A Slap In The Face

In a state teeming with immigrants from Central America and the Carribbean, it is incredible that Senators Schumer and Clinton voted against CAFTA. As Democratic House member Henry Cuellar told Kudlow and Company last night, CAFTA free trade will bolster Central American and Carribean economies, strengthen democracy, bind those nations closer to the US, and reduce the flow of immigration. This last point is especially important. If the economies of Central America and the Carribean improve because of stronger trade and investment, then the migration flow to the US will slow, simply because economic opportunities are improving in the home countries. In other words, free trade solves immigration problems. The strongest opponents of free trade in the hemisphere were Fidel Castro and Hugo Chavez. So now Schumer and Clinton find themselves taking the Castro-Chavez line and sending the wrong message to the millions of Latinos and Hispanics with close family ties back home who are living in the New York city metro area. Texas Democrat Cuellar, who counts himself in the John F. Kennedy Alliance for Progress tradition has the story exactly right. Schumer and Clinton have it exactly wrong.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Mike Holland, of Holland and Company, and John Rutledge, of Rutledge Capital

-- Cody Willard, of CL Willard Capital, and John Rutledge, on telecoms

-- KB Homes CEO Bruce Karatz, on real estate

-- Congressman Henry Cuellar, on CAFTA

Deadly Tax

Republican senators should not be mau-maued by the inaccurate bean counters at the Congressional Budget Office and the Joint Tax Committee over eliminating the estate tax.

A recent study by Constad suggests that incentives for higher saving, investment, employment and economic growth would lead to a small revenue increase if the death tax were repealed.

We are seeing this dynamic model at work with the huge gain in tax collections from capital gains and dividends at lower tax rates.

The Tax Foundation blog notes that tax exempt organizations have grown like weeds under the estate tax, thereby crowding out taxable income.

Tax deductible estate planning is very expensive. Compliance costs are huge.

As Steve Forbes told us last night, there should be no taxation without respiration. And as the Wall Street Journal points out this morning, America is about the most expensive place to die on the planet.

Instead of postponing the estate tax vote, Senate GOP should go for it right now.

Capital formation, growth, and jobs will benefit enormously.

Ensign's Bill

Markets were strong yesterday. The big story behind this rise was Senator John Ensign, Republican of Nevada, and his sweeping deregulation bill for US telecom.

It is the most market-oriented, investor-friendly legislation in history. It will include fast speed broadband, VOIP, video and wireless. We're talking about the nerve center of the US economy, which has been stifled for years by federal, state and local over-regulation and has caused the US to fall way behind in global communications.

Needless to say, telecoms led the way yesterday with a 1.8% gain. Among telecom service providers there were outsized gains in Sprint and Nextel, and solid gains with Citizen, Bellsouth, SBC, AT&T and Verizon. But even larger gains were registered by the telco equipment makers, who will bring the new fiber to the curb, to the home, and to the municipality, companies like National Instruments, Corning, Lucent, Andrew, Inter-Tel and C-Core. Well known names like Qualcomm and Nortel also rose but didn't make the top tier yesterday.

Pullout

Looks like we might have a date for a possible troop reduction in Iraq. General George Casey said yesterday that

I do believe that if the political process continues to go positively, if the developments with the [Iraqi] security forces continue to go as it is going, I do believe we will still be able to make fairly substantial reductions after these [December] elections, in the spring and summer of next year."

This is very positive. The sooner the Iraqis are self-sufficient, politically and militarily, the better.

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CAFTA Victory

In a real squeaker, CAFTA passed in the House, 217-215, in the wee hours of the morning. This is great. Although critics complain that the economies of the Latin American nations covered in CAFTA are too small to be worth opening free trade agreeements with, and that American workers will be harmed, CAFTA actually will allow American companies to grow and help keep costs and prices competitive, which will utlimately make for more jobs. It will give these countries an injection of economic stability and opportunity -- a much needed injection -- which will in turn help them grow and become ever larger and more valuable trading partners with the US. This is also a political victory: the Bush agenda of spreading economic as well as political democracy won an important victory in CAFTA. Free trade is a good thing. Artificially high prices for sugar and other goods are not. Goodbye, big sugar. Goodbye, isolationists. Hello, CAFTA.

12 More

Working with unflagging speed and efficiency, the British police have rounded up 12 more aiders/abetters of last week's failed bombings. They have not yet caught the bombers themselves, which is unfortunate -- but they appear to be making progress. Certainly they are sending a message. Good luck to them.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Keith Wirtz, president and CIO of Fifth Third Asset Management, and Brian Rogers, of T. Rowe Price

-- Steve Forbes, on the flat tax

-- Pulte CEO Richard Dugas, on real estate

-- Tom Brown, CEO of Second Curve Capital, on bank stocks

-- Sen. John Ensign, on his new telecom bill

A Point of Pride

There's been a lot of manufactured worry in the press about Judge John Roberts and his alleged membership (or non-memberhsip) in the Federalist Society. Roberts himself has confessed an inability to remember if he was or not; records show that he served for a year on the steering committee, a position that does not require full membership.

If this is true, I can only say that I'm disappointed in Judge Roberts: I would have liked to find that he was not only a full member of this excellent, poorly-understood group of scholars and lawyers, but that he had served as a substantial donor as well! Membership in the Federalist Society should be a point of pride, not something to be ashamed of.

Cuellar the Betrayer

Courtesy of John Fund in this afternoon’s Political Diary, I learned that a freshman House Democrat, Henry Cuellar, delivered a ‘stirring’ (in Mr. Fund’s phrase) defense of CAFTA on a call-in show this morning. Mr. Cuellar has the story exactly right – CAFTA would open up new markets for American business, in order to export more and create more jobs. Cuellar is bucking his own leadership in the House, and bucking all the major unions that put out a warning this morning that they will withdraw support from any Democrat who votes for CAFTA. Former Democratic House leader Martin Frost of Texas once wrote a letter to supporters saying that Cuellar betrays his party. Sounds like my kind of guy.

Tax Returns?

While full disclosure of any tax irregularities is necessary, it seems a little suspicious that Senate Democrats are already making noise about the White House's release of an IRS-authored tax summary of John Roberts' three previous tax returns, rather than the documents themselves. It's even more suspicious that they are trying to conflate this with the White House's refusal to turn over papers from Roberts' time as deputy solicitor general under George H.W. Bush -- papers that not even the current President has seen. Sounds like some people are trying to weasel out of the filibuster agreement rather pre-emptively.

