How much debt? US economy's net foreign indebtedness: $2.5 trillion (25% of 2002 GDP)
When did it start? Until 1989, US was itself a creditor nation.
To whom? Creditors are private investors and governments from Europe and Asia.
Why do they lend? Creditors' incentives:
- access to the largest consumer mkt in the world
- trade surpluses
- growing market share
- good returns on loans and investments in the US economy Why is it bad? The risk to the US: sooner or later the creditors pull the plug. Why?
- US debt burden becomes so great that additional lending would be too risky.
- Creditor nations wish to exert influence on Washington.
- We are a profligate debtor unwisely insulting our bankers.
The precedents: Great Britain in the early 1800s. Also in 1956, Washington pulled the plug when Britain (with France and Israel) invaded Egypt to capture the nationalized Suez Canal. By withholding an IMF loan to London, the US crashed the pound, forced Britain to withdraw from the war and its prime minister to resign in disgrace.