The yuan revaluation: bushco whistling in the dark

i posted the other day about the chinese yuan/renminbi revaluation and noted that it was definitely not enough (2.1%) to trigger the fall of dominoes that would lead to a collapse of the u.s. housing market... but that doesn't mean there isn't still reason for concern... when you've got folks like paul volcker [former Federal Reserve Board chairman] worried, you might want to think about paying attention...

Even gradually reducing the value of the dollar by an amount large enough - say 30 percent to 40 percent - so that Americans are finally discouraged from buying increasingly expensive Asian goods, may have unpleasant consequences. Among other dangers there is the risk that China will cut back on its purchases of American government securities, contributing to a sharp rise in long-term interest rates.

[...]

"The circumstances seem to be as dangerous and intractable as any I can remember," Mr. Volcker said Thursday, repeating an earlier warning in a February speech. "If people lose confidence in the dollar as a store of value, or lose confidence in the political strength of the United States relative to other countries, there is going to be trouble. I'm not saying a crisis is inevitable or that an orderly adjustment is impossible, but at some point big adjustments will have to be made."

The problem stems from America's persistent buying of much more from other countries, particularly China and Japan, than those countries purchase from the United States. The payment for the imports is in dollars, and because the foreigners do not use all of the dollars to make offsetting purchases here, they lend the excess back to Americans, who then use the loans to purchase more from abroad.

That satisfies this country's desire to consume and Asia's desire to step up production and employment for its vast population. But America's indebtedness to the rest of the world is rising at an annual rate approaching $700 billion. Everyone agrees that this indebtedness cannot continue to go up indefinitely. But while the pessimists see a sharp painful correction in the not-so-distant future, the optimists, a camp that includes the Bush administration and much of Wall Street, argue that the present arrangement is quite sustainable.

while the entire financial underpinnings of the u.s. teeter on the brink of possible disaster, we get all sucked up in karl rove and john roberts, not that they're not important, mind you... the point is, nobody's got our back, bushco is whistling in the dark, and we keep flocking to walmart...

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