Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

The Bush administration’s deficits were financed overwhelmingly by bond buying from abroad. As Orszag and Rubin’s paper remarked, United States Treasurys were still seen as the safest investment in the world. There was no chance of default or a sudden burst of inflation. “But if that expectation were to change and investors had difficulty seeing how the policy process could avoid extreme steps, the consequences could be much more severe than traditional estimates suggest.” Nor was it just the Clinton crowd that worried. In 2003 the nonpartisan Congressional Budget Office saw fit to remind its audience of an extreme scenario in which foreign investors stopped buying US securities, the dollar plunged and interest rates and inflation shot up. “Amid the anticipation of declining profits and rising inflation and interest rates, stock markets could collapse and consumers might suddenly reduce their consumption. Moreover, economic problems in the United States could spill over to the rest of the world and seriously weaken the economies of US trading partners.”