Transcripts For CNBC The Kudlow Report 20120530

this fall. and that sets up a massive mitt romn romney. the dow down 161 points. euro has lost 6 1/2% against the dollar this month alone. the dollar itself trading at almost a two-year high. and therefore, i must continue to sound the alarm against deflation. the europeans have no plan to fix or avoid the financial contagion risk that seems to be holding back the world economy. but first up this evening, now that mitt romney has captured 1,144 delegates after his victory last night in texas, he is now officially the presumptive republican nominee. cnbc's own john harwood joins us with the details. good evening, john. >> reporter: we've gonged the start of the general election campaign more than once before but today president obama himself gonged the start of it by calling mitt romney and congratulating him on the republican nomination and setting the stage for what both sides expect is going to be a very close campaign. now, why did the president do that? it's because mitt romney went over the top. as you mentioned. here are the delegate totals. 1,144 is what he needed for nomination. mitt romney's well over that. 1,191 at this stage. newt gingrich, rick santorum, ron paul, all the people with you once thought were going to threaten him, way behind. it's going to be a tight race all the way through november. look at these poll numbers from the averages of realclearpolitics.com. two-point advantage for president obama right now. that is within the margin of error. not a presumptive huge advantage for the president at all. there are mountains of cash that are going to be spent in this campaign. look at the numbers. so far president obama 217 million. mitt romney 97 million. but mitt romney's catching up fast. democratic party more than 400 million. republicans more than 300 million. by the end of this campaign both sides are expected to spend more than a billion dollars apiece. and all of that money is going to be focused on the target states. look at these on the map from new hampshire in the east to nevada in the west. these nine target states could be the decisive ones. maybe a couple of other outliers come in. but as of now this is where both parties are going to concentrate their firepower. they're going to get very familiar with the messages of both sides, with mitt romney talking about the economic failures of president obama and the obama campaign talking about mitt romney's substandard performance in their view at bain capital and as government of massachusetts. in fact, david axelrod, the obama strategist, is out with a five-page memo calling attention to the shortcomings of mitt romney's failures tonight, larry. >> five pages? he found that many shortcomings? five pages, john. >> reporter: he did. and i guarantee you that mitt romney's campaign can find at least five pages of shortcomings in president obama's record. >> many thanks to john harwood in washington. so from hope and change to fear and negativity. my next guest, john halman, says the president's 2012 campaign will pull back the curtain on the real obama and the "brass knuckle, pipe-hitting, red in tooth and claw politician." here now is john heilman from "new york" magazine national affairs editor. we also have barry nolan former joint economic committee communications director, and lars larsson, nationally syndicated radio talk show host. all right. john, thank you very much for coming on. appreciate it. i read your article today. now, let me just ask you this. i certainly get what you're saying. and i agree that these are the key points. but just on something like bain capital. with all these democrats. you know, i made a little list. cory booker and harold ford and ed rendell and archer davis and others. is this stuff backfiring? is this sort of negative, slam romney, might it be backfiring and dividing the democratic party? >> well, larry, it's great to be here, first of all. and nice to see you on tv rather than on the shuttle, where we normally run into each other. i think that most of those guys you just mentioned are not voters in swing states and they are guys who are members of the democratic establishment. i said in the piece what's true, which is that in business and politics there are democrats who are concerned that the president is being too divisive and too negative and too conventional i think is the key thing there and that it may hurt his brand as being above politics, as being a different kind of politician, and it could hurt his brand with swing voters in this middle of the electorate. now, that said, the president's people do not put ads on the air that they do not think work. and they do more polling and more focus grouping than any presidential campaign or any white house in history. i think to know the answer about whether the bain ads and whether now the onslaught against the massachusetts record that's going to start like now, to know whether those things are working or not you've got to go into those nine states that john harwood was talking about before and figure out among swing voters and among the president's base that he's drying to motivate, because it's a turnout game, too, what effect those ads are having there, not whether cory bookner or steve ratner or snin else sitting in the salons of washington -- >> okay. a lot of fund-raisers. a lot of private equity people that used to be for obama have walked away. but let me ask you one other one, here, john just at the beginning of our conversation. i don't think you wrote about this. but the whole issue of the obamacare contraception mandates and what i'm going to call the revolt of the catholics. and you just had the 43 catholic institutions