Paul Krugman: China needs to end its fixed currency policy

How so? China's artificially undervalued currency, the yuan, presently at about 6.83 yuan to the dollar, keeps China's exports cheaper than they would be under a floating currency system – or one where the market determines the yuan's value.

That currency depression creates an artificial competitive advantage for China's exporting companies – they can price their goods cheaper than those manufactured in the other nations and still earn a profit – taking jobs away from those regions. It's also driving up the U.S. trade deficit with China: too often, American companies are opting to buy the artificially-cheap, Chinese goods, rather than buy elsewhere, or buy American-made goods.

China has responded briskly to international requests to float its currency. It says if the U.S. wants to eliminate its trade deficit, its consumers should save more and consume less; China has also recommended that the U.S. government cut its budget deficit.

Economic Analysis: As Krugman outlined, China is playing a dangerous monetary game: China's calculating that its trillion dollars in U.S. debt holdings will prevent Congress from slapping a tariff or other restrictions on China's fixed-currency-driven cheap goods. Congress has withheld action up to now, but as more and more American workers are displaced amid double-digit U.S. unemployment by the cheap, imported goods – partially a derivative of an unfair trade policy – Congress may feel the political pressure to act.