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April 1, 2009

6

"The Times They Are-A-Changing" – The country is destroying itself outside your window…

by Master Pillow

One of my favourite television series in recent years has been Veronica Mars. Watching Kristen Bell playing the title character, a cross between Nancy Drew’s sleuthing prowess and Buffy the Vampire Slayer’s quick wit and sarcasm, solve a slew of mysteries was just plain engagingly amusing. There’s an episode during its third and final season (Episode 12: There’s Got to Be a Morning After Pill) where Veronica is lying in bed with her fingers entwined with her lover, Logan, which really struck an emotional chord. The duo had suffered a continuously destructive on again off again relationship over the past few years, alternating between bouts of intense passion followed by equally fiery temper. Though it was obvious that both Veronica and Logan had deep emotional bonds with the other the relationship was always much too temperamental to last. As they shared a moment of quiet respite a lyrical but melancholy alternative rock song wafted through the speakers capturing the essence of their turbulent relationship.

The country is destroying itself outside your window
Hear the pulsing machines breaking down
See the buildings crumble to the ground
– “Western Meadowlark”, Brown Recluse Sings

Veronica’s rocky bond with Logan is a perfect metaphor for global events that are happening daily all around us which are beginning to shape the future of the world as we head deeper into the 21st century. The one constant in the universe is change, which applies to every facet of our lives. Listening to this particular song by itself is actually depressing as, Veronica Mars the TV show not withstanding it seems to be about a country in the process of seemingly self-destructing right before our eyes. In fact, it’s happening as we speak and indeed has been going on for many decades already. That country is the United States of America and it is under siege from all sides of the geopolitical spectrum. Countries and empires rise and fall and rise again and all of us living at this present moment are privy to the biggest political tectonic shift since the United States emerged as the de facto superpower after the end of World War II. With its land unscathed by two World Wars and a roaring industrial backbone, America was well positioned to take the leadership role especially as the former pre-war powers like the United Kingdom and France were mired in mountains of debt and had their economies in tatters.

Of course, we all know how this played out over the next forty years as America jostled with the Soviet Bear during the Cold War era, eventually triumphing in December 1991 with the dissolution of the USSR and the formation of the Commonwealth of Independent States (CIS). I remembered watching at home as events unfolded especially as the Berlin Wall came crumbling down in 1989 and exulting to myself that the evil empire had lost and democracy had prevailed. Then again, I was young and didn’t fully comprehend the entire context of the event and only now can I look back and realize that nothing ever seems so black and white.

Growing up, the West was always the force of good and stood for everything that was right with the World whereas the Communist countries of the Warsaw Pact were merely the enemy, brainwashed by years of propaganda made by an inherently evil and corrupt political system. If only it were so easy to define. Preconceptions and assumptions are dangerous traits to have that can only be overcome with an open mind and heart. Yes, that sounds mawkishly sentimental but like so many things in life, sometimes the biggest clichés are true. Nowadays we can look back at the Cold War era and realize that people living under the Soviet umbrella were the same as any of us living here in the West and recall Shakespeare’s oft quoted line from The Merchant of Venice where Shylock proclaims:

“I am a Jew/ Hath not a Jew eyes? Hath not a Jew hands, organs/ dimensions, senses, affections, passions; fed with/ the same food, hurt with the same weapons, subject/ to the same diseases, heal’d by the same means/ warm’d and cool’d by the same winter and summer/ as a Christian is? If you prick us, do we not bleed?/ If you tickle us, do we not laugh? If you/ poison us, do we not die? And if you wrong us, shall we not revenge?” -Shylock, II.i.58. (1.)

Like I alluded to in my earlier “The Times They Are-A-Changing – The Final Frontier” post, everyone on this blue rock spinning in space better learn to get along with one another or else we’ll end up as nothing more than a footnote in time in the entire history of the Universe. It might be naive to think that such a thing could happen but would you rather sit back and throw your hands up and surrender to your primal cynicism that people will inherently never get along with one another? It might take much personal fortitude and a willingness to change one’s perspective towards others but in the end the only way to bridge gaps between cultures is to immerse yourself in them. No one is forcing you to learn their language, although that would really be a huge step, but anyone can attempt to do simple things such as try their cuisine or investigate and educate yourself on their beliefs and history. To not do any of these things and to merely criticize shows nothing but utter contempt and a wholly misguided haughty attitude of morality.

