ABSTRACT
In 2007-8, a housing bubble collapsed bringing with it the largest investment banks on Wall Street, many of which were saved only through a massive infusion of government funds. The effects spread rapidly across the globe. Several nations, including the United States, fell into a deep and prolonged recession. General Motors, once the largest corporation in the country, entered bankruptcy (along with Chrysler). The resulting bailout left the US government holding a controlling share of stock in GM, a company that was once emblematic of American capitalism. The enormous injection of money into the economy, both to bail out failing corporations and stimulate demand, forced the largest issuance of debt since World War II. It also raised some profoundly important questions. First, how much debt could markets absorb? In the past several decades, the United States had undergone a remarkable transformation from the world’s greatest creditor to the world’s greatest debtor. A seemingly insatiable appetite for imports created persistent trade deficits and fueled the rise of China as a new economic powerhouse. As a result of this reversal of fortune, the capacity of the United States to raise funds would depend, in part, on China’s willingness to continue to buy its debt.
