A Doomsday Scenario

As America debates whether or not to invade Iraq, fears that the country's economic recovery will stall are beginning to creep into the discussion; with that, worries about the health of the global economy are growing, too. A consensus is emerging that the gap between the US economy's growth potential and its actual performance will remain large for some time to come. Can the situation get worse? Yes, it can: much worse.

A number of worrying factors about the US economy have been around for a long time:

huge trade deficits have persisted since Ronald Reagan's misguided tax cuts of 1981 converted America from the world's largest creditor into the world's largest debtor. Today, these deficits set new records by the month;

America's appallingly low savings rate. When American wealth seemed to be growing year after year as the stock market boomed, this was understandable; individual Americans were becoming richer without savings, so why bother? Today's savings rate, while it has increased slightly, still finds America at the bottom of the world's savings league tables;