There are suggestions that China will allow its currency to appreciate against the dollar. Don’t believe it – China needs a cheap yuan and there is no chance that it will ever float

Bloomberg has quoted People’s Bank of China officials saying that the PBoC will stop mopping up foreign exchange inflows, and will let the yuan appreciate. This already has the metallic community atwitter over the coming fall of the dollar and the bursting of the treasury bubble.

This kind of thinking fits into the larger theory that the dollar and the treasury bond are supported by a Ponzi scheme funded by witting and unwitting central bankers at home and abroad. China buys treasuries so that she can ‘control’ us, while the Fed buys treasuries to ‘finance Obama’s deficits’ with hyperinflation.

Sooner or later, the music will stop and the Ponzi will collapse, enriching the metallic community and other doubters of America’s benighted currency.

Personally, I am very uncomfortable with China’s mercantilism, and I would like to see the yuan appreciate enough to bring the US’s trade with China into better balance. I don’t like the idea of hollowing out our manufacturing base in exchange for cheap consumer goods. A stronger yuan would reduce unemployment among the young and unskilled, and help us to revive manufacturing.

I think that threatening China with punishment for ‘currency manipulation’ is an excellent idea, especially if there is real policy follow-through, which has never occurred. Mitt Romney was pushing for that during the US presidential election, and was accused of ‘China bashing’. It's unsporting to bash one’s enemy!

The Ministry of Propaganda can say whatever it chooses about ending foreign exchange intervention, all of which is purely for foreign consumption, and meant to head off Congressional action such as the Schumer-Graham punitive tariff bill. But the hard fact is that China needs to add millions of new jobs every year as its peasants migrate eastward, and that requires a cheap yuan.

China needs to keep the yuan cheap enough that Americans will buy more flat screens and laptops, not fewer. Pretty soon it will be cars and airplanes. There is no chance that the yuan will ever float. China cannot build enough dams, bridges and power plants to create adequate internal demand; she must export in exchange for our paper money.

Hence her writhing around on the subject of the exchange rate, a topic about which she cannot afford to be frank. Instead, she pretends that she is unpegging, which we are supposed to believe.

The metallic community is wrong, as usual. The dollar, bonds and stocks are safe. Gold and silver will continue their downward drift.

Christopher T Mahoney is a former vice chairman of Moody’s. This post first appeared on his Capitalism and Freedom Blog