Go ahead, I triple dog dare you

Today, China's government reacted to the threat of impending U.S. legislation that would punish China for keeping its currency undervalued. China issued a big threat of its own: if the U.S. goes through with the legislation, China will dump its holdings of U.S. treasury bonds.

Oooh, scary.

China is, in fact, the biggest holder of U.S. government bonds. If it dumped those bonds, U.S. interest rates would rise, slowing growth and probably causing a recession here. Also, the dollar would plunge in value, making it more expensive for us Americans to buy most of the stuff we buy from overseas (read: almost everything). So if China follows through on this threat, America could indeed be hurt - although less than many think, since other countries would almost certainly jump in and buy dollars to pick up the slack.

But China wold be even more hurt. If China started dumping U.S. bonds, the value of the bonds China still held would fall dramatically, basically bankrupting the Chinese treasury. Also, a crash in the dollar would put even more pressure on China's yuan to appreciate, potentially forcing them to do the same thing that they're now trying so hard to avoid doing, only with much more dramatic consequences for the Chinese economy.

In other words, if China uses this so-called "nuclear option," we get hurt a little, they get hurt a lot. And since we're a richer and probably more stable country, we can afford to take a little hit more than they can afford to take a big one.

So China's threat is basically an empty one. This is basic game theory...Only if we believe that they're utterly and completely crazy should we take the threat seriously. And I, for one, don't believe that for a second.