NOTE: This is part of a continuing online novel. Here is the Table of Contents.

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In Beijing the announcement was put out early on the morning of the 30th. This meant it reached American ears just as Lou Dobbs was signing-on with the Monday version of his popular evening business show at CNN.

"In order to stabilize the Yuan at its natural level," the statement said in translation, "the Bank of China is adjusting its holdings in foreign instruments, including dollar-denominated instruments. We expect this program to continue for some time to assure all those with Yuan holdings an orderly market."

"What the heck does that mean?" Dobbs asked his guest.

"It means China will keep selling bonds," said Robert Mundell, from across the desk in his New York studio. (Columbia was just a short cab ride away, and CNN had sent a limo.) "Americans have predicted for years that a freely-trading Yuan would be a cheaper Yuan. This is merely applying a countervailing economic force against that prediction."

"So you don't think this means much to the market long-term? You don't think it has any other implications?"

"The reaction of the last day shows it has plenty of implications," replied Mundell. China had foreign reserves of $565 billion earlier this year, and now has more. It makes economic sense for them to diversity their holdings."

"What about the sense for us?" asked Dobbs.

"It makes no sense for us," said Mundell. "We hold one of our largest trade deficits with China. They've been buying dollars, in the form of bonds, to subsidize their trade with us. This news ends that subsidy. It may be good news for American exporters, but it's bad news in the stores. Have your listeners look around their Wal-Marts for 'Made in China' tags. They are everywhere. All those goods have gone up in price 25% because the price of the dollar has fallen that much against China's currency. That wave of inflation will hit us very soon.

"But there's more," Mundell added. "With China no longer buying our bonds, the price of those bonds must go down, until buyers are found. And that means the value of the dollar will go down against other currencies."

"Why would the dollar go down?" asked Dobbs.

"Foreign sellers sell dollars. Unless there are an equal number of buyers, the value goes down. Just as when there's more wheat than people want, the price goes down. When there's less opium than people want, the price goes up.

"In the short term that means cheaper oil for the rest of the world, because oil is priced in dollars. But falling bond prices also mean higher interest rates, higher rates for mortgages for instance, and lower housing prices, since a rising price of dollars means they can lift fewer housing dollars."

"What else?" asked Dobbs, plainly seeing his audience might be confused.

"Well, what happens when an oil exporter tires of taking this price cut? They could do one of two things. They could raise the price of oil, which would be bad for us, but bad for everyone else as well. Or they could start taking other currencies, like the Euro, the Yen, even the Yuan, for oil, all of which are appreciating against the dollar."

"What might the result be?"

"We might have to start issuing debt in Euros or Yen or even Yuan, which means buying those currencies to pay off the debt," said Mundell.

"That's outrageous!"

"Welcome to the real world, America," said Mundell with a smile. "I'm Canadian, and we've been doing this for years. Remember when the Canadian Dollar, which we call the Loony, was at 60 cents to the dollar, just a few years ago? Making money in Canada and exporting it was like throwing dollars out the window. You lost most of it in the translation. But now, with the Canadian Loony approaching 90 cents to the dollar, it's happy days.

"For us, that is. Not for you," Mundell quickly concluded.

"So what can be done?" asked Dobbs.

"You can try to buy dollars to stabilize your currency. Or you can hike interest rates for everyone."

"Won't that hurt our recovery?"

"It could kill it. But which would you rather have, a recovery or a currency?"