Think about it: China selling our bonds wouldn’t drive up short-term interest rates, which are set by the Fed. It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy those bonds up.
Man, if it were only that easy! If only long-term rates were determined by expectations for short-term rates, my job would be a piece of cake. But, alas, that's not the world we live in. You see, long-term rates reflect investor appetite, or lack thereof, for long-term bonds. And investor appetite for long-term bonds, as it is for any security or commodity, is determined by numerous, perhaps uncountable, factors. In fact, despite the Fed's own forecast that short-term rates will remain at record lows through 2015 (a long time by Wall Street standards), we watched the 10 year treasury's yield nearly double between May and early September of this year---literally debunking Krugman's assertion. Now, he does finish the above statement with a shred of doubt: he offers up the possibility that long-term rates could "somehow" rise, despite expectations for short-term rates, in the event investors ("China")---for their own reasons---decide to sell long-term bonds. The fact that, as he states, the Fed could inject more helium into the bond balloon is not something to feel good about---unless you believe there'd be no harm in printing money and propping up the bond market every time somebody sells. Talk about inflating bubbles!
If, like me, you're shocked by Krugman's lack of understanding financial markets, his attitude toward the dollar will blow your mind. He states:
It’s true that China could, possibly, depress the value of the dollar. But that would be good for America! Think about Abenomics in Japan: its biggest success so far has been driving down the value of the yen, helping Japanese exporters.
So, the depressing of the dollar would be "good for America!" Hmm... Tell me, are you an exporter? Me neither. I'm just an average consumer who likes to get his money's worth. A depressed dollar does me real harm as it makes for higher commodities (my gas and groceries) prices, and higher prices for the goods I buy from abroad. Odd that Krugman, with all his rancor toward big business, would suggest such a thing.