problem there is [McCain] is talking about suspending the gas tax, but in fact, what he should be talking about is a stronger dollar [emphasis added]. That would actually drive down the oil price and gasoline prices a lot more… I think [the lack of a discussion on the dollar] is a big shame. One of these candidates is going to wake up to the fact that that’s the number one populist issue – strengthening the dollar. It would be a big vote getter. A weak dollar is bad for the middle classes.”

    For McCain’s part, he believes that the weak dollar is a symptom of the trade deficit, the need to import foreign oil, the national debt, and Congressional spending practices. He stated in the interview that these problems hurt the economy and that weakens the dollar. Missing from that equation is the fact that the weak dollar significantly contributes to the rising costs of commodities, which increases the costs of doing business, which means less profit, less jobs, less wage increases, etc., and that brings down the economy.

    He’s got it backwards, and by not understanding the problem, the U.S. is no closer to a solution.

    It may be so that reducing the trade deficit, becoming energy independent, paying off the national debt, and bringing spending under control could partly strengthen the dollar in the long run. But none of these things are likely to occur in the next four years as free trade comes under assault, government regulations stand in the way of oil exploration, gasoline refineries, and nuclear energy alternatives, and the Democrats (who want even more Big Spending) keep control of Congress.

    What is needed is an active “dollar defense,” in the words of Kudlow. Barring the presidential candidates actually promoting real solutions to the real problems facing America – the Second Coming appears to be closer – those who presently serve in the White House, the Federal Reserve, and the Treasury, and their counterparts in the G7, are left to address the biggest issue facing not just America, but also one of the greatest problems facing the global economy.

    For its part, the CATO Institute’s Jagadeesh Gokhale and Thomas Firey are encouraging the Fed to stop cutting interest rates:

    “Congress has given the Federal Reserve two sometimes conflicting mandates: It should maximize economic growth and restrain inflation. The former apparently requires low interest rates; the latter, high ones. Walking that tightrope gives currency to the old saying that the Fed should “take away the punchbowl before the party really gets going.”

    “As we learned in the 1970s, high inflation — and expectations of high inflation — can devastate the economy. Low inflation — and expecations of low inflation — mean stable wages, interest rates and prices, all of which tend to encourage work, innovation and production…

    “The FOMC’s policy disagreements over interest rates reflect its members’ different perceptions and preferences about how quickly such adjustments should be promoted via monetary policy. We worry that further delays induced by excessively accommodative policy will result in a vicious cycle of higher inflation, increased inflation expectations, reduced Fed anti-inflationary credibility, slower capital reallocations and, eventually, a weaker economy [emphasis added].”

    Internationally, Kudlow has been calling on the G7 to take an active role as well, and has noted that this may actually be in the works:

    “Investors worried about the dollar, as I am, should really take a look at the recent London Daily Telegraph story written by Ambrose Evans-Pritchard… He reports an interview with Jean-Claude Juncker, the Luxembourg premier and chair of Eurozone financiers who is also known as the EU’s ‘Mr. Euro.’ The interview strongly hints of a G7 action to halt the collapse of the dollar and bring an end to commodity speculation by hedge funds.”

    That could be good news if it’s pulled off correctly, and that in turn could mean real relief for consumers the world over when it comes to ever-higher food and energy prices. As Americans get prepared to vote November, however, it remains unclear if any of the candidates are ready to get on the ball, and the American people may be damned if they don’t do so soon.

    ALG Perspective: The inexplicable silence by the presidential candidates, regardless of party affiliation, on an active dollar defense as the means to bringing down soaring prices clearly must come to an end. And coordinated action by the Fed and their G7 counterparts may be required before it is too late. ALG News will keep you posted on further developments on the dollar front, including if any of the candidates take the lead on this important issue.

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