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Kudlow’s Money Politics

Larry Kudlow’s daily web log of matters political and financial.

An Interview with Charles Dallara



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Last night on The Kudlow Report I interviewed Charles Dallara, former assistant secretary to the U.S. Treasury and the current managing director for the Institute of International Finance. Fresh back from Brussels, Dallara was the lead negotiator for the banks and the private creditors regarding the Greek debt.

Here are the video and transcript:

LARRY KUDLOW: A dramatic late night meeting that was somehow last night, although it probably seems much longer than last night for you. Let me ask you, in that meeting, can you tell us what actually happened? You’ve got Merkel, you got Sarkozy, you got LeGrange, rather. Did Sarkozy, for example, actually threaten you with 100 percent haircut on the Greek bonds for your banks? Did he actually come in threatening, two guns out? What was the story there?

CHARLES DALLARA: No, Larry, he was not threatening. We had a good, good discussion about the remaining issues that needed to be resolved in order to put this issue behind us there. We had spent the prior two and a half weeks negotiating and it came down to this final meeting between me, one of my colleagues)…and Chancellor Merkel and President Sarkozy. It was not a threatening meeting, it was a professional meeting where we exchanged views on the differences. And where it was very important for us to secure an increase in the amount of collateral that Europe would fund in order to underpin these new claims on Greek debt.

KUDLOW: Is that the 30 billion euros that’s being talked about that Greece has to borrow in order–this is important, you have to explain this to us. Greece borrows that money, that money goes into these new bond instruments, and that is what’s being traded out, that’s the actual transaction?

DALLARA: Well, that’s a core part of it. Of course, the key of all this is reducing Greece’s debt. You know, we agreed an historically significant reduction, 50 percent in the nominal value of Greece’s debt held by all private investors. It’s a remarkable agreement, Larry. But key to this forus was to insure that the new claims on Greece, the new paper, would not be full Greek exposure. And that’s where the 30 billion euro became pivotal. They had not been willing to commit that amount until that final meeting which we had with the chancellor and the president in order to secure for us what was a balanced deal.

KUDLOW: And regarding the 30 billion euros, what percentage of the total deal, what’s the net present value of this deal as you would estimate it, because after all, Greece is going to get this money but doesn’t Greece still stand behind most of these bonds in this transaction?

#more#DALLARA: Well, Greece will stand behind the remaining bonds, but for every 100 billion euro bonds that’s outstanding today, when the transaction is done, there should be roughly only 50 billion outstanding at that time. The new bonds will be Greek debt but the collateral will underpin the value of the principal on this so that the investors which we represent, Larry, will be exposed to Greek risk for the interest risk and will be collateralized for the principal risk. That’s the key to this, and it was the 30 billion that made it possible for us to agree to such a large, up-front haircut.

KUDLOW: Well just…

DALLARA: The net present value is something that we have to work out in the next round of more mechanical negotiations, but it’ll be somewhere probably just north of 50 percent.

KUDLOW: And you’re saying in published reports before you got on the plane, this is a voluntary decision on the part of the creditors that you represent. Is that still true now in the–after your long plane trip, and does that mean that the credit default swaps will not be triggered in?

DALLARA: Well, Larry, on the first question, it is absolutely a voluntary deal. I was in constant communication with my chairman, Joe Ackerman, will all of my board members, and with all of the major investors who were not represented on our board, to insure that they were willing, in this final hour, to go along with this transaction. We are confident that it will be very, very highly subscribed when the deal is done. And so I’m very confident that this is voluntary and it will lead to a very successful debt exchange when the details are ironed out and when the deal is implemented.

As far as the credit default swap is concerned, we’re not the judges of what activates a credit default swap. That’s up to those who are responsible for the standard setting in that–in that important element of the industry. It is my understanding, however, based on conversations that my staff have had with them, that it is unlikely that this would trigger the credit default—a credit default event, since it is a truly voluntary deal.

KUDLOW: Can you help us understand, a lot of people are asking this question.Two hundred and ten billion euros worth of private credits in this Greek deal but there’s still 350 billion bonds outstanding. In other words, the private creditors are only 60 percent of the total. People want to know, A, what is the participation rate going to be among private creditors, and B, what about the outstanding balance that is with the IMF and governments and elsewhere? How does that get handled in this transaction?

DALLARA: Well, that’s a very good question, Larry. It was very important for us to hear that both European governments and the IMF are going to sustain and augment their commitment to Greece because they don’t pursue the debt reduction route. They’re actually extending more debt, more loans to Greece. But I would say that it is extremely low interest rates on concessional terms and it is also an important part of helping funding the Greek economy in the next years. But one of the reasons why we resisted going any higher than the 50 percent was because there’s only so much you can squeeze out of the private sector turnip here. We only hold, as you said, 60 percent. And a substantial portion of that, Larry, substantial portion of that is held in Greece by Greek banks, Greek citizens, Greek pensioners, Greek insurance firms. So we still have to work out some important arrangements to protect the Greek economy from this decision that has been made.

KUDLOW: Could these arrangements be possible deal-breakers, Charles?

