Gold is up $10 and cyclical stocks are strong. Commodity stocks are up 1.5 percent as of 12:30 p.m. today. All this tells me is that no one is afraid of a quarter-point rate hike.

The rise in the gold price and the jump up in commodity stocks is not a good sign that a quarter-point hike will deflate inflationary expectations. I’d like to see some fear in the inflation stocks, but I’m seeing greed instead.

They need to make a statement. Bernanke’s monetary manhood requires a strong statement.

I still believe liquidity neutrality is 5.5 percent on the funds rate, based on the Wicksell inflation-indexed bond market model. Meanwhile, low tax-rates and high profits auger for a solid economic growth performance.

At the request of my friends at the Mercatus Center, here is some policy issues that need the most attention during the remainder of 2006:

The economy is still in good shape, but some of the key economic/policy issues are:

Under Hank Paulson — the fate of the dollar. It should appreciate, not depreciate. There is an outside chance Paulson will pursue tax reform, with the principle that income should be taxed only once. The system should be fairer and flatter. The Republican Congress should be curtailing budget earmarks and tight spending policies in order to get re-elected.

Immigration is controversial, but a recent poll by Ed Goeas of Torrance shows that 70 percent of registered Republicans want a comprehensive, balanced plan with border security, temporary workers, and ultimately legalization. I agree with this approach.

On energy, Congress is taking steps to permit off-shore drilling, which is very positive. They should do more.

Finally, Congress should not regulate or tax the Internet. Net neutrality is a bad idea.

*The WSJ editorializes on the lousy revenue estimates at the Joint Tax Committee and the Congressional Budget Office. It’s an important point because I believe the Laffer curve is still the most underrated economic growth policy tool out there. With historically low tax-rates on capital today, federal tax receipts are soaring. In fact, at roughly $2.4 trillion estimated for 2006, tax collections are way above the prior peak, which was around $2 trillion in FY 2000. This, of course, at lower tax-rates. Washington estimators always assume the economy is cyclical and governed by immutable laws. But the reality is growth would have been much slower after 9/11 without strong investment incentives provided by the Bush tax cuts on capital.

*Sen. John McCain has been campaigning around the country to cut spending and eliminate budget earmarks. He made a great speech on this point at the Reagan Library a few days ago. McCain is dead right and the GOP House and Senate should take stringent action to make earmarks transparent and votable before passage. They should also implement Sen. Judd Gregg’s SOS plan, which has Gramm-Rudman-type across-the-board budget cuts and a line item veto in order to meet reduced spending targets.

*The Bernanke Fed should raise their target rate 50 basis point tomorrow to enhance their credibility and enforce their tough rhetoric on curbing inflation. Forward market price indicators like TIP spreads, gold, and the dollar have responded to Bernanke’s rhetorical toughness. But now is the time for execution. The Wicksell model clearly shows that a 5.5 percent fed target rate would be a slight penalty above neutral. The central bank should go there immediately and then it may be possible to pause after that. Importantly, the Fed should be guided by forward-market prices for bonds, commodities, and the dollar to guide their liquidity policies.

*Online pollster Scott Rasmussen finds that 36 percent of Americans are very worried about inflation and another 36 percent are somewhat worried. This should spur the Fed.

*Denying White House press credentials to the New York Times for its unpardonable outing of the U.S. government’s effort to track world terror funds is a very interesting proposition. I’d like to see a Congressional debate on this and I’d like to see where election-year Democrats and Republicans come out on this issue.

*Warren Buffett praises the estate tax, but of course he doesn’t pay it.

*Chip stocks are getting killed. The SOX index is at an eight-month low. Until this sector shows life signs of recovery, it is doubtful that the overall stock market will rebound.

*Despite conventional wisdom that oil prices are a one-way trade higher, I still believe there is a significant chance that prices will drop $20 or more. Don’t ask me when, but Milton Friedman was right 30 years ago. Markets are more powerful than OPEC. Right now production is rising, inventories are high, and consumption is flattening. I think oil is moving to $40 to $50 at some point probably in the next six months.

From the early reports of Hank Paulson’s confirmation hearing to become the next Treasury Secretary, he sounds very much like a supply-sider on fiscal issues. This is a good thing.

He told the Senate Finance Committee that it would be a big mistake to raise taxes to deal with deficits and that he would like to see spending curbed. While he said tax cuts don’t pay for themselves, he does believe that tax cuts change behavior. Paulson emphasized the importance of U.S. business competitiveness and doesn’t want to see any over regulation. Amen to all that.

So far, I haven’t found any comments on the U.S. dollar. This obviously remains a big issue. If Mr. Paulson takes the poor advice given by someone like Fred Bergsten, who wants to depreciate the dollar by 20 to 30 percent, that would be a big mistake. At this stage, such a move would undoubtedly raise inflation and interest rates, posing much danger to the economy.

