Be careful what you wish for

In his column in the New York Times, Harvard economist Gregory Mankiw points out that China's accused currency manipulation is more complicated than our new Treasury Secretary has made it seem:

"Just before his confirmation as Treasury secretary, Timothy F. Geithner turned up the heat on the Chinese regarding the dollar-yuan exchange rate. President Obama, he said, 'believes that China is manipulating its currency. Countries like China cannot continue to get a free pass for undermining fair-trade principles'...

Critics of China say it is keeping the yuan undervalued to gain an advantage in the international marketplace. A cheaper yuan makes Chinese goods less expensive in the United States and American goods more expensive in China. As a result, American producers find it harder to compete with Chinese imports in the United States and to sell their own exports in China.

There is, however, another side to the story. The loss to American producers comes with a gain to the many millions of American consumers who prefer to pay less for the goods they buy...

Mr. Geithner and other China critics might also want to ponder how the Chinese keep the yuan undervalued. The essence of the policy is supplying yuan and demanding dollars on foreign-exchange markets. The dollars that China accumulates in these transactions are then invested in United States Treasury securities.

So when the Treasury secretary complains about the undervalued yuan, his message to the Chinese boils down to this: Stop lending us money."

The stimulus package just passed by the Senate will cost a lot of money; money that will be raised through the sale of Treasury bills to, among others, the Chinese government. A sudden change of heart by our foreign creditors could cause a currency crisis larger than any we've seen in the past. Antagonizing the Chinese is good politics, but bad economics.

If we're really interested in raising the value of the Chinese currency relative to ours, we might want to consider cutting our debt so we don't need so many countries buying our dollars. Until we do that, we might want to get off our high horse.