DALLARA: No, I don’t see any. I mean, I feel comfortable after the extensive discussions we’ve had, and they were not only with leading European officials but with Greek government officials as well, that there are no deal-breakers lying ahead of us. So, of course, one can never say never, and we do have a lot of technical issues to be worked out, but I’m quite confident these are not issues, based on my experience, that should pose insurmountable hurdles, Larry.

KUDLOW: Charles, you’ve been around this block many times. You’ve been involved in a lot of important international negotiations down through the years when you were in the Treasury Department, now as a private citizen. Let me just ask you, at the end of the day, when people look at this deal, is it really backed up ultimately by the ESFS, and I want to ask you if this emergency fund is going to be levered up four to five times to at least a trillion euros or more? There’s confusion about this, there’s no specific statements. Part of the original money from the EFS–EFSF has been sequestered, apparently, to–for emergencies for Italy and Spain and Portugal and perhaps other countries. Will there be enough money in this emergency fund or in whatever special investment vehicles it may also hold, to cover, to ring-fence to backstop your deal and the banking system in Europe?

DALLARA: Yes, Larry, this is very complex, you’re right. The 30 billion euro that’s been committed to us will come through the ESFS structures. In addition, they have developed two different arrangements, which are quite, I think, workable and complementary. One will be an insurance fund and one will be a special purpose vehicle lending facility which will enable the ESFS to leverage its capital fire power and support countries such as Spain and Italy, if necessary. I actually think that even though once again, all the technical arrangements have not been worked out, that Europe is on the verge of breaking the back of this sovereign debt problem. A lot of work additionally needs to be done. Countries, especially such as Italy, will need to really earn their credibility in the markets, Larry. But I think these firewall arrangements, alongside the Greek debt deal, now provide the best opportunity that we’ve had, really, since the sovereign debt crisis erupted, for Europe to move past this crisis.

KUDLOW: And do you feel longer term–this is my last question, Charles, and again, drawing from your extensive experience in these matters–do you feel that the conditionality from the emergency rescue fund, from the IMF, from whomever else, whether the ECBS is participating, the individual governments, the so-called troika and so forth, will this force these countries to live within their means, to downsize their governments, to downsize their entitlements? And is there any hope of an economic growth plan as well? Do you see what I’m saying? Is this just a short-term fix we’re going through with euphoria in the markets or is there a long-term solution that you, yourself, foresee?

DALLARA: Well, Larry, I think you’re going to the heart of the matter there now. A lot of the adjustment plans that are being developed now for Greece, for Spain, for Portugal, Ireland and Italy, have a focus on budget discipline. There are, however, crucial elements of structural reform, liberalizing labor markets, bringing pension benefits back into reasonable proportions, reducing a wide range of structural rigidities in their economies, which inhibit efficient allocation of resources and inhibit growth. Those areas will really prove to be the ultimate test of whether Europe can move through this and establish sustainable growth again. If you look at the measures announced by Italy last night as part of this package, for example, increasing the retirement age from 65 to 67, removing restrictions on various industries in terms of how a person can be employed and how a person can be released, these are crucial to the future of Europe, Larry. And I believe they are just getting their shoulder to the wheel on these areas.

KUDLOW: Hm. All right, Charles Dallara, we thank you ever so much for your time. Please go and get a great night’s sleep. Congratulations on the deal you worked out. It’s a great pleasure for me to interview.

No Armageddon



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The world economy has once again dodged Armageddon. The European Union finally forged a Greek bond deal, and a rescue fund big enough to ring-fence banks and sovereign debt, in order to avoid a catastrophic, Lehman-like contagion event. At the same time, the U.S. economy moved away from the threat of recession with a third-quarter real GDP report of 2.5 percent. In response, stocks are soaring. We’ll live to see another day.

First the American economy. Led by surging business investment of highly profitable corporations and a modest gain in consumer spending, the new GDP report says “no” to a double-dip recession. As the economy stalled out in the first half of the year — with 0.4 percent GDP growth in the winter quarter, 1.3 percent growth in the spring, and August data showing zero jobs and retail sales — I warned nearly two months ago that we were on the front end of recession. Turns out I was too pessimistic. 

Profits-rich business is the savior. 

Read my full column here

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Rick Perry: Flat Tax Is ‘Tax Cut for Everyone’



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GOP presidential candidate Rick Perry, who unveiled his 20 percent flat tax Tuesday, said his economic plan will “lower taxes across the board” and pull back every regulation that has been implemented since the 2008 financial crisis. He also dismissed criticism that it would raise taxes on the middle class.

“This is a tax cut for everyone in this country. Those who want to pick this apart, those that want to play class warfare, that’s their business,” Perry said. “Let’s not get down in the weeds here from the standpoint of going and saying this person over here is going to get a little bit different tax.”

The Texas governor is hoping his “Cut, Balance, and Grow” plan will help jump-start his fading presidential campaign. He’s now trailing four other contenders for the 2012 Republican nomination in a new CBS/New York Times poll. He stands at 6 percent; Herman Cain is leading the pack with 25 percent; and Mitt Romney is in second place with 21 percent.

