Lawrence Kudlow: Lower oil, King Dollar are unambiguously good
We all know that the American energy revolution, led by the new technologies of hydraulic fracturing and horizontal drilling, has created a flood of new shale-oil and natural-gas production that has overwhelmed world markets and driven prices down by roughly 40 percent. End-of-week crude oil closed near $57 a barrel, and the national average gasoline price finished at $2.60.
No matter what the naysayers are trying to sell, the new energy reality is unambiguously good for the U.S. and global economies. There may be some dislocations among countries, sectors or companies, but the overwhelming impact is positive.
In fact, the U.S. economy is already getting better. Recent numbers on jobs, retail sales, consumer confidence, small-business confidence, ISM’s, and business investment point to a 3 percent growth rate rather than the tepid 2 percent pace of the prior five years.
And it’s likely that oil prices will stay low or drop a bit lower.
The International Energy Agency’s new forecast for 2015 shows a global reduction in demand growth of 900,000 barrels a day versus a previous projection of an increase of 1.1 million barrels a day. But U.S. production is expected to increase by 685,000 barrels a day next year. So besides American technological breakthroughs, this oil-price-drop story is a triumph of the free-market forces of supply overwhelming demand — all while the OPEC cartel dissolves before our eyes.
As economist John Ryding puts it, “The oil supply curve is shifting outward at a faster pace than the oil demand curve, which argues against a rebound in oil prices in 2015.”
But there is another important angle to this story: Looming behind the falling price of oil is the return of King Dollar.
Since the middle of 2011, the dollar has appreciated by over 20 percent. Year-to-date it has gained 10 percent. Meanwhile, gold has fallen nearly 40 percent since 2011, and oil has dropped 40 percent in the past six months.
Since the U.S. dollar is the world’s reserve currency, commodities are priced in dollars. Hence a strong greenback generates lower commodity prices — oil, gold and everything else. This was the case during the Reagan 1980s and the Clinton 1990s. But when the dollar collapsed during the Bush 2000s, gold, oil and other hard assets like housing exploded upward to the detriment of the economy.
Now, however, as King Dollar seems to be on the mend, commodity prices are falling and the purchasing power of money for consumers and businesses is going up. Those greenbacks in your wallet or bank account are worth more and can buy more on the open market. Inflation stays low. Global capital flows to America.
Regrettably, neither the Bush nor Obama administrations particularly cared about the plight of the dollar. However, at a recent conference at the Federal Reserve Bank of Philadelphia, Paul Volcker, the greatest American central banker since World War II, argued that the main goal of the Federal Reserve is to defend the dollar’s stability. He also said he doesn’t understand why the Fed has adopted a 2 percent inflation target. He asked, “Do we want prices to double every generation?”
(It’s important to note that while the Fed can print excess money, the U.S. Treasury Department has statutory authority over dollar buying-and-selling operations. But then again, it’s crucial to note that the U.S. Congress has constitutional authority over the value of our money.)
When Volcker was undersecretary of the Treasury during the Nixon years, he argued against the inflationary dollar devaluation that occurred when the U.S. broke the Bretton Woods link to gold. Though he never publically said it, there is ample evidence that when Volcker ran the Fed, he was targeting (or carefully watching) the movement of gold, broad commodity indexes and the dollar as he restrained the money supply to conquer inflation.
Alan Greenspan often talked publically about the significance of gold as an inflation proxy during his first three terms as Fed chair. But unfortunately he gave up the discipline in his last years at the Fed.
And today, no one in U.S. officialdom is talking gold, commodities or the dollar. But the Fed has actually been tighter than people think, because only a small fraction of its QE bond buying and reserve creating circulated through the economy. And now it’s given up QE altogether. And next year it will begin to cautiously raise its target rate on the long road to normalization. This all helps King Dollar.
And with a new Republican Congress, there’s the enhanced prospect of lower business taxes, which would grow the economy faster. More support for the dollar.
So I will argue simply that a strong dollar and lower oil prices are unambiguously good for the economy. Naysayers be gone.