No Fourth Term

Looks like Pataki has chosen not to run again. He was strong supply-side tax cutter, which helped grow the NY state economy. He’s always gotten high fiscal marks on the Cato Institute’s governor scorecard. It’s tough to be even a moderately conservative politician in blue-state New York, but Pataki’s three-term governorship was a very strong achievement. He’s also looking for a supply-side tax reform package for next year’s budget. This package could be a cornerstone for Republicans statewide, including those who will run to succeed governor Pataki. Pataki was also a very strong homeland security governor, frequently acting behind the scenes, even getting less credit than he deserves. He appointed ex-FBI man James Kalstrom to oversee New York’s strong security effort. It's a shame to see him go.

CAFTA, Number 1

According to Investor's Business Daily's Brian Mitchell, CAFTA has become the White House's top legislative priority, with the fervent backing of Ways and Means chairman Bill Thomas. CAFTA passed narrowly in the Senate, and there appears to be uncertainty about it's future in the House. Let's hope Thomas can round up the necessary support.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Susan Byrne, CEO of Westwood Holdings, and Frank Husic, of Husic Capital Management

-- Jim Lucier, of Prudential, and Fred Smith, of the Competitive Enterprise Institute, on the new energy bill

-- Steve Malanga, of the Manhattan Institute, and Kim Strassel, of the WSJ, on the troubles at the AFL-CIO

-- Nick Fothergill, of Bank of American Securities, on defense stocks

Sheep In Wolf's Clothing

This is interesting. Since the Dems are the softer, mommy party and the Republicans are the sterner, daddy party, could this qualify Bloomebrg as a sheep in wolf’s clothing? Is he a John Lindsay-like character? Lindsay, of course, was the Republican Upper East Side blue-blood congressman-turned-mayor, who then turned Democrat when he ran unsuccessfully for the presidency in a somewhat hapless journey.

The Bloomberg side of this is even more interesting: since he could conceivably be elected to governor next year, if he wins the mayoralty this year, he could, while governor, turn Democrat. In effect, the suspicion is that Bloomie is rather more than a Clinton democrat. Let’s be thankful for small favors – at least he’s not a McGovern Democrat or a Ted Kennedy Democrat. But now comes the really tough question: is he a Pataki Republican? Stay tuned for more on the Bloomberg sheep-in-wolf’s-clothing chronicle.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Dan Genter, of RNC-Genter Capital Management, and Don Hays, of Hays Advisory

-- Christine Augustine, of Bear Stearns, on retail

-- Kevin Hassett, of AEI, on Judge John Roberts and his possible impact on the economy

-- Jonathan Bush, president of Athena Health, on the medical sector

Rove The Supply-Sider

If by some distant chance, Bush advisor Karl Rove is pushed out of the White House by the Valerie Plame-CIA kerfuffle, it would be a great loss for pro-growth economic policies --and quite conceivably for the stock market and the economy as well.

This is not simply a political matter, even though the main stream media is playing it that way. In my interview with Mr. Rove last winter, he was the first senior official to come down against raising the social security tax wage cap. He referred to the US as an IRA/investor-class nation. In a speech at the Ronald Reagan Library, he praised the Gipper’s supply-side tax cuts and his vision of limited government. In a recent speech to the New York Conservative Party, Rove talked about the conservative reform agenda for ownership and entrepreneurship and market choice for consumers in retirement, health care and education.

In other words, while Mr. Rove is in fact a brilliant political strategist, he is also a strong policy thinker who understands that economic growth and optimism win elections.

He knows that investors comprise roughly two-thirds of the voting public. And he knows that lower taxes provide incentive to build wealth.

I don't think there's much to the case against Rove, but I’ll leave that to the grand jury. Instead, my point is the economic content in this controversy. Let's hope we don't lose a strong pro-growth White House advocate.

Bloomberg's Next Step?

Looks like Bloomberg will win easily for mayor. If he does, he’ll become frontrunner for governor. (Check out Fredric Dicker in the New York Post.)He will, if he runs, doubtlessly be challenged by conservative republicans such as Randy Daniels and others (this all assumes Governor Pataki won’t run again.) Bloomberg is a social liberal, though he does have a reasonably good record on education reform, homeland security, and crime. But the Achilles heel for Bloomberg in a Republican primary will be his dismal record on tax increases. He should be challenged by a supply-side tax reformer. Nonetheless, the former businessman will be a very formidable candidate.

Hillary Backs Roberts

This is great news. And it means that Roberts should now have almost unimpeachable credibility with all but the most extreme left members of Congress -- the Dems' favorite mascot, Hillary Clinton, has said she will come out in favor of Bush Supreme Court pick Judge John Roberts.

Disunion

Yesterday, the trouble brewing in the AFL-CIO came to a stunning head. According to William Glanz of the Washington Times,

Four unions yesterday stormed out of the AFL-CIO's convention in Chicago, boycotting the annual event hours before it began, and likely will announce today that they plan to leave the federation entirely.
The Teamsters, Service Employees International Union (SEIU), the United Food and Commercial Workers (UFCW) and Unite Here said a lack of will to put sweeping reforms in place at the labor federation persuaded them to boycott the convention.

John Sweeney, current head of the AFL-CIO, has become an extraordinarily divisive figure, due to his being perceived as a running dog for the Democratic party, at the expense of promoting the interests of the labor unions. This is a bold move on the part of four powerful unions, and one that will hopefully restore some political independence to the organization. Which could mean, potentially, great economic news for America.

Stability Is Better

Of all the news stories regarding China’s so-called currency reform, the best one closest to my thinking was written by the New York Time’s Keith Bradsher entitled “Saying Goodbye to Mr. Greenspan.” Bradsher hits the nail on the head by reporting that an unknown central banker, Zhou Xiao-chuan, the governor of the People’s Bank of China, will be replacing Alan Greenspan as China’s currency and monetary guru.

He then goes on to say that the tight China yuan peg to the dollar generated “impressive stability [that] helped prompt business executives and entrepreneurs from around the world to invest $60 billion a year in new factories and other operations in China. These investors were confident that they knew what those businesses and their exports would be worth in dollars.”

