Questions and Observations

Free Markets, Free People

Musings, Rants and Links over the 18th Fairway:02/09/2010

We finally got a mixed bag on the employment front this month, a welcome change from the purely awful. However, with everyone focused on “creating” jobs I think this quick synopsis attacking the unrealistic expectations of when and where jobs will come from is well worth reading. This chart gives you an idea of how bad it really has been (click image for larger version)

PercentJobLossesJan2010

Yves Smith looks at the problem of how to handle the prospect of the financially weaker members of the European Union possibly defaulting. neither the PIIGS nor their colleague states want to take the steps they may need to take. Markets however are sending a clear message, “Do Something!” The risk goes beyond the direct damage from the potential losses from holding these countries debts. European banks are already shaky, with shaky assets and still a lot more leverage than is safe. I believe Europe’s bear market is likely back on.

European banks are shaky? How provincial of me not to mention our own banks. The coming wave of defaults in the Alt-A and Prime mortgage space are not getting enough attention, Yves helps out there as well. Not only are the losses coming (pretending loans are good only works until they actually default) but the banks are in for some serious lawsuits from all kinds of parties that bought the toxic loans. First in line are Freddie and Fannie. They will still lose at least 400 billion, but they’ll take a good chunk out of the banks hide on the way down.

the phrase “credit specialists at Citi” is not exactly the kind of thing which instills enormous confidence in analysts and investors these days

I think that is an understatement. They want to sell another fancy derivative designed to remove all risk if there is a systemic crisis when, of course, those supposed to pay up will certainly have the money to do so….Right?

Please imagine me banging my head against the keyboard. And no, the response of the Citi Spokesman doesn’t make me feel any different, in fact, it makes me feel worse.

The term liquidity is the pixie dust the financial commentariat uses to obscure what is really going on. I maintain, and have throughout the last few years, that our difficulties have not been a liquidity crisis (though many who had no business exposing themselves individually to liquidity drying up for them certain had a liquidity crisis) but a solvency crisis. David Merkel points out that liquidity always exists, it just goes where the marginal credit buyer has gone. Where insolvency risk seems to be increasing, the marginal buyer can become very scarce and will provide it to areas seemingly exposed to less risk. At the end of the day it is solvency that is our problem, and until we solve that liquidity will go to those perceived to be least at risk. Right now that is the government and those they are backing. Hence a credit crunch for much of the economy.

Speaking of credit, consumer credit has now declined for 11 straight months. A record, and by a long shot. (Click image for a larger version.)

ConsumerCreditDec2009

In the “no big surprise department,” and paralleling the argument I made at the time, it has now been shown that the ban on short selling during the crisis did not help support prices and damaged stock market liquidity. In the no surprise at all department the biggest complainers turned out to have fundamental problems that short sellers were pointing out accurately (much better than our regulators.) The loudest complainer of all, Overstock.com and their bizarre CEO, Patrick Byrne. The upshot, they have been cooking their books for years, just like the short sellers were claiming.

Cross posted at The View from the Bluff

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“Bi-Partisan Health Care Summit” Or Political Theater? (Update)

The GOP has every reason to be wary of and, in fact, refuse to participate in the televised “bi-partisan” health care reform summit the President is calling for on NPR unless a number of preconditions are met. The reasons are many, but perhaps the primary one has to do with the fact that this isn’t a summit proposed to begin bi-partisan talks on reforming health care, but instead, an attempt to shame Republicans into supporting the present Senate bill passed. The president refuses to abandon it and reset the health care reform debate at the beginning.

After months of behind closed door negotiations, it’s suddenly “sunshine” time. Why in the world wouldn’t Republicans be suspicious?  It’s hard not to conclude (especially after the results of the televised meeting at the GOP retreat) that this is nothing but political theater designed to show the Republicans as “obstructionists” and the “party of no”.

