Harmony

Krugman continues his lonely insurgency in favor of a tough line on China's currency. He's making sense, but making few friends in the commentariat (though Martin Wolf remains his staunch ally, and, intriguingly, DeLong delivers a quiet slap to overly simplistic opponents of yuan appreciation).

The elite consensus remains firmly against doing anything that might start a trade war with China, with Joe Stiglitz, Nouriel Roubini, Clive Crook, and many others begging the U.S. not to anger the Dragon.

Tim Geithner, that doughty defender of the pre-2007 financial/industrial status quo - in which an overgrown U.S. financial sector used cheap Chinese money to bloat its profits to monstrous size - has no personal desire to do anything to annoy China in the slightest. But the populist pressure is rising, with Chuck Schumer garnering ever more support for tariffs on Chinese goods. If Geithner had, as always in the past, refused to brand China a currency manipulator in the regularly scheduled Treasury report that includes such designations, mighty Congress might have roused itself from the depths of its partisan gridlocked slumber and taken matters into its own barnacle-encrusted tentacles.

So Geithner played for time, delaying the Treasury Department's report and taking an unscheduled trip to China in which he will plead, cajole, and desperately entreat China to let the yuan appreciate for its own good. All of the people who are afraid of a trade war are counting on the success of this trip. Ryan Avent is hopeful. The FT is hopeful. The Economist is hopeful. Matt Yglesias is supremely confident. Upon Geithner's frail shoulders rides the hope of the fraying Free Trade Consensus.

So, time for my official prediction: Geithner is going to get slapped, hard. The Chinese are not going to revalue the yuan. There are several reasons for this. One is that global demand for Chinese products is still extremely weak; China knows that many of its exporters are eking out razor-thin profit margins, and that a yuan appreciation would send millions of unemployed people into the street just when they had been conditioned to expect infinite growth and unending prosperity. In other words, bad news for China's government.

The second reason is that China has been feeling its strength of late, and even without tariffs or Congressional action, would see changing its currency policy as "backing down." China "backed down" in 2005, when the U.S. was still seen as too strong to challenge directly (and when Schumer's tariff bill looked like it might actually pass). Now, those in China who argue that the U.S. is in terminal decline, and China ascendant to supremacy, are being heard more loudly and heeded more closely. China slapped Obama in the face hard at Copenhagen, and they are ready to do it again.

So I predict we will get the same result we always get when we try to beg China to do something that is good for us but dangerous for them: zilch. It will be made clear to all that, until we decide to do something about it, we are living in China's world now. A harmonious world, to use their preferred term. Harmony means that they give the orders, and you take what they give you.