The Gap Again Widens

 The September trade numbers are out and America’s Trade deficit increased significantly since August. Not only did it increase, but it made the largest percentage increase since February of 1999. Of course, part of that dramatic note is due to the contraction that resulted as part of the economic down-turn.

An AP article (see: http://www.google.com/hostednews/ap/article/ALeqM5gNiyJ905Ho0Ur96V2TQhsBX19lGwD9BUNGF80) sites authorities who suggest that the increase in energy prices is outstripping the benefit gained in the export sector by a falling dollar.

As President Obama travels through Asia this will no doubt be a subject of discussion. A Chinese Yuan that is kept artificially low is credited with a not insignificant portion of the problem. The Chinese have indicated a willingness to let the Yuan adjust a little, but are, not unexpectedly, quite concerned about the state of the dollar (being holders of vast quantities of dollar assets.)

I was disappointed to see that the Obama administration rejected a meeting with the Dalai Lama on his upcoming visit to Washington DC. This symbolic act of deference to the Chinese seems like an interesting follow up to slapping a massive 35 percent tariff on tires imported from China.

This shows just how politics results in bass-ackwards policy. While comparing the Chinese Tire Tariff to the Hawley Smoot Tariff Act may be hyperbole, it cannot be said to be sound economic policy by any stretch of the imagination. (Proponents of tariffs often forget that the US exports things as well, and life gets a lot harder for those US companies that export goods and services when tariffs are imposed. [Why shouldn't other countries return the favor.] So, in essence, you are hamstringing the companies that do things well relative to the rest of the world in support of those companies that are not competitive of their own faculties.) Of course, the tariff is not an economic policy in that it is not a plan of action designed to achieve an optimal effect on US national income. Instead, it is a political policy designed to increase / maintain support for a political party, and no doubt there was some sort of tit-for-tat agreement (presumably related to support for healthcare and / or carbon constraints) that played into the agreement.

On the other hand, because there are relatively few voters of Tibetan origin in the US, it is quite easy to use turning down a meeting with a the Tibetan religious leader as a means to buy good will with the Chinese. Of course, the Chinese may gladly accept the actual injury imposed by the tariff in exchange for the imagined victory of being able to point out that the US doesn’t recognize the Dalai Lama’s status. The Chinese often seem more concerned about what appears trivial and symbolic than real offenses. However, from the Communist Party of China’s perspective, the economic cost of a tire tariff may be inconsequential compared to the boon of realizing that they can do as they please domestically and regionally without suffering the slightest loss of legitimacy on the international stage.

Of course, as we in the United States have gleefully accepted a situation in which we gluttonously overspend while the Chinese willingly buy up our debt, we are not in a great position to say anything if the Chinese say… abscond with a little boy in order to usurp a religious lineage (particularly one which has relatively few adherents / voters in the US.) [This referring to the Panchen Lama, who disappeared and was replaced with a Party-sanctioned puppet. I, of course, don't know that he was killed, just that he has been kept out of the public eye and incommunicado.]   

 Needless to say, I think, in this particular case, the Obama Administration got it entirely wrong. The Administration should foster free trade, and not encourage China to believe that they can set the White House’s meeting agenda and /or replace religious leaders without loss of legitimacy. It was big news that Italy dropped in the most recent Freedom House rankings from “Free” to “Partially Free”, but no one would imagine that Italy could get away with saying: “Sorry Cardinals, we know you picked this ‘Benedict’ guy, but we’ve got this other guy- ‘Antonio’, and he’s now the real Pope. By the way, before you complain, Vatican City is no longer a sovereign country - we took it over as it was never really its own country anyway.”  There would be outrage, and people would stop treating Italy like a first world power.

India’s first indigenously-built nuclear reactor-propelled submarine today begins a two year shake-down that, if successful, will result in its addition to the fleet of the Indian Navy. It is interesting to consider the potential strategic ramifications of the sub. It should be noted that this is not India’s first submarine (it has purchased from other countries in the past – notably Russia, who was credited in assisting in this project as well) and that, as mentioned, it’s launch ceremony is not synonymous with it entering service because it is still untried.

