The Bush Treasury, and perhaps Mr. Bush himself, seem to have fallen for the notion that a country can devalue its way to prosperity. This is the patent medicine of the manufacturers' lobby, as well as the kind of economist who has done so much for Argentina, Mexico and other nations over the years.As they say, with friends like these...
For those of us who didn't pay much attention in Econ 1, here's a quick lesson: running consistent trade and fiscal deficits eventually causes foreign investors (who are in effect lending the U.S. economy money, and who today own something like 40% of American securities) to want to get out of our currency and our markets. This is so for much the same reason that people who pile up vast credit card debt have a hard time getting further loans: you get to be seen as a bad credit risk.
As investors leave, two things typically happen: both the stock market and the dollar decline, sometimes precipitously, in which case it's called a "crash."
As the value of the currency declines, American exports become cheaper for foreign buyers and foreign imports become more expensive for American consumers. In theory, this works to rebalance the trade deficit.
While manufacturers may like a devalued currency since it makes them more competitive abroad, devaluing the currency screws the middle class. The middle class typically is invested in a narrow set of assets -- the typical mix being a single piece of real estate (your house), cash, and some American equities. The declining U.S. stock market and inflation cut quickly into the value of all three of these asset types. In short, devaluing the dollar works works as an undeclared tax on the wealth of the middle class.
This appears, then, to be how Bush plans to pay for his tax cuts for the wealthy: with an undeclared tax on the wealth of the middle class, in the form of devaluation of the dollar and inflation.
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