Recently, China announced a change in its currency policy. No longer will the Yuan be pegged exclusively to the US dollar. Rather the Chinese currency will float within a narrow band against a basket of world currencies.

The financial talking heads have been chattering endlessly about what this means and how to define the basket of currencies. They (perhaps) are looking at the trees and not the forest.

The likely outcome of this change may well be a slowing of the relentless purchase of US Treasuries by China’s Central Bank. Currently they recycle surplus US dollars (currently almost $800 billion total) resulting from our structural trade imbalance (due to our insatiable appetite for the lower cost goods they produce).

While this change will undoubtedly be only at the margin its impact may well be magnified by the actions of others (see hedge funds). The net result of this change could be higher US interest rates.

Higher rates may cause the US economy to slow.

If it happens this way it may be the beginning of the end for the overheated housing boom.