With the world economy struggling to recover from a recession that was nearly a depression, what's the stupidest thing we could possibly do now? Simple. The stupidest thing we could possibly do now is to repeat the same mistakes that got us into the Great Depression of the 1930s.

That's just what we might be doing. It's a huge risk to the economy and to the stock market -- but it may present some opportunities, too.

Here's the story. The stock market crashed, famously, in October 1929. But by early 1930, just months later, it had recovered more than half the losses. It looked like everything was going to be OK. Not!

What went wrong? What turned a recovery into the Great Depression? Congress enacted and President Hoover signed into law the Smoot-Hawley Tarriff Act. If put heavy import duties on goods coming into the United States from overseas, on the theory that it would discourage competition and help domestic industries and workers. It backfired because other countries retaliated with their own tariffs and duties. Pretty soon no one was trading with anyone, and the Great Depression was born.

Now Sen. Chuck Schumer (D., N.Y.) wants to revive Smoot-Hawley. Literally.

On Tuesday he introduced legislation in the Senate that would allow the Smoot-Hawley Tariff Act to be used to punish with penalties and high tariffs countries that the Treasury designated as "manipulating" their currencies. It's aimed specifically at China, who Schumer claims is deliberately keeping its currency -- the yuan -- undervalued relative to the U.S. dollar by 25% to 40%.

Schumer believes that this makes Chinese goods artificially cheap in the US, so domestically made goods can't possibly compete. Even if he's right, I don't see the problem. When's the last time you complained that stuff you want to buy was too cheap? Sounds like a good thing, to me.

Let's say Schumer's bill is enacted. And let's say China wants to avoid the punishment, so it revalues the yuan. Or let's say that China revalues the yuan right now, hoping to keep the bill from being enacted in the first place. What would happen? That's an easy question to answer, because the exact same thing happened in 2005.

Then Schumer and fellow senator Lindsay Graham introduced a similar bill. At that time Schumer claimed that the yuan was 15% to 40% undervalued. To avoid the bill being enacted, China started in July 2005 a gradual program of yuan revaluation versus the dollar. Three years later, the cumulative revaluation was 22%.

It made no difference at all to the competitiveness of Chinese goods in the United States. The proof? Over the three years of yuan appreciation, our trade deficit with China didn't shrink one bit. In fact it grew by 39%!

And something even worse happened, which I'm sure Schumer and Graham never dreamed of. The revaluation of the yuan triggered a massive run-up in oil prices, culminating in July 2008 with oil at $147 a barrel. That would surely have thrown the global economy into recession if the credit crisis hadn't emerged the very same month to do the work much more quickly and efficiently.

What does the yuan have to do with the price of oil? Nothing -- but the dollar has a lot to do with oil, since oil all over the world is priced, traded, bought and sold in dollars. When the yuan was revalued, that means that the yuan could be exchanged for more dollars -- and more oil.

Think about it. After a yuan revaluation of 22%, China could buy as much oil as it would have otherwise, but spend 22% fewer yuan. But instead of just enjoying the savings, China bought more oil because it was cheaper. But it was only cheaper to them, because they and they alone possess revalued yuan. For the rest of the world, trading oil in dollars, the price went up, and up and up.

It went up by more than 22% for several reasons. First, when China gets to buy 22% more oil for no additional expense, it's willing to bid up the price of oil at least until its effectively the same price in yuan as it used to be. But at the same time, that cheap oil made the Chinese economy grow faster, which means it both needed and could afford even more oil. The world can only produce so much oil so fast. A bidding war ensued, and gasoline hit $4 a gallon in the U.S.

So let's review where we are. The revaluation that began in 2005 made China grow faster. It made the U.S. trade deficit worse. And it raised the price of oil for everyone in the world except China.

So why would Schumer want to do that again? I don't know. I can't read his mind. Maybe he, like many Democrats, is influenced by the strong support they enjoy from labor unions. They're pretty likely to feel helpless against the onslaught of cheap Chinese labor. But passing a bill that only makes things worse isn't going to really help union workers, now is it?

But it's worse than that. If the yuan revaluation is bad for the United States and good for China, they might just do it anyway, on their own accord. If I were them, I would.

They could do a lot more to hurt the United States. And if Schumer pushes them hard enough, they just might do it for sheer spite. After all, after a 22% yuan revaluation, Schumer's just demanding more. He's still saying the yuan is undervalued, and in fact he's saying it's even more undervalued than it was before it was revalued 22%. If I were a Chinese government official, I'd be pretty upset at that.

I'd be so upset I might decide to teach Schumer a lesson and sit out a few Treasury bond auctions. Let's see what happens to U.S. interest rates if China doesn't keep stepping up to the plate as the largest single holder of our debt? We do have quite a budget deficit to finance. We really ought to be playing nice.

However it plays out, I don't see it as good long-term for the U.S. economy. If China abandons our debt, it's simply lights out.

But let's say they go ahead and revalue. That's not a catastrophe, but it's not good. Are you ready for $150 oil? For $5 gasoline? Bad for the economy -- but for investors it's straightforward what to do. Buy oil, and stocks associated with oil and alternative energy. They were the best performers in the summer of 2008 last time the yuan revaluation put oil into orbit. They may be again.