Expected Economy Impact of George W. Bush's Second Term
...he international economy. For years, the US economy was helped by lowering costs by outsourcing unattractive and low value jobs overseas. Combined with the technology advancement, the US working force is more efficient than ever. At the same time, a large number of developing countries have flourished absorbing American investments. By and large, it looked like a win-win situation. However, the situation has developed unbalanced from the start. To keep the model working, countries have been putting dollars into central bank reserves, and keep the dollar relatively strong. Japan and Taiwan were some of the major early players, while China and India joined the game later on. Domestically, the ever lowering saving rate is also forcing the huge spending in Bush’s first term to be financed mostly by foreign banks. This created an unprecedented U.S. current account deficit in Bush’s first term. Almost everything happened in the first term made the situation worse. Lower interest rates and taxes discouraged saving. Spending on wars and everything else created a huge budget deficit that also made worse by tax cuts and the soft economy. The Bush administration also didn’t push hard on China to loose up its currency policy. Therefore, by the track record, people were expecting situations to get worse and an unavoidable major discontinuity coming if Bush were to be elected again. On the contrary, Bush seems to identify the problem and is willing to solve it this time. On Nov 20th, the Congress passed a new spending bill limiting the spending growth rate to 1% outside defense and homeland security. With a slide in dollar value, this could reduce the growth in current account deficit quickly. Another good news is that China finally seems to loosen its currency policy. Without China adjusting its currency, the flexible currencies will bear disproportional impact of changes in dollar values. Of course, an essential issue worth looking out for is the growing protectionist outcry. Bush showed his protectionist tendency in the first term by imposing steel tariffs. Nonetheless...