Perry’s plan calls for a 20 percent flat rate on individual and corporate incomes and has a $12,500 exemption per person. It will keep deductions for mortgage interest, charities, and local taxes.

“We need to get America working,” Perry said. “We need a president who understands that the way to get this country back on track is by lowering the tax burden and particularly the regulatory climate, and that’s what this plan does.”

In fact, he plans on “pulling back every regulation that’s gone into effect since 2008.” He would repeal Dodd Frank, section 404 of the Sarbanes-Oxley Act (which requires companies to provide an auditor’s report on the adequacy of their internal controls), and Obamacare.

“Let me tell you, if you do just those things, put this flat tax in place . . . the stock market would go through the roof,” he said. “But more importantly, there are going to be a lot of people who don’t have a job today that will have one.”

Perry also vowed that his economic plan, which cuts government spending and overhauls the Social Security program, will balance the budget by 2020.

And if you don’t like the flat tax, you can stay in the old system, he said.

As for his rivals, Perry dismissed Herman Cain’s 9-9-9 plan, saying the new sales tax “will not happen.” He said Mitt Romney’s economic plan “nibbles around the edges.”

“We need to clearly put in a tax structure that’s flat, that’s simple, that’s fair,” he said.

Here’s my full interview with the Texas governor:

The GOP Pro-Growth, Flat-Tax Competition



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The latest Gallup poll pegs President Obama’s approval at a new low of 41 percent. That adds to the thought that the winner of the GOP presidential-primary sweepstakes is going to be the next president.

And inside that Republican contest, the policy pendulum is swinging toward pro-growth, flat-tax reform. A new agenda. With Herman Cain’s 9-9-9 plan and the announcement of a Steve Forbes-type flat tax from Gov. Rick Perry, the GOP flat-tax-reform competition is dominating the headline news.

While President Obama stumps for huge tax hikes — on incomes of $200,000 to the millionaire and billionaire level — and demoralizes businesses and entrepreneurs with his populist attacks on success and risk-taking, the GOP is fast coming up with a much better idea. 

Read my full column here

A Slight September Improvement



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While investors wait to see if the Europeans will agree to a major boost in their rescue fund to backstop sovereign debt and the banks who own it, here at home the economic news has turned slightly more positive.

A month ago, significant coincident economic indicators for August for nonfarm payrolls, retail sales, and industrial production all registered zero. It was a bizarre and pessimistic coincidence.  Now, a month later, the September figures are coming in better. Not fabulous, but better.

Jobs were revised up 57,000 for August and scored 103,000 in September. That’s way below what’s necessary to make a serious dent in unemployment, but at least it’s moving away from recession.

Retail sales in September gained 1.1 percent while August’s zero number was revised to a three-tenths-of-a-percent increase. Over the past three months, retails sales are rising 7.6 percent at an annual rate, a very decent number that reflects improving car and weekly chain-store sales. As a result, consumer spending after inflation in Q3 will come in at least 2 percent annually. Again, not fabulous, but certainly moving away from recession.

On the supply-side, industrial production came in at only 0.2 percent, with August remaining flat at zero. However, manufacturing increased 0.4 percent after a three-tenths rise in August. Additionally, the production of business equipment surged 1 percent in September after a 1.4 percent August gain, making for a hefty 15.3 percent annual increase over the past three months. That means businesses are investing their profits in new capital equipment.

The bottom line is that the September data could be signaling we’re not on the front end of recession. But the monthly numbers are volatile, and I’m not quite ready to remove the danger sign — especially since consumer incomes are barely rising, and any increases are coming in below the inflation rate.

And speaking of inflation, producer prices surged 0.8 percent in September and are up 6.9 percent over the past year. All that easy money from the Fed, producing an overly cheap dollar, is still circulating enough to keep inflation concerns on the front burner — despite the sluggish economy.

Inside the PPI, consumer goods — a proxy for the CPI — gained 1 percent in September for an 8.8 percent yearly jump. Even taking out food and energy (a silly thing to do), core consumer-goods prices are up 3.6 percent annually over the past three months.

And then of course the Washington message on the left hasn’t changed. Obama and the Democrats are continuing their populist left-wing campaign to tax millionaires and billionaires, beat up on banks and bank profits, and attack the oil-, gas-, shale-, and energy-production miracles that could lift the whole economy if government would only keep out of the way.

It’s not an encouraging sign for animal spirits. Rather, it’s a demoralizing message from the top. Without any serious policy change toward pro-growth tax and energy-regulation reform (or other regulatory barriers for that manner), it’s hard to get excited about the outlook for the economy.

But at least on the tippy-tip margin, the economic numbers are getting a bit better.

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What Needs to Happen in Europe



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The fear level in the market is so high right now that there has to be some solution to the greater problems before we can start to look at bank stocks on a fundamental basis, Rochdale Securities’ Dick Bove told me on The Kudlow Report.

