Larry Kudlow

Far-away terrorism and some low-intensity trade disputes have temporarily stalled the stock market. But is the fledgling Bush boom coming unglued? Even when things look a bit ragged around the edges, there's still no reason to doubt the market, the economy or the political prospects for George W. Bush's re-election. Critics beware.

Currency mavens may rant and rave over trade deficits, but these phony and opaque numbers have nothing to do with currency value. The United States has strong political leadership, a strong foreign policy and strong economic growth. You want to buy yen or euros? Go ahead. It's a free country. But it's a sucker's bet. Buy dollars.

In fact, the cheapest currency in the world right now is the U.S. dollar. Watch the greenback strengthen significantly in the years ahead. High after-tax investment returns, breathtaking productivity gains, totally awesome profitability, virtually no inflation and historically low interest rates tell this tale. So do falling unemployment claims and rebounding manufacturing indexes. A University of Michigan think tank just predicted a 5.4 percent unemployment rate for 2004, a 4.8 percent rate for 2005 and 5.2 million new jobs over the next two years.

Of course, inflation worriers point to today's high gold price (gold is a proven inflation metric). But gold, now near $400 an ounce, is $50 too high. Money is not all that loose: The Federal Reserve is in a mild excess-reserve position, exactly where it should be as we turn from deflationary recession to reflationary recovery.

Today's gold rebound is driven by a combination of monetary reflation, huge commercial demands from China and a terrorist-related risk premium. But none of these are inflationary -- at least not significantly. Commodity indexes, meanwhile, are about where they were in 1996-97, when inflation was 2 percent or slightly less. The current inflation rate for consumers and producers is even less than that.

In short, there's not too much money out there. Supply-side guru Art Laffer opined recently that U.S. money is actually relatively restrained. Growth of the U.S. monetary base and the measure known as MZM (money at zero maturity) are about 6 percent, a modest rate that shows non-inflationary balance between cash supplied by the Fed and cash demanded by the economy.

Meanwhile, economic profits are rising about 25 percent, and productivity is ranging around 4 percent. These are awesome numbers for business expansion and efficiency. Along with a 35 percent rise in the S&P stock market since the mother of all bottoms last Oct. 9, it's clear that the investment and business bust is over. We are on the front end of an eight-to-10-year boom.


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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