All that being said we most definitely live in interesting times and for readers of this blog I implore you to discover what is going on in the global arena right now as you read this very entry. America’s global influence and stature is on the decline, a product of some truly odd and downright destructive foreign policy decisions and a wobbly economy based on over-extended credit lines and rapidly insolvent banks. Whatever political capital it had gained after the Second World War and the Cold War victory has rapidly vaporized especially under the watch of the 43rd President, George W. Bush who, managed to somehow earn the dubious honour of getting the country entangled in two unpopular wars as well as preside over a ballooning national deficit.

When Bush took office on January 20, 2001 the national debt stood at a $5.727 trillion dollars. On the day he handed power over to the 44th President Barrack Obama it stood at a staggering $10.626 trillion dollars. (2) In a research poll released right before Obama took over the Presidency, it was found that only 2 out of 21 countries with large economies had an overall favourable view of the US as most pointedly criticized America’s foreign policy as being the biggest stumbling block to global relations. (3)

Not only is the US mired with massive debt and a less than stellar global reputation, as most people not living under a rock know the world has been plunged into a crippling recession due largely in part to a plethora of toxic housing loans made by American banks that have sent reverberations throughout the world economy. America isn’t just sneezing it’s been diagnosed with a bad case of the flu (hopefully not a terminal case of the stupids as well) and as the economy went into the tank it managed to bring the entire world with it leaving the inherently bad impression that the current financial mess has been wholly created by bad US monetary policy. For sure, the US is limping around on a gimp leg these days but a cursory glance at her global position at the head of the table shows that she is indeed under considerable duress from the superpower to be. The days of unilateral action by the US and a unipolar world are coming to a close.

Roughly 52 years ago in 1957 a major series of events that would later be termed the Suez Crisis was rocking the Middle East. After Egypt nationalized the Suez Canal a trio of countries UK, France and Israel embarked on a military offensive that eventually led to Israel controlling the Sinai Peninsula. The United States under Dwight D. Eisenhower did not support the military intervention and aggressively argued with his allies against such a campaign. When they did not back down Eisenhower forced them to capitulate and impose a cease-fire by politically blackmailing the then British Prime Minister Sir Anthony Eden with the threat of dumping a huge chunk of America’s Pound Sterling Bond holdings which, the USA had accumulated after the Second World War to help the UK rebuild as well as pay off her massive debt that had accrued during the war years.

If Eisenhower sold the bonds it would have started a substantial devaluation of the Pound and basically bankrupt the UK overnight as it would not have been able to even pay for imported food and produce. The UK capitulated to Eisenhower’s demands and the military invasion was halted. From this moment in history till today, the UK has never ventured out again on its own on such a scale to impose military clout without the staunch backing of the United States. It is precisely this event that many historians allude to as the final nail in Britain’s empire and marks the transition to America and the Soviet Union as being the next world superpowers.

Flash forward to March 13, 2009 a date that might have significant future repercussions. Those who love political science will no doubt realize that sometimes the course of history can be changed in a blink of an eye and in this case a scenario eerily similar to those that happened in 1957 is playing out before our eyes albeit without the presence of a single weapon of military might. Instead of Eisenhower playing a dangerous game of brinksmanship from Washington to influence the British Prime Minister in 10 Downing Street, this time it was Chinese Premier Wen Jiabao addressing reporters after the annual session of the National People’s Congress had ended. Mild mannered as always, Wen Jiabao threw out what appeared to be a nasty fastball aimed directly at newly elected US President Barrack Obama by proclaiming:

“We lent such huge fund to the United States and of course we’re concerned about the security of our assets and, to speak truthfully, I am a little bit worried…

China is indeed the largest creditor of the United States, which is the world’s biggest economy. We are extremely interested in developments in the U.S. economy.”

