Rather than dealing with the immediate policy steps to dampen the crisis, this paper attempts to reveal the worsening savings/consumption pattern of the US economy over the last ten years. Based on the closed logic of open-economy GDP-accounting, it argues that the current crisis is deeply rooted in shrinking public and private savings trends discernible as early as 1997. The current mortgage-market crisis and deep fall in new residential housing are products of a distorted financial environment that encourages over-borrowing and over-consumption. Expansion of the credit cycle through successive financial innovations has increased, not decreased output volatility. But the main foreign lenders to the US -Japan, China and Germany - have managed to offset their losses on US securities by buying into US companies. Large US firms have also benefited from rapid dollar depreciation as USD-denominated yields on their foreign assets experienced strong run-ups. The weak dollar has also helped American firms with large assets on foreign markets. So there were strong benefits for the US, not just on the goods-export side, but on the asset side, an aspect rarely emphasized
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