That graph shows the year-on-year increase in GDP in dollar amounts (the blue line). It also shows that net amount of additional external debt taken by the USA on a yearly basis (the green line), and deducts this from the first line to show growth net of external debt - the yellow line - which has below zero since mid-2000.
The underlying US economy is not growing - and it hasn't for 5 years
The WSJ Op-Ed pages explanation is that the USA has the world's most competitive economy, and that foreigners are keen to lend to the USA to benefit from its dynamic economy, and to get its consumers to buy their products, in a win-win cycle of development and prosperity. Americans get to consume, and the whole virtuous cycle is easily financed because of everybody's trust in the US economy.
The other way to look at it is that the US economy is really not growing, but is borrowing future prosperity. Foreigners are indeed willing to lend to America because it is a good credit, because the dollar is the world reserve currency and, and because of their mercantilist trade policies whereby they have hitched their currencies to the dollar - and have to purchase dollar assets to avoid the appreciation of their currencies that would otherwise take place because of their trade surpluses. So foreigners are providing goods to Americans and accumulating, at a growing pace, claims on the future US economy.
The fact of the matter is that US consumption is supported not by the fundamentals of the US economy (wages are stagnant, as shown in this graph from the Economist):
but by a debt binge, which is reflected in the fall in savings rates (both graphs below prepared by btower):
There is no growth. Americans are simply maintaining their lifestyles by going ever deeper into debt. And it's very simple: something that cannot go on forever, will not. For the time being, that debt orgy has gone on for longer than anybody expected, and it is not clear when it will end.
As Alexander G Rubio concluded in his diary:
And how long can such an unsustainable trend continue? General answer; far longer than you'd ever expect. It is in the very nature of irrational trends that they defy logic. Otherwise, would they be irrational trends? In fact such trends do have a sort of logic backing them up. The combined foolishness of a large part of the actors in a system will create conditions that favours irrationality, for a time at least. That is why many intelligent investors have ended up losing their shirts betting against irrationally exuberant booms. They were correct in thinking that something had to give. But unwise in trying to use straight forward logic to suss out an event which by its very nature is irrational. It's the old saw, that the market can stay irrational far longer than you can stay solvent.
The more specific answer of course is for as long as there is enough cheap credit available on both the macro and micro level. As long as the bank is willing to lend you the cash, and you're able to keep up with the monthly payments or roll them over into new loans, you could be living high on the hog. As long as the Asian central banks are willing to recycle their earnings into US treasuries, allowing US interest rates to skim at or just above the level of inflation, the party goes on.
And as a past master in the game of excess, I know that you can postpone crashing though the judicious application of stimulus of various and increasingly extreme forms for a surprisingly long time. But when that day of reckoning comes, when no matter what powders, liquids or pills you try to administer, the body just gives out, that hangover you've been kicking down the road, it's waiting for you, with interest, and pink elephants, and alligators in the ceiling, and a mariachi band.
Another way to put it, which the graph above underlines: today's growth is not yours, it is enjoyed by the very rich, and it will be paid by your children, when the loans from the rest of the world come due, eventually.
Update [2005-12-5 8:33:3 by Jerome a Paris]: I have no idea how this diary is still on the recommended list. It was gone this morning (European time) but reappeared and has climbed back up. Sorry to clog up the list like this... The torture story is much more important.
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