NEW DELHI -- It's becoming increasingly clear that the U.S. economy, despite a sharp slowdown, is holding the world against a global recession. Americans are borrowing globally and using the money to consume the goods of the world. Alas! This can continue only as long as U.S. assets exceed liabilities. Such good days have to end.
Despite the slowdown, the United States continues to be the buyer of last resort because the world's investors continue to put their wealth into U.S. securities -- "the net purchases of U.S. government and private securities have been running at record levels in recent months and totaled $469 billion for the 12 months ended in April," says a report in the Wall Street Journal. This money increases the liquidity of the U.S. banking sector.
It becomes possible for U.S. banks -- led by the Federal Reserve Board -- to cut interest rates. The U.S. consumer is able to borrow and import goods with this money. In fact, the U.S. pays for imports from China with the money it has borrowed from China. At the end of the day, the U.S. will have to redeem the securities it has sold to China after the imports have been consumed.