Bradsher has it exactly right.

Arthur Laffer has referred to this as outsourcing Alan Greenspan. I would add that while it isn’t perfect, it still gave China a highly credible currency as a medium of exchange and a store of investment value.

One cannot help but wonder whether the Chinese decision towards a somewhat more discretionary policy is linked to the retirement of Mr. Greenspan in January 2006. While most of the media has focused on the U.S./China-bashing trade protectionist threat, a.k.a. Senator Smoot Schumer and Senator Hawley Graham as a driver of the Chinese decision, Greenspan’s retirement could also be a significant factor in Chinese thinking.

In fact, the Greenspan retirement adds as much uncertainty to U.S. monetary policy as it does to China’s. For better or worse, the “Greenspan Standard” has brought down inflation and interest rates pretty steadily for nearly 20 years following Paul Volcker’s brave fight to do the same before Greenspan.

We have almost no idea who will replace the Maestro or what that person’s monetary views will be. Though Greenspan’s tenure has been marked by a highly personalized view, often a changing view, of how the world works in economic and monetary terms, it has been by all accounts an effective administration of policy.

On the whole, Greenspan has governed as a supply-sider. He favors lower tax-rates to spur economic growth, as well as price stability to sustain growth. And while the U.S. greenback over the past 10 years has sometimes looked like a Coney Island rollercoaster, the fact remains that non-inflationary growth was the rule in the U.S. as well as in China. What happens next is anybody’s guess.

Turning back to the specifics of China, it could well be that the value of the yuan will be pegged to a dollar-dominated currency basket rule. Perhaps a bit more influence from the yen and the euro, but still dollar-based. That’s the best possible spin on the China decision.

It suggests currency stability and more non-inflationary growth for the Big Tiger. It also rules out a creeping appreciation of the yuan, which could cause deflation in China and inflation in the U.S., to the detriment of both economies. The currency basket rule would also rule out an Argentina-like crackup of the yuan leading to a total loss of confidence by international investors.

In this sense the currency basket rule would still reflect significant dollarization of the China and Pac Rim economies, in my view a good idea both for economic, trade, and diplomacy purposes. This model would maximize connectivity between the regions. Such inter-connectiveness might also throw off positive benefits for political democratization and wartime cooperation. Free trade and currency connectivity could in theory lead to a more peaceful and prosperous world.

Meanwhile, I am still bewildered at the Treasury Department’s great faith in the merits of floating exchange rates. Does anyone, for example, truly believe that the dollar-euro relationship has been a healthy one? In dollar terms, the euro was first offered at about $1.17, dropped as low as 80 cents, shot up as high as almost $1.40, and is now around $1.21. Talk about out of control currency manipulations.

The failure of the G-7 great economic powers to generate greater currency stability is a glaring omission of monetary responsibility. The dollar-yen story is better, but still inadequate. Currency stability is a key building block for economic growth. The radical fluctuations of the major currencies in recent years has been a detriment to growth. Why this subject is swept under the rug time and again at major economic summits is beyond me, but it represents economic failure, not success.

Free markets function best when the basic monetary unit of account is steady and predictable. When we talk about currency manipulation I’d say China’s stability relative to the dollar is a success story. But what’s happened between the dollar, euro, and yen is manipulation on a grand scale.

Global currency reform to promote monetary stability and maximize economic growth has been completely ignored by the major powers. Instead of blaming China -- Europe, Japan, and the U.S. should take a hard look at their own failures.

Defiant Howard

John Howard, faced with the inevitable "are-we-at-fault" question from a member of the British press corps, responded with this:

Can I just say very directly, Paul, on the issue of the policies of my government and indeed the policies of the British and American governments on Iraq, that the first point of reference is that once a country allows its foreign policy to be determined by terrorism, it’s given the game away, to use the vernacular. And no Australian government that I lead will ever have policies determined by terrorism or terrorist threats, and no self-respecting government of any political stripe in Australia would allow that to happen.

Can I remind you that the murder of 88 Australians in Bali took place before the operation in Iraq.

And I remind you that the 11th of September occurred before the operation in Iraq.

Can I also remind you that the very first occasion that bin Laden specifically referred to Australia was in the context of Australia’s involvement in liberating the people of East Timor. Are people by implication suggesting we shouldn’t have done that?

When a group claimed responsibility on the website for the attacks on the 7th of July, they talked about British policy not just in Iraq, but in Afghanistan. Are people suggesting we shouldn’t be in Afghanistan?

When Sergio de Mello was murdered in Iraq -- a brave man, a distinguished international diplomat, a person immensely respected for his work in the United Nations -- when al Qaeda gloated about that, they referred specifically to the role that de Mello had carried out in East Timor because he was the United Nations administrator in East Timor.

Now I don’t know the mind of the terrorists. By definition, you can’t put yourself in the mind of a successful suicide bomber. I can only look at objective facts, and the objective facts are as I’ve cited. The objective evidence is that Australia was a terrorist target long before the operation in Iraq. And indeed, all the evidence, as distinct from the suppositions, suggests to me that this is about hatred of a way of life, this is about the perverted use of principles of the great world religion that, at its root, preaches peace and cooperation. And I think we lose sight of the challenge we have if we allow ourselves to see these attacks in the context of particular circumstances rather than the abuse through a perverted ideology of people and their murder.

Now, Howard has said, in a conference with President Bush, that the US-Aussie relationship has never been closer. A lot of this new closeness comes from the inflexible resolution showed by both Bush and Howard to defeat terror at home and abroad, to stand up for the principles that animate our two democracies, and their will to see Iraq, and the rest of the theaters in the War on Terror, through to the end. Tony Blair forms the third leg of this triangle.

But this new Australia-US closeness is based not only on common political cause, but on economic common cause as well. Howard, like Bush, is a tax cutter, a supply-sider. And Australia's economy is doing extremely well, domestically and internationally.

People seem to like these attitudes, both political and economic. Bush, Howard, and Blair all won re-election quite handily, despite the blatant attacks launched against them, here and in their home countries, by the MSM. Bush, Howard, and Blair are all active, forward-looking, politically and economically optimisitic thinkers. They believe in defense of country, throuhg military and economic means. They offer a viable alternative to the stagnation and introspection that plague Old Europe.

