There’s a lot of talk right now about U.S. credit downgrades and whether we can possibly get a Washington budget deal that actually controls spending and borrowing.

Stocks are worried. And they should be. But there is an additional danger lurking out there that investors need to be paying close attention to: the end of QE2.

In the long run, I think it would be great if the Fed finally stopped pumping all this inflationary money into the system. But shorter term, my advice to you is caveat emptor — investors beware.

The so-called “risk-on” trade, which means the cheaper dollar alongside booming stocks and commodities, has been a staple of this market going back to Fed head Ben Bernanke’s first QE2 announcement late last August.

Gold, silver, energy and oil, copper and raw materials, and foods have all obviously soared on this quantitative easing. And so have the exact same sectors in the stock markets.

But the risk-on trade may soon be replaced by the risk-off trade.

Keep an eye on next Wednesday, April 27. That’s when the Fed releases its minutes. There may very well be an “end QE2 signal,” which could mean the beleaguered dollar — at least temporarily — will go up, not down. It might also mean that commodity, energy, and even industrial stocks could go down, not up.

Already, I notice the best performers have been defensive shares, like health care and utilities, not the cyclical economic-growth groups.

There may be a correction in the cards as the Bernanke Fed’s ultra-easy money comes to an end. And that, investors, is what you should be looking out for right now.

We thought tax reform meant lowering rates and broadening the base by eliminating or cutting back on various deductions, credits, and loopholes. That’s what the Bowles-Simpson commission proposed. That’s what Paul Ryan and David Camp are working on. And that’s the pro-growth model.

But President Obama unveiled a much different tax-reform vision in his much-anticipated debt speech on Wednesday. He would raise tax rates on upper-income earners and small businesses. He also would eliminate deductions and credits, or so called “tax expenditures.” The president referred to these tax-expenditure reductions as “spending cuts.” In his context, they most certainly are not. They are more tax hikes.

Read my full column here.

A supercharged Mitt Romney in very strong form told me last night on CNBC that President Obama is completely “incompetent” on job-creation and the economy. I asked him whose head should roll: Bernanke’s? Geithner’s? Jackson’s at the EPA? Without missing a beat, Romney said Obama’s head must roll.

On his controversial Romneycare, the former Massachusetts governor moved further away from the plan he sponsored. While he wouldn’t completely disavow the mandate, his tone and emphasis has shifted away from defending his plan. Nationally, if elected he would immediately waive Obamacare for all fifty states as the first immediate step towards total repeal.

Romney also welcomed Donald Trump to the Republican presidential race, although he pointedly dissed Trump when he said Obama has passed the citizenship and birth-certificate test.

There’s a lot of pessimism in the air right now. It’s rooted in themes I’ve been discussing for weeks and weeks — namely, lower profit margins from spiking energy, food, and raw-material prices; supply-chain disruptions from the Japanese disaster that cuts into top-line sales revenue; and gasoline price hikes that are depressing the consumer.

It’s all there and it’s all a problem.

But I do not believe there’s an end-of-the-world stock market trade here. Corrections come and go.  We may be correcting.

However, the level of corporate profits, which are the mother’s milk of stocks, is rising — perhaps 12 percent in the first quarter and something like that for the rest of the year.

And the Fed is easy, and it will remain accommodative even after QE2 ends.

Now, I do worry a lot about the inflation from the depreciating dollar. And import prices are now rising 9.7 percent for the year ending March. This is bad.

But on the positive side, global growth, especially in Asia, is solid. Railroad shipping volume is picking up steam. The jobs picture is improving. Manufacturing is strong. Business CEO and CFO surveys are optimistic. Credit markets and financial conditions have recovered.

Even the Washington, D.C., story is improving, with new budget cuts and a potential compromise on a higher debt ceiling tied to spending reforms. And for now, tax rates are low.

All I want to say is, this is not the end of the world. There are pluses and minuses. It’s not a one-sided bear trade. I still believe in longer-term optimism.

And remember, there are always ways to invest profitably.

White House press secretary Jay Carney said Republicans should not “play chicken with the economy.”  The administration wants a prompt vote to raise the federal debt ceiling quickly. Carney went on to say, “The consequences of not raising the debt ceiling would be Armageddon-like in terms of the economy.”

But then again, if the federal debt limit keeps getting raised without any real new spending-limitation rules, Armageddon for the economy may come just as quickly.

The problem with the rising debt burden is too much spending and too little growth. A spending-limitation of 20 percent to GDP would go a long way toward fixing the debt-bomb problem.

A number of Republicans are proposing such a limit, with real teeth to force automatic spending cuts across the board if the limit is violated. House and Senate Republicans will not agree to an increase in the debt limit without these kinds of serious spending reforms. As they say, it’s time to stop maxing out the credit card. There has to be some discipline in the fiscal system.

The current $14.3 trillion debt ceiling will run up against the wall sometime early this summer. As of the end of March, there’s a $76.1 billion borrowing limit left. Treasury man Tim Geithner says all measures to postpone a U.S. default on its obligations will end approximately July 8, 2011. At that point, government payments — including interest on the Treasury debt — would be stopped.

So the message for investors is tighten your seatbelts. The hard-driving politics of spending reform and debt limits will go down to the wire. At virtually the same time, the Fed will probably have ended QE2. So debt-default worries, along with possible inflation fears, could drive up interest rates and hurt the stock market as well.

But let’s not forget, the debt bomb is coming due, sooner or later. Better for Washington to cancel its summer vacation and put some serious disciplined limits on federal spending and borrowing. Take away Washington’s credit card.

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.

Read my full column here.

Of all the discussion about Paul Ryan’s big-bang budget plan, the element I like best was caught in this Wall Street Journal op-ed title: “The GOP Path to Prosperity.”  In other words, it’s a growth budget. It has plenty of spending cuts, but it also has significant pro-growth tax reform. 