What the televised “summit” will likely consist of is Obama and the Democrats pushing for acceptance of the same bill now pending and the Republicans saying “no”. The desired outcome is to have them say it right there in the open on TV.  Of course they’d love to have enough Republicans submit to the pressure and commit to passage as an outcome. That’s most likely not going to happen. The most likely scenario has the Republicans say “no” and Democrats claim “see we tried to include them, but they refuse” and use that as a justification for reconciliation. As Democrats see it, it would be a win-win for them with a chance to make the GOP look bad.

The House Republican leadership has sent a letter to the President in which they question all of this. You can read it here. My favorite part of the letter comes after a series of very pointed questions are put to him:

Your answers to these critical questions will help determine whether this will be a truly open, bipartisan discussion or merely an intramural exercise before Democrats attempt to jam through a job-killing health care bill that the American people can’t afford and don’t support. ‘Bipartisanship’ is not writing proposals of your own behind closed doors, then unveiling them and demanding Republican support. Bipartisan ends require bipartisan means.These questions are also designed to try and make sense of the widening gap between the President’s rhetoric on bipartisanship and the reality. We cannot help but notice that each of the President’s recent bipartisan overtures has been coupled with harsh, misleading partisan attacks. For instance, the President decries Republican ‘obstruction’ when it was Republicans who first proposed bipartisan health care talks last May.

The questions mentioned address reconciliation, starting over and other important ones. It’s a letter that makes it clear that the House GOP leadership is very suspicious of the intent of the so-called summit – and rightfully so.

Of course that doesn’t mean they won’t end up playing along. The possibility that the summit would turn into a “bash the GOP” event is something they just won’t be able to stand and will show up in an attempt to avoid that.  Instead, they’ll just play into Democratic hands.  If I were them, I’d instead issue a statement saying that the GOP has concluded there is no good faith attempt on the behalf of the administration or the Democrats toward bi-partisanship in the summit citing their refusal to reset the debate and include the GOP from the beginning. As a consequence the Republicans see no utility in trying to make a silk purse out of the sow’s ear of legislation they already universally oppose.

I don’t know about you but I’d respect them much more if they did that than if they show up and play along in a bit of political theater that is designed primarily to cast them in a bad light for the benefit of the opposition.

UPDATE: White House (non)response to the GOP’s letter.

~McQ

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Counting Unemployment

The most recent release of unemployment data has raised some questions, namely, how can we lose 20,000 jobs in the same month that the unemployment rate declined to 9.7%.  The answer is simple: The unemployment rate is essentially a made-up figure.  And I can give you a much more accurate way to measure the unemployment rate.

First, let’s take a brief look at how the monthly Employment Situation figures are compiled by the Bureau of Labor Statistics.  The BLS combines two surveys to compile the Employment Situation.  The first survey is the Establishment Survey.  That’s a pretty accurate survey, because it consists of asking businesses to provide hard payroll data on the number of existing jobs.   The second is the Household Survey, which is where the train runs off the rails.

For the Household survey, they ask if you are employed.  If the answer is “No”, they then ask if you if you’re actively looking for a job. If the answer is no, then they just simply take you out of the labor force.  They don’t care whether you aren’t looking for work because you know there are no jobs available, or whether you’ve retired and are planning to sail a sloop across the Pacific.  If you aren’t actively looking for work, you aren’t part of the labor force.  So, the official unemployment rate generally understates–sometimes substantially–the real level of unemployment.

Fortunately, there is a better way to calculate the rate of real unemployment, and the BLS web site conveniently provides you with all the data you need to do it.  From here, we only need three items: The Civilian Noninstitutional Population, the Participation Rate, and the number of Employed.

The first thing we need to do is figure out the Labor Force Participation Rate during the most recent period of full employment.  If you take the average monthly labor force participation rate from the 70 months between Jan 04 and Oct 08, you get a participation rate in the labor for of 66% of the Civilian Noninstitutional Population.

Next, you multiply the Civilian Noninstitutional Population by 0.66.  That gives you the size of the normal labor force at full employment.

Next, you take the number of Employed, and calculate the actual rate of unermployment using the following equation:

1-(Employed/Normal Labor Force)=Unemployment Rate.