It's the Angslophere, people. The alliance of English-speaking nations is looking more and more like it will be the dominant player, in policy, philosophy, and economics, in the 21st century. India looks like it is on the cusp of joining, too, which would be an important and welcome addition-- it is the world's largest democracy. But whether the alliance grows in size or not, it will continue to exert a dominant political and economic influence -- much to the chagrin of Old Europe. The 21st century will be, as James Bennett has sugegsted, the century of the Anglosphere. And why not? Democracy, free markets, technological innovation, and human rights? What's not to like?

Rice the Free-Marketer

Condi Rice is, among her numerous other firsts, the first Secretary of State in
Lord knows how long with genuine free-market instincts. She seems to have taken the economic component of the Bush Doctrine to heart -- the idea that free markets must be set in place in order to further the spread of democracy. Rice may be a skilled diplomat, but she holds fast to the economic side of the idea of democratization. Witness, for example, her recent speech in Senegal:

In Senegal, before the rumble in Khartoum, Rice told a meeting of the 37 eligible countries: “AGOA is making a difference in people’s lives along with development assistance, good governance and overseas foreign direct investment.”
She turned stern: “But it alone will never enable people to lift themselves out of poverty. Open markets that allow individuals to realize the benefits of their own hard work are essential.”
Finally, some straight talk from America’s political leadership. “Africa businesses,” said Rice, “create more, better-paying jobs. And American consumers receive more goods at lower prices — products like sorbet from South Africa, woodcarvings from Tanzania, and tuna from right here in Senegal.”

Words all the more powerful for having come after the ugly reception offered to her and to her staff by the thuggish dictator of Sudan, Omar el-Bashir. El-Bashir, a living example of the source of Africa's economic woes, is also living proof that throwing good Western aid money after bad needs to stop -- despite the ramblings of Bono and the Live 8 gang -- until these dictators have been replaced by elected leaders, and real, free, efficient markets have been erected. There are no purely political solutions to the problem of tyranny -- economic solutions play just as large a part. Smith knew it. Hayek knew it. Friedman knows it. So does Rice. This is a good quality, in a Secreatry of State. And it's long overdue.

One Down

This morning, London police shot a man believed to be a suicide bomber as he was trying to board a train. Good. It's a shame they couldn't take him alive and get information out of him, but this sends a message, both about the fearlessness of the British authorities in hunting down terrorists and their skill in doing so.

Yuan Manipulation: The Wrong Course

The Chinese Communists partially capitulated to U.S. Congressional China-bashing protectionists and to U.S. Treasury monetarists in search of an impossible quick fix that somehow would narrow the bilateral Sino-American trade gap and provide more jobs for American manufacturers.

It is a poor deal, replete with bad thinking that very well could damage the economies of both nations. The People’s Bank of China announced a small currency revaluation whereby the yuan would rise to 8.11 dollars from 8.28 dollars. Henceforth, the daily trading price of the yuan against the U.S. dollar will now float within a trading band of plus or minus 0.3 percent.

Additionally, the value of the yuan will be referenced to an as yet undisclosed market basket of currencies. This last point could mean a stable yuan value in relation to the currency basket, but the potential pitfalls of this so-called managed floating exchange rate regime are sizable.

Remember when the U.S. dollar was taken off the Bretton Woods gold-dollar exchange system in the early 1970s. This led to over a decade of hyperinflation and high unemployment. Remember also when Argentina was forced by American pressure to terminate its dollar-based currency board system in the mid-1990s that ended an era of rapid Argentine economic recovery.

It’s hard to understand the charge of currency manipulation aimed at China when for over ten years they stabilized their shaky currency with a disciplined link to the dollar. During that period China growth soared and inflation collapsed. In fact, it appears that it was the U.S. dollar that was heavily manipulated with a near 50 percent appreciation between 1994 and 2001, and then a near 30 percent depreciation between 2001 and 2004.

Looking for currency confidence to attract foreign investment inflows to rebuild their economy, it was the Chinese who maintained stable dollar value even while the greenback embarked on a Coney Island-like roller coaster. As for the monetarists at the Treasury who insist that floating exchange rates are necessary for free market economic reform, they forget our nation’s own history where for the better part of 200 years the free market American economy became the most powerful in the world with dollar stability linked to gold.

The same was true for Britain from the early 19th century to the early 20th century. Today in Europe the idea was to link the original twelve nations of the European Union in a free trade zone anchored by a stable euro currency value. In the United States we have always had a free trade zone among the individual states linked by a fixed exchange rate common currency whether or not New York runs trade deficits with Mississippi or surpluses with South Carolina.

Senators Smoot Schumer and Hawley Graham are willing to risk a potentially depression-causing trade war with China with a 27.5 percent tariff on Chinese imports, the biggest tariff proposal since the early 1930s. Apart from the obvious threat of Chinese retaliation that could stop commerce and growth dead in their tracks in both countries, a recent study from the Asian Development Bank reports that a 10 percent or 20 percent yuan revaluation against the dollar would slow the Chinese economy and provide a boost to rival Asian exporters.

But neither scenario would tackle the problems Washington has targeted, namely the ballooning U.S. current account deficit and China’s significant contribution to it. Of course, no one ever mentions that U.S. exports to China have more than doubled since 2000 as Beijing has liberalized its trading rules during its move into the World Trade Organization.

Another interesting point if that over half of all Chinese exports to the U.S. are goods and services produced by American multi-national companies that operate large production facilities in China. These exports to the U.S., even though they are produced by American companies operating in China, are counted as part of the trade deficit, just like products from home-grown Chinese companies.

A number of perverse consequences could also stem from China’s currency shift. For example, if the yuan is pegged to a currency basket, but the greenback continues to rise this year as it has already by 10 percent on the strength of its investment-led recovery, then the China currency could actually depreciate relative to the dollar rather than appreciate.

Then again, if China accedes to the 20 percent or more revaluation demands of the Congress and Treasury, U.S. inflation and interest rates (including mortgage rates) might rise significantly with great damage to capital investment and housing. Up to now, Wal-Mart and Target shoppers have been quite happy to purchase quality Chinese goods at low prices. But a 20 percent price hike in Chinese goods will damage consumer spending and erode household living standards.

