But China could reduce or halt future purchases. A less ravenous appetite for Treasurys is already evident: a New York Times article in January was titled: "China Losing Taste for Debt From U.S." One reason for fewer purchases would be diversification. Another would be to divert money toward its own 4 trillion yuan ($586 billion) stimulus package.
Reduced demand for Treasurys would drive up U.S. interest rates, probably pushing down home prices even more than they've already fallen, and also could start a run on the dollar.

If your boss slashes your pay, if you have no savings because you spent more than you earned for many years, and if your creditors are threatening to cut off your credit cards and home equity loan, what happens?
The answer, of course, is that you're in serious trouble. And this could be the situation for the U.S. government -- which is facing lower income tax receipts and ballooning deficits -- if China loses its appetite for extending more and more loans by buying U.S. Treasury securities.
China is the single largest foreign holder of U.S. Treasurys. The money it lends to the Feds finances our significant budget deficits.

A FEW days ago Ben Bernanke, chairman of the Federal Reserve, was asked to identify the biggest obstacle to economic recovery. That “we don’t have the political will,” he replied.

Mr Bernanke showed his own will on Wednesday March 18th, when the Fed’s policy panel said it would purchase $300 billion in Treasury debt, mostly maturing in two to ten years, starting next week. It will also boost its purchases of mortgage-backed securities to a total of $1.25 trillion from a previously announced $500 billion, and its purchases of debt issued by Fannie Mae and Freddie Mac, the mortgage agencies, to a total of $200 billion from $100 billion.

The Fed had already said it was considering Treasury purchases, but expectations had waned in recent weeks. The announcement electrified investors, sending the Dow Jones Industrial Average up by 91 points, or 1.2%, and the ten-year Treasury bond yield down a stunning 50 basis points to 2.51%.

March 21 (Bloomberg) -- The dollar dropped the most against the currencies of six major U.S. trading partners since the Plaza Accord almost a quarter-century ago as the Federal Reserve’s plan to purchase Treasuries spurred speculation that it’s debasing the greenback.

“What it introduces is the problem of the currency to the extent that the Fed is buying what isn’t desired by foreign holders,” said Bill Gross, co-chief investment officer of Pacific Investment Management Co., in an interview on Bloomberg Television on March 19. “The Fed can keep interest rates where they want to keep them, at least for a 6- to 12- to 18-month period of time, but it will have consequences down the road.”