But today, our trade deficit is more than 6 percent of gross domestic product, and we borrow heavily to finance both private capital needs and government debt. Until lately, optimists insisted that cheap foreign debt-financing would continue indefinitely and prop up the dollar, because it was in China's interest to keep underwriting American purchases of its ever-expanding exports.
But, swollen with dollars, China is behaving more like an activist investor. The Chinese government's investment arm has begun buying not just debt but real assets, including 9.9 percent of the private equity fund Blackstone and a big chunk of Barclays bank. We can't count on China -- or anyone else -- funding America's burgeoning foreign debt at bargain rates indefinitely.
If the dollar slide turns into a crash, the Federal Reserve would face the unhappy choice of either hiking interest rates to raise foreign confidence in the dollar (thus deepening domestic recession) or letting the dollar sink further and increasing imported inflation.
...And the prospect of higher credit costs has Wall Street increasingly edgy. The Wall Street Journal recently tallied 21 credit deals ranging from $150 million to $20 billion since mid-June that had to be scrapped or delayed because nervous investors balked at the proposed financial terms.
The unsold homes backlog is at its highest level in 15 years, according to the Financial Times. It reports a 57 percent drop in the stock price of building companies in the past two years. Busted private equity deals and predictions of a deeper housing slump sent the Dow down 520 in two days.