Matthew Yglesias raises the question which isn't raised enough. As he points out, our large deficit and trade deficit are largely sustained because of the willingness of the Chinese (and Japanese) governments to buy up lots of T-Bills. In both cases, it isn't precisely clear that they are doing so for purely economic reasons, but rather for some other "geopolitical" purposes. I'm not sure what the magnitude of the interest rate spike (and currency devaluation) would be if China and/or Japan suddenly stopped buying our lovely bonds, but I imagine it would be rather large.
