Beating a Dead Tibetan

Just a few more thoughts on the relationship between the United States and China. So far the discussion of this sorta-kinda-reciprocal co-dependence between the two countries has been defined as, one side of the Pacific, a need for easy credit and cheap plastic shit and easy credit to buy that cheap plastic shit. And war and stuff. And then on the other hand, we have an economy completely reliant on exports. Why can't China just pull the plug on the comatose vegetable that is the American Dream? So far we've talked about China's need to keep its currency and wages low, both of which help to make their lead and melamine so deliciously cheap. That's the macroeconomic perspective, and its correct.
What we haven't really talked too much about (or if we have, I wasn't paying enough attention) is that China's interests in American T-bills and private equity is not just about keeping the dollar strong against the RMB; these are legitimate investments. Given the massive inflation that up until recently China was worrying about, the massive amount of money poured into the American financial system wasn't just a way to keep China's trade-relationship as static as possible (though it certainly was), it was also about keeping the money in a secure and safe place. Now that that secure and safe place has turned out to be neither, this doesn't mean that the Chinese government is going to sell off all of its American assets. If China decides to start selling off its American assets (and in doing so, take a dump all over the American dollar), we therefore just see a sharp(er) deterioration of China's trade position, we will see a massive deterioration of its financial position. An estimated 70% of Chinese reserves are held in dollar-denominated assets. In a sentence then: in my limited capacity to evaluate things, I would imagine that the flow of cash from China will not turn on a time, but instead slow down. On the other hand, as one blogger writes, China may not need to be so concerned about an imminent appreciation of its currency: right now, people aren't buying as much of their exports (i.e. its current account surplus is beginning to flatten if not fall) and people aren't investing as much in China, financially or directly. Which is to say, in the absence of the standard upward pressure on the Chinese currency, the Chinese government may not need to interene in currency markets by gobbling up T-Bills and other American assets. Which is to say, that counter to everything I've said to far, the value of Freedom is about to dive off a cliff.
On the other hand, and I'm just speculating here, the middle of a world-wide recession might be just the time for China NOT to loosen up on its currency manipulation. Any appreciation resulting from a more laissez-faire approach is only going to compound the short-term pain. And that brings me back to my initial thought: there will be no sudden apocolyptic cluster-fuck where American interest rates sour, the dollar tanks and the North American continent disappears into the ocean. This may all very well occur--but in slow motion.
Such is the fate of American prosperity: not out with a bang, but a whimper.
Oh, and a lot of unemployment.