Reply #25: Inflation Worriers, Dollar Pessimists (Kudlow, for a laugh)

[54anickel]

So who sounds nuttier, Mogambo or Kudlow?

http://www.nationalreview.com/kudlow/kudlow200411111107...

As the whole world expected, the Federal Reserve continued its policy of normalizing short-term rates by raising its policy target to 2 percent this week. Since last June the fed funds rate has doubled, but long-term rates have defied conventional wisdom by actually falling. This is a great sign that neither actual nor expected inflation is a problem.


So far in the Bush recovery cycle the inflation worriers have been wrong. In fact, lower marginal tax rates put into action by the president have contributed to minimal inflation and sustainable economic growth.

It’s interesting that even many supply-siders have forgotten the counter-inflationary impact of lower taxes. Stronger employment and higher investment are responses to lower tax rates. Therefore, increased production and economic growth are absorbing excess money and holding down inflation. Over the past year the consumer spending deflator has increased only 2 percent, while the core inflation measure (excluding energy) is a miniscule 1.5 percent.

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First of all, the dollar is fundamentally undervalued right now. With the U.S. economic-recovery miracle continuing to build, and with the successful battle of Fallujah moving us closer to democratic elections in Iraq, the dollar is actually poised for a major rally. But perhaps only optimists can see this.

For now, the real problem with the dollar is not so much that the Fed is too loose, but much more that the euro is way too tight. Just as with foreign policy, Old Europe has the monetary story wrong. The creation of new euros is way too stingy; it is in fact still deflationary.

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