Tags: larry | kudlow | obama | fed | easing | obama | qe

QE2, QE1.5 ... Whatever

Wednesday, 29 Sep 2010 07:04 AM

By Larry Kudlow

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There may be a new normal coming to Wall Street. It’s called: bad news on the economy opens the door for so-called good news on the Fed’s latest rescue mission to increase its balance sheet and pump up the money supply. I guess it’s QE2 or QE1.5. Whatever.

The Dow went up nearly 50 points in today’s trading, despite big drops in both consumer- and business-confidence measures. Obamanomics is still on the floor. That’s the key theme for the election.

However, the reflation trade is in full swing, with gold jumping $12 to $1,311 and the U.S. greenback sinking to its lowest point since early February.

So I guess an easy-money Fed is still creating a pretty good tailwind for shares. And I’m also gonna guess, even though most people disagree with me, that a continued dollar decline will result in a higher inflation rate sooner than you think. Whether it’s 1 or 2 percent more, whether it’s next month or next year, the message of rising gold and a dropping dollar is not good.

The Fed’s target rate, adjusted for current and expected inflation, is negative. And that abnormal situation, so reminiscent of the early and mid-2000s, is driving up gold and commodity indexes.

Treasury bonds keep rallying down to below 2.5 percent on the bet that in November the central bank will buy at least $100 billion of bonds if not more. The Fed believes the money supply has got to grow faster, and that somehow that’s going to break through the fiscal logjam and produce confidence in the economy and job-creation.

Yes, this monetarist view can build up the money supply. But will it solve the economy? Not unless there’s a change in the spending, taxing, and regulatory wall that Obamanomics has built.

© Creators Syndicate Inc.

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