In general, nuclear submarines have a mixed influence on strategic stability. A  sub’s ability to hide beneath the seas and to operate there exceptionally quietly for extended periods, means that it is a weapons platform whose survivability is high. This is consistent with deterrence theory. A state needs survivable weapons so that the enemy knows that massive retaliation to an attack is imminent, and that there is no use in trying to swamp an enemy’s deterrent capability.

On the other hand, submarines make the opponent exceedingly concerned about the sub owner’s intentions. Because a sub can pop up off-shore and launch along varying azimuths relatively close and without warning, there is a fear that they will be used to eliminate the enemy’s retaliatory capability as part of a plan to negate the opposition’s deterrent. Both China and Pakistan have small arsenals, and are, therefore, theoretically vulnerable to having their deterrent destroyed by a first strike. In reality China’s deterrent is apparently heavily fortified by being built into a mountain and is not so tiny as to make an opponent confident about knocking it out.

It should be noted that Prime Minister Singh emphasized during the launch speach that India did not have agressive intentions with the new weapon system . Of course, talk is cheap, and whether Pakistan and China believe the rhetoric will be determined by more than word choice. It will be interesting to see what effect, if any, the new system has on regional stability.

No one is more aware of the impermanence of power than old revolutionaries. Individuals who helped topple a government know that angry young men and women, spitting images  of themselves in their former glory, have a vast capacity to turn energy and passion into the death knell of an ineffective, corrupt, or abusive regime.

One approach to ensuring longevity and stability of a new government, as codified in the documents of America’s Founding Fathers,  is to accept the power of people to determine their own governance through democratic elections, rule of law, and limitations on the length and number of terms that office holders can serve. Another approach is to rely on propaganda, brutal suppression, targeted vote buying, and cultivation of cults of personality to maintain a passive populace. Authoritarian regimes have been dying off in the modern era, but are still more common than one would like. However, we are seeing interesting times for a couple of world’s remaining non-democratic revolutionary-born governments including, most notably, Iran and North Korea.

In essence, a non-democratic revolutionary government needs to create a successor to the divine right of kings argument. This argument was historically used to convince people of why they should accept rule by tyrannical forces who showed little or no interest in the citizenry’s well-being. This is unless, of course, you are a country such as Iran where the ”god-as-guarantor of earthly governors” argument still holds sway.  

Communist governents are noted for attempting to delude the people that they, as the citizenry, are, in fact,  in power- or in the process of being handed the reigns of power. One need look no further than the adoption of names, such as the Democratic People’s Republic of Korea(there are at least three things wrong with that name), to see the great effort made to convey to an oppressed people a false sense of empowerment. If truth-in-advertising ruled, Kim Il Sung would have named the country the Tyrannical Kim Dynasty House of Famine in Korea, but this would not have kept the pitchforks at bay. Communist regimes tell the members their populace that they are, as George Orwell described, all equal- except in that “some pigs are more equal than others.”  Of course, when you have no power, you are keenly aware of it, and so this leaves control of information, movement, and assembly as the true means by which the old revolutionaries keep from becoming the  former revolutionaries.

In some sense, the Ayatollah Khamenei’s dictates about how election dissent will be handled seem promising. He has suggested the possibility of an investigation, and has taken actions designed to calm civil unrest pending an investigation. However, he has also asked the foreign press to leave. This is, of course, precisely the thing a government does if it wants to crack heads with impunity, and without losing all appearance of legitimacy abroad. Khamenei seems to be hedging his bets by leaving open a variety of counter-revolutionary activities (note: I am not using this term in the manner that it has come to be used by Communist regimes, which is to say that a counter-revolution is any revolution that throws Communists out on their butts)  designed to ensure the theocracy holds.

