The Kay household has had another great year.  Visa extended its credit limit, and has raised its investment to an all time high.  Our bankers have demonstrated their confidence by raising their interest in our household to an all time high.  Their contribution has more than compensated for some setbacks.  M. Messer, the Frenchman who invested in the ranch by purchasing the old shed where we used to develop photographs, has not been around this year.  And that other European who bought the telephone for far more than it was worth – a real gent – has apparently retired.

We all spent a lot of time managing our 401(k) plans and surfing the internet.  And I did some big consulting assignments.  Strategic advice in the kitchen, and re-engineering the kids’ bedrooms, so we haven’t had time to deal with people outside or engage in domestic manufacturing, but fortunately Mr Veeraswamy has agreed to answer the phone and Ms Lee will do the sewing.  Neither of them expect to be paid  much, and they’ve agreed to accept IOUs for the time being.  So I’m pleased to report record levels of spending by the Kay household.  We’ve gone through a difficult time.  Mr Lie, who told us he could take us to the moon and back in his Special Purpose Vehicles, turned out to be just a Texan cowboy.  But we revalued the house – it’s a wonderful place, after all.  We enjoy the benefit right away, and the children will when they inherit it.  We went to the Caribbean for a couple of weeks to celebrate.

If I said these things, you would correctly conclude that I had lost touch with reality.  Yet this description broadly corresponds to the account I hear from my hosts of the American economy.  Mrs Thatcher exaggerated the insights you gain into macroeconomics from household budgeting, but there are enough parallels to be illuminating.

If expenditure exceeds income, then either you must sell assets or borrow.   For a credit card issuer, an extension of facilities is an investment, but it is unwise for the borrower to view it in the same way.  The United States has the highest rates of consumption to income of any developed economy.

In the last decade Americans have believed themselves richer than they were, have spent accordingly, and have borrowed from the rest of the world to pay for it.  The most tangible manifestation of the dream was the inflated value of the stock market.  And even though the most ludicrous excesses of 2000 have disappeared, US stocks remain extraordinarily expensive by historic standards.  The fantasy of indefinite growth in corporate earnings at unprecedented rates has somewhat abated, but has been replaced by others:  higher house prices make us better off, the government deficits that result from tax cuts don’t matter because of their stimulating effect on productivity.

What can’t continue won’t continue, and the growth of US fiscal and trade deficits will eventually be reversed.  The best story for everyone would be that the dream comes true, the productivity of American business increases so rapidly that output surges ahead of consumption.  So savings rise, foreign borrowings fall, and a stream of tax revenues will finance both military adventures and domestic largess.  There may be pots of gold at the end of the rainbow, but I wouldn’t advise anyone to make it a central planning assumption.

Private institutions have already had their fill of American assets, and today it is Asian central banks which are accumulating dollars.  At some point, not necessarily quickly, their willingness to do this runs out.  Or the US savings rate increases substantially, most likely after an internal financial crisis.  One day, America will stop spending more than it produces and then the rest of the world will stop producing more than it spends.  Everyone would prefer that not to happen. This is why dreamers – Mr Micawber, the framers of today’s US economic policies, or the hypothetical Kay household – always attract admiring supporters.

There is an old-fashioned distinction between borrowing for investment and borrowing to spend beyond your means.   And the category into which American borrowing falls is perfectly clear.