Destroy the dollar: Create prosperity

Published 15 years ago -  - 15y ago 41

man-551258_1280Lawrence Kudlow, former Reagan administration budget official, is a syndicated columnist, CEO of Kudlow & Co. and co-host of CNBC’s “Kudlow & Cramer”. Kudlow is probably one of the best known outspoken advocates of “supply-side economics”, the proposition that lowering marginal income tax rates and maintaining a sound dollar will boost capital investment, personal consumption, employment, and eventually tax revenues. They rarely, if ever, call for a reduction in federal spending. In short, supply-side economists are “low tax” proponents of the welfare state.

On the monetary front, supply-siders propose that the Federal Reserve monitor the price of gold to determine if inflationary or deflationary pressures are building in the economy. If the price of gold is increasing, assert supply-siders, the Fed should tighten monetary conditions. According to their view of the world, under these circumstances holders of dollars are unloading their excess supply of greenbacks and buying gold, revealing that the Fed has been “too loose”. Thus, to prevent inflationary pressure from undermining the economy’s growth path, the Fed should gently “tap on the monetary brakes”.

Conversely, if the price of gold is falling, supply-siders believe the Fed should open the monetary spigot to provide more liquidity in the marketplace, because a drop in the price of the yellow metal reflects “soft” economic conditions. This would drive down short-term interest rates to boost the economy. Apparently, this has been the thinking at the Fed for the past two years, since Alan Greenspan, the Fed chairman, began an aggressive policy to cut short-term interest rates, i.e., the Fed funds rate, from 6.5% to 1.25%.

Nevertheless, supply-siders have given the Fed relatively low marks for not injecting more money faster into the economy during the past two years to jump start the economy. Since the stock market bubble burst in early 2000, and with the economy entering a recession in the first quarter of 2001 and a lackluster economy since then, supply-siders have been virtually manic in their call for the Fed to inflate with abandon to “stimulate” the economy.

Last week, writing in Investor’s Business Daily, the aforementioned Mr. Kudlow, called for “shock and awe” from the Fed at its next policy making meeting (June 25th). Kudlow writes, ” …Alan Greenspan & Co. should turn the money spigots wide open that day–more than they have thus far in this reflation cycle.” (Emphasis added)

He continues: “A shock-and-awe liquidity expansion policy from the Fed will counter our underperforming economic recovery, offset the forces of world-wide deflation and recession, and stomp out deflation and fears at home.” Kudlow also asserts, “An aggressive liquidity stance will also accommodate rising transaction demands following the latest Bush tax cut”.

(Each of my current MBA students have volunteered to receive from the Fed at least one million dollars in new money to “accommodate” their future investing and spending. In fact, they are willing to spend new dollars created by the Fed on new homes, automobiles, jewelry, vacations and anything else they can purchase at the Garden State Plaza in Paramus, New Jersey. They promise to invest in the stock market, especially in highflying NASDAQ stocks. After all, they will not have tosave out of their hard-earned money to take risks in the stock market if they are the recipients of the Federal Reserve’s monetary inflation. If the Fed is going to inflate, they will be more than happy to be patriotic Americans and spend and invest for the good of the homeland economy.)

Kudlow as well as Steve Forbes and others have called upon the Fed to flood the economy with new money to stimulate production and consumption and “accommodate” more financial transactions. In short, despite their alleged free-market credentials, Kudlow,, are advocating the most self-defeating economic policy, i.e., inflationism.

Inflationism is the naive belief that cheap money brings about sustainable prosperity. According to the Austrian economist Ludwig von Mises (, “If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world. The economically backward nations would not have to complain about the insufficiency of their capital equipment. All they would have to do for the improvement of their conditions would be to expand money and credit more and more”.

Moreover, as Mises pointed out in his 1912 book, The Theory of Money and Credit, a cheap money policy will not magically create wealth. In short, the State’s printing presses do not turn bits of paper into real capital goods and consumers goods. On the contrary, printing money invariably dilutes its purchasing power, and “a continued inflation must lead to a collapse“. (Emphasis added)

Kudlow and Company are nothing more than central planners, and apparently have abandoned any support for honest money and free markets. They want the Fed to act as America’s Politburo, targeting interest rates, price inflation, commodity prices, and the stock market. Instead of allowing the free market to set prices, interest rates, and stock values, they believe the Fed can inflate us to prosperity–a policy that got us into this mess in the first place. In short, Kudlow and Company are “right-wing” Keynesians.

As Mises stated in magnum opus, Human Action, “The abhorrence of the gold standard is inspired by the superstition that omnipotent governments can create wealth out of little scraps of paper”. Kudlow, Forbes, and the rest of the inflationist cheerleaders believe debasing the currency is the road to prosperity. History and sound economic reasoning reveal just the opposite. Inflationism leads not only to impoverishment, but also to more government intervention.

Until we end the Federal Reserve’s power to create money out of thin air, inflation and the business cycle will always be with us. If the Fed’s power to create money is not stopped, our experiment in paper money may end like many other fiat money experiments, the destruction of the currency.

Published originally at : republication allowed with this notice and hyperlink intact.”

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