[player24]

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What will happen after the yuan is revalued and when all the money comes flowing out? If you figure it out, please let me know!


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Here is the "doomsday" scenario (not the only possibility, but worth considering):

There will be a big drop in foreign demand for US Treasuries.

US interest rates will rise.

The housing bubble will burst.

Construction employment and consumer spending will fall.

Falling home prices will lead to a wave of personal bankruptcies.

It will be more expensive to shop at Wal-Mart (imported goods inflation).

Inflation will put pressure on the Fed to tighten monetary policy (which will lower growth and result in staflation).

Ultimately, the US experiences a 1930s depression/deflation scenario.

Risk mitigating factors:

The aforementioned scenario helps no one (this hurts everyone in the short term, including/especially Asian exporters). Therefore, central banks will go to great lengths to ensure that a Chinese currency revaluation is controlled in terms of timing and magnitude. A full "float" could be diasastarous.

Globally, we are in a very low yield environment. US Treasuries (which have 'relatively' high yields) will retain some of their appeal to foreign investors (although a free-fall in the dollar will over-ride this appeal).

Policy issues:

In the long term, the US manufacturing sector will benefit from a controlled revaluation.

It might be better to pop the US housing bubble sooner rather than later.

Finally:

Doomsday scenarios rarely ever occurr.