I suspect the odd behavior of North Korea of late is also tied to regime control concerns. In this case, Kim Jong Il wants to continue the dynasty begun by his father, but his chosen successor is untried and vulnerable. Kim Jong Un needs to establish some credibility quick or the days of the House of Kim may be numbered. Of course, Kim Jong Il came upon a sure-fire strategy to keep the people from rising up. It includes all the usual element such as spying on them, beating any dissenters down violently, and building a cult of personality,  but it goes further to ensure that the population is starved half to death and are too busy foraging for sustenance to organize an opposition. However, the military will remain a threat unless Kim Jong Un’s primacy can be established.

In the past I have always found the Central News Agency of the Democratic People’s Republic of Korea (DPRK) (see: http://www.kcna.co.jp/index-e.htm) to be less than compelling and rarely worthy of examination. The stories are generally about how such-and-such Sub-Saharan African dictator sent congratulations to Kim Jong Il, or how the North Korean People wished to pay their respects to such-and-such nation. In essence, it was not only propaganda, but propaganda of the dullest and most mundane sort imaginable.

However, in recent weeks it is becoming increasingly worthwhile to visit the Agency’s site. Oh, it is still wild propaganda, but it is entertaining propaganda. Consider some of the current headlines:

“US Wild Ambition to Dominate Whole of Korea Can Never Come True”

“US Termed Chief Culprit of Nuclear Proliferation”

“Japanese Reactionaries Urged to Stop Their Rash Acts”

This last one is particularly amusing. It essentially rebukes elements inside Japan who would like that country to develop nuclear weapons. The irony is, of course, that the only way the Japanese will be sufficiently motivated to make major changes in their law as required to build a nuclear arsenal is in response to the continued provocations of their nutty newly nuclear neighbor who is constantly shooting missile tests across their bow lately.

Today the United Nations Security Council (UNSC) passed sanctions against North Korea consisting primarily of a complete arms export embargo and a partial arms import embargo. The big news seems to be China’s support for these efforts. While Chinese diplomats were careful to state that inspections must be carried out in accordance with international law, and, therefore, the sanctions did not equate to open season on DPRK shipping, they did go along with the provisions as stipulated. The Chinese don’t want a nuclear armed Japan any more than the North Koreans do. The difference is that the Chinese recognize that the way to avoid a Japan with nuclear weapons is a sane and stable North Korea.

Besides the long-range missile test that was earlier estimated would take place early next week, it will be interesting to see of what the North Korean response consists. As I have mentioned before, when you go as provocative as nuclear weapons tests, it is hard to up the ante without risking war. While the North Korean rhetoric is harsh, it is difficult to imagine what North Korea can do besides the same old bag of tricks it has been playing.

Tiananmen 19 Years After the Massacre

Today marks the 20th Anniversary of the tragic crack down against protesters on the broad open Tiananmen Square in the heart of the Chinese capitol. This action left hundreds, perhaps as many as a couple thousand, dead, and countless more were injured. There have been a large number of stories in the news this week about suppression of Internet sites as part of the Chinese government’s approach to handling the anniversary. This approach, which is said to go beyond limiting Internet access to putting family members of some victims under house-arrest, is a tragedy itself.

One would like to think there has been growth in governance in China that, even if it cannot keep up with the  rapid pace of economic growth, demonstrates forward progress and momentum. Because China has risen to such an important place in the global community, one might expect that its leaders would have begun to build the requisite level of courage and sophistication to do the people’s business well. Unfortunately, repression of people and information sources is an indication that governance is still immature in China, and is far from what the Chinese people deserve.

China is a spectacular place, and its people intelligent, industrious, and kind. As much as China has become a dominant force in recent years, I expect it will see yet a greater age in the future.  A government so cowardly as to prohibit its people from mourning, and so imbecilic as to think it can achieve some equilibrium under which its people are kept ignorant of detrimental information while accessing all the information necessary as a 21st century economic powerhouse, cannot stand, and will either evolve or be supplanted. With better governance, it is hard to fathom the limits for China. I don’t buy that Chinese government needs to look like Western governments, I suspect that its form of governance may end up being uniquely Chinese. They certainly have the history to know good from bad government. I just suspect that it will have to be of higher quality.