including notre dame file 12 lawsuits. what does that do? obama, it seems to me, is in danger here too of dividing democrats, some of whom may anybody favor of obama, last time might have been, but they're furious at his attack on the church and religious freedom. >> well, i'm not sure that -- that's certainly a very opinionated characterization of what he's done. but i think if i would tell you what i think ought bama campaign thinks, is they think they need to win a massive gender -- they need to have a massive gender gap to win. they think that among the constituencies that give them an advantage in the electoral college and in those swing states women voters, particularly single, unmarried, that is, college-educated, socially liberal women in the suburbs in those nine states that john harwood talked about, this issue is a winner for them with that group. and that group is really key to the president winning 273 electoral votes. >> lars larsson, let's bring you in. you heard what john heilemann said. i hope you read his excellent article which covers so many bases. >> i have. >> do you think, lars, that some of this has been amateurish? i don't mean john hel. emann's article p i mean obama's behavior has not worked and is backfiring. do you think that's possible? >> i think it's very possible. but i don't think the president has anywhere else to go. what's he going to do? he has to play hard knuckle politics right now because talking about his success record, what success record does he have to play? so instead he's playing the interest groups. he's playing homosexual marriage. he's hoping to play an obama cars card. i think by this time was hoping it talk about the great success of obama kaish. now it's something where we're shoving it down the throats of americans, starting with american catholics and other religious groups this is going to be pressed on who are seeing their health care costs increase because of these mandates the president has pushed through. it's going to be a disaster. and i don't think it's going to play well. as much as he might pick up some people by saying we're out there for you to american women, all those american women also belong to churches. or many of them belong to churches, and they don't appreciate the attack on their church or forcing their church to do things through this obamacare mandate. it doesn't make any sense. but it's probably the only road he's got to go down. >> john heilman, you're very clear in the article right at the top. you said he won't run on the economy, he's going to run on these various so-called demographic groups. okay. fine. but romney's going to run on the economy. so how does that standoff get stood off? that's what i'm really asking. >> well, i don't want to say that i don't think the president's going tone gauge on the economy. they know that the economy's a central issue in this election and they're going tone gauge on it. what they have to do is they have to have this race not be a referendum on the president's economic performance because as we well know although there are many democrats who love the president in the middle of the electorate there's a lot of uncertainty about his economic management. so rather than having this be a referendum on his 3 1/2 years in office they need to make this a choice, and in doing that they have to disqualify romney on economics. and so what they're going to say over and over again, they're going to point to the bain record, the massachusetts record and say is this guy's never created any jobs, and on ideology they're going to say he is a classic trickle-down republican and that those are the policies that brought on the great recession of 2008-2009. that may or may -- that may or may not work, but it's going to be an attack on romney. >> okay. >> big problem. >> hang on. barry nolan, i want to get you in here. >> the big problem that mr. romney has is he has it there on his website, where he says what he wants to do is put in place a tax plan that will cut his already historically low taxes and raise taxes on the middle class. he has to sell that to them. >> where does he say he raises taxes? just factually. just factually, barry nolan, where does romney say he's raising middle-class tax pz? what i've heard -- >> romney's tax plan, which has been analyzed by the center -- >> is 20% -- but everybody gets a 20% marginal tax rate reduction. i'm just looking for facts here, barry. you used to work for the joint economic committee. you used to be engaged in facts. >> and the fact is -- >> i don't see where you get a middle-class tax hike from romney's plan. >> the center for tax policy analysis looked at romney's plan and look -- it's hard to do these things because people come in so many different flavors economically. but what they found was typically people that make $40,000, $50,000 a year will have their tax rate go up. romney's will have his go down like off a ski jump. people that -- if he wants to sell that, he's got to convince americans that it's good for the rich to pay less, for the middle class to pay more, for people to work longer, for people on medicare to pay $6,000 more a few years down the line when they retire. he's putting all these burdens on those people and saying i want you to do that -- >> not like the burdens of obamacare or anything like that. go ahead, lars. >> well, how in the world do taxes go down if everyone gets a cut? that's always been the complaint of the left is, well, you're reducing it more on somebody like mitt romney because 20% of his tax bill is a lot bigger than 20% of a $50,000 a year american worker. >> one of the imaginary ways that he pays for this is to eliminate some deductions. so one