So, with this method, we can compare the unemployment level of Oct 08, right before the economy cratered, to last month.  When we do so, we get the following results:

OCT 08:
Civilian Noninstitutinal Population:
234,612,000
Participation Rate: 66%
Labor Force:
154,843,920
Employed: 145,543,000
Unemployment Rate: 6.0%

Jan 10:
Civilian Noninstitutinal Population:
236,832,000
Participation Rate: 66%
Labor Force:
156,309,120
Employed: 136,809,000
Unemployment Rate: 12.5%

Note that this calculation for Oct 08 is very close to the official unemployment rate of 6.1%.  But as the economy gets worse the official employment rates show greater and greater variance.  In other words, the official unemployment rate becomes progressively less accurate as the Employment Situation worsens, substantially understating the actual rate of unemployment.  This is, by the way a feature of the BLS’s method, not a bug.  It is no coincidence, as our Soviet friends used to say, that discouraged workers fall out of the labor force calculations.

Now, this measure I’ve explained doesn’t tell us anything about people who are working only part-time, when they’d prefer a full time job, so it doesn’t tell us much about underemployment.  But it does tell us, based on the recent historical labor force participation rate, what the size of the labor force should be.  Once we know that, it becomes very easy to see what the actual rate of unemployment is in real terms, rather than the notional terms provided by the Household Survey.

According the BLS, however, the Civilian noninstitutional population has increased by 2,220,000 people  from 234,612,000 to 236,932,000, while, at the same time, the civilian labor force has shrunk by 2,055,000 people  from 155,012,000 to 153,455,000.  Using the BLS numbers, then, the labor force participation rate is 64.6%.  That kind of demographic change might be expected in a couple of years when the baby Boomers begin retiring in large numbers, but for right now, it seems…counter-intuitive.

In any event, 12.5% unemployment is a far more realistic number than the BLS estimate of 9.7%.

154843.9
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Eye On The Polls – Not Good News For Democrats Or Incumbents (Update)

A bunch of interesting polls have emerged today.  One finds Obama at his lowest job performance rating yet.  Of course, as you might expect, Republicans mostly  disapprove of his job performance.  Democrats, on the other hand, generally approve.  But what gets his job approval rating to 44% approval, 47% disapproval in this Marist poll are the independents.  They’re very dissatisfied with his performance – only 29% approve while almost twice that number, 57% disapprove.

Remember it was the independents who put Obama over the top in 2008. Also remember it was they who put Scott Brown over the top in MA and were key in the elections in VA and NJ.

As for Obama’s personal popularity, that too has suffered.

And while GOPers strive to avoid attacking Obama personally, for fear of offending voters who see him in a favorable light personally, even that aura of invincibility is wearing off. Independent voters view Obama negatively, too, by a 39% favorable to 52% unfavorable margin. All registered voters still see Obama favorably by a 50%-44% margin, but that’s down 5 points in just 2 months.

However, there’s more to this than just Obama’s job approval and personal ratings. Also found in this poll is a strong trend toward anti-incumbency:

Meanwhile, members of Congress should brace for a difficult election year. 42% of registered voters said they would back their current member of Congress, while 44% said they would support someone else — a drop of 9 points in support of the incumbent in just 2 months.

Rassmussen has a poll out that begins to flesh out why that trend is building. Three-quarters of the public, according to his latest polling data, express some level of anger at the policies of the federal government. That’s up 4 points from November. It is also why I call the Tea Parties the “tip of the populist iceberg”. There are a whole lot of unhappy voters out there.

So how does it break down? Well, not as Jacob Weisberg and the “ignorant, childish voters who want to live in Candyland” crew would have you believe.

Part of the frustration is likely due to the belief of 60% of voters that neither Republican political leaders nor Democratic political leaders have a good understanding of what is needed today. That finding is identical to the view last September, just after the tumultuous congressional town hall meetings the month before. But only 52% felt this way in November.

And, as time goes by, this trend continues to grow. Note that the leaders of both parties are identified as being clueless by this 60%.

