Debtor Nation

Americans continue to buy only because they easily borrow from abroad. For now, the cost of borrowing is low, as countries buy low-interest US Treasury bills and bonds. Why foreign lenders send the US money in exchange for low interest rates is a “profound question,” suggests Professor Lawrence Summers. He and other Harvard professors analyze the sustainability of such lending, borrowing and spending practices and most agree that any jolt to the current balance could upset the global economy. Professor Jeffry Frieden points out that the US once invested in infrastructure and other goods of public value, contributing to future wealth, while current spending is frivolous. Growing income inequality compels individuals to spend more to feel better about their own decreasing wages, suggests Professor Rawi Abdelal. Individuals and companies that lose to foreign competitors blame globalization, refusing to admit their own bad decisions, and form strong blocks of opposition. Some economists compare the current situation to the early 1960s, a time when world bankers met in person, agreeing not to sell dollars and disrupt the global economy. “Today, there is no agreement at all,” said Professor Jeffrey Frankel. “The Asian countries and the oil exporters don’t meet each other regularly, they are not political allies, and there is no sense of propping up the system.” The current borrowing-spending patterns could trigger global recession. While the US would retain its status as richest nation on the planet, other nations would face catastrophe, suggests Professor Laura Alfaro. Growing imbalances reveal a lack in responsible leadership for the globe at large. – YaleGlobal