Stocks suffered their worst loss in two weeks on Monday after comments from Germany’s finance minister caused investors to fear Europe’s solution to its debt crisis may not come fast enough. The solution, said Bove, starts with the recapitalization of European banks.

“The problem is you cannot resolve the Greek problem without debt forgiveness, and you can’t give Greece debt forgiveness unless you allow the banks to write-down the Greek debt,” he said. “And you can’t allow the write-down of the Greek debt until you get equity capitalization of those banks.”

According to Bove, that equity recapitalization has to come from the private sector. “I’m talking about the private sector putting the money into those banks to rebuild the capital similar to what happened in the United States in the last crisis here in 2008 and similar to what happened in the United States in the late 1980s, early 1990s,” he said.

Once that debt forgiveness happens, said Bove, the Europeans can start to rebuild their economies.

Cain the Tax-Code Killer



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Herman Cain is the only GOP presidential candidate who wants to kill the tax code. That’s right. Put a knife in it. Junk the entire system. And people are cheering as he rises in the polls in his quest for the nomination.

Cain’s 9-9-9 plan is not perfect. But then again, the good should never the enemy of the perfect.

Read my full column here

Cain Advisor: 9-9-9 Plan to Add $2 Trillion to GDP



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Republican presidential hopeful Herman Cain’s 9-9-9 plan will add $2 trillion to U.S. GDP, as well as create six million jobs, his economic advisor Rich Lowrie told me on Thursday.

Lowrie also said that under the plan, business investments will increase by one-third and wages will go up by 10 percent. “And if you fold all that growth together,” he said, “federal revenues go up by 15 percent.”

Cain’s 9-9-9 plan would scrap the current tax code and replace it with a 9 percent tax on personal income and corporations, as well as a new 9 percent sales tax.

The controversial plan has helped fuel the Georgia businessman’s sudden surge in the GOP race. A new NBC News/Wall Street Journal poll has Cain leading the rest of the pack among Republican primary voters.

Critics contend the 9-9-9 plan will unleash a new revenue source with its national sales tax and will hurt the middle class. But Lowrie said the sales tax is a replacement tax, not an add-on tax like you’d find at the state level.

“All we are doing is pulling out taxes that are invisible,” he said. “We’re cutting the rates. We’re putting them back in at lower rates. Margin costs will go down and prices will not go up if you have marginal costs that go down.”

Lowrie also rebuffed criticism that the plan was unfair to the middle class. He called the plan fair and efficient.

The payroll tax, he said, will go from 15 percent to 9 percent, and there will be no hidden taxes. “[That] means I pay 9 percent, you pay 9 percent, and if you make a million times more you pay a million times more,” he said.

“We’re trying to strive for transparency,” he added, “and we want to make people aware of just exactly how much in taxes they are paying that is hidden right now.”

An Interview with Rick Perry



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I had the pleasure of interviewing Gov. Rick Perry last night on The Kudlow Report. The GOP presidential hopeful said he wants to dramatically increase oil and gas exploration and in the process create more than a million jobs.

“We’re sitting on a treasure trove of energy in this country,” Perry said. “There’s 300 years worth of reserves underneath the land of America and that’s how we are going to get America working again.”

Perry pledged to “open up all the federal lands and the waters” in his first 100 days in office, which he said will in turn get 1.2 million people back to work.

The Texas governor is unveiling his far-reaching plan today in the hopes of rekindling his presidential bid. A new NBC News/Wall Street Journal survey has the Texas governor — the former frontrunner — in third place behind Herman Cain and Mitt Romney.

In addition to job creation, Perry said the plan will “secure us — from an energy standpoint — from countries that don’t have our best interest in minds.”

To make it work, Perry vowed to pull back on regulations and rebuild the Environmental Protection Agency. And he said he doesn’t need congressional approval.

“I can move unilaterally to open up those lands, to pull those regulations back that are killing jobs, and to rebuild that EPA where it truly is an agency that is about protecting the environment,” he said. “We can get this country energy independent.”

Perry also took the opportunity to address the ongoing debt crisis in Europe, declaring that the EU will not be on the receiving end of any U.S. bailouts if he’s in office.

“If you’re too big to fail you’re too big. And that goes for Europe,” Perry said. “America is not here to bail out people who make bad economic decisions. It doesn’t matter whether you are on Wall Street, whether you’re a General Motors or . . . Greece. If you made bad decisions, you are going to have to live with them.”

Dexia and the European Wake-Up



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Yesterday’s massive 330-point stock market rally was generally linked to an expected Merkel-Sarkozy summit in a couple of weeks to nail down a new European rescue plan for bad government debt and troubled banks. But I think the more immediate cause of yesterday’s rally was the news that European leaders are rescuing the underwater bank Dexia. This bank-rescue mission looks to me like a new model to save all the European banks from the risk of catastrophic meltdown and contagion.

There are some key principles in the rescue — nationalization, good-bank/bad-bank breakup, asset sales, and long-term guarantees of bank deposits and liabilities — that could make Dexia a seminal event if it is saved. And it appears as though the authorities are road-testing the rescue as a model for bigger banks that may be in deeper trouble.

