How America Lives on Borrowed Money — and Gets Away With It! 10Aug2025
Imagine you’re spending more money for today's expenses than you earn every month -- so you rely on your credit card to cover the gap while hoping tomorrow’s income will catch up. Sounds familiar?
Now, picture that on a much bigger scale: this is essentially how the United States operates with its budget and trade deficits. The country spends more than it saves and imports more than it exports, and it makes up the difference by borrowing from the rest of the world.
But why does the US keep doing this, and how has it managed to get away with it for so long? Let’s break it down.
When domestic investment exceeds domestic savings, the country must borrow from the rest of the world to finance the excess -- which results in a trade deficit (more imports than exports).
So when the US has a large trade deficit, it means:
> It's importing more than it exports
> It is spending more than it saves domestically
> This excess investment (or consumption) is being financed by foreign capital (borrowing from abroad).
The trade deficit is the mirror image of the savings-investment gap. If Americans don't save enough to finance all the investment happening in the country, the rest has to come from abroad, which shows up as a trade deficit.
The trade deficit here includes both goods and services.
When investment is more than savings, a country needs foreign capital inflow. This inflow appears as a current account deficit, which includes the trade deficit (both goods and services).
Foreign capital inflows enable more investment than domestic savings alone would allow. This is exactly how the global financial system works -- savings in one country can be invested in another.
The US has run persistent trade deficits for decades, meaning massive cumulative foreign capital inflows. Basically, the foreigners are financing the gap.
> It's importing more than it exports
> It is spending more than it saves domestically
> This excess investment (or consumption) is being financed by foreign capital (borrowing from abroad).
The trade deficit is the mirror image of the savings-investment gap. If Americans don't save enough to finance all the investment happening in the country, the rest has to come from abroad, which shows up as a trade deficit.
The trade deficit here includes both goods and services.
When investment is more than savings, a country needs foreign capital inflow. This inflow appears as a current account deficit, which includes the trade deficit (both goods and services).
Foreign capital inflows enable more investment than domestic savings alone would allow. This is exactly how the global financial system works -- savings in one country can be invested in another.
The US has run persistent trade deficits for decades, meaning massive cumulative foreign capital inflows. Basically, the foreigners are financing the gap.
Reasons why the US attracts so much foreign capital:
1. Safe and Stable Economy: The US has a strong, stable political system and a large, diverse, technology- and innovation-led economy, making it a safe place for investors to put their money (safe haven status).
2. Deep and Liquid Financial Markets: The US financial markets (like stocks and government bonds) are huge and easy to buy and sell, which attracts foreign investors looking for flexibility and security.
3. Global Reserve Currency: The US dollar is the world’s main reserve currency, so many countries hold dollars and invest in US assets as part of their international trade and finance.
Primary Destinations for US Foreign Capital Inflows:
1. Government debt (US Treasuries)
2. Corporate and financial sector assets
3. Real estate
4. Consumption and housing (especially pre-2008)
5. Productive investments (to a lesser degree)
Productive investments include, business capital investment, foreign direct investment (FDI) in factories and investments in technology and innovation -- and not to forget improving infrastructure.
Foreign capital has been heavily invested in US Treasuries, which has enabled the US government to finance social welfare programs, stimulus measures during crises like the Global Financial Crisis and COVID-19 and other public spending, among other things.
Foreign capital has been heavily invested in US Treasuries, which has enabled the US government to finance social welfare programs, stimulus measures during crises like the Global Financial Crisis and COVID-19 and other public spending, among other things.
This has been going on for decades which facilitated large deficit spending by the US government.
The chain of modern US macroeconomics >
The chain of modern US macroeconomics >
Persistent trade deficits → Foreign capital inflows → Treasury purchases → Enables US deficit spending
Persistent trade deficits maintained by the US is a mirror image of large foreign capital inflows into the US. This heavy foreign capital flow has historically been invested in the US Treasuries.
Persistent trade deficits maintained by the US is a mirror image of large foreign capital inflows into the US. This heavy foreign capital flow has historically been invested in the US Treasuries.
The large-scale purchase of US Treasuries, especially by global central banks in countries, like, China, Japan and Germany enabled the deficit spending by the US government for long.
This chain is central to understanding modern US macroeconomics and its privileged position in global finance.
In short, the US has been running budget and trade deficits for decades -- spending more than it earns and importing more than it exports. But thanks to foreign capital flowing in (largely into Treasury notes and bonds), it’s been able to keep the engine running.
In short, the US has been running budget and trade deficits for decades -- spending more than it earns and importing more than it exports. But thanks to foreign capital flowing in (largely into Treasury notes and bonds), it’s been able to keep the engine running.
That money has financed everything from social programs to stimulus packages and in some cases, productive investments.
Whether this model is sustainable forever is up for debate. But for now, the rest of the world seems willing to lend America the money it needs to keep spending -- and the US appears quite comfortable carrying that debt.
Whether this model is sustainable forever is up for debate. But for now, the rest of the world seems willing to lend America the money it needs to keep spending -- and the US appears quite comfortable carrying that debt.
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