GAO says not much good and a lot of bad.

GAO steps in on currency devaluation

May 19 (Reuters) - It's hard to predict what the practical impact will be if China lets its yuan currency rise in value as the Bush administration, Congress and U.S. industry have demanded, a Congressional watchdog agency said on Thursday.

An 80-page study by the Government Accountability Office (GAO) found economic experts were widely split about the extent to which the yuan, also known as the renminbi, was undervalued and about who will be helped or hurt if it rises.

While lawmakers denounce China's policy of pegging the yuan's value at about 8.28 to the dollar as unfair, the GAO noted that letting it appreciate might also carry costs for some U.S. economic sectors.

"Some groups could be negatively affected by a higher-valued renminbi, including U.S. producers who use imports from China in their own production and would face higher prices and costs of production," the GAO said.

"Consumers could also face higher prices," it added.

This week, the Treasury Department warned China that it "likely" will be designated as a country that manipulates its currency for trade advantage unless it modifies its exchange-rate policies. On Thursday, Treasury named a new special envoy to China and said it was "critical" that China change its exchange policies.

But the GAO, which conducts studies on specific topics in response to lawmakers' calls for them, found scant agreement on what the impact of a revaluation might be.

Some three million U.S. factory jobs have disappeared in the last five years and manufacturers complain they can not compete with cheaply priced imports, though the GAO did not see the jobs coming back.

"In terms of employment, many experts believe that a rise in value of the renminbi relative to the dollar would be unlikely to have much, if any, effect on aggregate employment in the United States," it said, since interest rates and the supply of workers play a larger determining role in hiring.

As the U.S. trade deficit with China and the rest of the world has soared, the United States has borrowed massively to make up the shortfall between its spending and its income. The GAO said the huge flows of capital into the United States from China, which has become a major buyer of U.S. Treasury securities, could be disrupted and again the impact is unclear.

"While some analysts believe that the effects of a foreign withdrawal from U.S. financial markets -- or a reduction in foreign purchases of U.S. debt -- would have limited effects over the long run, some acknowledge that short-run disruptions, such as the loss of value of assets and higher interest rates, could be significant," the GAO said.

What are the impacts of a devalued Chinese currency?
1. Home prices will significantly drop and mortgage rates increase. 
2. Employment will not improve.

What a fuck'in disaster waiting to happen. 

People are buying homes with nothing down and using interest only ARMs. If their heavily mortgaged assets turn upside down then they'll be forced to walk. The question is."How will the new bankruptcy law impact people who have to walk from upside down loans?"  Are we going to see people whose financial life is ruined by getting into an inflated real estate market?  Others have consolidated loans or financed trucks and educations with home equity loans pegged to the prime rate.  With increasing interest rates, will these folks be able to make payments or will they too face foreclosure and the shadow of debt for the rest of their lives?

Where are the new jobs in manufacturing going to come from if we have high interest rates and little incentive to reinvest in the US?