CNBC's Larry Kudlow on the Economy

RA will Mark Zuckerberg just ring the opening bell is after all FaceBook Friday. Nice how is the. Market looking down okay well again I've got you know that it's kind of the market is rolling right now as we speak I've got it that I got the Dow is up forty from and actually that's what it is in the S&P up five -- -- ESP up five NASDAQ up. Eight the tenure US treasury is sitting at one point 73 gold. Is up 1430 oil trading down thirteen cents at 9243. So it looks. It's all some way up from. All right well we're joined by good friend and Friday regular guest Larry Kudlow from CNBC Larry good morning and welcome to the show. Eight Larry I wanna talk to you about the ten year treasury and deflation I mean it to ten year treasury at 170 this morning. Is this are you worried about deflation about us having a a very deflationary economy right now we. Been talking about this -- -- almost all -- on the Cutler report. The drop in goal that I know coldness. For the moment. Popping -- -- called -- had a horrific drop from 985050. As you noted treasury rate is down to whatever wants to have it. Resource stocks are getting killed. And the -- very strong now I'm McCain dollar guy but it looks like all of this stuff is happening at once and it's a deflationary signal I think what's going on here. There is so much demand for US dollars because of the European banking crisis and the potential agreed to leave the Euro write -- -- You know they're going out there European banks they're going in that dollars. And I think here in the US a lot of people are going into short term instruments. Has that as a haven of safety is a risk free investment -- not economic growth and that's. You have to wonder. Whether we aren't experiencing an unexpected bout of deflation. Which is taking place alongside it weak economy. Very difficult and the deflation in the issue and the drop in natural resource stocks and golden -- -- it's not good it is not good that you. It's how badly the stock market has been caving in the last couple weeks. Well an individual investor who doesn't understand the ramifications of deportation might say well that's this is a good thing I can -- now I can go -- by house does housing prices are gonna come down maybe car prices have come out is that would deflation means there that things haven't cheaper. And I hope. Housing prices have already cut out 35%. I don't know I had Gary -- on week they conduct another 20% I can't make that call I don't know. What I'm saying determine macro economic standpoint. Deflation -- space deflation is more like in 1930. Inflation is more like in 1970. Which do you think it closer to the truth right now I ask you. I'd have to say deflation Larry it is the that's what it feels like it does feel like. The -- Get 2% growth -- Employment. -- -- labor force. This is investment is slowing down I don't want to sound too bearish because in my heart I like to be optimistic. But I'm just saying. The fact that back on the price turtle guy I look at commodity prices. Currency prices probably the direction of the economy I don't like what I see and I would -- this. Instead of the Fed pumping in more QE. As we have so much unused liquidity and our banking system already. I just feel that it's a very important. To expand the bush tax cuts as a matter of adding liquidity. And economic growth in the event that I would. What speaker of the house John Boehner said this week in this series -- speeches at a White House meeting -- Is to extend the bush tax cuts. Don't wait for the end of the year crunch give business certainty I think that is absolutely vital quality. -- out -- -- but Larry on the idea and I I've read Boehner notes and I read your column but here's the Vick. The glitch right he says he wants to do that but Danny wants to implement major austerity measures is this the right time to be cutting Social Security austerity immunity if you do that are -- gonna crush the economy. Now I know I'm not a Cain may be you are I'm not if you have mild budget cut. That to me is not. -- That actually freaked out brought private resources I want the government. To be a smaller share GDP can I do not agree. It's spending increases are speculative. And that's -- cut -- our. Negative I don't agree with that I have a whole different view of the world. -- Understand Taylor but isn't saying he wants to not only freeze he wants to cut government and doesn't. What he thought you know -- always like to go back with -- 2008 levels which would represented gigantic increase from 2010 -- -- from 2000. All he's saying is if you raise the debt ceiling. And that's gonna come due in whenever December January -- -- board. And that should be offset that by spending cuts. I happen to agree with that so there's a package here that extend the bush tax rate so we can get full pledged that reform. Raise the debt ceiling. And that -- -- the dog the way we did last year. Currently ten year projection that every debt ceiling increase dollar have to cut spending I think that with that there was. -- I don't think the politics work. Obama is dragging its feet. He doesn't want to do that he doesn't have the executive leadership can see that US businesses need certainty about taxes and capital. That's the biggest problem. I agree he doesn't understand the economy need it that's. That right has no clue you've got these CEOs. Going to Washington. And he had those going to Washington. State don't raise the dividend -- don't -- the capital gains tax. To cut the corporate tax at all falls on deaf ears these -- the things