We have talked about selling some of Japan’s US Treasuries holdings to fund the reconstruction of the Tohoku region rather than dumping even more burdens on the backs of Japanese taxpayers.  Comes news now that might make Japan want to think about getting out of those investments before everyone else so as not to be the last one holding the bag.  And by “everyone”, we mean the Chinese who are the largest holder of US debt.

China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday.

The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high.

China’s foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.

Tang’s remarks echoed the stance of Zhou Xiaochuan, governor of China’s central bank, who said on Monday that China’s foreign exchange reserves “exceed our reasonable requirement” and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.

Meanwhile, Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.

The question is who would buy the US debt?

Quantitative easing (QE2) is scheduled to expire at the end of June. In a recent interview with Jon Hilsenrath of the Wall Street Journal, Fed Chairman Ben Bernanke indicated that QE will not be pursued once the current program runs its course. In an interview with John Nyaradi of Wall Street Sector Selector, Phil pointed out that this is not actually the case. “QE2 isn’t going to end. This is a misnomer about QE2 because what’s going to end is the new funding. About 50% of what’s going in from the Fed now is rollover money… (The Fed) is buying 85% of the Treasury notes. They can’t stop. How could they stop? Who’s going to buy?”

To be sure, they would beggar Europe, England, and Canada to take up some of the slack.  And Japan, Inc. has been an historic soft touch when it comes to bailing out the US.  But this time is different as the US is facing its own debt rating problems while they attempt to pull a Japan by keeping rates low.  Obviously, barring some kind of US government takeover of American savings – again, ala Japan – it will fall on the US Federal Reserve to buy a larger portion, thus monetizing the debt and weakening the USD.  That will undoubtedly lead to a cycle of higher interest rates, possibly hyperinflationary.

So where does this end? In Phil’s opinion, it will eventually end in hyperinflation. “There’s no end game to what we’re doing other than hyperinflation because we have to pay off our debt ultimately. Look at how ridiculous it is. We owe $15 trillion. And we go another $1.5 trillion into debt every year.” There’s no chance to pay off a $15 trillion dollar debt by adding another $1.5 trillion in debt each year. At this rate, in ten years, we’ll owe $30 trillion.

According to Phil, “There’s no realistic way to pay off this debt other than gross inflation. That means we need inflation, and it has to be hyperinflation because the inflation has to occur faster than our debts are mounting.” So we have to grow the GDP so fast through inflation that it dwarfs the rising interest rates on the debt that we have. Then, with devalued Dollars, “we may be able to start making some payments.”

That’s the last thing that Japan needs.  So rather than holding on to US debt, perhaps they should get ahead of the curve for once and protect the investments of the Japanese taxpayers.  Surely, there are a lot of things that Japan can do with that money besides propping up the US.

Tang also said that China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health.

Something that Japan should also consider with some of its nearly 900 billion in US holdings.  And especially if the Chinese sould follow through on these comments by dumping twice the Japanese holdings.