The collapse of the U.S. economy was caused in large measure by East Asian currency manipulation, especially by China. The economy collapsed because of our huge trade deficit and the massive foreign borrowing it caused.

The dot.com bubble, the real estate bubble and the stock market bubble were all created by Wall Street to camouflage these problems and give the illusion of a strong and growing economy. As we unfortunately learned, bubbles break.

Although many factors contribute to our trade deficit, currency manipulation is the main reason we cannot re-balance trade. Efforts to restore the U.S. economy will fail until this issue is resolved.

The rules of the International Monetary Fund require that currency markets, not governments, set currency values. Market-based currency values are essential for maintaining an open and stable global economy because they are the mechanism that brings dangerous and unsustainable trade imbalances like ours back into balance.

Here's how it works: When a country has a huge trade surplus like China's, the value of its currency will rise due to the strength of its economy. This causes the price of its products to go up, leading to lower sales relative to purchases, and thereby lowering the surplus. Conversely, when a country has a huge trade deficit like ours, the value of its currency will decline due to the weakness of its economy. This causes the price of its products to fall, leading to more sales relative to purchases, and thereby reducing the deficit. Net result: balanced trade.

But for more than 20 years now, the Chinese government has relentlessly intervened on a massive scale in international currency markets to illegally peg the value of its currency to ours. So, in the past, when the value of the U.S. dollar dropped a bit because of our trade deficit, and the value of China's currency should have risen a bit because of that country's trade surplus, China's currency dropped right along with the dollar instead. Therefore, Chinese prices remained artificially low relative to U.S. prices.

Currency manipulation is a very aggressive form of predatory trade. No wonder the Bible calls it an abomination (dishonest scales, Proverbs 20:23). There will be no end to our economic decline if the East Asians are allowed to keep stacking the deck this way.

China's persistent illegal currency market interventions prevented market forces from correcting not only the U.S.-China trade imbalance but also our overall trade imbalance. In fact, it actually caused these imbalances to grow at an alarming rate to an unprecedented and unsustainable level that now threatens to collapse the U.S. dollar.

If the currency market had been allowed to function, continuous incremental market corrections would have prevented the huge unsustainable U.S. trade deficit from accruing. Now the massive correction required to re-balance the international economy threatens the entire system.

China and the other mercantilist East Asian governments are manipulating the world economy. Those governments, not the market, are picking the winners and losers. Now the U.S. government is playing that game too. As we painfully are aware, government-managed economies end in disaster.

If currency manipulation is not effectively addressed, the stimulus package will just create another bubble that will soon break because all the money will quickly find its way back to East Asia, where it was borrowed from in the first place. This will make the crisis even worse by increasing our trade deficit and foreign debt.

And if we stop all the stimulus bills and bailouts, let the market do its thing, let all the failing banks and automakers go into bankruptcy, and let more businesses go under and Americans lose their jobs, even all of that pain will not restore health and equilibrium to our economy.

The U.S. economy will continue to decline until our trade deficit and foreign indebtedness are reversed. This cannot occur until we sell more than we buy in global markets, and this cannot occur until the East Asians stop manipulating our currency.

If America's discredited economic policy establishment continues to thwart efforts to stop currency manipulation, there will be no lasting recovery of the U.S. economy.

David W. Frengel is director of government affairs for Penn United Technologies, Inc., Cabot.