Kudlow’s Money Politics

Save the Greenback, Mr. President

We know that gold is soaring. And we know the dollar is slumping. But, did you know that year-to-date, while the S&P 500 is up 18 percent — a great showing, no doubt — gold is up even more? The precious metal is up 21 percent. In other words, measured in true, gold-backed purchasing power, stocks have really done nothing this year. Zip. It is most disappointing.

I try to be optimistic about better earnings, a stock-market rally, and economic recovery. And I’m sticking to my guns. But what we’re seeing right now is pretty darn close to what we witnessed in the 1970s — the rise in gold and inflation really cuts into the stock market.

So what’s the way out?

Well for starters, we need a stable dollar to stop inflationary pressures. And we also need lower tax rates to spur the economy, help it grow, and reduce unemployment. I’ve been calling this the Mundell-Laffer supply-side solution, after Nobel Prize–winning economist Robert Mundell and my mentor, former Reagan advisor Arthur Laffer. It was put to work with great success nearly 30 years ago to stop stagflation. It also launched a 20-year bull-market recovery.

Put simply, the Mundell-Laffer model exercises monetary restraint to save the dollar — and low marginal tax rates for economic-growth incentives that benefit investors, risk takers, small businesses, and workers. Right now, for therapy, the Fed should begin moving excess cash from the economy, and they should raise their target rate. Take a page from the Reserve Bank of Australia’s playbook and move rates higher.

In addition, the Treasury ought to get out there and buy these unwanted dollars in the marketplace. Just go out there and bid for them. And they need to stop printing so much debt from Congress. All this massive spending and borrowing is killing us. We need to be slashing tax rates on large and small businesses. There’s just no better place to begin job creation. And leave the Bush tax cuts in place, for heaven’s sake.

This supply-side shock therapy would save the dollar. And it would put real long-term torque into the recovery.

We’re supposed to be in an era of post-partisanship. So in this spirit, I’d like to respectfully ask President Obama and his economic team to give this plan a try. It worked for JFK. It also worked for Bill Clinton and Ronald Reagan. It can work for you as well.

The time has come to save the greenback and grow the economy, sir.

Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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