Obsessing over the debt is not by itself a policy. Advancing the economy and setting the stage for more job creation is a policy. Mr. Ryan kept an important dose of Ronald Reagan in both the spirit and reality of his plan. Limited government, lower tax rates, and deregulation (of energy) will all promote the path to prosperity.

Read my full column here.

Did the big March jobs report put President Obama back on the road to reelection? If so, he can thank the GOP, whose tax cuts saved him from himself. . . . 

Read my latest column.

Last night I had the pleasure of speaking with James Grant, the legendary founder of Grant’s Interest Rate Observer. He called the bubble in the 2000s. Right now he’s worried about a big jump in inflation. He thinks interest rates are totally unprepared for it. His solution is to restore dollar and gold convertibility.

House Majority Leader Eric Cantor just told me in a CNBC interview that there is no deal on budget cuts for the continuing resolution. “Well, I can say with definite answer, there is no deal,” he said. “So, yes, there’s a lot of talk about some number being out there. That number is not the $61 billion we’re looking for.”

A bunch of news stories today reported on a $33 billion deal to cut spending from the current-year budget. Vice President Joe Biden has been bandying this about, and at least some Senate Democrats have used it.

But Mr. Cantor steadfastly denies the deal. Earlier today, Speaker Boehner also said there was no deal.

The Tea Party Patriots group is massing out of the Capitol in a demonstration aimed at keeping the House Republicans’ spending-cut backbone completely upright. This is good. Because actually, that $33 billion spending-cut number includes the $10 billion cut from the two prior CRs. So the new number is only $23 billion.

And in round numbers, the GOP needs $60 billion or so to get back to the 2008 baseline, which was their original pledge.

Mr. Cantor emphasized bringing the spending levels back to 2008. So he added, “Nobody is rallying around that $33 billion number. That number is not a number that I subscribe to.”

The full interview with Eric Cantor will be shown tonight at 7 p.m. EST on CNBC.

Last week I had the honor and privilege of participating in the Reagan Centennial celebration here in New York City. It was truly a wonderful event put together by the Reagan Presidential Foundation, the Manhattan Institute, and the Wall Street Journal. Almost all of the key surviving architects of Reaganomics were gathered together.

The purpose of the event, “Supply-Side Economics: From the Reagan Era to Today,” was to review four key principles of economic growth initiated by President Reagan: Low tax rates on a broad economic base, sound monetary policy, free trade, and sensible regulatory policy.

These principles are what unleashed a wave of economic growth that led to an era of unprecedented prosperity here in America. And these same principles can restore our country to prosperity today.

Joining me in a special panel discussion moderated by CNBC’s Maria Bartiromo were two terribly bright thinkers: Lew Lehrman and Lawrence Lindsey. You can watch the entire conference at www.manhattaninstitute.org.

Here are a couple excerpts from my panel remarks.

Growth solves a lot of problems, okay? Growth solves budget problems, growth solves deficit problems, growth solves debt problems. I’m all for limiting spending. I just want to say that. Yes, yes indeed. We get back to 20 percent of GDP or less on spending, I am fine with that, okay? Fine with that. But I don’t see debt as this new red menace out there. What I see is growth as the Lord’s savior to the economy and our fiscal position. . . .

Just make the dollar sound and keep marginal tax rates low. The economy will grow beautifully. But if the dollar falls, as it’s been falling for ten years — on the index it’s at a ten-year low, nearly — then it neutralizes the lower tax rates, you see what I’m saying? Because commodity prices soar and the capital flows outside the country, and it’s a dreadful policy. So, low tax rates, limited government. Keep the dollar sound.

Right now, Republican presidential candidates are beginning to prepare for the upcoming election and are formulating their respective policy agendas. The key question the GOP candidates should be asked is whether they have a real pro-growth agenda. This, along with a free-market focus and a strong dollar policy, is absolutely key.

We must keep the legacy of Reaganomics alive.

Here’s the video of my interview last night with presumptive GOP presidential candidate, former Minnesota governor Tim Pawlenty. Here’s the key question: Does Pawlenty have a real, pro-growth agenda?

Last week, the Commerce Department revised real GDP up to 3.1 percent for the fourth quarter of last year. That was some cause for joy in the stock market. But today we saw a poor consumer-spending report for the month of February, which is picking up the rise in gasoline prices and the decline in consumer sentiment.

Real income after-tax — known as real disposable income — actually fell in February. But the inflation rate jumped 0.4 percent, which is almost 5 percent annually. And while real consumer spending did rise, over the past three months it has gained by only 1.4 percent annually.

The gasoline-driven inflation hike now puts consumer inflation as measured by the personal consumption deflator at 4 percent over the last three months. That’s higher than wage and salary income. So while energy prices are bulging along with food, real wages look to be falling — not a good combination.

So I repeat my Q1 caveat emptor.

Now, all may not be lost, because manufacturing production looks strong and job creation looks somewhat better. Housing, on the other hand, is still slumping. Some smart economists I know now think Q1 GDP could be less than 2 percent. But they expect a rebound in the spring and the rest of the year.

Well, maybe so. But a lot depends on gas and food prices and other inflation factors, and that in turn depends on the dollar. If the greenback keeps sinking and producer prices for businesses keep rising, then corporate profits may really disappoint along with the slide in real consumer spending.

How about flat-tax reform and a King Dollar linked to gold?

Economic growth over the past ten years has been less than 2 percent annually. And this is a mighty soft economic recovery going on right now, following the very deep recession.

So it’s appropriate enough that Republican House Majority Leader Eric Cantor unveiled a strong pro-growth economic plan at Stanford’s Hoover Institution this week. Cantor is afraid the Republican budget-cutting message is a little too austere, so he’s attempting to balance the necessary budget cuts with a pro-growth, tax-and-regulatory reform message.