Working with Ben Bernanke, Paulson should appreciate the dollar to curb inflation, keep rates down, and strengthen economic recovery. I continue to watch closely for any hints on the direction of U.S. currency policy.

Paulson is a free-trader. He boasts very strong ties to China, demonstrated by seventy some odd trips there as the head of Goldman Sachs. During his testimony he said he would push harder to get Beijing to move more quickly to overhaul its currency system. I do not agree with this. China has outsourced its monetary policy to the U.S., and that has served them well. I agree with John Rutledge, Art Laffer, and a handful of others who believe that the Chinese currency should be dollarized. But virtually all of Washington disagrees.

The interesting part of this discussion is that Chinese wages are rising as a result of rapid economic growth. That is a much more effective way of equilibrating trade conditions with the U.S.

When Mr. Paulson’s name was first announced, the stock market fell significantly, as it has today. Could be a coincidence. Then again, maybe not. We will wait and see.

The Supreme Court has agreed to hear a climate change debate at the urging of greenies, to rule on whether emissions from new cars, trucks, and power plants must be further regulated to slow climate change. This is totally wrong. This is a matter that should be decided by Congress, not the Supreme Court.

(To see the lack of consensus on this issue, read ’There Is No ‘

(The NYT was nuts to go ahead and expose this program. They went way too far. And whoever leaked this in government was treasonous, no two ways about it.)

Letter to the Editors of The New York Times
by Treasury Secretary Snow

Mr. Bill Keller, Managing Editor
The New York Times
229 West 43rd Street
New York, NY 10036

Dear Mr. Keller:

The New York Times’ decision to disclose the Terrorist Finance Tracking Program, a robust and classified effort to map terrorist networks through the use of financial data, was irresponsible and harmful to the security of Americans and freedom-loving people worldwide. In choosing to expose this program, despite repeated pleas from high-level officials on both sides of the aisle, including myself, the Times undermined a highly successful counter-terrorism program and alerted terrorists to the methods and sources used to track their money trails.

Your charge that our efforts to convince The New York Times not to publish were “half-hearted” is incorrect and offensive. Nothing could be further from the truth. Over the past two months, Treasury has engaged in a vigorous dialogue with the Times – from the reporters writing the story to the D.C. Bureau Chief and all the way up to you. It should also be noted that the co-chairmen of the bipartisan 9-11 Commission, Governor Tom Kean and Congressman Lee Hamilton, met in person or placed calls to the very highest levels of the Times urging the paper not to publish the story. Members of Congress, senior U.S. Government officials and well-respected legal authorities from both sides of the aisle also asked the paper not to publish or supported the legality and validity of the program.

Indeed, I invited you to my office for the explicit purpose of talking you out of publishing this story. And there was nothing “half-hearted” about that effort. I told you about the true value of the program in defeating terrorism and sought to impress upon you the harm that would occur from its disclosure. I stressed that the program is grounded on solid legal footing, had many built-in safeguards, and has been extremely valuable in the war against terror. Additionally, Treasury Under Secretary Stuart Levey met with the reporters and your senior editors to answer countless questions, laying out the legal framework and diligently outlining the multiple safeguards and protections that are in place.

You have defended your decision to compromise this program by asserting that “terror financiers know” our methods for tracking their funds and have already moved to other methods to send money. The fact that your editors believe themselves to be qualified to assess how terrorists are moving money betrays a breathtaking arrogance and a deep misunderstanding of this program and how it works. While terrorists are relying more heavily than before on cumbersome methods to move money, such as cash couriers, we have continued to see them using the formal financial system, which has made this particular program incredibly valuable.

Lastly, justifying this disclosure by citing the “public interest” in knowing information about this program means the paper has given itself free license to expose any covert activity that it happens to learn of – even those that are legally grounded, responsibly administered, independently overseen, and highly effective. Indeed, you have done so here.

What you’ve seemed to overlook is that it is also a matter of public interest that we use all means available – lawfully and responsibly – to help protect the American people from the deadly threats of terrorists. I am deeply disappointed in the New York Times.

Sincerely,

[signed]

John W. Snow, Secretary
U.S. Department of the Treasury

(For more commentary on this growing controversy, check out two terrific articles at The Weekly Standard: “National Security Be Damned“ by Heather Mac Donald and “Leaks and the Law“ by Gabriel Schoenfeld.)

Ann Coulter is right, Democrats really are “godless” liberals.

And, what’s more, conservatives are happier than liberals. This according to a Wall Street Journal commentary today by Arthur C. Brooks of Syracuse University’s Maxwell School of Public Affairs.

According to Mr. Brooks, polling data shows that conservatives are a happier bunch, and much better adjusted to their adult lives than liberals.

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