I was in Beijing last summer, about one year ago precisely (hence the caption on the photo.)  I noticed then that I couldn’t access my WordPress account to make any blog posts. It had worked just fine in Japan, which I visited immediately prior to traveling to Beijing, and more recently when I made a number of posts from Hungary at Christmas time. I had heard many times about China’s restrictions on the Internet, but it was an interesting and frustrating experience to experience it first hand.

I have heard that there are several approaches to censorship practiced around the world. Apparently, some Middle Eastern nations show you a screen that tells you that you are trying to go to a prohibited site. In China, the computer would just time out trying to get to the blocked site. Of course, there are various things that countries are attempting to achieve by way of censorship. Some are trying to enforce a moral code by barring access to pornography or the like, and others are trying to prevent illegal activity that may take place on otherwise legal sites (e.g. Craig’s List.) China’s government is trying to prevent people from learning things that would make the government appear inept, would let the citizenry know that there is potentially a better life available to them, or might create revolutionary momentum.

This is, of course, a dominant Communist tactic for maintaining the Party’s frontispiece of equality and prosperity. In reality, withholding information in the Information Age is like trying to bail out a boat with a pasta strainer – an exercise in futility. It is difficult enough for a dictatorship like that of Kim Jong Il, for which prosperity is irrelevant and the survival of the dynasty is everything. However, this attempt to control information is really a comic farce in a country as linked into the global economy as is China. The government’s fear may have true roots to be certain. No government can stand against a billion person opposition should it arise, but the lesson they need to learn is that more freedom doesn’t necessarily mean more risk of overthrow, it may well mean less.

I recently read a book by Chinese-American immigrant author Anchee Min who told her story about growing up in China. She said that she had been a virulently anti-American Mao supporter as a child. Then someone in the hutong got a television. They all gathered around to watch, and the process changed her worldview. The government-directed news programming showed a labor protest in Chicago, and was meant to convey the oppression of the capitalist working man. However, the take-away for the girl (and perhaps others that evening) was that the workers were well-dressed, well-fed, and, in the background, there were signs of prosperity and wealth beyond the girl’s comprehension.

James Michener in Bridge at Andau, conveys a story that has a similar take away about the capacity to conceal information in the modern era, or the lack thereof. In this case, a Hungarian man was at a soccer match in Budapest and met a couple guys who had traveled from Austria to catch the game. The long and the short of the experience was that the Austrians did similar factory work as the Hungarian, but had vastly higher standards of living. This was, of course, not the official line that the Hungarians were hearing from the government in those early years of the Cold War.

Day-by-day it becomes more difficult to deceive a populace, particularly if you want to be integrated into the larger world and accrue the benefits of commerce and international influence that follow. Certainly the Chinese government has made progress since the days of Mao in which brutal oppression ruled the day. However, there remains the need for the Chinese government to develop the courage necessary to let the truth be known. I suspect their days are numbered if they do not. At least this is my hope for the Chinese people.

President-elect Barack a has been presenting the details of an economic stimulus package that will consist of massive government expenditures on public works and attempts to incentivize businesses to employ more labor. (As an aside, the spending on public works may just help alleviate some of the risks resulting from our dilapidated infrastructure.) While the idea of increasing government spending, particularly direct spending such as public works, may be economically sound, it will likely face some daunting challenges because the general modus operandi of our government is not to be fiscally responsible. In other words, the proclivity to run up massive debt may well bite us in the ass. 

