WASHINGTON — A second big American interest-rate cut in a fortnight, alongside an economic stimulus plan that united Republicans and Democrats, demonstrates that U.S. policymakers are keen to head off a recession that looks like the consequence of rising mortgage defaults and falling home prices. But there is a deeper problem that has been overlooked: The U.S. economy relies upon asset-price inflation and rising indebtedness to fuel growth.
Therein lies a profound contradiction. On one hand, policy must fuel asset bubbles to keep the economy growing. On the other hand, such bubbles inevitably create financial crises when they eventually implode. This is a contradiction with global implications. Many countries have relied for growth on U.S. consumer spending and investments in outsourcing to supply those consumers.
If America's bubble economy is now tapped out, global growth will slow sharply. It is not clear that other countries have the will or capacity to develop alternative engines of growth.