Cantor focuses especially on getting business tax rates down to at least 25 percent. He also proposes a tax holiday to repatriate the foreign earnings of U.S. companies. So many CEOs have made the same argument. And this was done successfully in 2004-05. If enacted, maybe $1 trillion in cash will flow back home for new investment and jobs.

But no sooner did Cantor make this speech, than the Treasury shot down any idea of a corporate-tax holiday. I guess this is the same Treasury that works for the Obama 2.0 pro-business president. Or not.

Cantor is completely right on this. He’s also right on his other proposals to lower trade barriers and put a freeze on regulatory burdens.

Mr. Cantor also has an interesting proposal to deal with the backlog of 700,000 patent requests in order to speed American innovation and small-business creation. He also believes the visa system should be streamlined to bring in high-skilled workers from abroad in order to create new jobs at home.

It will be interesting to see if Cantor’s growth message is taken up by other Republican leaders, most particularly Paul Ryan. Will Mr. Ryan include tax-and-regulatory reform with his tough budget-cutting proposals?

The only thing missing from Eric Cantor’s speech was a monetary hook to stabilize the dollar. The GOP needs a King Dollar policy. Otherwise, all the best tax cuts will be blunted by a sinking dollar and rising inflation.

But bravo to Eric Cantor for getting out a growth message. And let’s see if the GOP presidential wannabes pick up on the need for growth plan.

Better news from the Japan crisis today, as the nuclear power company Tepco appears to be on track to complete a power line to the Fukushima nuclear power plant this afternoon Tokyo time.

If they can start running water into plants No. 3 and No. 4, to replenish the spent nuclear fuel pools, then potentially the apocalyptic fright of massive radiation could be off the table.

No one knows, certainly not I. So much of this story is unknowable. But at least there’s hopefully some good news.

The human toll in Japan is already massive. That’s a tragedy. But if somehow the meltdown story leading to massive radiation can be stopped, that would be a sign of hope for the Japanese people and all the rest of us.

One of the many fear gauges for this story is the U.S. and world stock markets, including Japan’s. While the Nikkei fell 1.4 percent Wednesday, the Dow managed a 1.4 percent gain today, up 161 points. It could be nothing more than a relief rally.

Traders are pointing to a strong factory report from the Philly Fed and a solid manufacturing gain for the index of industrial production. You want to say that the U.S. economy will survive the Japanese crisis, and undoubtedly that view is correct. But no one can rule out a worst-case Japanese story. Not yet, anyway.

And should that worst case ever occur — and let us pray it does not — no economy, including ours, will be spared.

But let me be hopeful on the Japan nuclear crisis somehow being solved. If that happens, the U.S. economic outlook is still 3 percent, or reasonably good.

All the economic stuff is still a sidebar to the Japanese tragedy. So perhaps as a sidebar to the sidebar, inflation pressures in the U.S. continue to rise. Today, for example, the consumer price index showed another big gain, the third straight monthly rise. This comes to 5.6 percent at an annual rate over the past three months. Producer prices paid by businesses have jumped 13.8 percent annually over the past three months. And import prices paid by everybody are up 6.9 percent over the past year.

Mr. Bernanke still thinks it’s all temporary — just a minor bulge in food and energy. But inflation expectations in the bond market and in consumer surveys show increases, not declines. Gasoline is holding at $3.55 at the pump. A year ago, it was $2.79. I hope the Fed is paying attention.

Here’s the transcript from my recent interview with top Senate Republican Mitch McConnell. One of the key points he made from my perch is that he wants a broad-based budget deal, but absolutely no tax hike.

LARRY KUDLOW: Sen. Mitch McConnell, welcome back to The Kudlow Report, sir.

SENATOR MITCH McCONNELL: Glad to be with you, Larry.

LARRY KUDLOW: Let me just begin with this catastrophic Japanese story, the tremendous human toll it’s taking and, of course, the nuclear power worries too. First, will efforts be made in the Senate to help our friends in Japan?

SENATOR MITCH McCONNELL: Yeah. If it needs Senate approval, we certainly will be there for helping our friends in Japan. What a horrible environmental catastrophe they’re experiencing, the loss other human life, and all the rest. We’re gonna be there for them in every way possible.

LARRY KUDLOW: What kinda stuff is being discussed right now in the way of assistance?

SENATOR MITCH McCONNELL: I assume that our emergency services experts are interacting with the Japanese. I know they are. The USS Ronald Reagan is either there or on the way there, you know, which– ‘cause, apparently, they would like additional helicopter support in delivering supplies. We’re gonna do everything we can to be helpful.

LARRY KUDLOW: And, the issues of the worries about a nuclear meltdown in Japan, will that effect Senate policy? Will there be hearings held to look at our whole nuclear and our energy program in the wake of these Japanese problems?

SENATOR MITCH McCONNELL: Well, I think it’s important not to rush to a conclusion about a major American energy policy in the wake of a disaster. For example, we all vividly recall last summer the BP oil spill. One of my colleagues said, “You know, when an airline– when– when an airplane goes down, you don’t quit flying.” I mean, we need to try to learn from what happened there. But, to rush to conclusion about– what this means with regard to our– policy in the future for nuclear power, I think it’s premature.

LARRY KUDLOW: No shutdown of nuclear licensing and things of that sort?

SENATOR MITCH McCONNELL: Well, you know, it took us 30 years to get back on track after Three Mile Island. I expect that this will– produce some difficulty. I just don’t think we oughta make American domestic energy policy based upon something that happens in another part of the world. Well, we try to learn from the mistakes that were made, and apply them.

#more#LARRY KUDLOW: Let me talk about American budget policy. You’ve recently said, “Not a single one of the 47 Senate republicans will vote to raise the debt ceiling unless some credible effort, unless something credible is done about our debt.” Can you expand on that? What, “something credible” would be necessary to vote for an increase in the debt ceiling…

SENATOR MITCH MCCONNELL: Well, first, let’s just talk about the situation. We have now a divided government. The American– public last November– decided– as one pundit put it, “Issue a restraining order against the actions of this administration over the first two years.” A divided government frequently has done very important things. Think of Ronald Reagan and Tip O’Neill. Fixed social security in ‘83. Ronald Reagan and Tip O’Neill did tax reform in ‘86.

