A spot of bovver for the world economy: China and the US at loggerheads

Useful article by Will Hutton in today's Observer about the world economy. To summarise:
China has fixed its currency against the dollar, which undervalues the yuan. This hold the yuan low, making its exports cheap. This keeps unemployment unacceptably high (10%) in the US.Also, China is sucking in money from the rest of the world: it has foreign reserves of $2.4 trillion, and they are growing by $40 billion a month. Nice for China, not nice for the balance of the world economy.

There are two possible responses to this situation:

1 An international economic agreement,  whereby China starts to encourage domestic spending by lifting wages, allowing Trade Unions and property rights, and allowing the yuan to float, which will mean that it becomes more valuable, driving down its exports. (This Link is close, but I cannot find Hutton' source).  

In response to this, the USA, EU (including Britain) continue to borrow, (because bank lending is still down, as is always the case after a credit crisis), thus maintaining domestic demand. Thus the world economy is saved, and is able to carry on expanding forever into a finite space until the next time.

2  The alternative is that Obama slaps a protectionist tariff onto Chinese imports, which leads to generalised protectionism, which means a trade war, which could mean another world war. Lovely.

Hutton thinks agreement along the lines of (1) above is very unlikely, because it would mean the end of one-party rule in China.

Clearly, this is a very simplistic analysis, but it does seem plausible. There is a risk that the leaky boat of the world economy is about to be hit by some very big waves.

Hutton ends by asking - what is Plan B?

Here's my 2p worth of Plan B.