Liquidity trap

The US is in a liquidity trap these days - much like Japan in 1990-2000 (the lost decade). After reading Krugman's blog, I think now I understand this phenomenon better, than I did when I first read about the liquidity trap in 2000.

In a normal situation, the interest rates in an economy are determined by level of savings (S) and investment (I) in the economy. If there are excess savings, then interest rates fall to equillibriate S and I again; and vice versa.

However, currently US is in a different situation. There is an excess of S which cannot be equillibriated to I by lowering interest rates - because interest rates are already close to zero! This is called liquidity trap.

However, as Krugman points in his blog, this situation allows US govt to increase fiscal expenditures without crowding out the private investment. Thus, the govt can use excess savings pool to finance some public expenditure without increasing interest rates!

Now, the question is that where did these excess savings come from? After all, US people don't save much, right? I think the savings came from mainly China, since the Chinese kept there reserves in US in $!