Bill Clinton and the republican Congress did welfare reform in ‘96. And, Bill Clinton and republican Congress actually balanced the budget, believe it or not, in the late ’90s. This is a time to do important things. Our debt situation is extremely dangerous. We now have a $14 trillion cumulative debt, the size of our economy. We begin to look a lot like Greece.

Over and above that, we have over $50 trillion in unfunded liabilities in Medicare or Medicaid and social security, promises we’ve made that we cannot keep. This is an important time in our history to begin to get our fiscal house in order. And, the President– so far, is remarkably passive, just sort of sitting on the sideline. So, what I have said, to get back to your question, there are 53 democrats and 47 republicans.

Fifty-three democrats can vote for a clean debt ceiling increase if they want to. But, 47 republicans, I’m quite confident, are gonna insist that we use that opportunity, which is all about our debt, to do something important about our debt.

And, I’ve been trying to incentivize the President every way I can, to come to the table. He doesn’t have to lay it out publicly. We need to have private discussions and see what we can come up with that would be an important accomplishment for the country.

LARRY KUDLOW: But, to make it credible, I mean I’m gonna guess you have a couple of months. To make it credible, would you, for example, insist on any conditions from the White House to have republicans vote for a higher debt ceiling? Specific conditions—

SENATOR MITCH MCCONNELL: Well, I’m not gonna start laying out a potpourri of options. I think they know and we know what would be significant. And, we should be discussing which of those significant items should be added to the debt ceiling. Think of putting an ornament on a Christmas tree. Add it to the debt ceiling, as a condition for having bipartisan approval, of raising the debt ceiling. And, I’m not gonna get into the specifics now—

LARRY KUDLOW: How about a spending—

SENATOR MITCH MCCONNELL: but we all know what our—

LARRY KUDLOW: –limitation—

SENATOR MITCH MCCONNELL: –we all know what are problems are.

LARRY KUDLOW: How about a spending limitation? A number of republicans have raised this. Senator Corker has raised this, something like 20, 21 percent of GDP. If I’m not mistaken– your whip, Senator Kyl has raised it also, Senator Mike Lee and others. A spending limitation, a debt limitation, an entitlement package. It’s kinda hard to do in the next six or eight weeks. But, would those qualify as conditions—

SENATOR MITCH MCCONNELL: All of those are the kinds of things that would be considered significant by the markets, by the American people, and by foreign countries. And, we’re in the process, within the republican conference, of looking at statutory solutions. Senator Corker’s got a creative and interesting one. And, we’re also looking at a Constitutional amendment that would not be a good candidate for a debt ceiling ‘cause the President, under out Constitution, is not involved in a Constitutional amendment to balance the budget. He doesn’t play a role in that.

Entitlement reform. A lot of study has already been done. The President’s own entitlement debt reduction commission has done a lotta study over the last year w– whose– all of these issues have been studied thoroughly. What is lacking so far is the political will to tackle them.

LARRY KUDLOW: Senator Schumer and some others, I believe Senator Durbin also, they want to have a big package deal discussion. Spending cuts, entitlement cuts, and also taxes. And, I wanna ask you, down through the years, we’ve had these big, grand design deals. Are taxes on the table for such a deal?

SENATOR MITCH MCCONNELL: Taxes are not on the table. We don’t have this problem because we tax too little. We have this problem because we spend too much. And, I’ve made it clear, both publicly and privately, that as a result of last November’s election, tax increases cannot be considered as part of the solution to any of these problems.

LARRY KUDLOW: Are there any movements in the Senate Finance Committee to lower the business tax rate structure? President’s talked about this. He’s sort of making a charm offensive with business. A lotta people on Wall Street took notice of that. He’s goin’ to be a centrist. He’s got Bill Daley as his new Chief of Staff. Is the White House pushin’ for business tax reform? Is the Senate pushin’ for business tax reform? Are you pushing for business tax reform.

SENATOR MITCH MCCONNELL: Yeah, we’d like to see the American corporate tax rate be competitive with the rest of the world. And pretty soon, we’re gonna have the the highest corporate tax rate in the world. I don’t think that’s good for business. By the way, we all be– oughta be ratifying trade agreements, not just the Korea deal, but the Panama, Colombia deal as well. We oughta be doin’ all of those things. And I’m waiting to see whether this is just a rhetorical shift on the President’s part courting business whether he’s gonna back it up with anything real. And, I think doin’ work on lowering the corporate tax rate, passing trade agreements, all of that, would have reality match up with rhetoric.

LARRY KUDLOW: Speaking of rhetorical shifts– President, in his news conference Friday, last Friday, said he was in favor of domestic drilling, domestic oil and gas production. Do you believe him?

SENATOR MITCH MCCONNELL: Well, I remember one previous President said, “Watch what we do, not what we say.” And, it is no question this administration has made it tougher to drill both on and offshore in this country. It’s harder to get permits. We’ve had to suffer through an endless moratorium in the gulf after the BP spill that is totally unpopular all across the southeastern United States because it’s costing us jobs.

One of my colleagues, Senator Vitter, on the floor of the Senate actually read the list of rigs, named them, that are now– that used to be in the gulf, that are now in places like West Africa and other places. They’ve been moved around the world, and the jobs have gone along with them.

So, the question is not what the President’s saying, but what he’s doing. We need to quit this anti-production– view that’s been pervasive. It needs to stop. The anti-pro– production view that’s so pervasive in the administration needs to change. He’s the President, he can change it if he wants to.

LARRY KUDLOW: Do you blame him for $3.57 gasoline at the pump, which many economists are saying will slow the economy and raise the inflation rate? Do you blame the—

SENATOR MITCH MCCONNELL: No, I’m—

LARRY KUDLOW: –President?