that would have stopped equation. -- the -- that would mark economic growth and and that's what Boehner saying -- singling out there because where people I think the guy closest to the truth right now. What asked let me ask you question why the dissolution of this is pretty simple -- You reduce future of Social Security benefits you say to people that are under 55. Look you have to work a little longer you're gonna get a little less in terms your Social Security benefits we're not gonna raise your Social Security tax and oh by the way. Medicare is gonna look different for you if you're under 55 as well you're not gonna get into your 67. That's the easy solution to this -- that that's the. And I've always been in favor of expanding the ultimate. Think that's got to be part of it I also want -- -- Some options that will -- consumer choice and market competition for health care but I think frankly raising but he. Eligibility. At -- That's layup and if you do it slowly over a long period of time you will fix that problem without doing any real damage to potential recipient on the I think that the company could do but I just wanna come back. You bet you don't want to be really doesn't tax rate -- threatening rhetoric -- -- in an inflationary environment just. No I I agree he'd he had -- if anything you wanna reduce tax rates you on every district payroll tax. Down to zero right if you could have been. I don't know about the payroll tax but I certainly Wednesday. You want to hold down income tax rate you don't want to be rated business taxes you don't wanna be rated investment taxes why would you raised in that. The -- taxes. A reduction in payroll taxes Larry that money gets right in the economy if you -- out. Think that only if it's permanent and it takes a big county you know on the one hand what you're saying to me is. You want to extend the retirement age but then you lie detector revenues. -- you gonna blow hole. In -- security coming out -- they've done deal temporary rebates. Which had noticed that the effect whatsoever. Payroll tax rebate the short term. Rebate. If all you're doing has blown hole. In those security there is no economic benefits whatsoever. -- -- -- You're you're the best we appreciate your time I had about twenty other questions that I wanted to ask you but I got -- a that's me I'm right here in Britain at home my home office. This way for you better go ahead fire away. Well let me let me like is Europe and that's like you're visiting in in recession yet and there are people saying that. They Europe's gonna drag down the American economy Europe is still out of recession of marginally out but he do you agree that Europe is gonna bring down the American economy. Not necessarily I mean I think that Southern Europe does it. But who cares. It was also has been actually a little bigger country and I don't know what the books look like you know. Spain. Portugal Greece they got a huge banking problems. And definitely -- I don't think there. Whether they're in a recession and not to Germany is not hitters that important. Friends on the cusp of recession. We've been doing very well so the Nordic Countries I'm gonna use Germany sweet they're in pretty good shape I think China. It is more important in Europe. And exports source and economical source and I guess my take on China judging from the numbers in there aren't a soft landing hard. So I don't -- that is holding things back I think the stock market right now I'm just worried about inflationary pressures I think that's really -- and I think I'm. Policy makers have kind of miss that story on this that there worried about it these bulletin inflation the money that's been created by the -- has not been put to work so. But the demand the dialysis there is substantial the supply of dollars. May not be adequate to meet this new demand demand coming from Europe visit. Yup they were -- get rid of that they -- yet it's on the screen where you put your money. Buying US dollars -- I think -- Hey did you notice that the yield on the S&P. 500 is greater than that -- and you are the yield on the ten year treasury. And yet I don't know that. That's that's you know it that you go back to market 2009 that's when this thing turned around right. You've got to remember calculate this on an after tax base. If you raise the dividend tax rate. As per the Obama budget. From 15% to 45%. Yeah that reduces the value of those dividend substantially. That -- -- after tax cash flows are much much lower to investors. And hence much more expensive to corporations. You rate in the cost to capital. And you're -- the investment return that is not good that's part of the problem here. Is that looming. Tax hike that is part of the problem and somebody Watson got right now and not to let this happen. But isn't he gonna raise the taxes only of people over quarter million of income are. Well I don't know who knows very well I think is gonna lose to Iran Romney had a great week out there yeah. Talking about that deficit and debt. And how that contributed to the tepid economy like the president has been unable to about the -- so I don't know I'm just saying the uncertainty factors very substantial. It is Larry you're the best thanks for joining. That's our our weekly tutorials on the economy do and I hope you appreciated back is this guy. He's he's as good as they do I watch him well as much as you do that almost every night you don't watch it every night all much. Stuff going on other things did you do any. And I don't wanna know I felt adults only this. I don't I don't don't this is PG rating.