How much money is there in the economy to borrow? Well, if you don't have foreigners lending you large amounts of money, and you don't have central banks creating large amounts of money, then the amount of money available to be borrowed each year is roughly equal to the amount of money saved.

Take a gander at that graph. The green line is personal savings. The Bureau of Economic Analysis calculates that. It's just income minus spending--the obvious way of figuring saving. The red line is debt. The Federal Reserve calculates that value. The value on the graph is the change from the previous year--that is, it shows each year's new debt, just like the green line shows each year's saving. Both values are adjusted for inflation--the graph is in billions of (year 2000) dollars.

Everything looks fine from the 1950s right up until the late 1990s. New borrowing goes up during expansions and drops during recessions. (Sometimes it even drops below zero in a recession--people are paying off old debt faster than they're taking on new debt.) Saving rises a bit during the early 1980s, when interest rates reached generational highs, then declines pretty steadily as interest rates fell.

Then, starting in about 1998, borrowing just goes through the roof.

How did that happen? It was largely due to two things:

China and rich oil-producing countries were making huge profits from our purchases, leaving them with lots of dollars. One thing they did with those dollars was lend them to us.



Banks lobbied for and got permission to lend much more money for each dollar deposited. Instead of lending out around $10 for each dollar deposited, they could lend out $30 or $40. And, using houses as collateral, they did just that.

Of course, none of this is news. People could have (and did) produce the same graph last year or the year before or the year before that--and when they did, they saw the same thing we see. So, why is it now that things have come to pieces? Starting back in about 2005, the American consumer reached the point that they could no longer service ever-increasing amounts of debt. That led to the housing bubble popping. The result is what you can see in the last datapoint on the graph--less new borrowing in 2007.

All the news just lately has been about how the banks have been unwilling to lend. Just as important, I think, is that consumers are unable to borrow--the ones who would be willing to take on more debt simply wouldn't be able to make the payments.

The real, long-term solution is going to have to be to get borrowing back under saving. That, though, would mean a huge decline in spending. Just the little drop in new borrowing that you can see on the graph is sending us into a recession. The central bank and the Treasury are terrified about what letting borrowing drop all the way down to our current level of saving would mean. So, since the consumer is all borrowed up, they're trying to have government borrowing replace consumer borrowing.

Because of their fear, the Treasury hasn't done one obvious thing that's necessary to get the economy back on sound footing--it hasn't made it more attractive for savers to save. They're afraid that more saving would mean less spending, resulting in an even worse recession. And yet, longer term, it's that saving that will support future borrowing.

In the meantime, we've dodged one bullet. Those folks who looked at versions of this graph from past years and got worried mostly figured that the crisis would come when China and the rich oil-producing nations either decided that they weren't comfortable loaning us so much money, or simply decided to spend more of the money on domestic consumption. Instead, the crisis has had the perverse effect of bringing dollars flying back to the US all the faster--brought by people who figure that US Treasury securities are the safest way to hold dollars.

That means that the Treasury has been able to borrow the hundreds of billions of dollars used for the bailout so far. But that's not the same thing as making sure that there's domestic savings to support domestic borrowing. Quite the reverse.