SENATOR MITCH MCCONNELL: –not gonna lay that just on his shoulders. But, he is you know, in terms of domestic production, this has been an administration that’s very hostile to domestic production, not just in the gulf, but in Alaska and other places, to the extent that we could reduce our dependence on foreign oil. I think we all agree that would be good. But, we’re not gonna do that any time soon with the proliferation of electric cars. It’s just not gonna get the job done. So, we need to be straight with the American people. And, that involves opening up more of our substantial domestic supplies of both oil and gas.

LARRY KUDLOW: Do you blame Fed Chairman Ben Bernanke for printin’ too many dollars? Value of the currency’s goin’ down. Food commodities are skyrocketing. Energy commodities are skyrocketing.

SENATOR MITCH MCCONNELL: Well, I’m not an expert on Fed policy. But, anyway, we were just talking about gas prices. Nothing will send the cost of everything up faster than an increase in gasoline prices. Just a penny up, you know, will cost us hundreds of millions of dollars a year. Everybody’s very sensitive to gas prices in this country.

LARRY KUDLOW: When you heard PIMCO’s Bill Gross, the big investment manager out west. He says he’s pulling out of the U.S. Treasury Bond market. What kind of signal do you take that to be? What do you and the Senators feel that kind of negativism toward bonds pushes the deficit reduction, pushes the budget issue to the front page, and to the front of your agenda? Are we losing time on this? If too many Bill Grosses pull out, who’s gonna buy our debt?

SENATOR MITCH MCCONNELL: Well, I think the message is this is a serious problem, and it’s a problem now. I mean, you get the impression the President hopes to finesse this past the next election. That’s fine if it’ll wait that long. There are many experts who come and talk to us here in the Senate who believe we need to act, and act now.

And, as I’ve suggested, Larry, I think the time to act is– in connection with the debt ceiling. We all know the kinds of actions we can take that would be viewed about the bond market, for example, as an indication the American government is gonna get its house in order. We know what the steps are that need to be taken. We need to reach out and grab them with both hands, and pass them.

LARRY KUDLOW: All right, Senator Mitch McConnell, Republican Leader, we appreciate it very much, sir.

SENATOR MITCH MCCONNELL: Thank you, Larry.

LARRY KUDLOW: Great. I really can’t thank you enough.

Here’s the video and transcript from my interview last night with Republican House Speaker John Boehner. We covered a wide range of topics including the tragedy in Japan, U.S. energy policy, the budget battle, and taxes. On that final topic, according to Speaker Boehner, a corporate tax cut is still possible this year.

LARRY KUDLOW: Speaker Boehner, welcome back to The Kudlow Report.

JOHN BOEHNER: Good to be with you.

LARRY KUDLOW: Thank you. Let me begin, of course, with the catastrophe going on in Japan — and ask you first, are there thoughts, policies, discussions in Congress? What can we do to help our Japanese friends?

JOHN BOEHNER: Well, clearly our hearts and souls go out to the people of Japan, and the tragedy that they have faced and are facing. Whether it’s military help, or whether it’s our expertise — food supplies — a lot that we will be doing — to help the Japanese people.

LARRY KUDLOW: Will the Congress appropriate additional funds for these kinds of emergency assistance?

JOHN BOEHNER: I think that’s yet to be seen. But I would not be surprised.

LARRY KUDLOW: And, do you think these food supplies and military assistance is gonna start right away? Is it in motion as we speak?

JOHN BOEHNER: I think it’s been in motion all weekend, and will continue.

#more#LARRY KUDLOW: Let me ask you also, of course related to this, is the whole issue of — the threatened nuclear meltdown in Japan. Is that gonna effect American energy policy? Are you gonna hold additional hearings on this

JOHN BOEHNER: Well, Chairman Upton at the Energy and Commerce Committee already has a hearing scheduled for this week with the head of the Nuclear Regulatory Commission. And, I’m sure the question will come up about those types of plants — what kind of experience we have here. But, it’s clear that there are lessons to be learned from what’s happening in Japan as we speak. And, I think that we need to learn those lessons as we continue to look at how do we produce more energy from nuclear sources here in America.

LARRY KUDLOW: You were home this weekend and Ohio has some nuclear power plants. Did local folks, did voters, were they talking about this? Were they worried about their own nuclear plants?

JOHN BOEHNER: No, I didn’t hear any concerns raised. But as you watch these images on TV, you can’t help but be concerned about what caused this. The design of these plants, as I understand, is about, they’re about 40 years old. And, what improvements have been made over the course of the last 40 years and, what’s the risk that we face if we continue to push more nuclear energy here in the United States. I think that’s the question the American people wanna know.

LARRY KUDLOW: And — I’m sure you’re right. Is it, are people saying, “This is the end of nuclear energy policy”? I mean, is it gonna be cut and dry? Or, are they gonna give this an honest look?

JOHN BOEHNER: Listen, I think we need we need to take a step back, understand what happened, understand what changes have been made, and really understand what are the risks here. As we all know Japan sits in volcanic area — prone to earthquakes. You know, they have some 1,500 earthquakes a year.

We’ve got parts of the United States that have some inclination toward earthquakes. But, we have other parts of the country where there’s no threat. But, we need to learn those lessons. But, I don’t think it should deter us from trying to do everything we can to move America toward energy independence.

LARRY KUDLOW: Let’s turn back to the budget. On Friday, you unveiled a new continuing resolution, I guess to stop a shutdown this Friday. You got another $6 billion of budget cuts in there towards your $61 billion target. Can this one get through?

JOHN BOEHNER: I believe that the continuing resolution this week will pass for another three weeks, keeping the government open. And yet, though, cutting some $6 billion, which means that over the last several weeks, we’ll be able to accumulate $10 billion worth of real savings.

