[ARCADIA]

Floating Chinese currency might be a DISASTER for both sides! China does not have a good banking system.

I am not sure that our banking system is any better. I recall that Greenspan nearly lost his lunch when he got wind of the amount of derivative liabilities our financial institutions were carrying.

Tariffs and trade quotas are a better way to adjust the imbalance. But, if we do not have the political maturity to address the issue rationally; then you break the currency peg, smash the system, and start anew. The one thing we know for sure is that the present arraignment can not last. We cannot continue a massive current account deficit indefinitely.

[A. Pole]

But, if we do not have the political maturity to address the issue rationally; then you break the currency peg, smash the system, and start anew.

As the history teaches, smashing things ends in, well, in more smashing.

If it were up to me I would impose at first small NON punitive tariff like 5 to 10% on goods and services. I would use money from it to help American producers and workers and see how the trade deficit shrinks (probably the budget deficit would ease).

I would tell to China - we are still your friends and you keep the currency peg the way you wish.

Then after seeing the results later I would increase the tariff again (maybe in few steps) to balance the trade deficit and reduce outsourcing.

This would be good for China and America and EVERYONE else. Trade would IMPROVE! It is WTO and international bureaucracies which are not good for anybody.