Republicans Must Get Wise to Obama’s Hard-Line Fiscal Strategy

by Larry Kudlow

Judging from the speech Obama gave following the deal to end the government shutdown, Republicans better get wise to the president’s next fiscal gambit when the three-month stop-gap budget and debt measures come due. As was the case with his hard-line defense of Obamacare, the president likely will be inflexible on ending sequestration budget caps, pushing for massive tax hikes, and permitting only the most inconsequential entitlement reforms.

Obama is interested in busting the GOP in 2014. He’s not interested in true budget restraint or other economic-growth measures.  

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Senator McConnell: White House Meeting ‘Unproductive’

Commencement Speech, University of Rochester Simon School of Business

A Kemp Growth Plan for Detroit

by Larry Kudlow

With Detroit filing for Chapter 9 bankruptcy, everybody knows major root-canal cutbacks are coming. Cutbacks of out-of-control government spending, pensions, and health benefits. Major cutbacks. We know that.

We also know that the downfall of Detroit is again proof positive that the public-union collective-bargaining model has utterly failed. Unions just loot the benefit lock box at taxpayer expense. That was the message of Governor Scott Walker’s victorious crusade in Wisconsin. If any good comes out of the Detroit debacle, it will be the spread of that message across the country.

But there’s another important point here. If Detroit is to truly recover, a growth program of tax-free investment incentives must be part of the process. Specifically, Detroit should be made a tax-free enterprise zone, along lines proposed years ago by the late Jack Kemp. 

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Bernanke’s Bumpy Ride

by Larry Kudlow

No matter how many monetary officials try to sugarcoat it with damage control, the fact remains that the Ben Bernanke Fed wants to end its quantitative-easing bond-buying operations over the next year. That was Bernanke’s statement at his last press conference, and I’ve seen nothing to contradict it.

As everyone knows, stocks and bonds collapsed right after Bernanke let the cat out of the hat. Fortunately, markets have stabilized since then. But my hunch is that unless the economy really falls back into a quasi-recession, the Fed is going to go ahead and end its bond purchases.

The central bank will more than likely begin to taper in September. And it will do so based on roughly 175,000 new jobs each month, which is consistent with a 2 to 2.5 percent economy.

But as the Fed implements this policy, there’s going to be a lot more volatility in the financial markets, with significant downside risks for stock prices and upside potential for longer-term interest rates. 

Read my full column here.

Deflationary Rate Hike?

by Larry Kudlow

In the aftermath of Ben Bernanke’s announced timetable for ending Fed bond purchases, long-term interest rates have jumped up while stock prices have cratered down. As I wrote yesterday, I think the Bernanke plan is premature — especially in a 2 percent economy with falling inflation and inflation expectations.

But just to get a little wonky on the interest-rate story, it’s noteworthy that 10-year Treasury notes have moved up about 70 basis points year to date. Currently they’re around 2.50 percent.

Most of that rate rise — more than 50 basis points — is coming from a jump in Treasury inflation-protected securities, known as TIPS. Now that could be a good thing, as rising real interest rates signify a stronger economy. The trouble is, on balance, it’s real hard to find strong evidence of a stronger economy. Instead, as economist David Goldman has noted, investors are bailing out of TIPS because they’re not worried about inflation — which, by the way, is running about 1 percent.

So selling TIPS bonds has raised market interest rates. And that, in turn, has done considerable damage to the stock market and perhaps will pinch the economy.

But the story doesn’t end there. So called inflation break-even spreads have been narrowing significantly. This includes 10-year TIPS implied inflation, as well as 5-yr 5-yr forward inflation expectations. They’ve all dropped about 60 basis points, which is roughly equal to the rise in real interest rates.

So one could argue — as a warning to Mr. Bernanke — that rising rates is a deflationary event, not a growth event. And if the Fed is too hasty in tapering its bond purchases — and after all, tapering is really tightening — interest rates may continue to rise for the wrong reasons, namely deflation rather than faster economic growth.

There is no doubt that the Fed has got to end its bond purchases and eventually figure a way out of its oversized bond portfolio. In recent months I have commended Mr. Bernanke for producing low inflation, after many of us wrongly predicted higher inflation. But as St. Louis Fed head James Bullard said this morning, the low-inflation trend may be too much of a good thing. And bond-purchase tapering — excuse me, I mean tightening — could generate deflationary impulses that could damage the economy.

As an old gold-watching guy, I am obliged to note that the crash in the gold price is moving side by side with the decline in inflation expectations.

All this is why I believe the Fed should move extremely slowly in shifting policy in our still fragile economy.

Bernanke Jumps the Gun

by Larry Kudlow

Without intending to — and perhaps without even realizing it — the normally cautious Fed head Ben Bernanke may have launched a major tightening policy during his news conference on Wednesday. The de facto policy shift immediately sparked a rout on Wall Street, with stock, bond, and gold prices all plunging. And it’s going to shake up confidence even more, perhaps even slowing the already anemic recovery.

Mr. Bernanke has stumbled into a major policy mistake.

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