China continues to squawk about the dollar, low interest rates, the US’s borrowing binge. The US continues to carp about China’s unwillingness to let its currency strengthen…
I’ve got an idea: Let’s make a deal. The US should approach China with a deal to raise interest rates modestly, say 50-75 bp. The economy doesn’t need a hike, but it would help the dollar at the margin and undermine commodities, which would help reduce the cost of China”s raw materials.
The US should vow to cut the budget deficit to no more than 5% of GDP once the stimulus is no longer needed. Let’s call it 2012, for argument sake.
China, in return, would agree to a one-off 20% revaluation of the Yuan, and agree to fully float the currency within 5-years.
The rest of the G20 would have to agree to hold their rates steady for a few months, to give the dollar some breathing room.
There, problem solved. Now get on with!
