The Making of America's Imbalances

This paper tracks the development of sectoral saving and borrowing in the US economy over the past 50 years. We show that the financial imbalances that erupted in the financial crisis of 2008 were long in the making and preceded the emergence of global imbalances in the 2000s. The record low household savings rate in the past decade was the product of two separate trends: a sharp fall in the asset acquisition of American households in the 1990s, and an explosion of mortgage borrowing in the 2000s. We present novel disaggregated estimates of the wealth effect on savings. We show that households reduce active savings in response to gains in financial wealth and increase borrowing with rising housing wealth. Finally, we argue that the American credit boom of the 2000s had few direct links to reserve accumulation in emerging markets. The mortgage boom was financed by the US financial sector which intermediated foreign funds from private sources