A well thought out post, Scriabinop. My guess is that these ideas are already under discussion at the Fed and Treasury. But if they are not, they should at least be considered. Please send your letter to Barney Frank, Chris Dodd, Tim Geitner, and Ben Bernanke, as well.
I guess that is a point of strategic analysis. I think it is a silly assumption to think the US $ or treasuries' value will be wiped off the earth if China trade stopped. The existence of our trade with them is what has justified weakening of the dollar in the past (wider trade balances). So the real result might be opposite. Furthermore, China treasury and monetary asset purchases are basically deferred trade. Eventually the treasury bills/notes/bonds come to maturity and they have to roll over, or buy a real asset. The US is still the world's largest exporter, despite things not seeming so. If China sells its dollars, those dollars will eventually come back to the US. There will be a time when those deferred exports are balanced off. It is China's error if when they choose to be an importer of American goods (with their vast reserves) the dollar buys significantly less - and likewise its' success if it is the other way around. If the fundamentals continue as they are, I imagine Japan (decreasing exports, decreasing savings/profit to finance debt, ballooning govt debt that will quickly go to 200% of GDP+) would be much more vulnerable to a currency and treasury run with the only solution being hyperinflation ... The US is still relatively serviceable. I don't have any idea concerning politics and China representation in the lobbying scene. It appears by the makeup of congress that protectionism is winning for now... (as in most parts of the world)