On the China side, a major revaluation would slow their entire economy including their purchases of American technology, machinery, commodities, and capital goods thereby damaging our economy as well. Then, too, what goes up can come down. Creating China currency instability could just as easily lead to a large fall in the yuan’s value as Chinese savers switch to gold, dollars, or Japanese yen and foreign investment inflows consequently dry up.

Indeed, the whole economic history of currency instability, whether in the name of floating exchange rates or the false hope of manufacturing protectionism is a sorry tale. That is why the new manipulation of the Chinese yuan puts U.S.-China monetary relations on the wrong course.

Bombs Again

Four new bombs in London. Luckily, this is much less serious than the first attack, apparently. Britblogger extraordinaire Tim Worstall has the scoop.

According to Instapundit, Britain's Sky News says the bombs are of identical design to those used on 7/7. This would argue against the perpetrators being mere copycats, I think. Scary stuff. But Howard and Bllair are standing strong.

A Supreme Pick for Business

Is Roberts the first supply-sider to sit on the court? Check out my new column at NRO for this and other thoughts.

Krauthammer's Convergence

A really terrific article in today's WSJ from the brilliant mind of Charles Krauthammer:

The Iraqi elections vindicated the two central propositions of the Bush doctrine. First, that the desire for freedom is indeed universal and not the private preserve of Westerners. Second, that America is genuinely committed to democracy in and of itself. Contrary to the cynics, whether Arab, European or American, the U.S. did not go into Iraq for oil or hegemony but for liberation--a truth that on Jan. 30 even al-Jazeera had to televise. Arabs in particular had had sound historical reason to doubt American sincerity: six decades of U.S. support for Arab dictators, a cynical "realism" that began with FDR's deal with the House of Saud and reached its apogee with the 1991 betrayal of the anti-Saddam uprising that the elder Bush had encouraged in Iraq. Today, however, they see a different Bush and a different doctrine.

Read the rest here.

Krauthammer's makes the point that, since the end of the Cold War, every "school", as he puts it, of foreign policy, has enjoyed a period of dominance. And the only one that has seen any major changes in the Middle East on its watch has been neoconservatism, via the Bush Doctrine.

More on Roberts

Roberts is also business’s first choice. He has the backing of Boyden Gray’s Committee for Justice, Stan Anderson, the legal advisor to the Chamber of Commerce, John Engler, president of the National Association of Manufacturers, Frank Keating, president of the American Council of Life Insurers, and former senator and pro-growth advocate Connie Mac. This is the first time business has weighed in significantly on judicial nominees, especially the supreme. And it’s a bad day for trial lawyers, a bad day for state and local regulators, bad day for expanded eminent domain takings clause supporters, a bad day for New Deal-like expanders of the commerce clause. It’s a good day for pro-business (large and small), pro-growth advocates. Roberts is a genuine free-market judge, who will not assume that business is always in the wrong, or that business is guilty until proven innocent.

This may particularly be the case with limits on damages for personal injury and product liability settlements, which hopefully will include asbestos, medical malpractice, phony securities lawsuits, and the like. Roberts may also be sympathetic to corporate patent-holders of intellectual property, and he may well seek to oppose local regulators in areas like telecom access, energy development and production, and streamlined power utilities. Roberts will be asked to rule on numerous internet issues, including local tax and regulatory barriers, as well as piracy and file-sharing suits. He will not be reluctant to overturn local court decisions if they provide obstacles to national economic growth and prosperity.

If he ascends to the Supreme Court, he may well be at loggerheads with Scalia and Thomas, who inexplicably have ruled in favor of abusive damage settlements in personal injury and product liability lawsuits. Roberts’s temperament and competence are beyond reproach, his strong business backing may be very helpful in garnering the votes of up to a dozen moderate or conservative Democrats. Before the announcement, Senator Lieberman suggested that Roberts would be “in the ballpark.” Even Lieberman’s liberal colleague Chris Dodd will feel the heat to confirm Roberts from the insurance lobby. So will moderately pro-business Dems like the two Nelsons, Mary Landrieu, Blanche Lincoln, Ron Wyden, and the Dakota boys Kent Conrad and Byron Dorgan. So will Dianne Feinstein of California.

Social conservatives such as Gary Bauer, president of American Values, and Priests for Life national director Frank Pavone, quickly endorsed Roberts. So did constitutionalists like Drew Bond, president of Townhall.com, and Third Branch conference chairman Manuel Miranda. Hence the Republican party looks to be united on the Roberts nomination. But the Democrats will be divided, as the nomination will split off the moderate wing from leftists like Boxer, Kennedy, Durbin, Schumer, NARAL, and People for the American Way. President Bush was true to his word, by nominating a true conservative. He avoided gender and race related interest-group considerations. He chose a truly distinguished lawyer and jurist. Hats off to Mr. Bush and Judge Roberts.

Roberts

Roberts seems like a good call: conservative, politically experienced, highly intelligent, difficult to defeat in confirmation. Plus, his stance on abortion -- the favorite point of contention in current Supreme nominations -- seems to be extremely moderate. Check out the Volokh Conspiracy for more.

On the Supply-Side

Staying home during my hip replacement recovery is giving me time to go back and reread some good articles gathering dust on the shelf. One of them was a 1997 lecture delivered by Nobelist Bob Mundell at St. Vincent College in Pennsylvania.

The article came from Jude Wanniski’s Supply-Side University. There’s a lot of really important content in the Mundell speech. Today’s thoughts come from this section near the end of his talk:

“I look at three things for signs of inflation in the economy: I look at the money supply, I look at interest rates, and I look at gold. You can see this in the bond market. If there is a big outbreak in the price of gold, you know that there is an increase in inflationary expectations and people will start to sell bonds, sending interest rates up.”

As readers know, I have been a dove on inflation. In fact, the chain-weighted CPI has been running around 1.8 percent annualized for the past eight months. The Fed’s money-tightening over the past year has prevented oil inflation from spreading to the rest of the economy.

Earlier their move from the prior monetary mistake of deflation to a pro-growth monetary reflation may have gone a bit too far, but that has been taken care of in their actions over the past year. Plus, supply-side tax cuts and over 3 percent productivity trends are large counter-inflationary developments.

Going back to Mundell’s inflationary guidepost, money supply is well contained. In fact, it has slowed markedly over the past year. Monetary base growth is down to 3.7 percent, with only 1.6 percent A.R. over the past five months. MZM has been completely flat over the last five months and only1.0 percent over the past year, essentially hovering between $6.6 trillion and $6.7 trillion. M2 is 3.6 percent over the year and 2.2 percent over the past five months.

