Several other factors have influenced the fall of the dollar, magnifying the primary effect of the trade deficit. Firstly, the accounting scandals at Enron, Tyco, WorldCom and many other companies revealed serious weaknesses in the US reporting and regulatory system, leading to falling confidence in US stocks, bonds and other investments. Plunging values in these markets beginning in 2001, and the consequent enormous investment losses, further shook foreign investor confidence. As a result, foreign investors stopped sending a net inflow of investment funds into US markets. Instead, they began to liquidate their portfolios, causing a net funds outflow.
The sharp increase in US government budget deficits (see chart) also undermined investor confidence. After several years of government budget surpluses, the Bush administration cut taxes dramatically and increased military spending, setting off a deficit that is estimated to reach $455 billion in 2003 (up from $153 billion in 2002), making the 2003 deficit by far the largest on record. State and local governments have also run high deficits, further compounding the federal imbalances and pushing state and local debt to a historic high of over $1,400 billion in 2002 (see chart). US households have increased their debt (for houses, education and consumer spending) an unsustainable level of $8,454 billion in 2002 (see chart). An overinflated housing market destabilizes the US economy, since falling real estate prices could trigger widespread defaulting on these loans, pulling down banks and other mortgage lenders. Finally, there is the effect of Washington's unilateral global posture and its far-flung military operations, which introduce uncertainty about the future. These and other factors have combined to put powerful downward pressures on the dollar, pressures that are expected to continue well into the future.
The sharp increase in US government budget deficits (see chart) also undermined investor confidence. After several years of government budget surpluses, the Bush administration cut taxes dramatically and increased military spending, setting off a deficit that is estimated to reach $455 billion in 2003 (up from $153 billion in 2002), making the 2003 deficit by far the largest on record. State and local governments have also run high deficits, further compounding the federal imbalances and pushing state and local debt to a historic high of over $1,400 billion in 2002 (see chart). US households have increased their debt (for houses, education and consumer spending) an unsustainable level of $8,454 billion in 2002 (see chart). An overinflated housing market destabilizes the US economy, since falling real estate prices could trigger widespread defaulting on these loans, pulling down banks and other mortgage lenders. Finally, there is the effect of Washington's unilateral global posture and its far-flung military operations, which introduce uncertainty about the future. These and other factors have combined to put powerful downward pressures on the dollar, pressures that are expected to continue well into the future.