The headline for this article reads “U.S. fate hangs on Obama talks with Hu, Medvedev.” While there is some truth to what the article’s author is saying, it isn’t the whole truth, as we’ll examine in a minute.

U.S. President Barack Obama came face-to-face with the presidents of Russia and China in London on April Fools’ Day Wednesday. How they size him up will decide the destiny of the United States.

Obama will have to reassure President Hu Jintao of China that he is on top of the enormous financial and economic crisis sweeping the United States and the world and that his trillion-dollar bailout plans for the U.S. banking system and the general American economy won’t set off hyperinflation and make the dollar worthless.

America’s financial destiny is already in the hands of China with its vast reserves of U.S. treasury bonds. Beijing held $681 billion worth of them in November, but Chinese Premier Wen Jiabao and Zhou Xiaochuan, governor of the People’s Bank of China, have both issued ominous warnings that they are concerned about Obama’s potentially hugely inflationary economic policies and the havoc they could wreak on the value of the dollar. Zhou has floated the idea of a revised International Monetary Fund arrangement that could replace the dollar as the world’s main reserve currency.

Is it actually a make-or-break for the US? Not necessarily so. Let’s say the Chinese stopped buying our debt tomorrow. While there is no doubt that a sudden cutoff of Chinese funding would send the US Treasury into instant default and cause a whole lot of pain in the US, it would also almost certainly cause an economic collapse… in China. Why? Because the day that China cuts off credit to the US, the value of the Chinese currency (the renmibi) is going to skyrocket. As export-dependent as China’s economy is, that kind of a currency revaluation would absolutely kill them; the rioting already taking place sporadically throughout China would probably become far more organized, and much larger, and could well mean the end of the rule of the Communist Party-perhaps even a breakup of China itself. The US, of course, would probably face a breakup of its own, but in this scenario I’d actually give the US a better chance of surviving intact than I’d give China.

I do not profess to know how long the Chinese will go on buying US debt, but I’d be willing to bet that they’ll do it for as long as the world remains mired in The Republican Depression of 2008. We’ve gone from the Cold War era of “mutually-assured destruction” threats via nuclear weapons to this new era of economic MAD via debt instruments. It’ll be interesting to see how both countries get out of their predicaments. If they can.

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