One interpretation of the results of the US election is that Ray Fair’s model (am having trouble with the interface, so no link -- it is available on nouriel’s web page in the elections section) was right: strong economic growth, particularly at the tail end of last year, propelled Bush Jr. to the victory that eluded his father.
Ken Rogoff memorably called the US recovery "the best recovery money can buy" a year ago. I would say it was the "best recovery (borrowed) money can buy." By borrowing tons of money, notably from East Asia, the US was able to have guns (the spending associated with invading iraq and the war on terrorism), the republican version of butter (rising housing prices and rising consumption funded by cheap long term debt, and a better equity market that otherwise would have been possible) along with tax cuts. By drawing on $441 billion in financing from foreign governments (central banks) in 2003 and probably a comparable amount in 2004, the US was able to avoid one of the standard problems with sustained fiscal deficits, namely higher interest rates. The cost of this strategy -- job losses in states exposed to foreign competition in the tradeables sector like Ohio -- was not enough to overcome the cultural redness of these states, or perhaps their trust in Bush as commander in chief.
I suspect the United States’ appetite for borrowed funds will soon exceed the world’s supply, at least at current interest rates. If not next year, then in 2006. The only way domestic investment can rise (without a fall in consumption to increase private savings, which is hardly expansionary) is if the government’s borrowing need gradually falls. If all tax hikes are off the table, the US has to spend a fair amount in Iraq next year, and interest rates stop falling to US interest costs start rising in line with rising debt, that is going to be hard. Despite all the talk that government is the problem, a fair amount of government spending goes to red states (highway money, farm subsidies, wyoming’s homeland security allotment, new weapons procurement, job retraining for Ohio, etc, etc). There is a reason why Bush has not vetoed a spending bill to date: his willingness to expand medicare to cover prescription drugs presumably explains some of his pickup among the over 60 voting population.
I rather suspect that Bush won’t have the foresight to recognize that the US needs to curb its own need for borrowing before its creditors demand that US curb its borrowing to protect the value of their own investment in america. The hardest thing in the world is to abandon a strategy that has worked to date to ward off future troubles, not to mention that Bush has made his unwillingness to change course on what he considers matters of principle (the department of homeland security apparently did not meet that threshhold) a mark of his leadership. But I hope to be proved wrong.