Larry Kudlow

Sometime in the latter half of the 1990s I coined the phrase "King Dollar." This was back in the post-Soviet collapse period, when the U.S. greenback ruled the world currency roost. As the Berlin Wall came down, taking totalitarian socialism with it, global investors and businesses sought the U.S. dollar as their currency of choice. They also chose the American model of free-market capitalism -- including supply-side reductions in marginal tax rates -- as their economic reform of choice.

The result was the greatest world economic boom in the history of history.

From Eastern Europe to India and China, and points in between, the world has experienced an unprecedented prosperity boom, a story best captured by the unbelievable rise in global stock markets. But along the way, as the world moved toward growth economics and away from central planning, King Dollar began to slide. Not because the United States was faltering (as the doom-and-gloom pessimists see it), but more because the rest of the world has been doing better.

In other words, the dollar hasn't slumped because it is necessarily weak, but because the new euro and new market economies are so strong.

There comes a point in this transition when the United States must begin to stabilize the dollar, however. I believe we are at that point now. It is time to think about reviving King Dollar. If we don't, there may well be negative consequences for U.S. inflation, the stock market and economic growth. I'm not worried about too much foreign investment, but I am concerned about too little foreign investment. I do not want to see a collapse of the worldwide demand for dollars.

Although I have never been an advocate of currency intervention by governments, there are moments in market history when unexpected interventions have worked. Clinton Treasury man Robert Rubin, a canny trader from his Wall Street days at Goldman Sachs, undertook a few interventions to buy and support the dollar in the mid-1990s. He sent a signal to currency traders, and it worked. During those years, the Greenspan Fed generally maintained firm control over the creation of new dollars. So, with a restrained money supply, the Treasury dollar-buying actions proved very effective.

Treasury Secretary Henry Paulson is today standing at a similar crossroads. Wouldn't this be a good time for Paulson to signal that enough is enough and call a halt to the dollar's decline?

Oil prices are rising. Gold prices are rising. And currency traders around the world have set up huge short-selling positions in the greenback. But a few strong words from Paulson, coupled with a few well-timed rounds of dollar-buying, could turn the U.S. currency story around.

Larry Kudlow

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