China’s move to unpeg it’s currency from the US Dollar will, through a wacky chain of events, increase interest rates. Nobody’s disputing that. The problem is that many of the home loans of the last two years have been interest only, adjustable rate mortgages. Many people don’t have any equity which means that if housing prices drop borrowers will owe banks more money than their homes are worth. Prior to the revaluation of the yuan people had said that housing prices wouldn’t drop because there were no obvious triggers looming that might pop the bubble. Queue Roy Roger’s horse.
I think I’ve been writing about this a lot because during the runup to the dotcom crash I watched CNBC religiously and the anchors would joke about how ridiculous it had all become. The greater fool theory made a lot of sense. Now it’s not just a few irrationaly exuberant day traders that could get burned. The Chinese kept the Yuan pegged by buying US Bonds. If they decide to sell their stockpile of bonds interest rates would rise dramatically and the housing market would collapse. That’d be bad for China because we buy a lot of their stuff but some say Chinese leaders have more flexibility when it comes to tough decisions because they’re perennially incumbent.