The game of macro-economic speculation is all about determining the magnitude and direction of money flows. As regards the possibility of China cashing in their U.S. Treasury bonds and using the cash to stimulate their economy, we must remember that these are the savings of the Chinese nation that they are withdrawing from our bank, and spending. Our bank, in this case is our government. The money was loaned to U.S. and now is being repaid. The way I see this is that US dollars will be transferred to the China account where, presumably, they will be exchanged for other currencies and spent. Those US dollars will now be in the world economy. It is an open question if the magnitude of this event will be large enough to move the needle on US Dollar strength or weakness. But the end effect should be for dollar weakness as these "new" dollars compete with existing dollars in the world market.
With that said, I was thinking of Laffers curve of diminishing returns to governments regarding taxes, whether too high or too low. Taxes returned to the US govt. have been inadequate to offset spending for many years. US Treasury bonds were sold to finance the difference. The money was spent. Now for the US govt. to repay the bonds money must flow out of Treasury and back into the world economy. This at a time when the U.S. economy is the strongest, at present, in the world. The US Dollar is still the dominant currency in the world. More of this dominant currency present in the markets must be stimulatory or inflationary. I do not see the U.S. government spending less so the offset will be minimal to these outflows. Any flow of these dollars back to this country will be stimulus and will generate taxes and the circle will be complete and perhaps the long period of diminished velocity of money will reverse as well.
Velocity of money has been that long gone elixir of vitality.
Do you remember those days. When govt. debt was financed by pure depreciation of the currency, and not the savings of savers. The long bond bull may be over and it may be a good thing. For awhile. The debt must be eased.
Laffer's curve site
Laffer may have been more influenced by the contemporary velocity of money than he knew.