Home Price Boom Fuels Deficit

An interesting aspect of the housing bubble was laid out in this New Zealand Herald editorial. The writer makes the point that, because savings are non-existant in the US, the cash used to finance the boom must come from abroad.

"Undeniably, much of the deterioration in the current account position reflects a consumer and, especially, a housing boom. Much of the money that flows in to fund the deficit comes through the banks and is lent to home buyers and to people drawing down the equity in their homes to fund consumer spending."

And when an owner "cashes out" equity, there is really just more debt that must be financed offshore, putting further pressure on the US dollar.

"Ben Bernanke, a Federal Reserve governor sometimes mentioned as a possible successor to Alan Greenspan, (sees) a "global savings glut" in search of places to invest. What worries Bernanke about this..is what the inflow of capital is used for.It is showing up in higher house prices and more construction."