The Yuan Remains the Same

The situation is somewhat analogous to the way that rumors about Russia's largest oil producer, Yukos, have driven oil prices higher. Russian President Vladimir Putin wants to keep oil billionaires like Yukos founder Mikhail Khodorkovsky from getting too involved in politics.

When Khodorkovsky meddled too much, Putin had him arrested and huge bills for back taxes were levied against Yukos. To fight back, Yukos supporters made grave threats that the crisis could force the company, which supplies 2% of the world's crude, to shut down.

In reality, Putin has no interest in shutting down one of his country's biggest sources of hard dollar exports. But domestic political machinations and accompanying rhetoric can be hard for markets to ignore.

There are some who disagree with Yang, of course. University of Maryland professor Peter Morici was director of economics at the U.S. International Trade Commission in the mid-1990s and has been a proponent of some protectionist policies like imposing steel tariffs.

He says the U.S. economy would grow another 1% a year if China and other Asian countries allowed their currencies to rise in value, reducing their competitive advantage vs. U.S. manufacturers.

That's because the U.S. is largely financing its import spending binge with money from the Asian countries doing the selling. In the first half of 2004, foreign governments -- almost all in Asia -- bought U.S. securities at an annual rate of $404 billion.

If the U.S. made more of the stuff it's importing, or was better able to compete with Asian exports abroad, borrowed money would go to build up those exporting industries instead of just being spent on foreign goods and shipped out of the country.

Careful What You Wish For

"The monies borrowed from foreign governments to cover these purchases are not financing investments in new productive assets," Morici wrote in a recent forecast. "Rather, this borrowing merely permits Americans to live beyond their means -- the average Chinese is now loaning Americans about one dollar in every ten that he earns."

That's actually a reason why the U.S. might not want the Chinese to revalue the yuan, although Morici dismisses it. If China and other Asian banks didn't have an interest in propping up the dollar by buying U.S. treasuries and thereby lowering interest rates in the U.S., who would?

Morici has suggested in congressional testimony that the Federal Reserve could make the purchases itself. But the scale of such a required intervention would be unprecedented and hardly seems possible.