As a retired banker I don't totally agree with you, but I do get your point. The difference here is the control China has by choosing not to lend us more money. That's already begun by the way, just keep an eye on the amount of total federal obligations held by China. China has been forewarning our political leaders and Treasury officials that they have little interest or capacity for buying more U.S. debt for almost two years. They have aggressive and expensive economic expansion plans within China and will have told us they intend to spend their surpluses domestically. China's holdings of our debt has been declining for almost a year. (In the last five years the value of the Chinese Yuan has declined against the US$ by about 25%. That means that anything that China buys that is priced in US$ costs them 25% more now than it did at the end of 2006...including our bonds and Treasury bills, and oil of course!)

Our Federal Reserve has a lot of power to react to a shallower market for our debt instruments--because the U.S. dollar is the world's reserve currency, our Fed can print more of it. That's an advantage that no other country in the world enjoys. Increasing the money supply (printing more money) worsens the inflation problem of course. It also lessens the value of the bonds and the dollars that those who lend to us already own and makes any new bonds we offer for sale more expensive.

The more important effect is increased domestic inflation--look at the headline in today's Wall Street Journal. Increasing inflation will quickly get the attention of the public, who will apply tremendous pressure on Congress to "do something". Printing more money makes inflation worse and renders U.S. bonds and bills even less valuable.

In relatively short order (a year or two), Congress will have only two choices, default on our obligations--an unthinkable alternative--or begin an aggressive program of balancing our federal budget and beginning to pay down the national debt. That will necessarily include massive spending cuts, including the "big four" as well as raising taxes. That's simply a matter or arithmetic, as we've discussed here many times before.

So, do we have a lot of control of our destiny because we owe China so much? I would argue that we do not. China can easily control our very way of life by simply refusing to lend us more money and demanding payment on the U.S. Treasury obligations they own when they come due. (As I suggested, defaulting on the payment of our obligations is simply unthinkable, even if we had to print more money and cause more inflation to do so.) China and our other lenders wouldn't specifically be telling us what we have to do, but by putting us between a rock and a hard place they would force our political leaders to make some very, very difficult and life-changing decisions for all Americans.

This process has already begun.