[contulluipeste]

"The treasuries are denominated in dollars: If China decided to dump all the treasuries on the market at once (driving US interest rates through the roof, and the price of the T's down), the US gov't would just buy it's debt back for pennies on the dollar."

Buy with what? With more printed dollars? When someone so large as China starts dumping cheap U.S. bonds (dollars) on the wild pulling down currency's value, it won't be the only acting player. Nobody wishes to loose value by holding to a rapidly depreciating currency, so expect a shopping spree all over the world. It all comes down to faith. Small players can't trigger such big events, but China could. It won't matter that U.S. debt problem gets solved if its currency looses monopoly.