Therein lies the problem. If they do not accept new debt in increasing amounts as payment for the maturing bonds, we have to 'pay the note'. Where in heaven's name are we going to get that much cash from? Printing it would collapse our currency into a Zimbabwe style hyperinflation.
Central banks do not move quickly, this announcement is in regards to China's central bank's outlook on 3yr and 5yr Treasuries and Agencies coming due in 2Q 2011 through 2017ish.
Which means the recession for the vast majority of the people in the United States will now continue until 2017ish. The whole time the ability of the Federal government to continue to pay out redistribution payments will be stressed and reduced and the purchasing power of the redistribution chits will steadily fall at a logarithmic rate. Jubilee Now!
There's plenty of domestic money looking for a home. Few Americans want 1 Year Treasuries at 0.27%, though. The Fed will have to raise interest rates to levels that investors want. The problem for the Chinese is that they will have severe problems investing their cash in any other asset, because of liquidity issues - the pool of capital available to invest is so large that getting in will cause the price to rise, and getting out will cause the price to fall by much greater percentages than US Treasuries. A big player like the Chinese will always buy high and sell low. But in something like gold, buying will drive the price up 10x, while selling will equally drive the price down 90%. This is why they buy Treasuries - relative to total volumes, they are a drop in the market, meaning that they don't lose huge sums just by buying and selling.
Ideally, the Chinese central bank would stop artificially suppressing the yuan's value (which it does by retaining them USD handed to them by Chinese exporters), and just sell its excess foreign currency. The sale of $2T excess USD could cause the yuan to rise rapidly - perhaps to 4 yuan to the dollar - compared to the current 6.5 yuan, and create a vast new market for American goods in China, since American imports will be much more competitive with Chinese goods, even with the stiff tariffs currently levied by Chinese customs. The average Chinese would love to buy imported goods, but the artificially suppressed yuan gives them no buying power.