Why the US credit machine is running amok

Low rates of capital investment and scant domestic saving have given the impression of high growth rates among English-speaking countries. But zero saving and a glut of cheap credit have stored up problems for the economy. Can the Fed prevent a recession?

The Anglo-Saxon countries have been the high-growth economies among the industrialized economies. By definition, strong economic growth implies that domestic investment exceeds domestic saving. Actually, Mr Bernanke and others have repeatedly justified the capital inflows with the fact that capital investment exceeds domestic saving.

On the surface, this is true. But this description represents a grotesque distortion of the economic reality. What has truly happened in the United States and the other English-speaking countries is that private households, in response to inflating house prices, have slashed their savings even faster than businesses slashed their capital investments. As a result, minimal investment exceeds nonexistent domestic saving. This explains their stronger economic growth.

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