About that yuan...

Brad DeLong claims to be mystified as to why the recession is hitting American manufacturing especially hard:

This is news to me. I had been confidently expecting the dollar to fall and manufacturing to pick up and lead the economy out of the recession. Time to rethink what is going on.

Paul Krugman agrees that reducing the trade deficit is the way to rebalance our economy away from consumption and bubbles:

A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.

There's just one little problem: the U.S. trade deficit will have a hard time falling unless our enormous bilateral deficit with China falls. And that will be unlikely as long as China keeps trying to prop up its own economy (growing at - gasp! - only 7%!) by keeping its currency, the yuan, artificially undervalued against the U.S. dollar. (Incidentally, China's exchange rate policy not only encourages the U.S. to consume instead of produce, it helps create bubbles here by injecting massive amounts of cheap loans into the U.S., but that's another story...) This is probably the answer to DeLong's mystery, though DeLong doesn't want to admit it because he doesn't want to anger the Celestial Empire.

Krugman, however, realizes that it'll be hard to boost U.S. exports to China while China is pushing the other way:

Anyway, the rest of the world may not be ready to handle a drastically smaller U.S. trade deficit. As my colleague Tom Friedman recently pointed out, much of China’s economy in particular is built around exporting to America, and will have a hard time switching to other occupations.

Pretty much. The massive U.S. debt-and-consumption super-bubble that powered the Asian export-led development boom for 35 years has finally popped...except China's government is determined to force the party to keep going. In response, we could start a trade war with China, but instead of boosting our exports it would just make our depression worse. As long as China is unwilling to help us rebalance, we're going to have to find some other way of righting our economy, even as we try to dodge the next bubble.