But doesn't China have to buy treasuries because of their trade imbalance?
And isn't it in our debt holders best interest to avoid total collapse so they can collect interest payments? Isn't owning U.S. debt a way to collect a fraction of our economic output? And if we have Depression level unemployment, there is less tax revenue generated?
Not really. China is increasingly buying other assets, instead of Treasuries: stocks, companies, real estate, etc. In the end, they will own the USA.
In fact this scenario was famously depicted by Warren Buffet in his "Squanderville versus Thriftville" essay: http://www.tradereform.org/2008/03/squanderville_versus_thri... Want some concrete examples?:
The chinese Lenovo acquired the IBM PC division in 2005.
Chinese oil and gas acquisitions: http://blogs.forbes.com/christopherhelman/2011/02/10/watch-o...
China's investments in U.S. up sharply: http://articles.latimes.com/2010/mar/04/business/la-fi-china...
They have no way of dumping USD in the short term without seriously devaluing their own dollars. Not to mention a devaluation of the dollar would mean their export model goes to hell.