OK, lets follow this logic a bit more... China and Japan have a huge amount of dollars because of our trade imbalance with them. What are they going to do with them? They are caught in as big a bind as we are. For sure they're not going buy Euros - they'll immediately lose 40% from a couple of years ago. What would you do in their shoes?
Would you just sit on them?
Would you keep buying treasuries and at leat get some minimal interest?
Would you buy stocks and bonds in american companies?
Would you start buying hard assets in the US, such as real estate?
That one.
I am wondering if China does not take the opportunity to clean up its act a bit. If it did, it would become formidable virtually overnight. The economy is going gangbusters over there and the masses are getting a taste of it. Enough to cause unrest in the country side.
I think China's real postion today is not that good simply because of the percentage of non performing loans their banks hold. But if their economy were allowed to grow without being stolen off by the power elites then that percentage of non performing loans could get very small in a few years (as compared to the total economy). They could grow themselves right out of their trouble just like the US has done for the past 25 years or so.
Japan is holding the lions share of the US treasuries. China only holds $180 billion in US treasuries. Japan will go to great lenghts not to get screwed (again) by making the Yen more valuable than the dollar. They have routinely gone into the market and purchased dollars in order to preserve their own hide.
Hard to say what a viable strategy is because as the inflation hits the US those same dollars held today will buy less and less here.
Plus the Chinese Yuan is pegged to the US dollar, which makes the Yuan worth just as much as the dollar before and after the $ slide.