So this week let’s revisit the comparison between the Political Class and the Mainstream (you proles in flyover land) voters. And as we saw last time we checked it out, the PC bunch is totally clueless:

The divide between the Political Class and Mainstream voters, however, is remarkable. Eighty-eight percent (88%) of Mainstream voters are angry, but 84% of the Political Class are not. Those numbers include 57% of Mainstream voters who are Very Angry and 51% of the Political Class who are not angry at all.

But then 68% of Mainstream voters don’t think the leaders of either major political party have a good understanding of what the country needs today. Sixty-one percent (61%) of the Political Class disagree.

By comparison, the majority of Republicans, Democrats and unaffiliateds don’t believe the current political leaders have a good handle on what is needed today.

Older voters and higher-income voters share that belief most strongly.

Thus the Tea Parties and the very negative reaction by the PC to them. They simply don’t get it. Which is why we’re suffering through this spate of leftist pundit tantrums in which they damn the people, democracy, and the opposition for being unwilling to roll over and submit to their sublime enlightenment, ability to know what is good for us and benevolent despotism. We’re seeing laments about how the good old day before the damned internet, talk radio and 24 hour cable let the enlightened elite do as they wish.

Look around you my friends – to this point that’s worked out just wonderfully hasn’t it?

Rasmussen lists a bunch of reaction which pretty much outline what you’re hearing from the most vocal of the Tea Partiers:

Most voters oppose the now-seemingly-derailed health care plan proposed by President Obama and congressional Democrats for months. They continue to have very mixed feelings about the $787-billion economic stimulus plan approved by Congress last February.

Looking back, most voters still don’t approve of the multi-billion-dollar government bailouts of the financial industry and troubled automakers General Motors and Chrysler.

Forty-nine percent (49%) worry the government will try to do too much to help the economy, while 39% fear it won’t do enough.

As the economy continues to stumble along, 59% of voters believe cutting taxes is better than increasing government spending as a job-creation tool, but 72% expect the nation’s elected politicians to increase spending instead.

Eighty-three percent (83%) of Americans say the size of the federal budget deficit is due more to the unwillingness of politicians to cut government spending than to the reluctance of taxpayers to pay more in taxes.

Voters have consistently said for months that they have more confidence in their own economic judgment than that of either the president or Congress.

Charles Krauthammer calls this “The Great Peasant Revolt of 2010”. And in a very real sense it is. What Republicans haven’t yet grasped is this revolt is pretty non-partisan. The reason Republicans seem less threatened by it is because of their fiscally conservative, limited government philosophy. Democrats, on the other hand, suffer more because of their tendency toward fiscal profligacy and government expansion. The problem for Republicans, however, is the country is no longer in a mood to see them give fiscal conservatism and limited government lip service.  If you don’t believe me, take a look at this Iowa poll:

A third of Iowans from across the political spectrum say they support the “tea party” movement, sounding a loud chorus of dissatisfaction with government, according to The Des Moines Register’s new Iowa Poll.

Neither party has a lock on these restless advocates of limited government and fiscal control, according to the poll. However, their conservative leanings appear to give Republicans a greater opportunity than Democrats to make gains at the dawn of a volatile election year.

Is the GOP listening?

It should be clear to both sides that we’re moving into an era of “do what you say or be gone”. The days when incumbents only left office when they assumed room temperature, as did Jack Murtha today, are coming to an end.  What the Tea Parties signal is a much more connected, networked and activist population which has been empowered by the communications technology of today – much to the chagrin of the elitists.

The fun is just beginning. Barack Obama and the Democrats may not realize it, but the era of big government is over.

UPDATE: Gallup also has polling numbers out today. They run different approval ratings for Obama on 9 different issues.

At 36%, Americans give President Barack Obama his lowest job approval rating yet on his handling of the economy. By contrast, the president’s 51% approval rating on handling foreign affairs is up slightly from last month.

As I’ve noted any number of times, the foreign policy’s crisis is yet to come.  2009 was a year of checking out the new president and assessing his strengths and weaknesses.  2010 will be the year that actually tests his foreign policy skills and abilities.

On domestic issues, Obama’s approval rating is in the tank  at 36%.