of the things that they're look at doing is eliminating deductions such as your home mortgage. people that -- >> looking at. >> that will really affect -- >> for rich people. they're going to eliminate the deductions for high-income people. barry nolan, you've given me the new math. >> the analysis -- >> i want to go back to john heilemann. john, i don't think you talked taxes in your article. are the obama people talking taxes when you interviewed them? >> well, yes. the president's been apretty clear on this, larry. his attitude is on the issue of the bush tax cuts he now is in favor of letting them expire on everybody -- all the bush tax cuts expiring except for people who make less than $250,000 a year. and i think the president's people, although it runs against every piece of conventional wisdom that an incumbent president would run on raising taxes on anyone, the president's people are very comfortable making the argument that that is the only way to solve the long-term fiscal problems the country faces and that it polls incredibly well. 75% of the people in the country are in favor of raising taxes on the rich. they're happy to be there on that position. >> at the same time it's mitt romney and his party that are telling everybody every minute that we are going to all die if we don't get the deficit under control. so at the same time he's saying let's take what we bring in way down and imaginary forces will somehow cause them to go way up. >> barry nolan's got the new math. lars larson, thank you very much. and most especially johnally heilemann for an excellent article in "new york" magazine. up next on "kudlow," high stakes in the country. the union-led recall vote of republican wisconsin governor scott walker is going to be a leading indicator for elections this fall. if wisconsin goes walker red, it is lights out for obama. don't forget, folks. free market capitalism is the best path to prosperity. i actually think free market capitalism will survive this election very handily. welcome back to "the kudlow report." so president obama today entered the wisconsin gubernatorial campaign. this is the second most important election this year. because a democratic defeat in wisconsin could be an ominous sign for obama's re-election hopes. the latest polling average in the high-stakes union-led recall effort gives republican governor scott walker a seven-point lead over his democratic challenger, milwaukee mayor tom barrett. a walker win, that is a game changer for the entire election. but not if the obama campaign has anything to say about it. take a listen. >> it has nothing to do with president obama at the top of the ticket, and it certainly doesn't have anything to do with mitt romney at the top of the republican ticket. so no, i don't think -- you know, there may be some that will, you know, predict that it means doom for us in wisconsin in the fall elections. but i think they'll be proven wrong. >> all right. nice try. but let me make it clear. my view, if wisconsin goes read for walker and romney, oh, my gosh, lights out for obama. it would be a total landslide. here now to talk about this, former north dakota senator byron dorgan. senior policy adviser at aaron fox. and joining us from on the ground in wisconsin tonight is tea party supporter and radio talk show host tony katz. tony, you're on the ground out there. if scott walker wins, isn't this a gigantic defeat for big labor and for the big democratic party and ultimately for the big president, mr. obama himself? isn't that just basic political math? >> it's the trifecta. it's a big loss all the way around. they cannot say after pouring in some $40 million, i believe the number is, from unions into defeating scott walker to try to get their candidate, kathleen falk, who they didn't even get through the primary, they can't now say oh, it doesn't really matter. the words of congressman wasserman schults trying to say oh, this is just a dry run. well, this dry run is costing the people of wisconsin $20 million, according to estimates. that's no way to treat the people of america. when scott walker and rebecca clayfish, remember, they're both on the ballot separately. when they both win their re-elect from this ridiculous recall, you will see the reverberations all across the country that people realize -- >> hang on. >> -- that unions can be beat. >> hang on a second. i want to get to senator byron dorgan. senator, to me a walker victory is a great reburr, particularly to big labor and particularly to the big labor unions in the government sector, saying effectively voters and taxpayers want fiscal restraint for labor, not just for everybody else but for labor. that's one of the meanings here, is it not? >> i think this is a governor that took a hard right turn and decided to scapegoat public workers. but look, this exists in wisconsin. this is not a message for anybody anywhere. it's not a harbinger of what might happen between obama and romney at all. i know you made that suggestion at the top of this. but this is a food fight in wisconsin. you know, i'm not there. i don't know all the details of it. i know a bit about what the governor did. i know a bit about the koch brothers, who are sending a lot of money up in that direction. but that'll get resolved. and then we're going to have a presidential contest. and in that contest i think people will be concerned about the economy and other issues. and let me just make -- i listened to your previous panel. let me make this point one more time. when this president took over, this economy was contracting a7%. now it's expanding. not fast enough but expanding. so you know, i think this president has done a pretty good job of turning