Imagine you own a department store.  I walk in one morning to purchase a new pair of shoes that cost $50 dollars.  My trade deficit with you has increased by $50.  To a consumer this is no big deal; to the shortsighted Keynesian however this is disastrous.

Trash talking China for artificially devaluing the yuan has recently become vogue in Washington.  Front running presidential candidate Mitt Romney has been critical of China's money manipulation on the campaign trail.  The Senate is considering a bipartisan bill to "punish" China for keeping the yuan under priced.  Pennsylvania Senator Bob Casey says the bill will "let the officials in China know that there are consequences to cheating."

Talk about the pot calling the kettle black.

With gold at $1,600, gas averaging $3.50 a gallon across the nation, and U.S. money stock growth hitting  When Fed chairman Ben Bernanke launched his last massive Treasuries purchase known as QE2 last fall, he boasted about the immediate effect of boosting the stock market.  Days later he blasted China for artificially fixing the price of the yuan.  Like a chain smoking dad lecturing his kids on the danger of cigarettes, its "do as I say, not as I do" for a Congress and Fed unwilling to acknowledge their own reckless fiscal policy. 23.3% at an annual rate for the past 3 months, the rest of the world is seeing the inevitable effect of Keynesian prime pumping.

What Senate Majority leader Harry Reid and his cohorts in Congress don't understand is that the U.S. doesn't suffer from China's currency manipulation, it benefits greatly.  Whenever you go on a shopping spree at Walmart, the dollars that go to China are not left unspent.  They are reinvested in the U.S. through the purchase of government securities and high value manufactured goods.  This may finance Washington's appetite for buying votes but that is another issue all together. 

America still remains the largest manufacturer in terms of output in the world; we just don't make socks and t-shirts anymore.  Instead we manufacture pharmaceuticals, commercial airliners, medical devices, and semiconductors.  Cheaper consumer goods leave more capital left over to be invested in the financial and service sectors.  Low skill production has migrated offshore to where cheap labor is in abundant supply, namely China.  Following Deng Xiaoping freeing up of the pre-communist controlled agriculture sector, China has grown leaps and bounds in terms improved standard of living.  Decentralizing government control tends to do that, a lesson our president never learned while teaching at the University of Chicago.

Only a fool would believe that making goods at Walmart more expensive is going to cure our economic ills.  Consumers paying more for Hanes t-shirts isn't going to stimulate the economy.  Not to be the bearer of bad news but underwear factories aren't coming back to the U.S. any time soon.  The ocean of safety and labor regulation from Washington has told entrepreneurs and capital investors to look elsewhere.  The recent squabble between Boeing the National Labor Relations Board wasn't the warm welcome corporations are looking for when deciding where to invest.

With prominent commentators such as Paul Krugman at the New York Times calling to increase American exports and close the trade deficit through dollar devaluation, the thought that other countries may mirror this tactic never crosses their mind.  Exports can't be stimulated when central banks around the world are engaging in a currency race to the bottom.  Over the last year China suffered from an estimated 6.4% inflation.  This number is most likely underestimated given the flawed calculation methods as food prices rose an astounding 14.4%.  There are currently 64 million vacant apartments in China, the inevitable effect of an unsustainable property bubble cause by massive government spending financed by money printing.  China's yuan to dollar peg has been both a boon and disaster for its citizens.   It has brought profits to their manufacturers while driving up the cost of their domestic consumption.

The Great Depression was made worse by protectionist measures such as the Smoot-Hartley tariff.  "Punishing" China to bail out special interests such as unions will only hurt the already limping economy.  China's currency peg is ultimately to the American consumer's benefit and it would be shame to lose it.

I don't want to pay more for t-shirts, do you?