Question

What will happen if the US raises barriers to trade, but doesn't deal with its debt-financed consumption? (You might find some guidance on this if you can translate what Greenspan is saying in the section 15.2 "Case In Point")

Answer 1

If the US raises barriers to trade but doesn't deal with its debt-financed consumption, then the US economy is likely to witness an economic crisis. This is because trade barriers cause inflation in the economy, as the price of imported products rises due to reduced supply. On the other hand, since the consumption is being financed through debt, the cost of debt as well as the amount of debt is likely to increase. There will come a point where people will start to default on their debts giving rise to financial crisis that can end up into a full-blown recession.