– Wen Jiabao, March 13 2009.

To the innocent bystander it sounded like nothing more than a simple observation but it not only reverberated right through every global financial market it rumbled straight to the Oval office. Much like Eisenhower did many years ago, Wen Jiabao was partaking in a high stakes poker match with the American President, openly challenging him that things are going to be very different in the years to come. To calm things down, in a totally unprecedented move two days later President Obama himself replied to Wen’s musings highlighting just how important the China-US relationship has become:

“Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States.” Barrack Obama, March 15, 2009.

Simply put, China owns a large chunk of American debt. By most guesstimates China owns over $1 Trillion in American Bonds making her the largest creditor with Japan coming in second. As China has risen since Deng Xiaoping opened up the country to market reform it has sought a safe haven to park its growing trade surpluses and found it by investing in American debt. Over the years, especially as America’s trade deficit has ballooned with China, this figure kept growing and growing until the present where it has become the major creditor to the rapidly insolvent American economy. Now that the US is in a deep recession Obama truly needs China to keep investing in American debt to help fund his newly proposed stimulus package. In short, he wants China to foot the bill. Without China it would be incredibly hard for the rest of the world to soak up the massive cost of Obama’s plan with most thinking that it would be nigh impossible.

The problem for Wen Jiabao is that he fears a massive devaluation of the American dollar is on the horizon since the only way for Obama to meet his plan is to print more money. Any economist worth his or her salt knows that when a country prints more money that its inherent value will decrease. Print too much and it will drastically devalue in worth. For China, that would be disastrous as its $1 Trillion Bond holdings will drop dramatically as the Greenback plunges. Wen’s comments are meant to put Obama and the US on probation that China will stop investing in American Bond holdings if the government doesn’t address the need for proper government spending.

Of course, the nightmare scenario for all involved is clear much like British Prime Minister Eden faced all those years ago. If China dumps all her US holdings the Greenback will devalue and drop like a rock causing the country to slip further into a depression and basically bankrupting the nation. Informed people will realize though that this is M.A.D. Not mad, as in insane, although it certainly borders on that but M.A.D. as in Mutually Assured Destruction, a coined phrase left-over from the Cold War which relates to nuclear war. The concept boils down to the simple fact that the US and the Soviet Union never would embark on a nuclear war since it would mean the total destruction of both of them and indeed the world thus there would be no winners.

For all intents and purposes, China is currently linked to the hip of the US economy as it relies on the Americans to buy the bulk of Chinese export goods. If the US economy were to truly go into the tank especially if China sold her Bond holdings it would decimate the Chinese economy as well thus ensuring that M.A.D. came to pass. A shot is never fired but both the American and Chinese economies would be in shambles if the Greenback devalued overnight. This is the inherent problem with the Chinese economy that, at the moment, places so much emphasis on exports especially to the US. The problem for the US is that the government and its citizens have been living in credit denial for too many years. Instead of saving money for a rainy day the average American citizen spends more than they own relying on easy credit to boost their spending and standard of living. If you want to look at it in a different light, every American citizen owes thousands of dollars to the Chinese government who is subsidizing their exorbitant lifestyle. This cannot go on forever. The Chinese will eventually slow down their purchasing of US Bonds whereas the American citizens have to realize to live within their means. To think otherwise is sheer idiocy.

But what about 20 years from now? This is the American nightmare on the horizon, especially if people don’t realize that the soaring national debt is not something to ignore and be laughed at. Watching people walk by the national debt clock and not care about it is mindboggling. Much like a family who finds itself in debt and has to find any which way to cut back and pay it the US government is firmly in the same boat. As long as the Chinese economy relies on Americans to buy the bulk of its exports it will not seek to destabilize the status quo but if it manages to diversify and expand local high tech industries and find new trading partners the future is bleak if the US keeps on the path of no fiscal reform. If China truly decouples from America and achieves total production and financial independence then it can wield a bat much bigger than Eisenhower ever dreamed off. In twenty years time if China continues on its massive growth spurt it will overtake the US as the world’s biggest economy and it will have “won” without firing a single shot by figuratively owning the US debt.