around an economy that was falling off a cliff. >> yeah, but okay. but tony katz, look, there has to be some government downsizing. that was the issue. whether it was collective bargaining or having the unions pay more into their pensions or more into their health care. and if walker wins, the voters of wisconsin will join voters in indiana and ohio and other places saying you know what? government unions are not immune from this kind of downsizing. isn't that the message that's going to come out of this? >> well, not the message that i see -- >> take out the -- >> and let me just say that -- >> take out the politics and let's play it by the numbers. i don't know who we're asking here. are we asking me? >> yeah, tony katz, go ahead. >> all right. >> let's play it by the numbers. a $3.6 billion debt gone in wisconsin. they didn't raise taxes. they now have a $150 million surplus. that's the numbers. there shouldn't be a question of republican or democrat or liberal or conservative. do the numbers work and did the plan work? the answer is yes, it did. the unions lied about what would happen. scott walker was right. and he's going to get rewarded. and by the way, it should be very important to know that, you know, you talk about the koch brothers. afp putting together this bus tour for a better wisconsin. i'm glad they're doing it. thank god they're doing it because someone has to get the message out there. someone has to be able to be the counterweight to those unions. and i want to see more people getting out there. three cheers for americans for prosperity. >> may i say a word? >> let's not talk about them badly again. >> can i say just a word? >> yeah, the last word, please, sir. >> good for the koch brothers. but know what? i got a big fancy mailing at my home from the governor of wisconsin. he's raised $30 million. $30 million. he may win or lose. i don't know what's going to happen to him. i think this is a guy that took a hard right turn. and frankly, it's not where america is. yes, we need to cut spending. we need to do a lot of things, including raising some additional -- >> fiscal responsibility is exactly where america is. >> senator dorgan, i think that scott walker sent you a letter because he loves you. >> no, he sends all americans a letter asking for money. >> no, he sent a special letter to you -- i've got to go. you're both terrific. senator dorgan, we appreciate very much. tony katz, thank you, buddy. coming up on "kudlow," deflation alert. euro jitters put the squeeze on stocks. the dow's decline today makes this the worst monthly performance for the index since may 2010. should investors fear a total collapse of the euro banking system? we're going to ask some impressive experts. "the kudlow report" will be right back. if scott walker wins in wisconsin on tuesday, wisconsin is in play for the general election. trust me. mine was earned off vietnam in 1968. over the south pacific in 1943. i got mine in iraq, 2003. usaa auto insurance is often handed down from generation to generation. because it offers a superior level of protection, and because usaa's commitment to serve the military, veterans and their families is without equal. begin your legacy, get an auto insurance quote. usaa. we know what it means to serve. i'm jackie deangelis at cnbc global headquarters with a news update. morgan stanley ceo james gorman told an in-house group that the firm worked 100% within the rules on the facebook ipo but that there was some unprecedented confusion in the opening hours. gorman will be on cnbc's "closing bell" tomorrow. meantime, the "los angeles daily journal" is reporting that a federal grand jury is investigating possible financial misconduct during the mccourt family ownership of the dodgers. it's just the first day of the national spelling bee in washington, and here's the new star. 6-year-old laurie ann madison spelling dirigible. >> dirigible. d-i-r-i-g-i-b-l-e. dirigible. [ applause ] >> laurie ann got a tougher word in the second round. engluvies. it's a bird's crop. unfortunately she only missed it by one letter. the virginia girl is the national bee's youngest speller ever. when larry returns, he'll spell out the latest euro fear hitting stocks here. "the kudlow report" will be right back. right back. for a hot dog cart. my mother said, "well, maybe we ought to buy this hot dog cart and set it up someplace." so my parents went to bank of america. they met with the branch manager and they said, "look, we've got this little hot dog cart, and it's on a really good corner. let's see if we can buy the property." and the branch manager said, "all right, i will take a chance with the two of you." and we've been loyal to bank of america for the last 71 years. what happens when classroom teachers get the training... ...and support they need? schools flourish and students blossom. that's why programs like... ...the mickelson exxonmobil teachers academy... ...and astronaut sally ride's science academy are helping our educators improve student success in math and science. let's shoot for the stars. let's invest in our teachers and inspire our students. let's solve this. and somebody asks me a question about the volt. what really blows them away is when i tell them i almost never go to the gas station, despite the fact that they see me driving to work every day. i fill the volt up once every -- maybe once every couple of months. and that feels absolutely wonderful. i'm hardly using gas, but it's there when i need it. anybody that thinks that this car doesn't have solid performance, hasn't driven it. there's no other car like this on the road. ♪ welcome back to "the kudlow report." i'm larry kudlow. in this half hour, stocks