Lack of fiscal restraint is not a trait that solely characterizes the George W Bush Administration, but rather is much more widespread. While many will point to the Clinton years as an example of when the government shifted into surplus territory and began chipping away at the debt, it should be noted that much of the money that was overflowing the public coffers was earned in a speculative bubble on information technology. Firms that weren’t making a dime had stocks that were going through the roof. The 1990’s  may be seen as a time in which monetary discipline was lacking more than one in which fiscal discipline reigned. The Federal Reserve kept rates low, and the feeding frenzy continued.   

The question is how do we pay for the economic stimulus? Obviously, taxation is out of the question. The other half of fiscal policy for combating a recession (besides boosting government spending) is to reduce taxation. A government cannot raise more revenues in a recession because increasing tax rates means that disposable income is reduced by the amount of the tax hike, and the public, which is already being thrifty, reduces its spending yet further.

This leaves borrowing money, and, because our domestic propensity to save is low and many people have low or reduced incomes at the moment, this means borrowing from abroad. Under ordinary circumstances, this would not be a problem. After all, America’s current account deficits mean that there are a lot of US dollars in foreign hands, and, historically, the dollar has been seen as a low risk place to invest and a good place to weather financial storms (even ones centered in it.) However, because, even in economically good times, we don’t save or act with fiscal restraint, it may well be that confidence in dollar assets will erode. This could put the Federal Reserve in a very bad place. Foreign markets may not buy dollar assets at the low interest rates that have been put in place to fight the recession, and raising interest rates in a recession is an economy killer. While we are talking mostly about long-term borrowing, and so there may be expectations of better times ahead (no where to go but up?), I don’t think it is clear what a run up on interest rates will do.

Furthermore, even if foreigners would otherwise be willing to purchase US assets, they may be spending down their reserves in an attempt to boost their own domestic economies. Granted, China has a massive amount of reserves (about $2 trillion USD), and a fraction of that amount would go a long way in stimulating the Chinese economy. However, the combination of a need to spend these reserves and a “once bitten, twice shy” attitude toward dollar assets could spell doom for the president-elect’s plan.

Source: CDC Image Library

China reported the death of a patient from the H5 N1 strain of bird influenza. While the World Health Organization (WHO) states that there is no indication of a rising threat, the fact that the patient died in Beijing as opposed to some remote and isolated rural farming community does make one think.

I’ve been thinking about the flu pandemic threat as of late, partly because it seems interesting how it came and went off the world’s radar screen.  I’m certain it is still front and center in the minds of the public health and emergency management communities, but the topic has been supplanted in the media by the elections, financial crisis, and other topics of the moment. The White House put up a great site on the topic, but it seems not to have been updated for the better part of a year, and mostly centers around the 2005 strategy white paper that was developed to assist in combating a pandemic. Of course, the White House is not the only entity (government, business, or non-governmental institution) distracted by other issues.

A flu pandemic is one of several events that could have the effect of driving our current recession into depressionary territory. If Murphy was correct in the formulation of his law, we might well see an outbreak in the next 18 months or so.

Source: US Navy

Let me first make clear that I am not talking about the combating of piracy of intellectual property here. Judging from the prevalence of North Fakes and Rolaxes in Beijing markets this summer, I have no reason to believe the Chinese government is committed to that type of counter-piracy.  

They have, however, shown a willingness to take a leading role in combatting piracy on the high seas near the Gulf of Aden. This represents an interesting shift from a China that that was not militarily active outside its immediate region, and  People’s  Liberation Army Navy (PLAN) that didn’t (until recent years, couldn’t) conduct operations beyond China’s coastline. China Daily reports that it is the first time that the Chinese have deployed ships into a situation beyond China’s coastal waters in which they might have to engage in combat operations. (See: http://www.chinadaily.com.cn/world/2008-12/27/content_7346349.htm)

This is a great mission for China to flex its military muscle and demonstrated its blue water capability in a decidedly uncontroversial setting. Even the US Defense Department, which has historically been critical of China’s expansion of its military capability, has welcomed the Chinese activities. (See: http://www.defenselink.mil/news/newsarticle.aspx?id=52386) Let me first say that it is pretty hilarious for the US military, whose annual spending in 2008 (including supplemental war spending) was $656 billion – a level of spending greater than the total national income of the Netherlands, to be critical of any nation’s military expansion. However, part of the reason for this hypocrisy may have been that China was expanding its capabilities without contributing to global security operations in the way that the US military does.

