Chinese Mercantilism Is Making a Mess - Opinion

Bernanke estimates U.S. capacity underutilization at about 8% -- that comes to the same $1.3 trillion. Amazing!

At the recent meetings of the International Monetary Fund, Treasury Secretary Timothy Geithner asked European allies for help in persuading China to revalue the yuan. Led by Germany, the United States was told to pound salt and instructed to slash its budget deficit and tighten monetary policy.

No surprise. Germany enjoys huge trade surpluses with a euro that is undervalued for its economy, because it is lumped into euroland with weak Portugal, Ireland, Greece, Spain and Italy. Germans live well and impose austerity and unemployment on those neighbors. Berlin doesn't want any sacred mercantilist cows slain, lest its own ruse get discovered.

If the United States cut its budget deficit in half and raised domestic interest rates two percentage points, U.S. consumption and imports would crash, unemployment would rocket to 15%, and a global depression would result whose horrors we all thought were long ago buried in history books.

If China and Germany won't be reasonable, the United States is really left with no option but to take direct action to balance its trade.

China's government purchases to suppress the yuan come to about 35% of GDP and provide a subsidy on exports of similar amount. Washington should even things up by imposing a comparable tax on purchases of yuan and euro for the purpose of importing from or investing in China and Germany, until their leaders agree to engineer an orderly revaluation of currencies and trade.

The Chinese and Germans shouldn't care -- after all, the Americans are nothing but whining spendthrifts whose problems are of no import. They would scream bloody murder anyway.

Beneath the howls, domestic demand and employment in the United States would fire up, manufacturing would flourish, GDP growth would rise to about 5%, and unemployment would fall to a similar figure.

The extra growth would eventually balance the U.S. budget, as it did during the Clinton years.

Once China, Germany and others agreed to a realignment of exchange rates and the tax ended, all nations would benefit from trading with a more rapidly growing and stable U.S. economy.

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