China and Currency Manipulation

A couple of interesting posts on the currency situation with China, from Krugman and the Telegraph. Both articles argue that the Treasury should officially declare that China is manipulating its currency which would immediately trigger punitive measures starting with the imposition of tariffs on Chinese products.

Unfortunately I think both articles are wrong as most of the comments on Krugman's article point out. Take tariffs for example, Walmart will spend a fortune to water down any bill so that is unlikely. Even if it were possible, the manufacturing isn't going to come back to the U.S., it will move to Vietnam or some other low cost nation. Once the manufacturing base is destroyed it's difficult to rebuild it overnight, especially since investors are not sure how long the tariffs will last.

I agree that this is a mutually assured destruction, while it will hurt America some, it will wreck havoc in China, massive unemployment leading to unforeseeable consequences. In America this will lead to some inflation but more could be in the offing. The current low interest rate levels are sustainable specifically because China is still buying bonds to keep the yuan pegged to the dollar. As the rates increase, it would trigger a new round of defaults etc. Moreover, the US is about to lose the triple A rating, so the consequences for the US could be substantial as well.