Most interesting though was the fact that in the list of 9 issues, both foreign and domestic, independents did not once give Obama a majority approval rating, again making the point that indies are not at all happy with his administration.

~McQ

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Bernanke’s Plan To Drain The Monetary Swamp

Interest rates are at record lows and literally trillions of hastily printed dollars have been pumped into the economy by the Federal Reserve in an effort to stem an even deeper recession. While it is debatable as to whether or not it has really accomplished that goal, what isn’t debatable is at some point, the Fed has to wring that excess money from the economy or risk all sorts of dire consequences.

The Wall Street Journal carries the Bernanke plan for doing so. The centerpiece of that plan is found in the interest rate the Fed pays banks on the reserves it keeps. Right now, that’s .25%. The plan is to gradually raise that rate with the assumption that such rate raises will give an incentive to banks to keep even more money on reserve and thus out of circulation. This “interest on excess reserves” then is the primary vehicle the Fed plans to use to begin to pull money out of circulation.

But that’s a process fraught with risk. Because the immediate effect of any such interest rate increase will be to tighten credit. And depending on the strength of the economy, it has the potential to affect it negatively. Says the WSJ:

Extricating itself from these actions [low interest rates and trillions of infused dollars] will require both skill and luck: If the Fed moves too fast, it could provoke a new economic downturn; if it waits too long, it could unleash inflation, and if it moves clumsily it could unsettle markets in ways that disrupt the nascent economic recovery.

It’s pretty easy to drop interest rates and pump money into a down economy. But going the other way is not at all as easy. “Skill and luck” are understatements. Timing will have to almost be perfect. The problem is, should markets get skittish because of moves by the Fed that it sees as having a negative effect, things could break negatively quickly and spiral out of control. While the Fed would like everyone to believe this is a piece of cake – and will continue to tell us it is – it’s not at all an easy thing to do. The desire of those talking positive about the ease of draining the monetary swamp is to bolster confidence and allay fears if possible so a panic which could undermine the whole plan doesn’t develop. That, however, is going to be extremely difficult:

The nature of its exit from today’s unusually low interest rates will affect everything from mortgage rates and what companies pay on short-term borrowings to the rates savers earn. The timing and sequence of the steps are the subject of intense speculation in financial markets.

At the risk of boring the living hell out of you, I want to stress that this plan may be one of the most important plans in quite some time. If it isn’t executed perfectly, we could see a quick slide back into recession or rampant inflation. Read the whole article if you get a chance. The Fed has some other contingencies and plans as well. But as you’ll see as you read through them, all present the possibility of having a very negative downside if the strength of the economy is misread and/or the execution of each portion of the plan isn’t almost perfect.

The economic high-wire act – without a net – the Fed is about to embark upon is a very difficult one. Yes, it’s necessary and, in fact, critical – but it isn’t going to be easy. And if screwed up, could be pretty devastating to a recovering economy.

~McQ

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“The Green Police?”

Did you happen to catch the Audi commercial during “The Big Game” last night (btw, congrats Saints)?  It is, I suppose, an attempt at humor.  And it’s a good commercial, I guess, because I remember which product it was pushing.   But in reality I found it to be a bit scary.  Why?  Because it foretells something which I would hope is unlikely, but – at least at a state level – I believe couldbe entirely possible in some places.  Don’t forget, California was talking about drive-by thermostat monitoring and restricting car colors that could be sold in the state.   So this isn’t at all beyond the possible at some future date in a state near you:

~McQ

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Deficit Spending – Pimping The Great Lie

When the NY Times entitles anything, especially an editorial, starting with “The Truth About …”, you should be immediately suspicious.  As Arnold Kling says, that normally means “The liberal elite narrative about …”.  And it’s editorial, “The Truth About The Deficit” is no exception.  The first part of the editorial is spent on a selective history lesson which makes all of our troubles, as you might imagine, something brought on by the GOP’s focus on tax cuts for the wealthy.  Nevermind that they were across the board marginal cuts – this narrative won’t die.

