Kudlow: More Mustard Seeds

Larry Kudlow explains it all:

But if we really want to jolt the economy, there’s a tried and true way to do it. Lower marginal tax rates across-the-board for individuals and businesses. Labor and capital costs will be reduced, risk taking and success will be rewarded, and investment will flow back into the United States. A chronically cheap dollar will simply repel investment, not attract it.

On the other hand, there are some positive mustard seeds that could grow into recovery. For starters, the drop in the CPI is boosting real wages. Of course that is an offshoot of the plunge in retail gasoline prices, which represents a $350 billion dollar tax cut for consumers. This may be why core retail sales rose ½ percent in November, the first positive reading since July. It’s also a big tax cut for corporate profits. In fact, for businesses, the plunge in commodity prices in general has balanced out prices paid and prices received. The CPI/PPI ratio has turned positive in recent months. This is a very good sign for corporate profits. And it may be a key reason why stocks have been rising and why the November 20th bottom looks like the real bottom.

Another mustard seed is the big decline in the 3-month dollar Libor rate, along with declining short-term credit market spreads in general. There is a thaw in the money market freeze up.

Still another mustard seed is the decline in mortgage rates. This, along with lower home prices, has raised housing affordability to its best level in many years. In fact, as economist and Carpe Diem blogger Mark Perry recently pointed out, housing affordability has reached an all-time historical high. In other words, the excesses of the recession are gradually healing.

The mis-investment of the recession is gradually being absorbed. The Fed is adding liquidity and that is another plus. I just don’t want them to go hog wild and destroy the dollar in the process. If we maintain a steady currency and provide a much needed tax rate reduction for large and small businesses, and if we allow market forces work out the rest, then the economic patient will heal. That’s my message.