As an economist, I have been saying for quite some time that Bush's policies of cutting taxes, increasing spending and borrowing the difference from foreigners cannot be sustained indefinitely. Apparently, the first reaction of the foreign exchange markets supports this. Check out what happened to the exchange rate of the dollar against the euro as soon as it became clear early Wed. morning that Bush would win:
It seems the markets dont like Mr. Bush's plan to "make the tax cuts permanent" together with his seeming inability to ever see a spending bill he doesnt like:
http://finance.yahoo.com/q/bc?s=EURUSD=X&t=5d
Why is this happening? Because every single working day, we need the foreigners to buy another $2 billion of our paper to keep things in balance. As soon as they start getting the idea that we have no intention of returning to any semblance of long run balance, they will start to desert the dollar. When that movement starts turning into a rush, then we are in for a rocky time - Sharply rising interest rates, a tanking stock market and a recession.
A couple of years ago most economists regarded such a scenario as possible but not likely. Now that Bush is reelected and has already made a speech saying he will continue on the same course he has been on it gets a whole lot more likely. What to do? Buy euros. Its what people in the markets call a no-brainer.