More Hussman

From this week's Hussman report:

There continues to be pressure on China to revalue the yuan. In standard Orwellian fashion, China 's maintenance of a fixed and stable exchange rate with the U.S. dollar is being criticized as “manipulation.” We should be careful what we wish for – the deep current account imbalance with China owes far more to profligate fiscal policy in the U.S. than to unfair currency policies abroad. Sure, the yuan appears undervalued, but before pushing for a revaluation, U.S. policy makers would be really, really smart to get our own fiscal policy in order so we wouldn't be so heavily dependent on foreign capital inflows to finance U.S. economic activity.

Unless that happens, a revaluation of the yuan will do more to stifle growth in U.S. gross domestic investment than any single policy move that Congress could contemplate. Thinking about this in general equilibrium is a disaster: the stuff we buy from China isn't really stuff we make at home, so we'll observe import price increases without enjoying much increased demand for domestic production, the stuff that China competes with us to import (mainly oil), being priced internationally in U.S. dollars, will become cheaper to China, thereby exacerbating energy prices, and the major source of growth in U.S. gross domestic investment in recent years (foreign capital inflows from Asian central banks) will drop off substantially. This is going to be interesting.