How To Win A War Without Firing A Shot?

Give your enemy enough rope by which they may hang themselves.

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The Chinese Connection

By PAUL KRUGMAN
NY Times

http://www.nytimes.com/2005/05/20/opinion/20krugman.html?hp=&pagewanted=print

Stories about the new Treasury report condemning China's currency policy probably had most readers going, "Huh?" Frankly, this is an issue that confuses professional economists, too. But let me try to explain what's going on.

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So why is the U.S. government complaining? The Treasury report says nothing at all about how China's currency policy affects the United States - all it offers on the domestic side is the usual sycophantic praise for administration policy. Instead, it focuses on the disadvantages of Chinese policy for the Chinese themselves. Since when is that a major U.S. concern?

In reality, of course, the administration doesn't care about the Chinese economy. It's complaining about the yuan because of political pressure from U.S. manufacturers, which are angry about those Chinese trade surpluses. So it's all politics. And that's the problem: when policy decisions are made on purely political grounds, nobody thinks through their real-world consequences.

Here's what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise; the housing bubble will probably burst; construction employment and consumer spending will both fall; falling home prices may lead to a wave of bankruptcies. And we'll suddenly wonder why anyone thought financing the budget deficit was easy.

In other words, we've developed an addiction to Chinese dollar purchases, and will suffer painful withdrawal symptoms when they come to an end.