If the crash of 1929 had been like previous ones, the subsequent hard times might have ended in a year or two. But instead, unprecedented government meddling prolonged the misery for more than a decade by igniting a trade war.

Eighty years later, is America on the cusp of repeating the mistakes of the past?

The Telegraph is reporting that a trade war with China could be imminent. Chinese officials are warning Washington that the U.S. will come off worst if it imposes trade restrictions over allegations that China is artificially suppressing the value of the yuan.

Ding Yifan, a chief official at China’s Development Research Center, said if America became more belligerent, China could respond by not only refusing to lend more money, but by dumping its current holdings of U.S. government debt. Ding’s comments came during a conference in which officials questioned the creditworthiness and reliability of the dollar.

Chinese policy makers are currently deciding how to respond to Washington’s moves to punish Beijing for holding the yuan’s value constant to the dollar. Officials at China’s central bank, however, publicly stated that they would not use America’s vast debt to China to influence U.S. policy.

Tensions are rapidly rising. According to the Telegraph, “The dispute risks escalating if China’s trade surplus with the U.S. climbs further and more U.S. jobs are lost.” Making matters more explosive is the fact that Chinese officials seem convinced that the U.S. is in decline and that China now has enough power to economically challenge America, says analyst Ambrose Evans-Pritchard.

Most Western analysts don’t take the Chinese threat seriously enough. Yes, if China were to dump its dollar holdings it might cause interest rates to soar, but the move would hurt China the most, they say, because it would destroy its best customers. Additionally, the Federal Reserve could just print up whatever money was needed to cover government spending and push interest rates back down. Thus China would lose the most in any trade war, goes the argument.

Unfortunately, these views are childishly simplistic. If the Federal Reserve began widespread dollar printing—of the scale required to redeem China’s vast holdings—it could send the dollar’s value plummeting and even risk destroying the dollar’s place as the world’s reserve currency.

The importance of reserve currency status cannot be overstated. Since the world uses dollars to conduct international trade, there is a built-in demand for dollars that supports their value even when the government runs gargantuan budget deficits. This is why interest rates can be so low, and Americans are able to borrow so much for so little, even though the government has become the world’s largest debtor with a national debt approaching 100 percent of gross domestic product.

If America’s biggest creditor, which is also the world’s biggest exporter, pulled the plug on America, would the world even want dollars anymore? Even if America could survive China’s “nuclear” dollar option, what would happen if just one other major country, like Germany, Japan or Saudi Arabia, took China’s side?

The world is not such a friendly place for America these days. Calls for the end of the dollar as the world’s reserve currency have been heard from more than just Iran and Russia. Other powers and emerging powers, like France and Brazil, have also called for a new global currency. Even the International Monetary Fund is pushing to use some form of an international currency.

Even if American analysts are right, and China would lose more than America in a currency war, that doesn’t mean it won’t happen. Should Americans trust that China will react the way American politicians think it should?

Yet, America is in a very difficult predicament. While it may be perilous to risk a currency war, over the longer term it is equally as perilous not to challenge Beijing.

As British historian Niall Ferguson points out, under the current relationship China gets 10 percent growth while America gets 10 percent unemployment. This is clearly an unstable and highly friable relationship. Eventually something will have to give.

America is losing more than $1 billion per day in trade with China. During the second quarter of this year, the trade deficit came in at $123.3 billion—the fourth consecutive quarterly rise. Additionally, America’s full embrace of free trade costs the country millions of jobs. Free trade only makes sense if the playing field is level—and it is far from level. China’s giant state-owned corporations benefit from a strong mercantilist policy.

Nucor Corp. ceo Dan DiMicco sums up sentiment in many of America’s manufacturing centers. The giant steelmaker ceo says the proposed legislation being pushed by Congress “is a jobs bill, pure and simple.” He says those who call the legislation “protectionist” and who warn it could start a trade war are naive.

“We are already in a trade war,” he says. “[W]e just haven’t shown up yet.”

Unless China backs down on its exchange-rate policy, allowing the yuan to rise substantially, and thus making American manufacturing more competitive, a trade war with America’s most important lender could be on the horizon.

But here is the real danger. Trade wars have a nasty proclivity to snowball out of control.

Remember the Great Depression. During the four years after the 1929 stock market crash, the nation regressed like at no other time in its history. Forty-two percent of America’s banks folded. Production at the nation’s factories, mines and utilities fell by more than half. People’s real disposable incomes collapsed 28 percent. Stock prices cascaded to one tenth of their pre-crash height. Unemployment rose from 1.6 million in 1929 to a whopping 12.8 million by 1933—leaving one out of every four workers jobless. People lost their savings, their homes, their health and their hope.

But what made the 1929 crash turn so much more deadly than the previous short-lived crashes of 1920 and earlier?

According to many economists, this crash was unique because just months later, the first shots of a trade war that quickly engulfed the world were fired.

Post-World War i industrial America, reeling from the effects of the stock market crash and subsequent job losses, erupted into protectionist fervor. Riding a populist wave, U.S. politicians imposed the Smoot-Hawley Tariff Act—one of the most draconian protectionist policies in America’s history.

Historian Richard Hofstadter, with the benefit of hindsight, described the tariff act as “a virtual declaration of economic war on the rest of the world.” And that is just how the rest of the world saw it. Foreign nations were outraged. Within two years, 25 countries had retaliated; U.S. and foreign trade took massive losses. America exported $5.24 billion in goods in 1929; by 1932 the total had fallen to just $1.6 billion. Overall, world trade declined some 66 percent by 1934.

What does this all have to do with 2010 America? The first shots of global trade war have already been fired—and don’t think the economic bombshells will only fly across the Pacific.

Trade specialist Gary Hufbauer from Washington’s Peterson Institute warns that populist fervor risks igniting a hot trade war. Americans have grievances piling up over tires, aluminum, paper and steel, and it is all coming to a head.

But here is the catch: What happened when America curbed the import of Chinese tires? Sales just shifted to Mexico and Brazil—not to U.S. producers, noted Hufbauer.

So where does it all end? Does America need to slap restrictions on Mexico and Brazil now too? And what will happen when they retaliate?

The last thing America needs is a trade war. The economy is already mired in recession. America is reliant on imports, unemployment is sky high, the housing market is collapsing again, the banking industry is far more fragile than government regulators admit and the Treasury is more dependent on foreign borrowing than ever. And don’t forget—China mines some essential products like rare earth minerals that are produced nowhere else in the world. Cut off the supply of rare earths and you no can no longer manufacture lasers, super-efficient light bulbs, iPods, flat-screen tvs, hybrid cars, wind turbines, radar systems, precision-guided missiles, and a host of other military technologies.

Yet at the same time, America can no longer afford to let American companies offshore manufacturing jobs to other countries without consequences. America must do something to keep the jobs, and hence more business profits, at home.

There are no easy choices, and as the economy continues to deteriorate, the calls for political action will mount. Trade war looks inevitable.

Bible prophecy shows that America will be economically besieged in the near future. Prophesies in both the New and Old Testaments indicate that America will be the biggest loser in a looming global trade embargo. Trade war is coming. The worst depression America has ever witnessed will be the result. Will the tension over the value of the yuan be the trigger?