Then again, can’t we all just get along? The US government and President Obama have to realize that past this massive stimulus the number one priority is not Iraq or Afghanistan but the soaring debt. This stimulus will plunge the country greater into debt and a coherent and concise plan has to be put in place that will gradually bring the budget under control much like Bill Clinton achieved during his years in the oval office. Let there be no mistake, you can’t just cut fat. The government wastes money for sure and many programs might have to be scaled back or outright dumped but all this comes at a price, namely increased taxes. Now no one likes to pay more tax but would you rather bankrupt your country and handicap future generations to a lower lifestyle? It’s human nature to protect oneself but surely anyone can see that their children and by extension their grandchildren will suffer from wanton and uncontrolled spending practices.

China is rising and the US is falling in relative terms, this much is certain. Obviously, having two superpowers butt heads will lead to tension and miscommunication but the world cannot afford to watch these powers play petty politics as the global economic outlook is so dire. This is not the time for protectionism to rear its ugly head or for dimwitted politicians who only care about their re-election chances or dwell on rampant patriotism. Frankly put, we’re all in this together and there’s no more important geopolitical relationship than the one that is forming between the current Superpower and the heir apparent.

Ever since I was in high school the prevalent wisdom has always been that the next Superpower was going to be China. Back then it seemed like nothing more than simple lip service as the USSR still reigned as the West’s greatest rival. Although China was growing, the late 70s and early 80s were all about Japan. Some people in the West saw Japan’s rise as a harbinger of US demise as people frantically proclaimed that Japan would soon be the greatest economy on Earth. People scrambled to learn the Japanese language and business techniques figuring that it was a matter of time till they overtook the US.

Well, we know how that turned out as the Japanese miracle hit a brick wall to which it has never recovered. While Japan was stuck in stagflation and went through multiple recessionary periods in the 90s the rest of the world ploughed ahead at full speed and nowadays you’ll not hear even one economist shout that Japan is going to be the next power. Indeed, things are so dire in Japan right now as its economy is contracting at a ridiculously higher percentage than the US. The newest numbers out of Tokyo put the Japanese GDP as contracting at a disastrous annual rate of around 6% and many economists point out that it could plunge significantly more.

So what about China? Will it keep chugging on or will it hit an economic brick wall like Japan did? If I had a crystal ball I would make billions but unfortunately, like everyone else, you can only guess. What we do know is simple math and that even in this economic crisis China continues to grow albeit at a lower 6-8% rate. Millions are unemployed adding strain to the population and increasing the likelihood of social unrest but at the same time China, due to its political system, has an array of weapons that no country, including the US, has at her disposal. While the US is drowning in debt, China is the most solvent country on Earth with an estimated reserve of over $2 Trillion USD. Its banks have not been hit hard by the housing downturn in the States and are controlled by the central government which has ordered bank managers to open the taps and let the cash flow. While credit streams remain tight in the West, Chinese banks are swamping the citizens with easy loans to get the money flowing into the economy. Of course, many of these loans might come back to haunt them in the future but for right now they are having the intended effect of boosting the economy.

China has the 2nd biggest stimulus package in terms of dollar value at approximately 4 trillion yuan ($586 billion USD) but it’s a whopping 2.1% of total GDP from 2008-2010 and is contributing more than even Obama’s massive plan that clocks in only at 1.6% during the same period. Other G20 countries have undertaken even smaller stimulus plans which show a giant divide in economic practices amongst the key industrial countries.

