King Dollar & Lower Taxes

How ironic. Ben Bernanke launches QE2 and everyone worries about a dollar collapse. But instead, it’s the euro that has collapsed, dropping 9.5 percent relative to the greenback. Overall, the dollar index has appreciated 7 percent.

Some, like Robert Mundell, believe sharp currency swings change monetary policy. In this case, as Euro-debt worries escalate, the rising dollar amounts to a tightening of Fed policy. Smaller than what happened last winter and spring during the Greece problem, but still significant.

This is partly why U.S. stocks have corrected lower by just under 4 percent. Tighter money slows the economy. It’s too bad, because the October numbers show an economic awakening, maybe influenced by GOP election confidence.

In any case, if the greenback keeps appreciating, economic concerns and stock jitters could deepen. All this despite booming corporate profits and strong holiday retail sales.

So, this would be a great time to make a deal on extending the Bush tax rates. Today’s White House meeting seemed to lean ever so slightly towards a deal. But nothing’s definite. Maybe lunch at Camp David.

But my macro point is this: A suddenly stronger King Dollar will be just fine as long as tax rates stay low. The Laffer-Mundell supply-side model argues for tight money and lower tax rates in order to maximize economic growth. That’s what we need now.