Washington shutdown fears are sinking the U.S. dollar, according to some news reports. Surely there’s something to this, as investor confusion rises and confidence falls, and as Washington seems to be gridlocked over a few billion dollars.
Frankly, the GOP could easily declare victory and accept a $35 billion to $40 billion spending cut for the final strokes of the 2011 continuing resolution. This kind of deal would move the domestic discretionary baseline back towards 2008. No mean feat.
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Over ten years, estimates range above $400 billion in real cuts in the level of those domestic programs. Considering where the process started — with the failure of the Democrats to propose a budget, and then the early Democratic response of only $5 billion in CR budget cuts — the GOP has come a long way in the absolute right direction.
So from here the GOP could move from billions in CR cuts to trillions in cuts in the Paul Ryan budget.
Yet however this works out, the principal cause of the declining dollar is not a threatened government shutdown. It’s the excess money creation of the Fed, which is falling further and further behind the international curve of currency stability.
While Bernanke & Co. have increased the adjusted monetary base by about $500 billion since late December, other central banks have been tightening policy in order to stabilize their currencies and fight inflation. The ECB went for a quarter-point hike this week. And the euro is trading strong at 1.44 to the dollar.
Over the past year or so, Canada and Australia have raised rates several times. Their currencies are soaring. China and other Asian countries also have been gradually tightening policy. In all these cases, foreign central banks are rejecting the over-supply of dollars coming their way.
So, by the way, are Middle East oil producers, according to CNBC reporting. As U.S. crude-oil prices have shot up 30 percent since mid-February, the Saudis and others have been selling much of the dollar proceeds from the high-priced oil sales.
It just seems like nobody wants dollars. Over the past ten months, the dollar index has lost 15 percent. That’s because there’s too many of them. And a lot of the excess dollar flow is finding its way into commodities — including oil, but most especially gold and silver, which are traditional monetary substitutes. Right now gold is cruising towards $1,500 an ounce. Silver has passed $40. Crude oil is over $112, and European crude is back to $126.
In a recent survey by Reuters, one-in-five traders said they expect Brent oil to hit $150 this year. Gasoline prices in the states continue to surge, with the AAA national average retail price moving to $3.74. In almost ten states, the price is hovering around $4.
Nobody knows where the energy tipping point is for the economy and stocks. And by and large, the market has held up rather well. But these spiking prices are surely a threat.
There’s no question that the potential U.S. debt bomb from overspending is a backdrop fear for investors. Long-run, that bomb could be just as much a dollar destroyer as the over-easy Fed. And perhaps the debt bomb and cheap money are ultimately two sides of the same coin.
But in the short run, after the government shutdown goes away, the big problem behind the sinking dollar is a stubborn Fed with its head in the sand, and with its failure to see world monetary and commodity threats closing in all around it.
Larry,
The problem with the Fed is that it is stuck. If it raises interest rates then the national debt payments that are all short term bonds roll over to higher interest rates and cause us to default our national debt. Keeping interest rates at 0 for a long period of time while rescuing the banks puts tons of printed money into the system and causes potential hyper-inflation.
The only hope it sees right now are to risk hyper-inflation so that we can repay the debt with dollars that are worth ~95% of their current value. Of course they will wipe out the value of the savers in the meantime, but that is a small price to pay for saving the likes of Goldman Sachs and JPMorgan don't you think?
Plus it keeps the over-bearing leviathon US government in control of everything. And if they play their cards right they can get us rubes to stand by while they create an uber-central bank to control all the national central banks. Think of the graft, corruption, and power they could get with that setup. They're going for broke, playing for keeps, and they're all-in with our money.
Sounds logical Mr. Kudlow, but this President and Fed are not like the types Republican or Democrat you are used to dealing with. This is in fact two sides of the same coin and utter chaos of our economy is their desire.
You can't justify spending at these levels at these times and printing so many dollars at the same time as sound policy. Let alone denying domestic oil production as we die at the pump by the day.
40% of corn crops goes to ethanol, so we die by the day at the grocery store as well.
This Mr. Kudlow is by design as we have a President not looking our for American interests, but his own nefarious interests. Let there be no doubt about that fact. America can't survive another five years at the pace this train is moving in the wrong direction.
Sen. Reid nor Obama will want to implement any of the Ryan plan, as that would undo the direction they want to keep going.
Kudlow has shifted his view in the last year or so of the fundamental center of mass problem... and is right on in this analysis, which shall become clearer.
For a country with a massive trade deficit, a dollar decline is good news. It makes our products more competitive overseas and expands U.S. companies market share abroad, allowing them to create jobs in response to higher demand. In this way a virtuous cycle can begin.
A strong dollar policy largely benefits U.S. financial firms (AKA Wall Street rentiers, annuitants, etc) who take advantage of a strong dollar to directly or indirectly purchase assets overseas--in this way they create jobs overseas. Although most large-size corporations these days receive a generous share of their revenues from their financial subsidiaries, those institutions whose enterprise is locked solely financial wizardry are most likely to lobby for a policy which most benefits their bottom line.
To correct the bloated financial sector imbalances conspicuously present in the U.S. economy a financial transactions tax on short term holdings is wise.
...The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt.
--k. marx
Larry I love your show and watch you on the call. You have been around long enough that you see the big picture.
Obama does not want to pay down the debt. Mr. Ryan has worked so hard and many other Republicans are coming up with ideas. They are wasting their time! We are going to default so the door is opened for Sorros and his group of progressive, Socialist, communist will take over our Republic.
I feel defeated now. Once you really know the truth about Wall street and the Fed plus Obama and all his so called friends it's fruitless. You might as well just tell people to sell and buy gold. We are headed for some big changes.
Really, do you think we could actually pay off a 14 trillion dollar debt. We need to get out of all our wars and take away all foreign aid. Raising taxes and taking away services will never make any difference. Bernake should have let us fail the first time around then maybe we would not be in this debt and may be recovering by now. This is not going to happen now and Goldman sacks really must take alot of the blame. Follow the money---who made the most on all the debt?
Still just give up, Obama is a socialist and does not care at all about the America we know. He cares more about unions, Sorros and his hippy friends from the 60's. Many of them should be in jail but they are teaching at some of our best universities. America better get wise to what they are teaching in our schools it's no different than a indoctrination like China has for their children! Wake up America or you will lose all!
Cutting Spending should not be all that hard. We have 757 military bases outside the continental United States. 57 on Okinawa alone. Shut down 700 of them and bring the troops home. That would cut spending and aid our balance of payments.
Cutting medicare costs would be easy if you removed the lawyers from the examining room. How much is spent on "defensive medicine"?
The bureaucracy is rife with waste. A housewife could do a better job of managing it. Department heads might buy a lot of unneeded supplies in order to spend all that was allocated. They do this out of fear that their budgets will be cut next year.
The deficit fight is more for for political points than concern about our monumental debt probem. The Tea Party has it right on this one.
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