I am especially interested in the deposit and liability guarantees. I think these will be part of a big Euro-TARP capital-injection program based on the EFSF rescue fund of the ECB and IMF. In other words, like the FDIC, Treasury, and Fed guarantees of all bank and money-market funds in late 2008, the Europeans may do likewise as Greece defaults. The rescue funds will then support the banks, probably inject some debt capital or preferred shares, and then with those guarantees have the banks raise private-equity capital in the marketplace as soon as possible.

Dexia looks to me like the first example of the European wake-up. As such, it triggered a big bank-stock rally which led to the overall market rise.

One thing I don’t favor is a bailout of the sovereign countries. Greece should default, at least in a structured way, with large bond haircuts. Portugal, Italy — they should not be bailed out. But the banks will have to be bailed out, as distasteful as that may be, in order to avoid a global catastrophe.

This is where the troika support is necessary, and the principle of guaranteeing all deposits and liabilities will be very helpful.

A final thought: I am persuaded that the ECB should cut rates and move to quantitative easing as part of the solution to the deep financial stresses that are pulling down the European economy. And I have a sneaking suspicion that Ben Bernanke will move to QE if the ECB does, even though it hasn’t worked up to now. Maybe this talk of pouring in money to raise nominal GDP will be the Fed’s new raison d’être.

But if the ECB runs a big QE to pump in liquidity (following the Bank of England), then the dollar is going to keep shooting up, imparting deflationary pressures on the U.S. economy that we cannot afford.

Whether Bernanke thinks in these terms remains to be seen. 

Obama’s Populist Shift



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Team Obama is out and about mourning a “double-dip recession,” while Fed head Ben Bernanke is warning of a faltering economy. I have described the current economic environment as the front end of a recession.

But Obama’s populist, class-warfare attack on millionaires and billionaires, his new war on bank profits, his linking arms with the protesters occupying Wall Street, and his big-government stimulus plan will surely not solve this crisis.

The September jobs report underscores the economic alarm. The unemployment rate stayed at 9.1 percent. But the rate of marginally unemployed (U6) jumped from 16.2 percent to 16.5 percent. Nonfarm payrolls rose by 103,000 while private payrolls gained by 137,000, small-enough increases to dodge a recession bullet right now. But nearly half those job gains came from the return of 45,000 striking Verizon workers.

Read my full column here

An Interview with Jack Welch



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Here’s the transcript of my interview with Jack Welch from last night’s Kudlow Report on CNBC:

KUDLOW: We welcome back to The Kudlow Report an old friend, the great, famed CEO Jack Welch.

Mr. Welch, thank you for coming back, sir.

WELCH: Larry, it’s great to be here.

KUDLOW: Let me just begin, as we have all day, luminaries like yourself, the way too soon passing of the brilliant entrepreneur Steve Jobs, what’s your thought on that?

WELCH: Absolutely tragic. I mean, his family has certainly had the biggest loss, but America and the world has lost something. He wasn’t just a genius entrepreneur, he was an executor. He got–people are not giving him enough credit for getting a million or two million or five million to the customer on time with great quality. That’s a real job.

KUDLOW: He was a great retailer and a great marketer you got there.

WELCH: Great marketer. Great–a supply chain manager and a great genius of an entrepreneur. He–to show you his impact, though, I had an experience at home. My stepson’s grandmother called, 85 years old, upset as could be.

KUDLOW: Mm-hmm.

WELCH: The kids called from college, two of them. They don’t call when CEOs die.

KUDLOW: Yeah.

WELCH: They were so impacted. What this guy did for business, he invented cool.

KUDLOW: Yeah.

WELCH: He made cool–most business guys are in suits like you are and I am right now.

KUDLOW: Right.

WELCH: This guy, though, delivered products that made business cool.

#more#KUDLOW: And he made a better world of it. I think…

WELCH: You know…

KUDLOW: …everybody agrees that his impact was just vastly beyond just being a businessman.

WELCH: Oh.

KUDLOW: Just vastly beyond.

WELCH: I mean, he was a true visionary.

KUDLOW: Yeah. All right, I appreciate that very much.

Let me come back to some of the current events of the day. President Obama had a lengthy news conference today, over an hour. Among the many points he made, I want to get your take on this, he is endorsing the Senate Democrats’ idea of a 5.6 percent surtax on millionaires. And the president also indicated, however, that other tax increases would still be necessary to fund the budget. Do we need a millionaires tax? Will it help the economy grow? And the whole tax plan, how do you see it?

WELCH: Will this–will this tax be on income or wealth?

KUDLOW: I think it’s going to cover capital gains, dividends and ordinary income, as far as I know, take effect in 2013.

WELCH: Well, look, I think we ought to go back and look at what he’s done so far, Larry. He put a stimulus bill in, $785 billion, whatever it was. It did nothing. Now, let’s look at what he projected. He projected we’d have 6.2 percent unemployment in October 2011. We’ve got 9! Larry, if you’re in a business and you miss by that much, somebody’s calling you in for a chat.