All of this because the democrats did no budget last year. They did no appropriation bills, and dumped this mess in our lap. I want the continuing resolution through September 30th finished as soon as possible. But, that’s gonna mean real cuts. It’s gonna mean real limitations on what this administration can do for the balance of this fiscal year. And, I’m hopeful that we’ll get it finished as soon as possible.

LARRY KUDLOW: I mean, you’ve got a lotta pressures, as we know. You’ve got tea party conservatives on one side. You’ve got people that want policy defunding of Obamacare on the other side. Democrats are way apart. I mean, it’s almost a $50 billion gap. You told me a little while ago if the democrats won’t take the whole loaf of budget cuts, you’re gonna give it to ‘em one slice at a time. Do you think you can get most of the original $61 billion in cuts?

JOHN BOEHNER: Well, I think we’ll see. We’re in discussions with the democrats in the Senate, with the administration. We want to cut spending because cutting spending will lead to a better environment for businesses to help create jobs in America. That’s the core of what we’re trying to do, bring some fiscal sanity to Washington, D.C.

LARRY KUDLOW: And, you’ve also been talking about next year’s budget, if you get to it, for 2012. And, you want to put some entitlement reforms in there. You wanna put some entitlement limits and caps. How specific will you be? What kind of size reduction in spending might that come to?

JOHN BOEHNER: We’ve got serious fiscal challenges facing our country. And, it’s time that we, as Americans have an adult conversation with each other about the serious challenges that face our country. No more kicking the can down the road. I’ve watched it go on for all the years that I’ve been here. So, you will see us bend the curve. You will see us lay out a plan that will not only balance the budget, but pay off the debt.

It’s gonna take a long time to do this. But, it’s time to make decisions. And, the unfortunate part of this is that the  president a year ago set up a Deficit Reduction Commission. They did a lot of very good work. And, they worked very hard. And, I don’t agree with everything they did.

But, when the  president submitted his budget about a month ago, not one idea from his own Deficit Reduction Commission. That’s just kickin’ the can down the road. It’s whistling past the graveyard. And, House republicans, along with our colleagues in the Senate are not going to do that. If he won’t lead, we will.

LARRY KUDLOW: How do you react to criticism from democrats? Let’s see, Senator Reed, Senator Durbin, Senator Schumer, they say republican spending cuts are bad for economic growth, bad for jobs. How do you react to that and, has the Republican Party focused too much on spending austerity, and not enough on economic growth?

JOHN BOEHNER: I gave the  president a letter signed by 150 economists over a month ago that said that cutting federal spending will lead to a better environment for job creation in America. Businesses and, I used to be a small business man understand that you can’t continue to borrow 40 cents for every dollar the federal government spends.

And, if we begin to cut spending, and people understand that we’re serious about putting America on a sound fiscal footing it will send the signal to business people and investors that America is a place they can invest in. It’s that investment that creates jobs.

LARRY KUDLOW: What about pro-growth tax reform, particularly business tax cuts? What about pro-growth regulatory moratorium? There’s been a lotta talk about over-regulation of energy, for example. We got, what, $3.50 at the gallon. Many economists believe that’s gonna raise the inflation rate and lower the economic growth rate. So, tax cute — an — and regulatory freezes, where’s the GOP on that?

JOHN BOEHNER: Well, when you look at what it’s gonna take to create jobs in America, we talked about cutting spending. We also need to look at all of this regulation coming out of this administration. And, whether it’s Obamacare, whether it’s the Dodd-Frank financial services bill, the EPA that’s choking our ability to produce more American energy, we need to look at the regulatory side as well.

But, how about the three free trade bills that are sitting downtown the administration’s holding Panama, Colombia, South Korea? Free trade will create more jobs here in the United States. And, we need to produce energy. We need to produce energy because we need to bring energy prices down.

But, let’s not forget that if we begin to do all of the above on the energy side we because it’ll create up up to a million new jobs here in America. So, we need to do all of these things, if we’re going to create a better environment for our economy to get up and get moving and get Americans back to work.

LARRY KUDLOW: You know, President Obama and especially Vice President Biden — Mr. Biden was over in Russia recently, talking about admitting Russia into the World Trade Organization, which would require a congressional vote. Wouldn’t it be better to get these free trade deals passed before we put Russia into the World Trade Organization?

JOHN BOEHNER: Well, these free trade bills, some of them have been out there for three or four years. I believe that — and then, the South Korea trade agreement. Let’s deal with these. And if Russians want to actually agree to play by the rules then we can have a discussion about whether ascension into the WTO is the right step.

LARRY KUDLOW: Let me ask one last one. Do you believe that President Obama has turned pro-business? I get this question all the time. He had a charm offensive, he spoke to the Chamber of Commerce, and particularly his new Chief of Staff, Bill Daley. Have you spoken to Mr. Daley? Have you heard from him that they want a pro-business, pro-growth agenda? How do you come out on all that? Have any changes really been made in the last couple months in the White House?

JOHN BOEHNER: Well, I’ve talked to the  president a lot over the last couple of months. And, I’ve talked to Mr. Daley a number of times. Talk is cheap. Actions speak louder than words. I haven’t seen any new actions yet.

LARRY KUDLOW: What are you looking for? What would be a hint?

JOHN BOEHNER: Well, send the three free trade agreements to Congress for our consideration. Let’s put a real moratorium on new regulations coming out of his administration, which he’s also called for.

LARRY KUDLOW: How about Mr. Camp, your Chairman of the Ways and Means Committee? He runs tax policy, I know he runs trade policy too. Have you deputized him to come with a business tax cut reform bill?

JOHN BOEHNER: If we want to make America more competitive, we’ve got to reform our corporate tax code. It is in the way of job creation in America. Dave Camp is a great Chairman. We came to Congress together 21 years ago. He is working on that reform. There’s a number of hearings that are already set up. The administration appears to have some interest in wanting to pursue this. And, I’m optimistic.

LARRY KUDLOW: Could this happen in my lifetime?

