More fundamentally, even if foreign investors give the United States an unlimited length of rope by continuing to finance ever-greater buildups in US external liabilities, there is a problem of long-term burden for the US economy as it becomes increasingly indebted abroad. To the extent that the borrowing is primarily directed not towards financing investment but rather toward financing high levels of private consumption and government dissaving, the accumulation of foreign debt amounts to mortgaging the country's economic future. Eventually, there will be a price to pay in the form of a major terms of trade loss as the external debt is serviced. This will reduce the real standard of living of US citizens - many of them of the next generation- from levels otherwise attained as real consumption is eroded through higher import prices. Injudicious, and perhaps inequitable, deferral of the adjustment burden into distant future is a fundamental reason to address the external deficit even if a sharp break in confidence and a hard landing are considered unlikely.The housing bubble is a significant contributing factor in the ever growing amount of US external liabilities. Mortgage debt is being bought by foreigners. Furthermore, the housing bubble has allowed a huge amount of home equity extraction, which has fueled strong consumer spending. A significant portion of this consumer spending is being spent on imported products. All this increases US external liabilities.
Unsustainable.
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