The question of interest is what the PLAN deployment means for the future of international affairs. Is it an isolated activity or the beginning of expanded military operations to remote locations? If it is the beginning of expanded military operations afar, will these operations shift from being unambiguously in the interest of global security (such as fighting Somali pirates) or will these activities increasingly reflect Chinese national interests in contravention of global strategic stability? The Chinese have stated intentions to contain there sphere of interest to their immediate region, but these statements have been viewed skeptical.  

2009 and is shaping up to be an interesting [re:  possibly terrifying] year. There is a great deal of talk about change here in America because, of course, we will obtain new leadership that will represent a substantial shift in character and approach. There is also excitement about change because, given the current economic climate, it might appear that any change would represent improvement. I would not be surprised if American governance is  one of the areas in which change might fall far short of expectations – both because the expectations are so high and because the free world’s inertia is more substantial than people generally understand.

Where might we see major change? First, there are a couple dictators in poor health that could cast off their mortal coils. If either Kim Jong Il or Fidel Castro pass away, it will be interesting to see how events unfold in nations where the leaders are such ingrained fixtures. I expect the situation in North Korea will be a much more dramatic affair. With the slightest modicum of decent governance, North Korea could achieve great advances. No doubt there are some in potential power positions who would like to see a move toward the Chinese model of economy and governance, but they will be opposed by factions who are afraid of being hanged if any pretense of a rule of law were to be established. This could make for an interesting power play. No doubt there are great efforts being made to get a successor into shape to lead.

The economy will probably remain in the tank for quite some time, and there will be many countries more badly hurt by it than is the US. There are nations that rely heavily on the America consumer’s perpetual need for more stuff to pull themselves out of poverty. It was satisfying to see that sales figures for the post-Thanksgiving  shopping day were surprisingly good. Because I am going to Hungary over Christmas, I was intrigued to see that polls indicate that Hungarians too might cast caution to the wind and do a big Christmas this year. I am interested to see what effect Hungary’s economic problems have had on daily life in Budapest because I have been going every couple years since about 1994. The aforementioned  unanticipated consumer confidence may have a profoundly positive effect.  It is certainly much better than people white-knuckling their cash in terms reducing the severity or likelihood of recession.

There are a few countries that will be of particular interest in the upcoming year. We may get a feel for how import-dependent China actually is during the new year. While it is commonly thought that China is an export-driven economy, some economists have suggested that its own internal consumption may be enough to keep it afloat. It also may turn out that its $2 trillion [USD] in reserves can help keep them afloat. It was reported today that the Yuan depreciated against the dollar. This will no doubt raise the ire of those who feel that China is killing the US by keeping the Yuan too weak (thus encouraging us to import from them and discouraging their own citizens from importing from us.) I suspect China will whether the storm alright.

Russia may be a different picture. Russia’s economy is not as diversified, and low fuel prices will hit them hard. It will be interesting to see what effect this has. Will it lead them to ease off their aggressive stance a bit, or will it make them more desperate? There are still a lot of Russians who long for a return to the days in which they were not so marginalized. 

I expect poor economic conditions globally, unfortunately, may translate into increased violence and turmoil. Expect yet further tensions in the Middle East and South Asia, as well as worldwide terrorist activity.

Hopefully, and most certainly, there will be some good news as well. Maybe a breakthrough in cancer treatment or solar cell technology that will have earth-shaking ramifications. Of course, we could experience a 1918 scale flu pandemic or something else hideous as well. My inability to maintain an optimistic note is an indication about how I feel about the situation. So Merry Christmas and a non-cataclysmic New Year.