got slammed today over greek election fears, the threat of a meltdown, risk of spanish banks, and worries over another weak jobs report coming out friday in the usa. if we were knocking out 250,000 jobs a month, by the way, we wouldn't give a drachma about greece. but alas, we are not. also driving down stocks, investors are scared about an irresponsible congress doing nothing to spur the economy by extending the bush obama tarks cuts. i'm calling them bush obama because mr. obama signed an extension in 2010. also this evening, i've been sounding the deflation alarm. everybody in the world wants dollars, including european companies and depositors. somehow or another, the world is going to have to have more dollars to stop a downright deflation. but first up, another day of sharp losses for the markets. the dow drops 161 points for the day while all the major detections fell more than 1% across the board. a lot of investors think calamitous financial events in europe could be imminent. so let's talk. we have stephanie link, cnbc contributor, director of research with thestreet. we have richard clyde, a columbia university professor, a global strategist at pimco, and himself a former assistant secretary of the treasury. and our pal tobias lev kovic, citi's chief investment strategist. richard, as a man of the woshlgsd not only with pimco but your former treasury responsibilities, do you see any clear steps by the authorities in europe to patch up a shaky financial system? not just spain. not just greek. but the whole potential for contagion, for deposit runs, and you name it. is there a plan? >> well, larry, we need those steps, but we don't see them. there may be a plan, but it's a well-kept secret. it really looks like they're taking this one day at a time. greece is a risk. spanish banks are in crisis. and what you have is really a game of chicken between the ecb and the european authorities. and no one wants to blink. and as a result it's quite chaotic. >> an important "wall street journal" news story came out late last evening. the treasury is sending the undersecretary of the treasury to meet with these leaders. is she and the rest of them going to try to concoct some deposit-taking guarantees the way we did back in 2008? guarantee the deposits, the credits, the liabilities, to give confidence to this whole story. is something like that being cooked up? >> well, it maybe being cooked up. but all these things take time. you have 17, potentially 27 governments involved. treaties need to be changed. parliaments. and as a result all of this is down the road. you have spanish banks on the verge of insolvency and contagion to portugal -- >> and not a clear safety net. that's one of the troubling things to wall street. steph, i read your notes with great interest because you sound more cautious than general. what's your take? >> we started raising cash in march because while we had gains at the time and because we were more concerned that the u.s. was starting to see kind of a peak in terms of economic data. i don't think there's a collapse in the u.s. but it's on the margin a little bit less robust, right? and then you have europe. and then you have china really much slower in terms of offering a lot of stimulus. so you wrap it all together and you know, we have these events that we are now waiting for, that we have to get through. so i think you're in this trading range. we have a lot of cash. we want to put it to work. we don't think it's doomsday. we see a lot of good values out there. a lot of cash-rich companies. 187 companies in the s&p 500 year to date have raised dividends. so there are good stories out there. just got to be careful. >> tobias, i don't know. maybe this is a tough question. maybe not for you. when would the correction bottom? as stephanie said, you're in 2%, 2 1/2% economic growth. we're not collapsing. we're not going into double dips. all that stuff. profits are rising, albeit more slowly than before. can you see through the current fog a bottom for this correction? >> i can. what i'd like to see is better signals. we're starting to see a couple of them. our panic euphoria model has dropped into panic. that generates a 94% probability that stocks rupp in 12 months. i kind of like those numbers pf our valuation work is sitting with those 95% probabilities. the problems we're seeing is for example the citigroup economic surprise index has not stopped going down. we haven't seen greater interest correlation to show real fear marking across the market board. so while we think the bulk of the selling is behind us and we were getting equally nervous like stephanie back in march that too many of our indicators were in kind of danger territory, now they're starting to move the other way, but it's probably a bit too early. and i would argue i'm less worried about europe. i'm much more worried about the fiscal cliff and how corporates are going to respond to -- >> the tax hike. the failure to extend the tax hike. >> and sequestration in terms of spending cuts and the extended unemployment benefits going away. all this is going to put a real high bar for businesses to go and invest, hire people, et cetera. >> richard claridin, you are a veteran of the washington wars. do you think that congress will extend the bush-obama -- i'm calling them because obama did sign them once. the bush-obama tax cuts? will congress extend them, or are we just going right to the edge into january? >> well, i think we are going to go to the edge because this congress is not going to do anything until after the election. i actually think ultimately the bargain is a tax reform. it's lower rates, a broader base, and i think there is some support from