As for bonds, the 10-year has been ranging between 4 percent and 4.25 percent for quite some time, a historically low yield that suggests no inflation problems. Gold at around $420 is the subject of disagreement among supply-siders, but I think that when adjusted for deflation and inflation $420 gold is only slightly above its 1994-1996 average, a period of 2 percent inflation. Our golden cone construct suggests the yellow metal could rise by as much as $50 and still not signal an inflationary problem.

Those who use the 10-year average gold price and compare it to today’s price, thereby suggesting that gold is 25 percent too high, are incorporating the worst deflation period in many, many decades. That is why I prefer the 1994-1996 base.

Alan Greenspan’s letter to Congressman Jim Saxton, head of the Joint Economic Committee, states that the slope of the yield curve is about in its average range for the last 20 years. Therefore, he is not concerned about an economic slowdown.

If the Fed stopped its restraint at 3.25 percent, Greenspan would be correct. But futures markets are pricing in a 3.75 percent to 4.0 percent funds rate target by yearend. In that scenario the curve would be much flatter or even slightly inverted if bonds rallied down to 3.75 percent on declining inflation expectations, as well as declining growth expectations.

Already the flattening yield curve has damaged earnings at the nation’s two biggest banks, Citigroup and Bank of America. Undoubtedly, more curve flattening will slowdown mortgage credit as well. Greenspan’s letter quite clearly asserts that policy is not targeting the so-called housing bubble. But more Fed tightening and more curve flattening will slow housing, as well as other sectors.

The oil shock will take three-quarters of a percentage point off of 2005 growth, according to the Maestro. But I think he is underestimating the degree of monetary restraint and its economic impact. The dollar is now close to 113 yen and 1.20 euros. Over the next six months the greenback will surely rise another 5 percent to 10 percent, on top of its 10 percent rally so far this year.

The T-bill market is now pulling alongside the 3.25 percent fed funds rate, raising the probability of another rate hike in August. Fortunately for the economy and especially the supply-side corporate and investor class economy, the effects of lower tax-rates on capital continue to exercise a very positive influence. But even two years after the inception of these tax cuts the Fed should still be slightly accommodative. Over-tightening by pulling too much cash out of the banking system would neutralize the tax cuts, which are the biggest pro-growth factor out there.

For the moment, President Bush has removed the growth-killing carbon tax from the policy agenda and Greenspan himself has slowed the China-bashing protectionists from legislating a new Smoot-Hawley tariff. But monetary and trade uncertainties may stop the stock market from beating its 20 percent undervaluation in relation to strong profits and the low 10-year bond rate.

Stocks are healthy, just as the economy is. The question is whether government policing power on money and trade will inhibit growth and hold back share prices.

Clement?

According to the Washington Post,

President Bush is close to making his first nomination to the Supreme Court, and Washington was abuzz with speculation Tuesday about Judge Edith Clement of the U.S. Court of Appeals in New Orleans.

There was no word from the White House on when Bush would disclose his selection but officials familiar with the process said it appeared an announcement was imminent. No one claimed to have been told the name by Bush, but Republican strategists and others focused on Clement, a 57-year-old jurist who was confirmed on a 99-0 vote by the Senate when she was elevated to the appeals court in 2001.

A dark horse? Certainly. But she makes a lot of sense -- and she isn't open to accusations of being outside the mainstream:

Known as a conservative and a strict constructionist in legal circles, Clement also has eased fears among abortion-rights advocates. She has stated that the Supreme Court "has clearly held that the right to privacy guaranteed by the Constitution includes the right to have an abortion" and that "the law is settled in that regard."

We'll know for sure soon.

Steyn on Plame

Not to waste any more words on the Plame Affair, but: Mark Steyn has an excellent column on the subject in the Chicago Sun-Times:

As I wrote in this space a year ago, an ambassador, in Sir Henry Wootton's famous dictum, is a good man sent abroad to lie for his country; this ambassador came home to lie to his. What we have here is, in effect, the old standby plot of lame Hollywood conspiracy thrillers: rogue elements within the CIA attempting to destabilize the elected government. If the left's view of the world is now so insanely upside-down that that's the side they want to be on, good for them. But ''leaking'' the name of Wilson's wife and promoter within the CIA didn't ''endanger her life'' or ''compromise her mission.'' Au contraire, exposing the nature of this fraudulent, compromised mission might conceivably prevent the American people having their lives endangered.

Read it all here.

If It Ain't Broke...

Non-inflationary prosperity is shining through the latest economic stats for June. Against the backdrop of supply-side tax cuts, record productivity and profits, and rising international trade...the economic picture is strong growth and price stability.

These very same economic growth factors that are driving up stock prices, now to 4 year highs, are also behind the plunging federal budget defecit. In fact, stock price movement frequently leads budget changes by about a year. Isn't that an interesting point.

Overall retail sales are rising by nearly 10% over the past year, and the chain weighted CPI, which is the best measure of consumer inflation, came in at 1.8%. This is the 8th straight month of below 2% core prices.

Clearly, the Fed has succeeded in stopping energy price hikes from filtering through the rest of the economy. And the 3.22% Treasury bill remains below the 3.25% Fed funds target. This suggests no real need for additional rate hikes, although futures markets are pricing in two additional 25 basis point Fed hikes.

Someone ought to tell them at the Fed...if it ain't broke, don't fix it.

Using the S&P 1500 composite, industrials led the way. Consumer staples were second. Tech was third.

The doggy dogs were energy and utilities.

The dollar was firm today, 1.209 Euros and 112 yen. Gold closed down to 4 bucks to 419.9; oil was off 2 bucks today closing at 57.80.

Technology, steel and autos led the charge on European stock markets, which reached new three year highs. Asia was strong, up six-tenths of a percent, led by South Korea, Hong Kong, Malaysia and Japan. Latin America also gained with big contributions from Chile and Mexico.

Splendid

Non-inflationary prosperity is shining through the latest economic stats for June.

Against the backdrop of supply-wide tax cuts, an appropriately accommodative Fed, record productivity and rising international trade, the U.S. economic picture is strong growth and price stability.

