Larry Kudlow

If Treasury Secretary John Snow would leave well enough alone and quit attacking the Chinese yuan and Japanese yen, investors could look forward to an optimistic worldwide scenario of rising stock markets and economic recovery.

The major central banks have poured in new liquidity to end their deflation woes, and many countries -- especially the United States -- have cut taxes to stop investment drag. But Snow and other representatives of the Group of Seven industrial nations stood firmly in the way of these positive developments with their new push toward "flexible" currency exchange rates and their move away from the old policy of exchange-rate stability.

This new G-7 policy is a little piece of trade-protection mischief orchestrated by Snow (and the White House political office) at the request of the National Association of Manufacturers. NAM wants a cheaper dollar so they can make their goods less expensive for export. A rising yen and yuan work toward this selfish aim.

Why selfish? A cheaper dollar also raises the cost to businesses and consumers for goods and services purchased abroad. But that's beside the point for political interest groups like NAM (or the steel and farm lobbies).

Currency manipulation has an ugly history. Back in 1986-87, NAM persuaded then-Treasury Secretary James Baker to pick a fight with Japan and Germany in order to make their currencies more expensive and the dollar cheaper. That piece of financial handiwork led to the October 1987 stock market crash and temporarily signaled the end of the Reagan boom.

In the late 1990s, the International Monetary Fund put big pressure on various Asian tiger economies to float their currencies. As soon as the tigers caved in, their currencies collapsed, along with their economies. The virus of financial disarray spread worldwide.

The White House, of course, is worried about creating new jobs in the manufacturing sector, a development that will come naturally as the U.S. economy moves ahead in the production of new inventories and capital equipment. But on the first trading day following the G-7 agreement, both stock and bond markets sold off worldwide in a clear vote of no confidence.

There's an age-old rule that comes into play here: The currencies of emerging nations don't float, they sink. Newly developing countries need reliable money in order to attract desperately needed foreign investment. Without new capital, they cannot grow. But new capital depends on a steady currency. Economist Arthur Laffer called this the "moneyness of money," a necessary condition for economic growth.


Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.
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