KUDLOW: And, in fact, his whole plan is doubling down. Now…

WELCH: Same plan.

KUDLOW: …the financing, it’s more spending. I don’t want to prejudge it, but it’s more spending, and it’s temporary tax rebates or temporary tax credits. It didn’t work for George W. Bush, it didn’t work for Barack Obama 1. Why should it work for Obama 2? Isn’t there a better way? We all know the economy’s in lousy shape and it’s faltering, as Bernanke said. Jack, with your experience, what’s the better way to grow this economy?

WELCH: I would say you start out with discretionary spending. It’s 1.3, 1.4 billion. Eight hundred and fifty of it’s defense, 450 is total discretionary. Take 25 percent of the 450, that’s $100 million, 90 or so.

Take 5 percent of defense, that’s 50…

KUDLOW: Take it out of the budget?

WELCH: Take it out of the budget.

KUDLOW: Right.

WELCH: Take–but reduce it, not from projections, actual take it out.

KUDLOW: Level. The level.

WELCH: The level we’re at.

KUDLOW: Right.

WELCH: Take it down. That’s a billion-three or a billion-five–a trillion-three or a trillion-five over 10 years. That’s one step, OK? Step number two, freeze regulations.

KUDLOW: Right.

WELCH: Freeze them. This Senator Johnson thing…

KUDLOW: President Obama mocked the Republican freeze on regulations at the press conference today. I just want to put that in. He mocked.

WELCH: He’s shown no ability to lead. Let’s talk about that. But let’s just take this point. Let’s just take freezing regulations until we get unemployment below 6 percent. So, you know, we–just freeze them. The third thing, entitlements. Go after means testing. Lower the age for those below 50. Increase the age till they can get it. Means test. I shouldn’t be getting Social Security. I shouldn’t be getting Medicare benefits at the level I’m getting them. I mean…

KUDLOW: This would provide some confidence, is what you’re saying, right?

WELCH: Larry…

KUDLOW: Let me come back to taxes. Is it time to raise the tax rates on the upper income?

WELCH: There’s nothing that says it should.

KUDLOW: OK.

WELCH: All it is a transfer payment.

KUDLOW: Right.

WELCH: Take it from one hand, give it the other hand. Doesn’t work.

KUDLOW: And I think a lot of people are skeptical. So you raise taxes on millionaires, which sounds good. `Hey, get the millionaire. I’ll feel better if a millionaire gets hurt.’ It’ll be spent on spending. It won’t be used for debt reduction. Isn’t that the possibility here?

WELCH: Everything’s going to be spend on spending.

KUDLOW: Yeah.

WELCH: I mean, they are spenders. They believe government should do more. They don’t believe jobs come from the private sector. They believe government creates jobs. That’s just a fundamental difference.

KUDLOW: So another part of his news conference today, he was asked about the so-called Wall Street Occupiers, the Wall Street protesters, that’s going on around the country and predominantly here but not only here. He expressed a lot of sympathy for that group. And I want to ask you, those guys are against the banks, they’re against financial institutions, they’re against a lot of things to do with capitalism. Are we going to live through a period of kind of left-wing populism where we’re bashing millionaires and billionaires, we’re bashing banks, we’re bashing corporations, we’re bashing Wall Street, we’re bashing, you know, Bank of America for raising its debit card fees. Is that the way this election period is going to go? And how’s it going to affect the economy?

WELCH: Well, that’s all bad news. But it would be solved if we had jobs.

KUDLOW: Mm-hmm.

WELCH: I mean, these people have a case. Unemployment at 9 percent. The president promised 6 percent, Larry, in October of ‘11. That’s–nobody goes back and looks at the pledge they made.

KUDLOW: Where did it fail? Where did that plan break down?

WELCH: Shovel-ready jobs. People were ready to go, but we had a couple things wrong. Davis-Bacon wages, that changed the class structure. Buy America. A lot of these jobs–and with a penalty if you didn’t. So a lot of these jobs, they weren’t ready. From the cup to the lip was a much bigger distance. And then to put regulations on top of the stimulus.

KUDLOW: So how do we stop this demoralization, to use Governor Christie’s word? How do we get back to the Steve Jobs optimism, entrepreneurial model of economic growth? It worked for Jobs, it worked for this whole country. How can we preserve that spirit of Steve Jobs?

WELCH: Larry, companies–I just had a review of my 12 companies in the last week–they’re on fire. They’re growing revenues at 7 percent average, the 12 companies. Their EBITDA is up double digits, strong double digits in some cases. This economy doing more with less is not good for jobs because it’s not growing fast enough. It’s growing at a 1 to 2 percent range. We got to get it to 3 to 4, and that’s unshackling this government away from it. When I take out 25 percent of the discretionary spending, the same way we did in GE 20 years ago, guess what it does? You give them a soft landing, you take care of the people who are injured. You–we’ve got a balance sheet to do that. But when they come to work, they don’t come to work and say, `What can I do today?’ It’s when they come to work they cause problem, not the cost of them.

KUDLOW: And you’re sending a signal. There’s a confidence signal…

WELCH: Yeah. And we’re going to unshackle business.