That is why the stock market is moving to a four-year high with the potential for a major league upside breakout.

Yesterday’s data showed 11 percent export growth, a sign of the global recovery. It also showed 12 percent import growth, a sign of U.S. expansion. Exports to China increased 15 percent in May following a 24 percent gain in April. As an added bonus, core import prices increased only 2 percent in June, following 2 percent in May and 2.3 percent in April.

This morning’s numbers were equally positive. Overall retail sales are rising by nearly 10 percent over the past year, with core sales up 7 percent.

Meanwhile, the chain-weighted CPI, or the Boskin CPI, which is the best measure of consumer price inflation, came in at 1.8 percent. This is the eighth straight month of below 2 percent core prices.

That is why the term price stability is appropriate.

The Fed may hike rates a few more times this year, but there’s no strong reason for them to do so. While the bond rate has drifted higher to 4.18 percent, it is still signaling modest and non-inflationary growth. The curve is still under 100 basis points.

Meanwhile, the 3.22 percent Treasury bill rate remains below the 3.25 percent fed funds rate target. This is a market price indicator that suggests no need for additional rate hikes.

As one wag once put it, if it ain’t broke, don’t fix it.

Overhaul

A fascinating article in the New York Sun about the coming overhaul of the Department of Homeland Security. Key paragraphs:

Mr. Chertoff opened the speech with condolences to the British people after the London bombings. He said Homeland Security would look to deploy technology to detect explosives and bioterror, chemical, or radioactive material on the nation's rail, subway, and bus systems.

Homeland Security Deputy Secretary Michael Jackson later told reporters the detection tools would probably be installed in large metropolitan areas with subway systems that face the greatest risk of attack, like New York and Washington.

Those detection technologies, which are still in varying stages of development, could cost the government an estimated $6 billion to buy, install, and maintain in mass transit, said American Public Transportation Association president William Millar. He agreed with the push for better weapons detectors, as long as federal funding is provided and "it doesn't hold up our passengers."

An estimated 32 million commuters ride subways, trains, and buses every day, Mr. Millar said.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Mike Holland, of Holland and Company, and Eugene Sit, of Sit Investment Associates

-- David Reilly, of the Rydex Commodity Fund, and Chris Lofgren, CEO of Schneider National, on commodities and transport

-- Jerry Taylor, of the Cato Institute, and Frank Gaffney, of the Center for Security Policy, on the CNOOC/Unocal deal

-- Brian Ruttenbur, of Morgan Keegan, on homeland security stocks

Dissension in the Ranks

This fascinating post from Austin Bay shows the possiblity that radical Islam might, with our strenuous help, defeat itself.

More On Rove

In the Karl Rove kerfuffle over Valerie Plame, though Bush is standing up for him so far, there is one important though that has been left out of the discussion. Karl Rove has become famous as a strategist and advisor, but he has an overlooked skill as well: he is an underrated but strong policy advisor. Rove is basically a free-market supply sider, who has consistently spoken out against raising the payroll wage-cap tax, has been a strong supporter social security reform through personal savings accdounts and lower marginal tax rates, as well as making the Bush tax cuts permanent. Rove would also love to abolish the estate tax.

In this sense, the Rove story is not merely a political story, it has economic and stock market consequences as well. If Rove is fired, pro-growth free-marketers and supply-siders lose an important advocate in the high policy councils of the White House. The stock market would lose a good friend: not only does Rove support tax cuts, he has long been a devotee of the Investor Class. More than anyone else in presidential politics in either political party, Rove knows that investors turn out heavily (2 of every three presidential votes cast come from investors) and that they vote their portfolios, for low taxes on dividends, capital gains, estates, tax free- savings accounts, and other means that would boost wealth creation.

We fret that investigations before a grand jury can wreck the life of any citizen, particularly if that citizen is one whose name is as well known as Karl Rove’s. All President Bush has ventured is that he will withhold judgment about Rove's involvement in leaking the identity of a CIA operative until a federal criminal investigation is complete:

"This is a serious investigation," Bush said at the end of a meeting with his Cabinet, with Rove sitting just behind him. "I will be more than happy to comment on this matter once this investigation is complete.

The grand jury hearing testimony on the Plame case has been operating much longer than expected, causing certain people to speculate on whether the prosecutor is preparing to mount charges of perjury against senior Administration officials. Whether Rove is one of these is unclear – the prosecutor has said that Rove is a “subject” but not a “target” of the investigation.

As for the prosecutor himself – he is not a tool of the Left. He is simply an extremely committed, intelligent, and successful prosecutor, hugely admired by James Comey and other leading lights of the legal profession. Patrick Fitzgerald, head of the US Attorney’s office in Chicago, has also gotten indictments and convictions of some of the world’s most dangerous terrorists – including an indictment, in 1998, of Osama Bin Laden. You can read more about Fitzgerald here. But it’s safe to say that most of the politicization of this story will be coming from the press and from Dems on the hill.

Recently, in OpinionJournal’s Political diary and on the WSJ’s editorial page, considerable uncertainty has been cast on the legal status of Karl Rove’s actions. This is not investor friendly uncertainty, but it makes it unclear whether Rove has done wrong. He didn’t name Plame; he didn’t even know her name, according to Miniter. The law that might be applied here is meant to punish people who leak the names of covert operatives with malicious intent against the operatives; it looks like, here, that Rove was helping out a reporter, to warn him against being taken in by Joe Wilson. With so much uncertainty, it seems strange, then, that the calls for Rove’s head are so strident. Welcome, as Mr. Miniter put it, to hardball politics.

"Reform" Reform

Tough as it is in human personal terms, a rough sentencing of 25 years for Bernie Ebbers probably does more to curb corporate fraud and corruption than the entire Sarbanes Oxley act. I’ve always believed that we already have sufficient laws on the books to prosecute corporate fraud and those that deliberately engage in it. This includes plausible deniability. CEOs must not give a wink and a nod to subordinates who engage in accounting fraud while keeping enough distance to appear innocent.

What we need is proper prosecutorial enforcement of these laws. What we do not need is a one-size-fits-all Sarbox, which merely piles on with redundant auditing and significant expenses, especially for start-ups and small businesses -- Section 404 in particular.

