What would happen if China dropped its peg?

Many analysts and politicians see China's peg to the American dollar as a weapon it uses for grabbing market share and stealing jobs from U.S. manufacturers. But the reality is quite different, argues Peter Schiff, who says that "de-pegging would cause the economic equivalent of cardiac arrest." Yet this "tough love" from China and other countries would be much-needed medicine.

Our economy is currently on life support provided by an endless flow of debt financing from China. These purchases are the means by which China maintains the relative value of its currency against the dollar. As the dollar comes under even more downward pressure, China's purchases must increase to keep the renminbi from rising. By maintaining the peg, China enables our politicians and citizens to continue spending more than they have and avoiding the hard choices necessary to restore our long-term economic health.

Contrary to the conventional wisdom, when China drops the peg, the immediate benefits will flow to the Chinese, not to Americans. Yes, prices for Chinese goods will rise in the United States – but so will prices for domestic goods. As a corollary, the Chinese will see falling prices across the board. As anyone who has ever been shopping can explain, low prices are a good thing.

In addition, credit will expand in China while it contracts here. When China abandons the peg, it will no longer need to swell its currency reserves by buying Treasuries or other dollar-denominated debt instruments. Other nations will no longer feel the pressure to keep their currencies from rising, so they too could throttle down on their onerous dollar purchases. . . .

A weaker dollar will price many imported products beyond the reach of most Americas, giving our hollowed out manufacturing sector the opportunity to rebound. However, if our industry has any chance of getting off the mat, we must reduce taxes, repeal regulations, reform our cumbersome legal system, and, most importantly, replenish our savings to finance the necessary capital investment.