1. The Global Glut of Savings
[E] One of the leading indicators of a financial crisis is when you have a sustained surge in money flowing into the country which makes borrowing cheaper and easier, says Harvard economist Kenneth Rogoff. Our crisis was no different: Between 1987 and 1999, our current account deficitthe measure of how much money is coming in versus going outfluctuated between 1 and 2 percent of gross domestic product. By 2006, it had hit 6 percent.
[F] The sharp rise was driven by emerging economies with lots of growth and few investment opportunitiesthink Chinafunneling their money to developed economies with less growth and lots of investment opportunities. But weve gotten out of the crisis without fixing it. China is still growing fast, exporting faster, and sending the money over to US.
2. Household Debtand Why We Need It
[G] The fact that money is available to borrow doesnt explain why Americans borrowed so much of it. Household debt as a percentage of GDP went from a bit less than 60 percent at the beginning of the 1990s to a bit less than 100 percent in 2006. This is where I come to income inequality, says Raghuram Rajan, an economist at the University of Chicago. A large part of the population saw relatively stagnant incomes over the 1980s and 1990s. Credit was so welcome because it kept people who were falling behind reasonably happy. You were keeping up, even if your income wasnt.
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