The entire bit of revisionist history (with the normal “blame Bush” tautology) is aimed at justifying this paragraph:

Americans should be anxious, for reasons including the huge deficit. But the cold economic truth is this: At a time of high unemployment and fragile growth, the last thing the government should do is to slash spending. That will only drive the economy into deeper trouble.

What the NYT and the Krugman’s of the world believe is government spending can be substituted for private spending and have the same result – economic growth. And that economic growth, spurred by this spending, will create jobs. But if you think about it, unless the government is buying goods and services produced by the private sector, that’s most likely not going to happen, is it? Temporary jobs located in “infrastructure improvement,” unemployment benefit extensions and jobs “programs” don’t create jobs. Private sector growth does. And when government is borrowing .40 cents for every dollar it spends, it starts to dry up the private credit market. That means if there is a desire to expand, the credit isn’t as readily available as it would be if the 800 pound credit hog weren’t in the market.

Then there’s this:

To truly tame deficits will require serious health care reform …

To which Kling replies:

In Washington, serious health care reform means “fixing” private health insurance. But our deficits are caused not by problems in private health insurance. They are caused by the structure of Medicare and Medicaid. That is where we need reform. But the Times and other liberal mouthpieces need to create a narrative that makes it sound as though unsound government programs are the fault of the private sector.

Spot on. This has been the most irritating part of the “health care reform” issue. It is the public programs – which neither party will touch – that are breaking the bank, yet we continually hear politicians on the left talk about “greedy [private] insurance companies” as the sole reason health care costs or so high. In fact, without private health care insurance to pay the difference, Medicare and Medicaid would have foundered long ago. But the point is the deficit problem is not one caused by private insurance.  It has no effect on public debt.  That is caused by the mismanagement of the government programs. And other than a passing wave at “stopping waste, fraud and abuse” – the promise of every politician since the inception of those programs, and accomplished by none of them – this “reform” package ignores the real problem while attacking the private market.

But back to the primary point of the NYT’s attempt to persuade you that deficit spending – massive deficit spending – is a good thing:

Here is an unpopular but undeniable fact of life: When private sector demand is weak, the federal government must serve as the spender of last resort. Otherwise, collapsing demand sets in motion a negative, self-reinforcing spiral in which lack of demand — for goods, services and new employees — leads to ever deepening economic weakness.

And here’s the undeniable economic truth about the snake oil they’re peddling:

The narrative is that we are suffering from a shortfall in demand. The reality is that the private sector has decided that workers should be hired on the basis of profits, rather than on the basis of debt. The government may choose to make a different decision, of course, but that will not necessarily strengthen our economy.

One of the many economists not at all in agreement – despite President Obama’s claim to the contrary – with the prescription that deficit spending is not only good, but necessary. And while they can blame the situation on anyone they choose, the decisions being made to run up this massive debt based on some pretty flaky economic logic are theirs and theirs alone.

~McQ

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Podcast for 07 Feb 09

In this podcast, Bruce, Michael  and Dale discuss the unemployment numbers and Sarah Palin.  The direct link to the podcast can be found here.

Observations

The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2009, they can be accessed through the RSS Archive Feed.

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BlogTalk Radio – 8pm (EST)

Call in number: (718) 664-9614

Yes, friends, it is a call-in show, so do call in.

The Super-Bowl Half-Time (or blowout) Podcast

Subject(s):

Unemployment: What are the real numbers? Will it pick up or are we, as many fear, in a jobless recovery? Or are we in a recovery at all?

Tea Party Convention: Birthers and profit and Palin, oh my! Is the movement being co-opted? Is it a true populist movement?

China: Is the rhetoric heating up? Do they feel they have us over a barrel and now’s the time to assert themselves? Can they be counted on to support tougher sanctions on Iran?

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New Cold War? About Those Improving Relations With China …

I certainly wouldn’t put much confidence in the claim that relations have improved between the US and China.  In fact, despite Obama’s claims, it appears they’re much worse.  Recent actions by the US have riled the Chinese to the point that they’re being anything but subtle about their feelings and certainly not  keeping those feelings out of state sanctioned publications.  According to the UK’s Sunday Times, 55% of Chinese agree that “a cold war will break out between the US and China”.

