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THE CONSERVATIVE REVIEW - April 12, 2011
Shutdown Threat Is Not All that Ails the Dollar
by: Larry Kudlow
Townhall.com
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.
Frankly, the GOP could easily declare victory and accept
a $35 billion to $40 billion spending cut for the final
strokes of the 2011 continuing resolution. This kind of
deal would move the domestic discretionary baseline back
towards 2008. No mean feat.
Over ten years, estimates range above $400 billion in real
cuts in the level of those domestic programs. Considering
where the process started -- with the failure of the Demo-
crats to propose a budget, and then the early Democratic
response of only $5 billion in CR budget cuts -- the GOP
has come a long way in the absolute right direction.
So from here the GOP could move from billions in CR cuts
to trillions in cuts in the Paul Ryan budget.
Yet however this works out, the principal cause of the
declining dollar is not a threatened government shutdown.
It's the excess money creation of the Fed, which is fall-
ing further and further behind the international curve of
currency stability.
While Bernanke & Co. have increased the adjusted monetary
base by about $500 billion since late December, other
central banks have been tightening policy in order to
stabilize their currencies and fight inflation. The ECB
went for a quarter-point hike this week. And the euro is
trading strong at 1.44 to the dollar.
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Over the past year or so, Canada and Australia have raised
rates several times. Their currencies are soaring. China
and other Asian countries also have been gradually tighten-
ing policy. In all these cases, foreign central banks are
rejecting the over-supply of dollars coming their way.
So, by the way, are Middle East oil producers, according
to CNBC reporting. As U.S. crude-oil prices have shot up
30 percent since mid-February, the Saudis and others have
been selling much of the dollar proceeds from the high-
priced oil sales.
It just seems like nobody wants dollars. Over the past
ten months, the dollar index has lost 15 percent. That's
because there's too many of them. And a lot of the excess
dollar flow is finding its way into commodities -- includ-
ing oil, but most especially gold and silver, which are
traditional monetary substitutes. Right now gold is cruis-
ing towards $1,500 an ounce. Silver has passed $40. Crude
oil is over $112, and European crude is back to $126.
In a recent survey by Reuters, one-in-five traders said
they expect Brent oil to hit $150 this year. Gasoline
prices in the states continue to surge, with the AAA
national average retail price moving to $3.74. In almost
ten states, the price is hovering around $4.
Nobody knows where the energy tipping point is for the
economy and stocks. And by and large, the market has held
up rather well. But these spiking prices are surely a
threat.
There's no question that the potential U.S. debt bomb from
overspending is a backdrop fear for investors. Long-run,
that bomb could be just as much a dollar destroyer as the
over-easy Fed. And perhaps the debt bomb and cheap money
are ultimately two sides of the same coin.
But in the short run, after the government shutdown goes
away, the big problem behind the sinking dollar is a
stubborn Fed with its head in the sand, and with its
failure to see world monetary and commodity threats
closing in all around it.
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