KUDLOW: All right. So unshackling business, reforming the corporate tax code, freezing regulations. Some tough spending measures from Jack Welch. Who fits the bill for all this in the Republican presidential primary sweepstakes right now? Who are you backing? Can you tell me?

WELCH: Yeah, I’m backing Mitt Romney. Now, whether or not he takes the whole platform, because I want to drill, too. I want to drill on nongovernment land and I want to get royalties from that that are going to help lower the deficit. And I want to have by 2020 total energy independence not from renewables. I want to still support renewables. You don’t stop that, but I want to really unleash the energy-driven sector in this economy.

KUDLOW: I thought Romney was a greenie. He flirted with cap and trade when he was the governor of Massachusetts.

WELCH: I said he may not follow my whole platform.

KUDLOW: What about–what about Governor Perry. Last question, what about Herman Cain, who’s actually going to appear on the show later?

WELCH: I hope Herman Cain’s serious. I don’t think he’s serious. I think he’s got a book tour he’s on, OK, and…

KUDLOW: Well, I’m going to ask him that.

WELCH: Yeah.

KUDLOW: OK, I’m going to ask him if that’s the case.

WELCH: Well, that’s one…

KUDLOW: But if he were serious, could you back him?

WELCH: I’m afraid he’s not electable, and I’m afraid–I think–I think Romney, by the way, will have more trouble in the primary than he will in the general.

KUDLOW: So you’re looking for a defeat of Obama?

WELCH: I want to take this administration out. They don’t understand how to create jobs. They don’t understand to grow this–America is on fire. America is still the greatest country in the world. And we have everything going for us except a government that is not supportive of capitalism.

KUDLOW: All right. I hear you. We’ll leave it right there. Mr. Jack Welch, former CEO of General Electric and just a famed businessman and adviser. I’m Larry Kudlow, we’ll be right back.

Chris Christie’s Decision



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So, Gov. Chris Christie gracefully, elegantly, and forcefully decided to stay out of the race.

Fortunately, the logic was consistent with past statements these many months that he has a job to do in New Jersey, he can’t leave that job unfinished, and he’s not going to walk away from the people who elected him. He has a loyalty to the state of New Jersey.

In the end, he said, “Now is not my time.”

No one will know that for sure, but if that’s what the governor believes, then he is right. I think he showed a lot of character in his news conference. And Chris Christie is full of good character.

Also, he continues to criticize President Obama. Christie said he has failed the leadership test. On the attack, Christie said, “Make sure President Obama is a one-termer.”

So you can bet Governor Christie will be on the campaign trail fighting to make Obama a one-termer. He’s not going to endorse in the GOP primary yet. But he’ll be on the hustings. I go back to what I think was the key point in Christie’s Reagan Library speech: Obama’s class-warfare, soak-the-rich policies are dividing the country, demonizing success, and sending a demoralizing message.

I hope Christie keeps the drumbeat going.

Still Front End of Recession



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The stronger-than-expected ISM manufacturing-index reading for September might normally suggest that the economy, at least for now, has dodged a recession bullet. After zero jobs and zero real consumer spending in August, which put the stalled economy on the front end of recession, the ISM number is the first major September reading.

But economist Michael Darda says hold the applause: Inside the ISM, new orders and order backlogs either flat-lined or declined and remain below 50 — the DMZ recession marker on the index.

Darda believes weak data in the U.S., plus the ongoing European crisis, plus the China slowdown, plus widened corporate credit spreads and stressful financial conditions, all point to a declining economy and additional stock market drops.

Read my full column here

Obama as Demoralizer-in-Chief



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So just when everyone had concluded the Chris Christie matter — saying “Great speech at the Reagan Library, but he’s not gonna run for president” — the New York Post comes along with a story that says the New Jersey governor is seriously considering a 2012 run. Apparently the Reagan Library experience had a big impact on Christie, and others. He’s now being urged to go for it by Nancy Reagan, Henry Kissinger, former president George W. Bush, and former first lady Barbara Bush.

According to the Post story, even Christie’s wife Mary Pat is warming to the idea.

I don’t have anything to add to this in the way of a forecast. But it does give me a hook to weigh in on Christie’s speech. It was uplifting and inspiring. As many have commented, it was a Reagan leadership speech on exceptionalism, or “earned American exceptionalism,” as the Wall Street Journal editors put it. I agree.

There are a couple a points that I want to emphasize, though. 

Read my full column here

A Twisted Outlook



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Stocks collapsed roughly 700 points over two days after the Federal Reserve launched its “Operation Twist.” The market correctly perceives that the central bank’s plan to swap $400 billion of short-term notes for long-term bonds adds no new reserves to the financial system. So it wasn’t QE3, that’s for sure. No stimulus. In fact, with the Treasury yield curve flattening, the Fed’s sterilized asset swap actually tightened financial markets.

The Fed should have listened to the GOP congressional leadership, which in a letter advocated no more stimulus and no more market-subverting interference.

