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We hadn't thought about this connection between the Chinese renminbi and U.S. housing prices, but the shock to interest rates from a revaluation (which the U.S. government is pushing for), could have very serious domestic repercussions.

Brad Setser and I have been writing endless papers and blogs (see here for the latest from Brad) about this "balance of financial terror" and argued that the reduction of such foreign financing of our twin deficits would sharply increase US long term interest rate and cause a hard landing for the US and global economy.

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Read more from this blogger: Is the US Really Serious or Masochist About Demanding a Revaluation of the Chinese Currency? Playing with Fire and the Risk of a Market Crash