Suppose that I have some AAA rated government securities with 1 year to maturity, a coupon rate of 4% payable semi-annually, and a stated par value of $1,000.

Quickly now: how much would you pay for them? What if I would sell them to you for 75? OK. Just keep that in mind.

So… what about those nay-sayers who worry about China dumping dollar-denominated securities on the world market? Well, I’m at a loss to explain the doom-and-gloom scenario they paint for us. A few things come to mind, though:

Working against China’s hypothetical machinations, is the fact that, in order to sell more and more securities, they would have to accept a smaller and smaller price. Which means that the value of China’s portfolio would be decimated by such an action. Regardless, if China were to begin unloading treasury bills, their price would fall – that much is certain. What is not certain, is how much they would fall. But the fall in bond prices on the secondary market alone is not enough to cause any concern. China’s hypothetical decision to unload US t-bills does not change the fact that the United States government has the strongest credit rating of any entity, anywhere, ever.

The problem is that Uncle Sam just issues new debt to replace the old debt, plus interest. The government currently relies on China for the bulk of this. And if nobody else was willing to refinance the government’s outstanding debt, then we’re in trouble. What would hurt is not a unilateral asset-dump, but rather, further refusal to finance our government’s spending; the subsequent lack of sufficient credit would drive interest rates up, thus revealing how very fragile our monetary experiment really is.

It is the government’s own doing that she is now dependent on a totalitarian regime with a horrendous track record for liberty and human rights – China is only a symptom.