But the real issue is the new FOMC forecast: “There are significant downside risks to the economic outlook, including strains in global financial markets.” That was the killer statement.

Read my full column here

Obama’s Bizarre Tax Attack



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It could almost make your head spin. With an economy on the front end of another recession, President Obama’s tax attack on the folks who are most likely to succeed, invest, start new businesses, and create jobs is nothing short of staggering. Only liberal-left class-warfare ideology can explain this.

In his speech on Monday, Obama laid out $1.5 trillion in tax hikes over ten years, aimed almost entirely at America’s well-to-do. This includes $800 billion from rolling back the top rates in the Bush tax-cut plan, $470 some-odd billion to reduce itemized deductions for upper-bracket payers, and — oh yes — a millionaire’s tax called the “Buffett Rule.”

Pause a moment on the Buffett Rule. Almost all of Warren Buffett’s income comes from capital gains taxed at 15 percent. He only pays himself $100,000 a year, which would be taxed at the top rate. Most of his wealth is untaxed as unrealized capital gains. So his effective income-tax rate is lower than his secretary’s.

Read my full column here

Mike Bloomberg’s Irresponsible Riot Tactic



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New York City mayor Mike Bloomberg, in a radio interview on Friday, warned that high unemployment could lead to widespread rioting. That’s right. He actually said that. At a time when European cities have suffered massively from hooliganism, and at a time when U.S. towns like Philadelphia and Kansas City have suffered huge human and commercial tolls from so-called flash riots.

For Bloomberg to come out with this statement is irresponsible and incendiary. But you know what? He’s got a personal agenda. This is a desperate talking point to sell Obama’s jobs plan, which Bloomberg favors as a solution to high unemployment and zero growth.

Read my full column here

Hats Off to the House GOP on NLRB Vote



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Thank heavens the House Republicans just passed a bill — the “Protecting Jobs from Government Interference Act” — that would stop the National Labor Relations Board from telling any company where it can or cannot operate in the United States.

Finally, a pro-business signal from Washington. This one inspired by Boeing’s attempt to operate their $750 million South Carolina plant to produce the 787 Dreamliner with at least one thousand workers. The NLRB has alleged that Boeing is retaliating against union workers in the state of Washington by operating a non-union in the right-to-work state of South Carolina.

This is nonsense.

Boeing is actually adding union jobs in Washington State. And if you keep them out of South Carolina, their next stop probably will be China.

Is that what we want?

This is the same NLRB rogue regulator that wants union strike posters displayed in all businesses and is pushing for back-door card check to end the secrecy of union-organizing ballots.

And it is exactly this anti-business bias coming out of the administration that has caused a capital-investment strike by American companies, which are sitting on nearly $2 trillion in cash.

The president should have taken the NLRB into a special presidential woodshed set up in the Oval Office. That’s what Ronald Reagan would have done.

You want to know why this economy could be on the front-end of a recession, with zero jobs? Think anti-business. Think over-regulation.

So I applaud what the GOP has done. Never forget: free-market capitalism is the best path to prosperity.

The Downturn Scenario



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Is the economy standing on the front end of a new recession? As IMF executive director Christine Lagarde and World Bank president Robert Zoellick warn that the global economy is entering a new economic danger zone, there’s plenty to be worried about right here in the U.S.A.

The August batch of economic stats shows zero jobs and zero retail sales. Industrial production rose slightly to save us from a clean zero sweep, but it was only two-tenths of 1 percent. However, manufacturing registered by the New York Fed and the Philly Fed showed continued declines. Jobless claims continue to rise. On top of all that, consumer prices showed a surprising increase.

So at best, we have a stagflationary stall in the economy, while at worst a recession could take hold.

Even on the profits front, which has been strong, top Wall Street economist Ed Yardeni reports a large drop in the growth of corporate tax receipts, suggesting a major profits slowdown. A Wall Street Journal story reports a profits squeeze from manufacturers. With productivity slipping, unit labor costs paid by business are rising faster than the prices business can get. Echoing that, producer prices are rising much faster than consumer inflation at retail.

The recession call is not conclusive. I’m the first to admit it. And my optimistic instincts rebel against the downturn scenario. But facts are facts. They must be reported. And the numbers aren’t good.

At this stage there’s virtually nothing the Federal Reserve can do. It caused the huge oil shock by depreciating the dollar during QE2. That’s been a killer. Now it’s time for some pro-growth fiscal policy. The Obama stimulus package repeats all the president’s past mistakes: temporary tax cuts, big spending, government planning (think Solyndra), and all these targeted clean-energy and infrastructure plans that spend the public’s money but do not on balance create new jobs — and certainly do not create new entrepreneurial start-up businesses.

House Republicans ought to take a look at the revolt against Obamanomics. All the polls show it. Republican Bob Turner’s dramatic election win in Queens, N.Y., shows it. The voter zeitgeist has turned against the president’s policies. The GOP should rip up the Obama plan and come down with fundamental tax and regulatory reform to generate new economic-growth incentives and roll back the big-government regulatory costs on business.

The force is with the Republican party as the country awaits bold new action to get us out this economic mess.

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