Perhaps most importantly, however, is the massive liquidity injections from the rest of the world, or what Brad Setser calls "the quiet bailout." In the first half of this, global central banks accumulated $283.5 billion of Treasuries and Agencies, something around $1,000 per capita. This is real money — I outlined the likely implications in January. Foreign CBs are happily financing the first US stimulus package; will they be happy to finance a second? Do they have a choice? Their accumulation of Agency debt is also keeping the US mortgage market afloat. Do not underestimate the impact of these foreign capital inflows. If the rest of the world treated the US like we treated emerging Asia in 1997-1998, the US economy would experience a slowdown commensurate with the magnitude of the financial market crisis.If this is really the primary explanation for our ability to ride out the storm, then we're back to the same old place we've always been: foreigners are keeping the American economy afloat, and they'll continue to do so until they decide to stop — which could be anytime from tomorrow morning to never. It all depends on how much faith they maintain in America as a good place to invest their money.
Of course, foreign investment in the U.S. will eventually slow down. It has to. The only question is whether this investment bubble unwinds slowly or, like most bubbles, in a panic. Neither is a very pleasant long-term prospect, but obviously there's unpleasant and there's unpleasant. Let's hope for the former.