What has spurred this turn of events?

The finding came after battles over Taiwan, Tibet, trade, climate change, internet freedom and human rights which have poisoned relations in the three months since President Barack Obama made a fruitless visit to Beijing.

You’ll most likely remember how the administration touted the visit as one which significantly improved out relations with China. Apparently the administration was the only one which saw it that way:

During Obama’s visit, the US ambassador to China, Jon Huntsman, claimed relations were “really at an all-time high in terms of the bilateral atmosphere … a cruising altitude that is higher than any other time in recent memory”, according to an official transcript.

The ambassador must have been the only person at his embassy to think so, said a diplomat close to the talks.

“The truth was that the atmosphere was cold and intransigent when the president went to Beijing yet his China team went on pretending that everything was fine,” the diplomat said.

In reality, Chinese officials argued over every item of protocol, rigged a town hall meeting with a pre-selected audience, censored the only interview Obama gave to a Chinese newspaper and forbade the Americans to use their own helicopters to fly him to the Great Wall.

President Hu Jintao refused to give an inch on Obama’s plea to raise the value of the Chinese currency, while his vague promises of co-operation on climate change led the Americans to blunder into a fiasco at the Copenhagen summit three weeks later.

Diplomats say they have been told that there was “frigid” personal chemistry between Obama and the Chinese president, with none of the superficial friendship struck up by previous leaders of the two nations.

And, if you can believe it, it has gone downhill from there.

An independent survey of Chinese-language media for The Sunday Times has found army and navy officers predicting a military showdown and political leaders calling for China to sell more arms to America’s foes. The trigger for their fury was Obama’s decision to sell $6.4 billion (£4 billion) worth of weapons to Taiwan, the thriving democratic island that has ruled itself since 1949.

“We should retaliate with an eye for an eye and sell arms to Iran, North Korea, Syria, Cuba and Venezuela,” declared Liu Menxiong, a member of the Chinese people’s political consultative conference.

He added: “We have nothing to be afraid of. The North Koreans have stood up to America and has anything happened to them? No. Iran stands up to America and does disaster befall it? No.”

Apparently they’re on to the new but unspoken motto of the Obama administration “speak a lot, but do nothing”. What is being sensed by these military leaders in China is weakness. And such weakness is never left alone or ignored in international politics – it is always, in some way, shape or form exploited. While some may see this as nothing more than saber rattling, knowing the Chinese, it’s much more than that.  It signals a significant change in our relationship:

Chinese analysts think the leadership, riding a wave of patriotism as the year of the tiger dawns, may go further.

“This time China must punish the US,” said Major-General Yang Yi, a naval officer. “We must make them hurt.” A major-general in the People’s Liberation Army (PLA), Luo Yuan, told a television audience that more missiles would be deployed against Taiwan. And a PLA strategist, Colonel Meng Xianging, said China would “qualitatively upgrade” its military over the next 10 years to force a showdown “when we’re strong enough for a hand-to-hand fight with the US”.

Chinese indignation was compounded when the White House said Obama would meet the Dalai Lama, the exiled spiritual leader of Tibet, in the next few weeks.

“When someone spits on you, you have to get back,” said Huang Xiangyang, a commentator in the China Daily newspaper, usually seen as a showcase for moderate opinion.

If that’s the moderate opinion, you can imagine what the more hawkish among China’s opinion makers are saying.

This is what happens when amateurs play at foreign policy and those they’re dealing with sniff out weak (or non-existent) leadership. As I mentioned quite some time ago, 2009 would be a year of relative calm as other nations took the measure of the new administration and what they could expect. Once that was done, 2010 would most likely be the year when they’d act – and frankly, given this from China, it’s most likely not going to be a pleasant year for US foreign policy.

Oh, and if you think China is willing to back the US on new sanctions against Iran – as the administration has been claiming – I’d be willing to take that bet and give odds that no such backing will ever be given by China.

~McQ

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