What is truly mystifying is how Michael Oxley can tell a crowd in London that Sarbox was overkill and should be modified and then say that he does not intend to do anything about it. So far, Oxley has blocked attempts to hold oversight hearings on Sarbox’s damage to entrepreneurship. I don’t get it. Either the bill needs changing or it doesn’t. Most business folks I talk to believe it needs to be changed. What’s needed here is reform of Sarbox reform.

The sooner the better.

Amen!

Permit me to say amen to this morning's Wall Street Journal editorial called "the tax cut expansion". Lower marginal tax rates have expanded the economy at a better than 4% annual rate, widened the income base for households and business and thrown off tax collections at a 14.5% yearly pace.

Let me add this to the journal thought: non withheld individual income tax receipts have increased by 34% fiscal year to date compared to last year. This is mostly capital gains and dividend related tax collections.

Though we won't know for sure for a while, it is likely that the supply side cuts on dividends and cap gains will have paid for themselves. This is the purest form of the laffer curve. While congress clings to static revenue estimates our economy is actually a dynamic one, where shifting tax rates affect economic and investment behavior.

Once again I make my plea to the congressional budget office and the joint tax committee. If you move to a dynamic model of tax cuts and the economy you will more accurately forecast rising revenues and lower budget deficits.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Morris Mark, of Mark Asset Management, and Fred Dickson, chief market strategist of DA Davidson and Co.

-- National Economic Council chair Al Hubbard, on terror, jobs, deficits, and more

-- a follow-up with Michael Darda, of MKM Partners, and Russ Roberts, professor of economics at GMU

-- Dan Clifton, of Americans for Tax Reform, and Howard Silverblatt, of Standard & Poor, on dividends

We Should Worry

According to OpinionJournal's Political Diary, Hillary turned on the anti-Bush rhetoric at the Aspen Institute's opening gala, first comparing Bush to Alfred E. Neuman, and then this:

Joan Allen, an attendee from Houston, Texas, dared to ask Ms. Clinton what three government programs she'd be prepared to cut, given her complaints about the federal deficit.

"I was disappointed," Ms. Allen later told me. "She avoided the question entirely and launched into more Bush bashing. Even liberals told me afterwards that they wished she had given me an answer."

Hmm. Hillary not mentioning which programs she'd cut is a little suspicious. I have no doubt that she will run as a deficit-buster, especially since she has already made some noise about fiscal responsibility. But she will not reduce spending: she will simply raise taxes. Her reluctance to talk, even now, about spending cuts, is an ominous sign.

Furthermore, she appears to be moderately hawkish now on the War on Terror, and particularly on Iraq. But remember her husband? The one who "loathed" the military? And remember how anti-military she, Albright, and other members of her clique were when Bill actually was President? I predict that if she runs and wins, we will see a resurgence of precisely this sentiment, and a corresponding slackening of our efforts in the war. Bad news.

Fortunately, Ed Cox (Nixon's son-in-law; talk about sweet irony) is going to mount a stiff Senate challenge to her. He just might surprise everyone. He's going to be on John Batchelor tonight, at approximately 10 PM, WABC 770, to tell everyone why.

The Plame Affair

Whatever they may claim, the folks calling for Karl Rove's dismissal are motivated by sheer partisanship, not out of a sense of justice, or worries about the integrity of the the CIA. The story so far is complicated, but the basic gist of it is this: Rove did not "out" Valerie Plame in retaliation for her husband's "disloyalty" to the Bush administration. As John Podhoretz observes in the New York Post:

In the Cooper e-mails just surrendered by Time to the prosecutor looking into the Plame case, "Cooper wrote that Rove offered him a 'big warning' not to 'get too far out on Wilson.' Rove told Cooper that Wilson's trip had not been authorized by . . . CIA Director George Tenet . . . or Vice President Dick Cheney. Rather, 'it was, [Rove] said, Wilson's wife, who apparently works at the agency on WMD [weapons of mass destruction] issues who authorized the trip.' "

There's no mistaking the purpose of this conversation between Cooper and Rove. It wasn't intended to discredit, defame or injure Wilson's wife. It was intended to throw cold water on the import, seriousness and supposedly high level of Wilson's findings.

While some may differ on the fairness of discrediting Joseph Wilson, it sure isn't any kind of crime.

After all, as Mickey Kaus noted:

Without identifying her by name, Rove mentioned Wilson's wife's employment but did so in order to get reporters to pay less attention to Wilson's report, not (at least on the surface) in order to blow Plame's cover or retailiate against Wilson (and "stifle dissent"). ... Does that get Rove off the legal hook? I think it should--if Rove didn't intend the info to become public and trusted the reporters he talked with to be responsible. Rove's problem is that the statute doesn't seem to require an intent for the info to become public for there to be a crime; it only requires an act of disclosure.Specifically, it punishes anyone who "intentionally discloses any information identifying such covert agent to any individual not authorized to receive classified information." Matt Cooper would be such an individual. ... Other provisions in the statute require either a "pattern" of behavior and an intent to damage the U.S., but that's not true of the provision that would seem to most easily apply to Rove. ... But Rove still has the defense that he didn't know Plame was a "covert" agent being protected by "affirmative measures."

So there's clearly some measure of legal obscurity here. It's clear, though, from Time's summary of the emails that the intent of the email was not to "out" Plame (her name is NOT mentioned) but to make Wilson look foolish and weak.

Can you even out someone if you don't mention their name? Yes, technically. But if you don't mention their name, it seems a real stretch to argue that it was your original and main intention to out them.

Was it a crime? It seems like a stretch, also, to say that if one provision of a law might apply to Rove's action, it is a crime serious enough to warrant his dismissal and prosecution.

Should Rove go? No. Politics can be a tough game, particularly twentieth-century American presidential politics. Maybe what Rove did was underhanded, or sneaky, or any uncomplimentary adjective you like. But to demand his resignation, disingenuously acting as if nothing comparable had ever been done in Washington, and mutter about legal action -- well, that's a political tactic as surely as Rove's emails about Wilson were.

Rove has been compared, wrongly, to everyone from Gilded Age kingmaker Mark Hanna to Nazi propganda minister Joseph Goebbels. Michael Barone, however, made a very astute comparison: to FDR's man of all work, Harry Hopkins, part diplomat, part press secretary, and part strategist. Rove is all these things and more. One thing he is not, though, is a criminal. He shouldn't lose his job, and he shouldn't be prosecuted.