Stimulus Plans by Country (4)
.nobrtable br { display: none }

Raw Dollar Amount% of GDP from 2008-10 $586,000,000,0002.1 $787,000,000,0001.6 $47,000,000,0001.3 $108,000,000,0001.1 $124,000,000,0000.7 $30,000,000,0000.5 $35,000,000,0000.4 $2,400,000,0000.1

Country
China
USA
Russia
Germany
Japan
England
France
Italy

While the Democrats and Republicans spar over minute details and pork barrel politics, the Chinese central government worked quickly by dispersing the stimulus funds and it looks like it is having its intended effect as the money is trickling down into the Chinese economy. Early indicators look promising and most economists are now predicting that China will be the first country to “bottom out” and thus be the first to recover from this global mess. China’s PMI (Purchasing Managers Index) is definitely on the upswing and though it is still contracting, the rate has steadily subsided.

China’s PMI (5)
.nobrtable br { display: none }

PMI 38.8 41.3 45.3 49 *54 Expected*

Month
November 2008
December 2008
January 2009
February 2009
*March 2009*

A PMI score below 50 indicates that the manufacturing sector is in contraction while anything above 50 shows growth. Looking at the above data one can easily see that though China’s key manufacturing sector is hurting that the trend is significantly upwards with it almost hitting the break even mark in February. Most experts now predict that March numbers will show that the sector has gone over the hump and is beginning to expand once again.

China’s automotive sector has also finally leapt over the US in January 2009 to become the world’s biggest auto market, a feat no one expected would happen for many years if the economic crash did not occur. Although overall sales were down in January, China managed to capture the pole position due to a huge drop in car sales in the USA but February brought even better news to the Chinese market as it managed to grow an astounding 24.7% from a year earlier due to China’s stimulus plan which cut the purchase tax on cars with small engines from 10% to 5%.

While the American government struggles with what to do with Detroit’s big three (GM, Ford, Chrysler) their Chinese counterparts have made it one of the ten key sectors targeted by their enormous stimulus shot in the arm. Not only did they lower the tax rate but they created and implemented a plan to lend out an additional 5 billion Yuan ($731 million USD) to all farmers buying minivans or autos with small 1.3 litre engines in an effort to spur growth. Not satisfied with that, Beijing is also pouring an estimated 10 billion Yuan ($1.4 Billion USD) to local carmakers to upgrade their technology and develop eco-friendly cars for the future. The abject contrast between the state of the Chinese economy versus the American couldn’t be starker when looking at these key industries. While the US debates pouring money into battered Detroit carmakers just to keep them from going under, it is mindboggling to watch from afar as China is on the opposite path to modernizing and expanding their product lines to compete with future trends.

Much of GM’s future lies in the potential success of their hybrid Volt car that runs on a combination of gas and battery power that promises to revolutionize the market, or so they hope. As eco-friendly as it seems the manufactures suggested price is a dazzling $40,000 which puts it into a higher range than needed. If government subsidies kick in they hope to bring that down to the mid 30s but with a nebulous launch date and GM bleeding around $5 million an hour (!) there’s no way to properly predict what will happen to the once mighty company.

Compare that to China’s BYD car company which no one but the most ardent automotive fan would have heard of before. BYD stands for Build Your Dreams and in December 2008 they stunned the world by unveiling at the Detroit Auto Show their own new battery technology that promised that by 2011 their new car would be able to run on a single charge up to 250 miles totally obliterating the Volt’s 40 mile per charge lifespan. Now, it all could be a bunch of smoke and mirrors and many cynics saw this as a pipe dream but someone didn’t think so. You might have heard of him. His name is Warren Buffett and he immediately invested 150 million Pounds into the company to purchase a 10% controlling interest. With the huge Chinese government subsidies going into R&D for eco-drive cars, BYD’s dream car might not be as vapourware as most think. If it comes anywhere close to even half the 250 miles per charge range it would still outlast the Volt by over three times the distance. We don’t even have to wait till 2011 to see their progress as BYD has already released their first hybrid car, the F3DM, at the end of 2008 into the Chinese market and while it won’t have the 250 mile per charge range it’s already tested to go 62 miles per charge which is already more than GM’s Volt. And the cost? A more affordable $21k USD.