that. perhaps a lot of support. but it's going to take, as you know, a lot of heavy lifting to get tax reform -- >> how bullish would it snb. >> that would be huge. >> if we just got a 60 or 90-day or 120-day extension of current rates. how bullish would that snb. >> it would be bullish to the extent the next president, whoever he is, indicates serious tax reform is on the table. absolutely. >> steph, another question. are there enough profits to go around to generate a rally? in other words, i look at the s&p. yes, it's the u.s. s&p 500. but roughly half the earnings come from overseas. you are going through, you're worried about europe, you're worried about china. you didn't mention razzle or other emerging countries. are there enough profits in the system to generate a rally in the stock market, or is it all in the market? >> no, i think there are plenty of places, particularly in the u.s., you look at some themes that we've been playing, i still think housing makes sense here in the u.s. like a weyerhaeuser. non-res construction, we've seen a little bit of an implement prochlt there. like a united rentals kind of thing. look at companies that benefit from lower commodity costs. a lot of consumer discretionary as well as staples. so i think there are places to look for to be investing. but again, i think you want to be very valuation-sensitive. >> just to follow up. a great point. the decline in energy, crude oil, which is substantial, dropping under $90. the decline in retail gasoline, which is substantial. now, it sounds like a great sign. but if it's linked to a big slowdown in worldwide growth, it main not be a great sign, and i want you to take us out on this, tobias, because this is an interesting conundrum. >> i think you hit an important point. commodity prices going down are actually bad for corporate profit margins. they're not good if you look at it historically. it signals exactly what you've suggested. that economic activities -- remember, commodities are about 10% of corporate costs. 63% are labor. so job growth is actually bad for corporate margins, believe it or not. it's not bad for the economy, and it's not bad for corporate profits in general, but margins do slide. i think the bigger issue, and you talked about it in terms of the earnings, remember, 70% of corporate sales are coming from the u.s. and yes, the 50% number you citeed is of companies that have international exposure. but u.s. hospitals don't have any international exposure. retailers in the u.s. don't have any exposure either. >> just real quick. are you buying -- >> we're buying semiconductors. we're buying tech hardware. defensively against that we're looking at things like utilities and telecom services are where our overweights are. >> i appreciate everybody. stephanie link, richard claridin. tobias levkovich. so gloomy in stocks. up next on kudlow deflation alert. i like king dollar but not when it soars higher from an emergency situation like europe. now, on the flip side, as we just mentioned, oil and retail gas prices are coming down, but is that a good signal or a bad signal? it could be great for consumers and business, unless there's a global deflationary recession. still ahead, by the way, democrats' debt limit dilemma. here we go again. i have a simple solution. just extend the bush-obama tax cuts and hightail it oust town before you do any more damage. just extend the tax cuts. don't worry about the other stuff. i'm kudlow. we'll be right back. l be right . if you made a list of countries from around the world... ...with the best math scores. ...the united states would be on that list. in 25th place. let's raise academic standards across the nation. let's get back to the head of the class. let's solve this. we believe the more you know, the better you trade. so we have ongoing webinars and interactive learning, plus, in-branch seminars at over 500 locations, where our dedicated support teams help you know more so your money can do more. 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[ all ] i'm with scottrade. it's another reason more investors are saying... put me at 5 timesd out my greater risk of a stroke, my first thoughts were about my wife, and my family. i have the most common type of atrial fibrillation, or afib. it's not caused by a heart valve problem. i was taking warfarin, but my doctor put me on pradaxa instead to reduce my risk of stroke. in a clinical trial, pradaxa® (dabigatran etexilate mesylate) reduced stroke risk 35% better than warfarin. and unlike warfarin, with pradaxa, there's no need for regular blood tests. that's really important to me. pradaxa can cause serious, sometimes fatal, bleeding. don't take pradaxa if you have abnormal bleeding and seek immediate medical care for unexpected signs of bleeding, like unusual bruising. pradaxa may increase your bleeding risk if you're 75 or older, have a bleeding condition like stomach ulcers, or take aspirin, nsaids, or blood thinners, or if you have kidney problems, especially if you take certain medicines. tell your doctor about all medicines you take, any planned medical or dental procedures, and don't stop taking pradaxa without your doctor's approval, as stopping may increase your stroke risk. other side effects include indigestion, stomach pain, upset, or burning. pradaxa is progress. having afib not caused by a heart valve problem increases your risk of stroke. ask your doctor if you can reduce your risk with pradaxa. a deflationary siren may be sounding. today the ten-year treasury yield slid to an all-time record low. 1.61%. i've been around forecasts. that is incredible. key commodities remain on a vicious downward spiral. crude oil settling at a new 2012 