JOHN BOEHNER: It could happen this year.

LARRY KUDLOW: (LAUGH) Okay.

JOHN BOEHNER: I hope that much was in your lifetime.

LARRY KUDLOW: I have high expectations. You think it could, you think you could get business tax reform this year, that’s possible?

JOHN BOEHNER: I do. I actually do.

LARRY KUDLOW: All right. Speaker John Boehner, we appreciate your time very much, sir.

JOHN BOEHNER: Nice to see you.

LARRY KUDLOW: Great.

Stocks got slammed today. The Dow dropped 228 points as the much anticipated correction appears to be taking hold. Year-to-date, the broadest index, the S&P 500, is still up 3 percent, and the Dow is up 3.5 percent. Curiously, a $2 drop in oil did not rescue the market. But a lot of worries about China growth, a Spanish credit downgrade, and a widening U.S. trade deficit weighed down the market right from the opening trade.

All eyes are turned to Saudi Arabia as the so called “day of rage” begins. Reports are that Saudi police opened fire on protesters in the kingdom’s east. Most experts do not expect a major protest to develop, such as in Egypt. But frankly, who knows?

The Shia underclass comprises most of the workers in the oil fields. And former Saudi ambassador Robert Jordan told me in a CNBC interview that he didn’t think the fully employed Shia workers would have any desire to shut down the oil fields. That may be why the Saudi stock market jumped 15 percent this week and the world price of oil edged lower.

As Donald Rumsfeld would say, it’s an unknown unknown.

But in the midst of today’s stock market gloom there are two positives: First, a new government report shows that corporate profits  – the mother’s milk of stocks — reached new all-time record highs. In fact, after-tax economic profits are up 107 percent from the late 2008 trough. That’s a bigger gain than the 91 percent increase in the S&P 500. The growth of future profits will undoubtedly slow. But the level will continue to rise. The same could be said for the overall stock market, despite today’s 2 percent correction.

A second positive is trade. While the monthly trade deficit increased slightly, total U.S. trade — exports plus imports — reached its highest level since August 2008. That is a sign of growth. What’s more, large import gains for industrial supplies and capital and consumer goods is another sign of strong domestic growth.

But even with these positives, I acknowledge some more unknown unknowns.

For example, the big rise in gasoline prices since last August, with pump prices hitting $3.53 today, is a $182 billion annualized tax on motorists, according to veteran analyst Peter Beutel. He goes on to say that including diesel, heating oil, jet fuel, and other parts of the rising cost of the oil barrel, the total energy tax on the economy is $330 billion.

And the fact remains that Fed head Ben Bernanke is monetizing the energy-price spikes by pumping in excess QE2 money. That could set a significant inflation threat.

So I am being realistic. There are unknown unknowns out there. That may be the message of today’s stock market sell-off.

Here’s my interview last night on the huge spending mess and budget battle taking place in Washington with House Budget chairman Paul Ryan of Wisconsin. I was very impressed with the congressman.

LARRY KUDLOW: Now there’s a story raging on cnbc.com right now that is telling the truth about government handouts, Social Security, Medicare, unemployment insurance. It makes up more than a third of total wages and salaries of the U.S. population, a third of what you earn. It’s a record figure that will only increase if nothing is done to stop it. The Senate is going to vote in the morning on the Republican plan to cut $61 billion. The Dems say they have a better plan, a piddling six billion. The sparring over spending, however, appears to be getting us nowhere. So here now we are honored to have House Budget Committee Chairman Paul Ryan, Republican of Wisconsin.

Mr. Ryan, you are very kind. I know you are a very busy person. I just want to ask you this, the public is seething over this out of control budget spending and borrowing and deficits and the rest of it. Seething. Now why is it — I hear it from Jeff Sessions, Eric Cantor’s press conference today, you have said it. It seems like the Republican position now, since you can’t get your budget cuts through, is to do everything to avoid a shutdown. Is that the case? And why?

PAUL RYAN: It’s not to do everything to avoid a cut — shutdown. It’s to get these lower spending levels. Look, we want spending cuts and we’re basically saying, `If a shutdown occurs, it is because the president and Harry Reid don’t want to do any spending cuts.’ This on top of the fact they increased discretionary spending on domestic government agencies by 24 percent. You throw a stimulus on top, it was 84 percent. A blowout of spending that occurred. And so what they’re trying to do is lock those numbers in, those high levels for five years. And so if they could — if the government is shut down, it’s because they are unwilling to bring back those massive spending increases, double-, triple-digit increases at the government agencies. And we want to see the cuts. We want to go back to normalcy. They don’t. And if — and if there is s shutdown, that’s why.

KUDLOW: All right. So, OK, fine, you phrased it differently and that sounds more interesting to me.

RYAN: Good.

KUDLOW: Look, at this — at this moment, what are the odds that you’ll get you’ll $61 billion budget cut with the Democrats at, I don’t know, six, seven, eight, $9 billion? And the White House doesn’t even have plan. Eric Cantor blasted them today, saying they don’t even have a plan. The — your majority leader. What’s the odds, Paul, that this is going to happen.

#more#RYAN: I don’t know what the final number is going to be, Larry. But I do know this, it’s not going to be 2010 levels. We’re already now below 2010 levels. We already cut four billion in the current two week cycle we’re in below the 2010 levels that the president swore he was going to maintain. So we’re already going in the right direction. We’ve already gone below President Obama’s spending floor that he tried to put in his budget. So as far as I’m concerned, we’re going in the right direction. Are we going to get all the way to 61 billion? I don’t know. But we are showing that we are not going to accept those elevated 2010 spending levels. The president has already gone below that. The question is, how much farther do we go? And that’s what we’re debating over.

KUDLOW: All right, let me ask you this. I think that the public, ordinary citizens and so forth — I hear this on my radio show all the time. You know, they see gasoline prices jumping to $3.50.

RYAN: Right.

