Currency Wars Set To Escalate

Between the idea
And the reality
Between the motion
And the act
Falls the Shadow...T.S. Elliot, "The Hollow Men"
 
In what could be possibly the worst piece of legislation to move through Congress - after the healthcare catastrophe of course - during Obama's failing reign, a House panel is set to approve a bill which would deem China's currency, the yuan, as "undervalued" and allow the U.S. to slap import duties on Chinese goods coming into the U.S. Here's the link: Confederacy of Dunces

The aspect that I find most problematic with this legislation is how exactly can anyone determine the "correct" value for any country's currency?  Perhaps the U.S. dollar is substantially overvalued.  In the absence of free markets, there is absolutely no way to determine "fair" valuation for anything.  How about if China threatens to sanction the U.S. if the Fed/Treasury does not cease and desist from capping the price of gold?

If the U.S. were to succeed in forcing China to revalue its currency higher, however, two huge problems will result.  First, this will drive up the cost of imported Chinese goods for the U.S. consumer and fuel the already percolating price inflation.  Walmart has already raised prices on average by over 5% this summer.  Prices will escalate even more if Congress is arrogant enough to slap import duties on Chinese imports.

Even more problematic, at least for our borrow-and-spend Government, is the effect this will have on China's appetite for buying Treasury paper.  If China were to "artificially" revalue its currency higher vs. the dollar, the net effect would be to create massive currency translation losses on its holdings of U.S. Treasury bonds.  And perhaps this is part of Congress' motive.  Create a mechanism in which to repay large Treasury bond holders with "cheaper" dollars.  Of course, it's also a way to discourage further foreign participation in financing the the U.S. Government's rapidly escalating borrowing requirements.

Friday Music:  "U.S. Blues"  I'm Uncle Sam/That's who I am/Been hiding out/In a rock n roll band