low, nose-diving more than 17% this month alone. and the rapid dollar rally rolls on. i mean rapid. i love a strong king dollar but not when it happens in a couple of weeks. surged almost 6% since late april. the question is are we going to have a nasty round of recessionary deflation? here to talk is john riding, chief economist at rdq economics, and dave goldman, former head of fixed income research bank of america. he is currently president of macro strategy. okay. i'm looking at simple price indicators because i'm a simple guy. i see the dollar shooting up. i see gold down 300, 350 bucks over time. i see these treasury rates absolutely collapsing. i even see energy prices starting to collapse. i don't know if i'm right. but it has a deflaugsry look to it. so much of this could be coming out of europe. you tell me, is deflation a problem? >> it's an extreme risk, though i don't think it's an inevitable outcome. we have the first major oecd economy, name lly spain, which going to implode to the point that bank senior debt is likely to be wiped out. that simply hasn't happened in the post-war period to any major economy. and the knockon effects to the rest of the european banking system. >> for italy, for portugal -- >> for france in particular. >> for france, too. >> because the french banks own the spanish bank debts. sow see the subordinate effect of the french banks tanking as the spanish banks tank because spain potentially could take other banks with it in the chain reaction. >> hold on to that. i want to get your reaction. i just want to add this point. depositors are leaving these european banks. individuals but mostly corporations. they want dollars. now, do we have a shortage of dollars relative to this phenomenal demand coming out of europe? i know the volume of dollars is substantial. but in terms of this new demand for greenbacks from all these businesspeople that don't trust banks going up into france, is that a problem that could turn into a deflation problem? >> i don't think it could turn into deflation, but certainly a theme. and it was a theme at the atlanta fed conference. not enough safe short-term dollar influence. and that's why yieldand e low. but to come back to your indicator, yields are low, inflation expectations aren't low. so although we've got these very low 1.6% ten-year yields, people are expecting still in the markets 2.1% inflation over the next ten years. so it's the real yield that's low. the real yield at almost minus half a percent. so it's this demand for -- >> but it's the next ten months, john, i'm worried about. it's not the next ten years. i want to stay on one other point. you know i'm an inflation hawk and you know i'm a king dollar guy. is it possible that the inflation indexes are heading toward zero? not forever. but that the deflator from the personal consumption, the cpi. is it possible that we are heading for something like zero inflation, which would be on the tippy, tippy edge and bernanke would call that deflationary? >> if we were to have a big commodity crack from here, that's certainly possible. we saw it in 2008 into 2009 when we had the big drop in oil prices from $140 a barrel down to about $40 a barrel. that is certainly possible. but if you look over the last one year, over the last five years, over the last ten years, the inflation rates have all been around 2% to 2 1/2%. so i'm saying we're talking stable inflation. >> so david goldman, where is the principal deflation pressures? i'm just reading the price indicators. where is the source of this deflation? >> there's virtually perfect 100% correlation between stock prices, gold pricears, oil prices, all these things, treasury bonds, it's all moving together because people are -- >> moving down. >> the source of risk is europe right now, and the problem with the germans is although they are right not to write a blank check for the spanish, who have a black hole in their banking system, they have to make clear where you draw the line, that the senior debt of, say, the french banks will be defended at all costs -- >> what about the overnight debt? that the fdic guaranteed during our crisis -- i mean, i'm not saying forever. i'm not a socialist. i'm just saying preventing the implosion -- >> you took -- you finished my sentence. >> maybe we have to have some guarantees of the repo market, which is the interbank overnight debt, deposits in general, and bank loans, bank debt. just for a while to stabilize things. >> absolutely. the germans have done a very poor job of signaling where they will write a check and they will have to. >> and when. >> and when, exactly. the europeans have had a political implosion with the french elections. the sarkozy -- >> you want to cap this? you've got a cap. 30 seconds. >> i would just say the problem with the european banks is one of the asset class problems is the government debt itself. so there is an issue of what you recapitalize the banks with or guarantee the banks with. i think the ecb is going to have to respond again if we have a bad outcome on june 17th for the greek elections. if we see that, we could see, say, a trillion-euro lti -- >> and all these safety net guarantees. they're all going to have to cooperate. they're all going to have to cooperate. i don't know. it is vexing. stocks are going nowhere until this is solved. and probably stocks are going down if they go any place until this is solved. that's the way i look at this whole story. here we go again. we're being held hostage by europe. you know, we freed and liberated europe in world war ii. god bless us. now we're being held hostage by them. i can't stand it. john ryding, david goldman, two of the smartest guys i know. up next the debt limit dilemma. i say don't worry about the debt ceiling, just extend the bush-obama tax cuts and then get out of town before anybody does any real damage. just extend the tax cuts. house members peter welch of vermont, marcia blackburn of tennessee will have a face-off. 