Not sure I follow the reasoning here. Can you explain?
Simply enough, the amount of U.S. Treasury bonds/securities that China holds at the moment is enough to bankrupt its own economy if they decide against it. In other words, China holds a good bargaining position right now, but cannot fully backup the threat without destroying their own reserves and manufacturing base.
I don't have time to find the links right now but some very interesting economists on this issue are the Brookings Institute, Paul Samuelson (MIT), and Paul Krugman (Princeton).
See also: http://www.nytimes.com/2010/03/15/opinion/15krugman.html
Cutting off oil production (Iran, UAE, Venezuela, Saudi Arabia) is something you hear every so often. These are all countries where oil is most of the economy, virtually all of the exports and the state/king directly controls it.
Take Saudi Arabia. Apart from continuing to directly feed the public with grants, subsidies and giveaways, Saudi Arabia has tens (or maybe even hundreds) of thousands of royal family members, religious elites and tribal leaders relying on money from selling oil. Cutting off oil is impossible.
Sure China has the theoretical ability to hurt the US economically. But the US has an even bigger economy and just as many ways of pinching back. Besides that, there is no such thing as a pinch that doesn't hurt the pincher.
If the US "owes" China $1 trillion, it means that the US received $1 trillion in physical goods, and in return China got $1 trillion in little pieces of paper. Another way of describing it is the US receives actual money, which can be spent now, in exchange for only giving "promises" back, which may or may not actually have to be replaced with money in the future.
So yeah. While debt for individuals, or in smaller amounts is often "not good", debt starts to get weird and quantum-meta-paradoxical when it is between countries and involves huge sums. Also, ultimately, China can't make the US "repay" them or cough up cash. They could threaten to start a war, but a war between the China and US would arguably be just as bad for them as for US. Potentially worse for them.
It's complex, so I won't claim this is a black-or-white truth. But these are some of the factors involved, I think.
e.g. We're taking a stand for the citizens of the world and refuse to trade with China until they implement the Kyoto protocol.
e.g. Due to human rights abuses and the refusal to make progress on the issue we are suspending trade with China.
I'm sure there is some more politically suave reason but if we can't pay look for China's human rights / eco record to become an issue, ultimately culminating in our refusal to pay them.
e.g. We have to stop paying them so they'll ratify a non-exempt agreement so that we can ratify it. :)
On the other hand, inflation could increase faster than the yields on those bonds, in which case you are out of luck. (And some yield curves look pretty strange these days, although not the USD yield curve.)
First, debt default isn't anything like suspending trade. Russia and Argentina, just to mention recent cases, had defaults but didn't stop trading with other countries (that would have meant a much bigger disaster).
Now, even if you managed to get a crazy dictator that was willing to screw China (thereby probably getting into a war), he would have no practical way to stop paying only China. More than half of US debt is in form of liquid instruments, e.g., treasury bill, notes and bonds. To stop paying China would mean also stop paying whoever else holds them. But stopping payment for even a fraction of those bonds would be catastrophic, of course.
Please let me know how failing to pay US bonds in anyway affects the median US citizen?
Put simply if you can't afford to pay your debts it is less catastrophic to not pay them.
Crazy dictator? You mean like FDR who cancelled almost half the US debt by inflating the currency and barring ownership of gold?
Canceling the debt would do two very important things, massively lower the debt burden of the individual US household, and increase the US workforce available for free market activities almost 50% via shrinkage of the federal and state governments.
If you read about basic finance you'll understand why. Google for "risk-free rate" and "repo", for instance.
The role of the US dollar now is much bigger now than in FDR's time.
What happened to "a real man honours his debts?" And since you haven't noticed, the US itself is not exactly politically popular right now.
"We're taking a stand for the citizens of the world and refuse to trade with China until they implement the Kyoto protocol".
"Due to human rights abuses and the refusal to make progress on the issue we are suspending trade with China."
I have to laugh when I hear stuff like this. Since when was America concerned with human rights? The US would never risk total economic suicide by suspending trade with China over human rights. As D'Angelo Barksdale said in "The Wire": "Fair? It's not about fair. It's about money, motherfucker".
The US isn't exactly in a position to lecture others on their morals. Let's look at some of the stuff it's done over the years: supply Saddam with WMDs to gas the Iranians, arm and train Osama Bin Laden, reject Kyoto, lie it's way into a war in Iraq, the use of depleted uranium munitions in that conflict causing birth defects among the locals, having it's Vice-President and Secretary for Defense profit directly from the decision to go to war, the use of private military contractors who literally have a licence to kill without fear of prosecution, Gitmo, Abu Gharib, arming Isreal to the teeth while it bombs Lebanon and encroaches onto Palestinian territory in violation of international law, kill millions of people in the 3rd world in covert wars who are of no threat to America.... and so on ad infinium.
On that last point:
http://www.youtube.com/watch?v=tOtYGToqENg
p.s. I've got nothing against America, any American I've ever met was very friendly, open and honest. The Government is the problem, as Regan once said. Oh, and go ahead and flame me all you want, but you can't deny history or the facts.