Like the Reagan administration twenty years previous, Bush’s strategy has been to give the 5% top earners the highest tax breaks and to try to shift Social Security to the private sector, while cutting Medicare and other social programs. Bush is harkening back to the days of “trickle down economics” – the belief that allowing the rich to make as much money as possible will lead to them donating more money to the poor – a plan that the current president’s father called “voodoo economics.” The result so far? The dollar is dropping like a stone.
The Cost of War
The tremendous spending on the war in Iraq, a war which was only supposed to cost the US no more than $1.5 billion in total but ended up currently costing $1.8 billion a day and rising, is just one factor. Another would have to be the creation of the Department of Homeland Security, which has raised federal spending by billions since its creation on October 8, 2001. The cutting of social programs has not offset this increase in spending, while the tax cuts and the growing trade deficit ($666.2 billion in the past 12 months, according to The Economist) have all led to one thing: since July 2001, the dollar has dropped by 6.5 per cent.
What Will the Asians Do?
In response, many are choosing to switch to the euro. In a recent survey conducted by the Royal Bank of Scotland, 70% of the 65 central banks who provided information about their reserves have switched their reserves from the dollar to the euro, thereby dumping more dollars on the market and adding to the devaluation. Already the Asian market is grumbling, with financial leaders from China, Japan and South Korea meeting in late February to develop strategies for handling a rapidly weakening dollar.
Bush’s response has been to encourage consumers to spend more money in the hopes of increasing productivity. So far, this approach is floundering. According to the Organization for Economic Co-operation and Development, US productivity has actually dropped from a 9% high in the third quarter of 2003 to 1% at the end of 2004. Another hope is that people outside of the US will take advantage of dropping prices to buy more American goods. However, the only significant effect the dropping dollar has made in terms of trade has been among exporters to the US, who see their own goods devaluing rapidly and are already worried.
The Beginning of the End?
If exporters shift their markets, and if the Asian market moves from the dollar to another currency, it could spell the beginning of the end for the US economy. The only realistic counter-strategy is also the simplest and at the same time, the most painful: the US government must cut spending and raise taxes. The rest of the world is already coming up with its own solutions.