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i have a solution in six words. extend the bush-obama tax cuts. that's right. just extend them. that's what folks really care about. so let's talk. we have two distinguished house members, peter welch, democrat, vermont. marsha blackburn, republican from tennessee. thank you. ms. blackburn, marsha blackburn, let me start with you. i can tell you with the debt ceiling not going to come around until next february or march, what folks up on wall street are worried about is the tax cuts. will they be extended? and to me you could really help the economy if you just extended them this summer. >> and i completely agree with you. go ahead and provide the certainty that our constituents are saying that they need. whether they're employers. heth they're small business owners. whether they are individuals who are just saying let us know what is going to happen with the tax code and providing that certainty will go a long, long way. >> peter welch, i don't see -- there's no way you all are going to get some big grand design. you are the guy who wanted an independent, clean debt limit. okay? you know what? you may be right. i don't know. we could revisit history. here's what i know, peter. the debt limit is not going to come around in a serious way until we're well into next winter. what is coming in a serious way is january 1st tax rates go up across the board. and i'm calling it the bush-obama tax cut because as you remember, my friend peter welch, obama signed an extension back in december 2010. why not just go there now, bipartisan, do everybody a favor, just extend the tax cuts? >> well, in my view it won't work. we do have a debt problem, and i agree with marsha on that, but i think the only way the math works is to put everything on the able. this budget we just passed, the ryan budget, we increased pentagon spending. we have to be cutting it. we have to put revenues on the table in my sxru work on some spending cuts as well because there are areas we can save money but if you don't have all three of those elements, revenues -- and that can include cleaning up the tax coat, by the way. the pentagon making a contribution to debt reduction as well as domestic discretionary, we're not going to get the right -- >> you'll never get a grand design this summer. it's just not going to politically happen. you know that. marsha, here's my point. give yourself a 90-day or maybe a six-month extension on the tax cuts. what mitt romney is saying -- and we're all waiting for a romney landslide, and the senate's going to go into republican hands and the house is going to stay in republican hands and xwrofrn romney's going to have his own 100-day agenda. and then you all can hash through spending and debt reduction and entitlement reform. but right now what impacts the economy, investment and business, are these tax cuts, which must be extended for at least six months. that's all i'm saying. that's the thing that's right in front of us. >> well, it is right in front of us. and going ahead and extending those tax cuts would be a smart move. but larry, i was looking at something from the bipartisan policy center today, they think we might hit this debt ceiling sometime between october and december. and i had i it is incumbent upon us to start saying how much more can we cut and where can we go about making these spending reductions? >> why don't you say -- and i'm being very serious here, really. why don't you say this was the george bush-era tax cuts, president obama signed on to them, he extended them, all you want to do is a bipartisan extension of the tax cut, you all will get credit for it? in fact, mr. obama might even get more credit. you might be saving it for the last few months. >> in all candor, we have a disagreement here, but i do not believe extending the tax cuts, particularly at the high end, is going to reduce the debt. i don't think it's going to provide certainty. certainty comes from congress getting out of gridlock and being able to pass a transportation bill, keep student interest rates on the stafford loans at 3.4% instead of doubling them, working together on energy efficiency that can create jobs in our local communities. and what is creating uncertainty in this country is the very serious dysfunctional problem that we have in congress where we can't find a way to get together. >> all right. ms. blackburn, i'm out of time. i want to give you a 30-second cap. what are we going to do about all the successful rich people and businesses? should we just tax them? >> not at all. you know, what we have to realize is so many individuals are organized as sub s corporations, pass-through entities. they are the small business operators. the mom and pops. they cannot take additional taxes, an increase in taxes. we done have a revenue problem. we have a spending problem. let's get the spending out of control and cut it. >> i appreciate those of you. we had a little bit of disagreement. including me. i don't know. just extend the tax cuts. house member peter welch, thank you from vermont. marsha blackburn from ten, thank you very much. >> absolutely. >> the really mischievous part of that story is that president obama made a deal with speaker john boehner, they would both benefit politically and america would benefit economically. i'm larry kudlow. we'll see you tomorrow evening. 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