The United States as a Global Borrower

Step 1. Draw demand and supply for financial capital in the original scenario, in which foreign investors pour money into the U.S. economy. The supply of capital includes the funds arriving from abroad. The original equilibrium E₀ occurs at the rate of return R₀ and quantity of financial investment Q₀.

Step 2. Diminished confidence in the U.S. economy as a place to invest affects supply: U.S. financial assets come to be seen as more risky.

Step 3. When foreign investors' enthusiasm diminishes, the supply of financial capital shifts to the left, from S₀ to S₁.

Step 4. The new equilibrium E₁ occurs at a higher interest rate R₁ and a lower quantity of financial capital Q₁. Turn S₁ off to see the market before the change.