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The Prices Are Right
The inflation hawks are losing their argument.


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Larry Kudlow

For months the inflation hawks have been decrying the upward price of gold and the weakening dollar — both historic signals that prices are headed up. They’ve made the loud argument that inflation is on the way, and to stave it off the Federal Reserve must raise interest rates — quickly and by a good amount.

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At least for now, they are flat out wrong: The latest consumer-price index, which arrived this week, shows a tiny 1.1 percent increase over the last twelve months. One core measure registered an anemic 0.6 percent rate.

While the CPI is surely a backward-looking inflation indicator, forward-looking gold dropped over $13 to $408 on the news. The 10-year Treasury bond has dropped below 4 percent instead of rising over 5 percent. This is a big surprise. “Inflation is not even a remote risk in the U.S.,” according to Fed governor and former Princeton economist Ben Bernanke.

Gold is actually not so high. In constant dollar terms, today’s gold price is only $383, a far cry from the gold and inflation spiral of 25 years ago. So there’s not a boatload of excess money out there.

The weak-dollar argument being used by the inflation hawks also appears to be bottoming out. The Europeans are getting set to put a lid on the appreciation of the euro, which has been hammering the dollar and holding back their economy. It’s likely the European Central Bank will intervene in favor of the dollar and cut their overnight-policy rate — presently at 2 percent — by a quarter or even a half percent. Any turnaround in the greenback will be slow, but it could well appreciate by 10 percent or more this year.

Of course, the U.S. economy is growing rapidly, while the Euros are hardly growing at all. U.S. retail sales closed the year up 6.7 percent, with overall real consumer spending up about 4 percent. Since the end of 2002, U.S. real gross domestic product has risen about 41/2 percent, business investment about 81/2 percent, productivity roughly 5 percent, and profits about 30 percent. Stocks are roaring. Eurozone economies have nothing even remotely close to this American performance.

Meanwhile, low tax rates, price stability, and steady-as-you-go interest rates in the U.S. will produce another year of spectacular growth. Seeing this, even Democrats in Iowa have taken to trashing each other instead of the Bush boom.

The economy and the stock market will continue to vote for President Bush this election year. That means low tax rates will remain low; trade liberalization will expand in the Western Hemisphere and perhaps worldwide; and more incentives for tax-free saving and investing — including personal-savings-account choices for Social Security enrollees — will spring from a Bush second term. In addition, healthcare plans will continue to lean toward private-sector competition, rather than a government-sponsored takeover, and education testing and choice will remain on the path of reform.

The dirty little secret is that the Bush tax cuts are working. “Today the economy is strong, and it is getting stronger,” Bush recently told a group in New Orleans. The economy is back from the dead, and investors are very pleased about the wealth rebound in stock prices. In the past two election cycles, two of every three voters owned stocks. A recent poll from Investors Business Daily shows that economic optimism is up from 50 percent to 60 percent, while trends in presidential leadership and the direction of the country point firmly in the same direction.

Importantly, the IBD poll also shows that 62 percent of Hispanic voters approve of Bush, which is equal to his standing with whites. This new mark is up 6 points from December, and is undoubtedly linked to Bush’s sensible proposal for an expanded guest-worker immigration plan.

The most recent USA Today/Gallup survey corroborates the IBD’s findings. According to Gallup, Bush’s favorability and job-approval ratings have nearly rebounded back to the 60 percent mark. For the first time, the public registered 41 percent to 35 percent approval of the president’s tax cuts. And on foreign affairs, the president’s approval rating on both Iraq and the overall war on terror is favorable by nearly 2 to 1.

In short, the Democrats on the campaign trail have virtually nothing to run on. The president has stolen their bacon on national security, the economy, healthcare, education, and immigration. He has done so with a reform agenda on domestic issues and a tough, clear-headed approach to foreign policy.

Bush will win easily in November as long as he stays on message. And that victory by itself will raise entrepreneurial spirits to promote still more prosperity.



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