KUDLOW: Maybe on the way to four, maybe on the way higher. They’re real worried about that. They’re still . . .

RYAN: I paid 3.67 today.

KUDLOW: All right. They’re still worried about their paychecks. They’re worried about jobs. Tell us how this budget battle affects jobs and growth, which I think has still got to be the end game.

RYAN: It is.

KUDLOW: Growth, growth, growth.

RYAN: Our end game, Larry — and you’ll see this in our budget — is economic growth, is job creation, is prosperity. Today’s really big deficits simply translate to tomorrow’s big tax increases and interest rate increases. Our fiscal policy is on a collision course with our monetary policy and our tax policy. So the more government borrows and spends and prints today, the more businesses will pay for it tomorrow and the less economic growth we will have. Getting these deficits and debt under control today means more jobs and economic growth today. We want tax reform. We want budget reform. We want government to live within its means so that the entrepreneurial economy can take off.

So look, we’re talking about $61 billion out of a $3.8 trillion budget. We have a $1.6 trillion deficit this year alone. And so when we keep borrowing all of this money, Larry, we are simply saying we’re going to pay higher taxes tomorrow, higher interest rates tomorrow.

KUDLOW: All right, that’s a key point. I don’t hear Republicans making that point the way you just did.

RYAN: I say it every single day.

KUDLOW: A higher spending and greater deficits guarantees humongous tax hikes.

RYAN: Absolutely.

KUDLOW: Which will sink this economy if we don’t get it through. What . . .

RYAN: Higher tax rates loose — and don’t forget the monetary policy angle of this.

KUDLOW: Right.

RYAN: We’re going to have an interest rate problem, as well.

KUDLOW: All right. That’s a great message.

Now final point in our limited time. There are going to be some entitlement proposals in your 2012 budget.

RYAN: Mm-hmm. That’s right.

KUDLOW: If we ever get to the 2012 budget.

RYAN: Right.

KUDLOW: Now how far are you going to go? You have been a great leader. You have been willing to say things that most people shy away from. You’re not afraid to touch this story. On the other hand, you may be alone in Washington D.C.. What are you going to say, Paul Ryan, on the entitlement fix?

RYAN: Well, I’m not going to be alone come April. April is when we put our budget out, and we will propose fixes to our fundamental entitlement problems. We will attack the drivers of the U.S. debt and we will put in place a plan that gets growth back in the economy by getting this debt under control. So, yes, we will tackle the big drivers of our debt. Those are our health care entitlements. We’re going to offer reforms that are prospective. And the point we make, Larry, is we can have prosperity and not austerity if we go now. The changes we’re going to propose do not affect people in a near retirement. They’re for prospective generations, but it’s a plan to keep our taxes low, our interest rates stabilized, and get our debt taken care of and our deficit taken care of.

KUDLOW: Are you talking . . .

RYAN: That’s a plan for prosperity.

KUDLOW: All right, Mr. Chairman, are you talking about benefit cuts? That’s a tough sell. You may be right.

RYAN: So . . .

KUDLOW: But are you talking about benefit cuts?

RYAN: It’s very clear that these entitlements are growing themselves into bankruptcy, that they are going bankrupt. So we need to reform these entitlements going forward so that they’re sustainable. So what we’re going to do is propose plans that reform these entitlement programs that prevent people in and near retirement from any kinds of changes, and reforms for the next generation, my generation, you know, the X generation on down, so that we actually have these benefits for us when we retire.

KUDLOW: But, Paul . . .

RYAN: Right now nobody in my generation thinks they’re going to get these benefits.

KUDLOW: I . . .

RYAN: We’re going to fix these things, and it will change the way the benefits operate. You’ll see all the details, Larry, when we bring our budget out in April.

KUDLOW: All right. I want to see — I’m dying to see it.

But what do you say to supply siders and others who argue — regarding Social Security, not health care — if you grow the economy in the next 50 years at 3 1/2 percent per year, which is the long-term growth since World War II, then Social Security will fix itself?

RYAN: No, it doesn’t.

KUDLOW: Now that doesn’t mean we shouldn’t have personal account option and so forth, but that’s what they argue. If you grow the economy, growth, growth, growth, then we don’t have to slash benefits and the Republican Party will look better, not worse.

RYAN: Except, first of all, nobody is talking about slashing benefits. We’re not even talking about touching benefits for people in and near retirement. But we’ve run those numbers on growth and Social Security and they don’t catch up, because when you have more growth and you have more Social Security contributions, you have more expenses. The more you pay in, the more you get out. So growth, you cannot grow yourself out of our Social Security solvency problem. I’ve run those numbers with the actuaries. You do need to make some changes in Social Security benefit for the future generations to make this program solvent.

KUDLOW: But the actuaries say you can only grow at 2 percent for the next 50 years.

RYAN: No. But even if you run bigger growth numbers through the system, you still don’t fix the problem. I’ve run those numbers. I’ve run the 3 and 3 1/2 percent growth numbers through the system. We are kidding ourselves if we think we can simply grow ourselves out of our entitlement problems. We can’t. We have an $88.6 trillion unfunded liability with our entitlement programs, according to the GAO. Last year that was a $76.4 trillion problem. Every year we delay fixing these entitlement programs. We go about $10 trillion deeper into our unfunded liabilities.

KUDLOW: All right. I got to get out.

RYAN: We got to fix this stuff and we got to have pro-growth economics to help us do that.

KUDLOW: Right. I need to spend a solid hour with you on the air to walk through this, but it’s great stuff. You’re fascinating.

RYAN: All right.

KUDLOW: It’s great. Look, I wish you all the best in the world. You’re wonderful to come back on the program. House Budget chairman Paul Ryan of Wisconsin.

Fierce Federal Reserve critic Rep. Ron Paul (R., Tex.), head of the House Financial Services Committee, discusses his back-and-forth with Fed head Ben Bernanke over U.S. monetary policy.