In incredibly under-reported news, China issued a statement on Saturday that all but guarantees QE3 and has potentially huge consequences for the United States.

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.

Given that China's foreign exchange reserves are $3.04 trillion and they're now saying that a trillion dollars should suffice, that means they could slash their foreign reserves by as much as 2/3rds.

At the very least this means we should expect China to lend far less money to the United States. At worst, if they're looking to reduce their foreign reserve holdings from $3 trillion to $1 trillion, they could end up dumping a very large amount of U.S. debt on the market.

This would mean that the largest government investors in U.S. debt (the Federal Reserve and China) as well as the largest private investor in U.S. debt (PIMCO) will have announced dropping U.S. debt investment in the last three months.

This will have to have an effect on the Federal Reserve's decision of whether or not to extend QE2 or implement QE3. The Federal Reserve is meeting this week and Chairman Bernanke is expected to have a historic press conference after their meeting on Wednesday.

Although I expect there will be a QE3 or some kind of continued money-printing at some point, the markets have not been expecting that. However, in light of China all but saying that it will be reducing its investment in the U.S., more than ever the math doesn't add up: The U.S. government isn't going to be able to find enough buyers of its debt if both China and the Federal Reserve leave the market. As a result, it seems like the Federal Reserve will have to keep printing money (or start up QE3 very soon after ending QE2).

This is exactly what I wrote about in March 2009:

The problem with the "nuclear option" of printing money is that once you start, it's hard to stop. When the Fed announced its decision to print money, the value of the dollar immediately dropped (see graph to the right). That means that foreigners that had invested in the U.S. (Treasuries or even in the stock market) automatically lost money because the dollars they had invested are now worth less--and they'll continue to lose money if the dollar gets weaker. If that happens, foreign investors will tend to reduce future investments in the U.S. since they prefer not to lose money. With reduced foreign investment the shortfall between what the government wants to borrow and what the world wants to lend it will increase... which means the government will, again, be faced with the decision of reducing spending or printing even more money.

They say there are no accidents in politics, and China's announcement is politics. They made their announcement just days ahead of an extremely important Federal Reserve meeting at which the future of money printing will be decided, and at which Chairman Bernanke is scheduled to have a historic press conference. China's announcement is not an accident and it's not coincidental.

China is not our friend and this announcement was designed to make Chairman Bernanke squirm, and to force our hands on monetary policy. China has all but guaranteed that the Federal Reserve will have to print more money which may very well be a death blow to the dollar and its status as a reserve currency. We are paying the price for depending on them to loan us so much money.

It's frustrating to watch this unfold because many of us predicted it over two years ago.

We have idiots running and destroying our country. There may be other more polite ways to say this, but there are no other possible conclusions.