FOR A DECADE, Americans have been living on a great wave of borrowed money. It's been possible only because foreigners have been willing to lend enormous amounts to them -- more than $800 billion since 1982, when it began. There are now clear signs that the rest of the world is becoming less willing to continue lending on this lavish scale. That gives a new urgency to the struggle to get the federal budget deficit down.
The deficit is on a rising trajectory. Even if the negotiators huddled at Andrews Air Force Base manage to cut some spending and raise some taxes, next year's deficit is likely to be about the same as this year's -- well over $200 billion. The Treasury will keep the government running by going to the markets and borrowing that $200 billion-plus out of the pool of capital that also finances all private investment -- housing, and every kind of business expansion. This pool of capital is fed by Americans' savings, as well as by the inflow of foreign money. But because Americans are notoriously poor savers, their economy has become crucially dependent on the money from abroad.
Unfortunately for this country, a lot of that money is currently being attracted elsewhere. The development of their Eastern neighbors has seized the attention of Western Europe. The huge drop in the Japanese stock market has induced large institutions there to call some of their foreign investments home to buttress their accounts. Changes in the international flows are reflected in the currency exchange rates, and the recent fall of the dollar signals a decline in the accustomed stream of money coming into the United States.
If President Bush and Congress make little progress in reducing the government's borrowing, the whole impact of a shrinking capital pool will fall on private business. That means higher interest rates and lower investment. Private investment has been falling for several years, in proportion to the size of the economy. That helps explain some of this country's troubles in meeting world competition.
If the Bush administration and Congress want to restore American investment to a healthy level without depending on foreign money, they will have to be far more radical than anyone who runs for office has yet hinted. They will have to turn the budget deficit into a surplus, to compensate for the dangerously low rate of private savings among this generation of Americans. Foreign money helped hold up investment in the 1980s, but it looks as though that isn't going to last forever.