'Smell The Coffee' editorial

http://www.baltimoresun.com/news/opinion/bal-ed.econ08nov08,1,2830789.story?coll=bal-opinion-headlines
'Smell the coffee'
November 8, 2004WHAT ARE global currency traders telling Americans?
Last week, as President Bush, flush with electoral victory, confidently outlined his agenda for his second term, support for the dollar sank.
The president talked of remaking the U.S. tax code, while vowing not to raise taxes.
He talked of halving this year's record federal deficit by 2009, but didn't mention that that projection doesn't include the potential cost of the wars in Iraq and Afghanistan or scaling back an arcane but increasing important levy, the Alternative Minimum Tax - which alone could cost $500 million.
He talked of solving the looming Social Security crisis by creating private accounts, while not offering any way to offset the cost of the transition, estimated to start at $1 trillion.
And by week's end - despite good news in the latest U.S. jobs report Friday - the dollar hit a record low against the euro.
The dollar has lost more than 20 percent of its value since Mr. Bush took office, and it has fallen by more than 8 percent since its last high toward the end of April.
Said one London currency trader quoted by Bloomberg News after the favorable jobs report failed to spark a dollar rally: "There is something seriously wrong with the dollar. If you can't smell the coffee on this, I don't know what's wrong with you."
For currency traders, the strong smell comes from the record U.S. budget deficits resulting from the president's reckless cutting of taxes but not of spending.
Federal spending is $400 billion higher this year than when Mr. Bush took office, while federal tax revenue is $100 billion lower. Even if Mr. Bush does markedly lower federal deficits by 2009, they're expected to soar again - particularly if he makes permanent his tax cuts, adding another $1 trillion in debt by 2014.
Absent tax increases, there's little reason to believe that cuts in discretionary federal spending can fill the fiscal hole. Nor can economic growth. It's just much too big.
What currency traders see is a country living way beyond its means now and - President Bush's confidence aside - way into the future, a nation borrowing billions of dollars each day from foreigners and their governments to keep its government afloat and balance its trade deficit with the world.
A moderate, carefully managed decline in the dollar could help the U.S. economy's competitiveness, or at least stabilize America's growing indebtedness to the world. But the all-too-real fear is of suddenly reaching a tipping point beyond which world investors stampede from the dollar and America - resulting in a sharp dive in the dollar, harsh spikes in U.S. inflation and interest rates, and a deep plunge into recession.
In his first term, Mr. Bush appeared blind to mounting deficits. At the start of his second term, his concern does not appear appreciably heightened. Instead, Mr. Bush is offering a radically large ambition - simultaneously overhauling the tax code and Social Security. The nation must respond cautiously, lest he break its bank.
Copyright © 2004, The Baltimore Sun