Obama's Asia Trip Takes Aim At China

[Project Grudge]

"In August, the Obama administration sent the USS George Washington to do joint exercises with Vietnam, which has territorial disputes with Beijing in the South China Sea. Team Obama is negotiating a nuclear deal with Vietnam, drawing militarily closer to Indonesia, and has been more aggressive than the Bush administration in selling arms to Taiwan. In July, at the Association of South-East Asian Nations, Hillary Clinton ambushed the Chinese by rallying 12 countries to protest its territorial incursions. And now Obama is visiting India, Indonesia, South Korea, and Japan, the four Asian countries most crucial to its effort at balancing Chinese power...


The interesting thing about looking at American foreign policy through an Asia-centric, rather than Middle East-centric, lens is that it is suddenly no longer so clear who the hawks and doves are. President Obama began his dealings with Beijing in a conciliatory vein, but almost two years in, his policy is more hawkish than President Bush’s. He’s angered human rights types by restoring military ties to the Indonesian Special Forces and, according to The Economist, may cut a nuclear deal with Vietnam that allows it to enrich uranium outside of the nuclear Non-Proliferation Treaty. And if Obama is more hawkish than Bush, the Democrats are, in some ways, more hawkish than the GOP. In September, when the House passed a resolution aimed at pressuring China to revalue its currency, Democrats supported it almost unanimously while Republicans were split. Paul Krugman regularly excoriates China for its currency policies. Nancy Pelosi has long excoriated it over human rights; in 2008 she urged Bush to boycott the Beijing Olympics.


What makes the China debate different from foreign policy debates during the Cold War and the “war on terror” is the role of economics. Since the USSR offered few opportunities for lucrative trade and investment, American businessmen (with a few exceptions, like Armand Hammer) had no problem with the Republican Party taking a hard anti-Soviet line. Similarly, after 9/11, there was no powerful business constituency invested in maintaining ties to the Taliban or Saddam Hussein. But China is different. If the neocons want a new cold war with China, they’ll have to take on corporate America in the process, which would make for very interesting times in the GOP."

http://www.thedailybeast.com/blogs-and-stories/2010-11-08/obamas-asia-trip-takes-aim-at-china">Obama's China Ambush

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Things can get hairy right quick. It's starting to feel like a powder keg. Plus, it looks like the US is being hypocritical because as the German Finance Minister said, “It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their printing press."

[leveymg]

1. Not everyone who wants a tougher line on China trade policy is a neocon.

China has stopped buying US debt: http://www.econoshock.be/2010/is-this-the-real-reason-for-qe2/

"Over the last 2 quarters, China has stopped buying USD debt. This makes a difference of 150 Bn USD per quarter, 50 Bn USD/month. The gap China leaves is now filled by the US central bank."

When that goes on for a year, it will match the US-China trade deficit: $600 billion/yr

That will make a $1.2 trillion dollar total bite that China is taking out of U.S. current-accounts. Ouch! Utterly unsustainable.

Trade war, anyone? Looks like it's going to happen. I would dump that Wal*Mart stock, now.

- Mark

P.S. -

You should read the article that preceded it on the Fed's Quantitative Easing (QE2) policy. Scary


http://www.econoshock.be/tag/qe2 /
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Ben Bernanke wrote an Op-Ed in the Washington Post, explaining his strategy. It is astonishing how the central banker sees QE, and the arguments he gives to support his actions. <...>
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3 November: QE-Day

Posted on 02. Nov, 2010 by

Balance sheet of the US Federal Reserve - Source: New York Times

Financial markets are focused on the message from the US central bank, today and tomorrow. It is widely expected that the Fed will continue its strategy of monetary stimulus aka Quantitative Easing. Quantitative Easing (QE) is a strategy of buying Treasury securities to put downward pressure on long-term interest rates. The hope is that new action by the Fed will make a deflationary spiral of falling prices less likely, and make it somewhat easier for consumers and businesses to borrow and spend.

So the Fed believes that it will help the US economy that economic agents can borrow and spend more easily, and is willing to bet an expected 1 Trln USD, or 100Bn USD per month, on this strategy. With this strategy, the Fed wants to:

* hold down long term interest rates
* depreciate the US dollar
* create inflation in the MT/LT

If you believe these are solutions, instead of new problems, the US strategy could become a success. But it is far from certain that they will achieve the expected result. The US dollar market is vast, due to its role as reserve currency. As a consequence, the impact of even 1Trln USD is not certain. QE can also have serious drawbacks:

* It is a road without any return. If the first trillion does not work, the Fed will only quicken its money printing. The point of no return has been reached, and Bernanke will not change its policy anymore.

* The Chinese are not happy about QE2, and they will diversify away from USD, and even quicken this strategy. The Chinese will be buyers of euros, gold, natural resources, African hard assets, and food.

* Once inflation hits, it will be difficult to control. That’s the problem with money printing. You can start this, but there is no economic and monetary manual that explains how you can successfully stop this policy.

In the meantime, we are witnessing decisions today and tomorrow, that will have effects for the following years. This emergency policy would only be necessary in extreme situations. Therefore, the optimism from the corporate sector, and the Billion USD bonuses in the US banking sector are in stark contrast with the panic policy of the US Federal Reserve.

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