Anyone wondering what sort of shock might trigger the dreaded - but rare - double-dip recession should pay close attention to the brewing global currency war and the protectionist posturing of American politicians as the mid-term U.S. election date nears. It was a trade war in the early 1930s that helped turn a recession into the prolonged Great Depression. And a reprise is not implausible.
On Wednesday, the "China bill" sailed through the U.S. House of Representatives with bipartisan support. This bunch would have trouble reaching a consensus that night follows day. But bashing the Chinese for currency manipulation was a no-brainer. The Chinese do deliberately keep their currency weak to boost exports. And it's a lot easier to blame China for everything that has gone so wrong with the U.S. economy than fingering bad domestic policies, a lack of effective financial regulation and years of cheap money.
For their part, the Chinese aren't about to sow more seeds of social unrest by cooling their own export machine. They just might dare Washington to try imposing punitive tariffs on Chinese goods, which would hurt Wal-Mart and the rest of the import crowd a lot more than China's exporters. Try explaining to cash-strapped American consumers that they have to pay more for imported stuff to protect jobs that have already been lost and aren't coming back. And then try to get re-elected.
It also may have escaped Washington's notice, but Beijing continues to take baby steps to liberalize its currency. A case in point is a recent deal with Hong Kong removing restrictions on opening bank accounts, issuing bonds and doing account transfers in yuan. Similar deals will soon be struck with other Asian financial centres, and McDonald's plans a corporate bond issue in Hong Kong denominated in remnimbi.
None of this excuses China's currency games. But historians can attest that trade wars can and do spark unintended consequences, including, once upon a time, a depression to end all depressions.