When I said that the currency peg is a scarecrow, I meant that the USA is actually giving China an outlet to peg its currency, in the form of bond auctions which soak up all the USD they receive from the trade imbalance. Obviously a bond does have return and as such China is experiencing inflation on an increasing rate because of the massive amount of bonds they have, but it is definitely slowed because they are able to buy UST and delay the impact of the dollars.
It matters immensely that they are invested into UST and not hot dogs or anything else you listed. When they are in UST they are effectively taken out of the economy and it allows the Fed to control the supply of money. If they were to go to hot dog companies the supply of money would go up and we'd experience the inflation immediately.
Also your gold backed scenario is flawed. I can accept that you are saying that China will manipulate their gold holdings via hoarding and not letting their increased gold holdings from trade imbalances work towards inflation of prices. You are leaving out the fact that the deflation that the USA will experience will make USA domestic products more appealing to those in the USA. All the while China would have to refuse to use their increased purchasing power as a nation to let their gold reserves deflate. There would be literally no reason to not allow themselves the use of gold and continue to hoard indefinitely. Eventually it would reach a point that the USA and other deflated nations wouldn't trade internationally because their prices were competitive to any export China had to offer. But really its just a silly thought experiment. We wouldn't go to gold unless fiat currency collapsed in a hyper-inflationary scenario.
It's the USA that is abusing monetary policy, not China. If the strength of our currency was allowed to reflect our economic situation for the past 40 years, we wouldn't have been able to sustain such huge trade imbalances, regardless of how hard countries tried to maintain a peg to our currency.
Edit: This thread shouldn't even be about Ron Paul. Just that I couldn't help myself but respond to LegendKiller's constant hate.
Sorry, but the Fed has control over the monetary flow in the US regardless of what China does. If it wasn't USTs, it'd be RMBS, if it wasn't RMBS, it'd be munis. Money out of the economy through investments is money out.
Now, the problem with China is that for every USD printed, they have to print 6x RMB. Every time the dollar is weakened, and they are trying to stop that, the RMB must be weakened, which is why they have such a huge problem right now.
The jobs issue isn't a scarecrow, the marginal differential between China production and US production is almost wholly accounted for by the labor/currency differential. The remainder is pollution, regulation, and general health of US workers. The deflation issue is nonsensical, ever look at the real trajectory of China GDP plotted against the RMB? You'll notice something, as they devalued, their GDP skyrocketed, there's a reason for this.
China's inflation isn't caused by their purchases of bonds, it's caused by the government having to print RMB to keep the peg and FDI.
That's not even to mention that every dollar invested in USTs actually does result in money going into the US economy in the form of domestic government spending.
If they went to hot dogs they would increase the cost of hot dogs and the hot dog makers would make money, employing more people and yes, eventually inflation. However, that wouldn't be until the entire economy was effected by the raise in employment in hot dogs. The benefit behind buying up USTs is that they prevent the money from going to other investments. The Japanese did this well, until they couldn't anymore and eventually bought "stuff", eventually floating the entire US economy upwards while they went down.
Again, you think that China would go to gold, but the problem is that they don't need to. As we pegged to gold our currency would raise while theirs would go down. This would make their goods look cheaper. They could simply drain the US of gold, as France did around the turn of the 20th century, resulting in a Treasury crisis and JPM acting as the Fed. Except this time China would still be manipulating the currency and causing a trade imbalance.
We don't maintain the trade imbalances, they are forced upon us through currency manipulation of the Asian countries. That's what you're not getting.