GM might have invented the car but can Chinese car makers truly make the leap into the International market while also leading the way in eco-friendly models? The jury is still out but it’s no longer as farfetched as it seemed to be only a short half year ago.

As the G20 gets ready to meet in London a short time from now, there’s no doubt that global eyes will firmly be on the newly minted G2 – the US and China. Other countries will still have their say but it’s now absolutely imperative that US President Obama and his Chinese counterpart Hu Jintao get on the same page and realize the enormity of the task at hand. For all intents and purposes China is the number two economy in the world now and though the numbers might still place Japan at that spot her inability to deal with any sort of meaningful global economic leadership places that onus directly on Beijing’s doorstep. China’s exports were down sharply in January (-17.5%) and February (-25.7%) but nothing compared to Japan which is in complete freefall, plunging 45.7% in January alone from the year before and an even sharper 49.4% in February. Japan’s auto sector is being hit hard with shipments plummeting 64% leading most economists to figure that Japan’s economy will contract almost 6% for 2009. Just doing simple math will tell you that if China grows 6-8% and Japan contracts 6% that it won’t take many more years for China to outstrip her Asian counterpart.

While the Olympic Games in Beijing were China’s coming out party, this economic crisis has given China a gigantic opportunity to take center stage and how it deals with the new limelight will shape world history for years to come. The question everyone has to ask now is how do you react to this? China’s strategy until now revolved firmly around Deng Xiaoping who once said:

“Keep a cool head and maintain a low profile. Never take the lead – but aim to do something big.”

China has always been content to lay low and stay in the background letting other nations stomp around on the world stage but this time the dragon is stirring as Hu Jintao seems to be manoeuvring his country into a position of strength by openly flexing China’s muscle. Premier Wen Jiabao’s March 13th speech was just the beginning. Just last week, Zhou Xiaochuan, the governor of China’s central bank, released a new essay calling for a new global reserve currency to replace the American dollar. Typically, the strongest economy on the planet becomes the de facto reserve currency. This use to be the Pound Sterling which gave way to the American Dollar. Although China is not even close to supplanting the US it’s certainly causing a ripple amongst economic think-tanks and finance ministers around the globe who feel that the greenback is vulnerable.

Make no mistake, China is not trying to suddenly topple the American dollar and replace it with the Chinese Yuan, at least not right now, but it’s a political move to both show the world that a new alternative is rising and highlight the inherent danger of the American government’s continual need to print more of its own currency to pay their way out of the mess they created. China is also trying to bolster its own stature amongst world forums and organizations like the IMF whose voting percentages have not been balanced by the rise of emerging economies. Basically, the bigger your economy and the more SDR’s you own the more percentage of voting rights you are awarded in the IMF. Thus the US alone has around 17% of the total vote.

IMF Voting Percentages (6)
.nobrtable br { display: none }

Percentage of Vote 16.77 6.02 5.88 4.86 4.86 3.66 3.25 3.16 2.89 2.69

Country
USA
Japan
Germany
UK
France
China
Italy
Saudi Arabia
Canada
Russia

Zhou Xiaochaun indeed brought forth an old idea to make the IMF’s SDR (Special Drawing Rights) the reserve currency that is in turn made up of a basket of world currencies. Even if the idea is shot down it’s apparent that China’s government is not at all happy with the way the US has run the world’s economy into the tank and many nations have already stood up and expressed support for a new global currency including Russia, Malaysia, Indonesia, Thailand and even a recent UN panel of experts.

China’s SDR gambit is sure to fail but it’s merely a sign of an increasingly confident nation and masks the bevy of deals behind the scenes which are truly building the groundwork for a future move to the Yuan’s ascendancy to supplant the USD as the de facto reserve currency. These things take time, almost moving at a glacial pace. Even though the US GDP outstripped England at the end of the 19th century it wasn’t until the end of World War II that the USD began to supplant the Pound as the global reserve currency, a time period of almost 100 years. The same fundamental shift is beginning to happen today as the Yuan gains prominence but it will entail many years of mutual co-existence with the USD as nations invest in both currencies.

More importantly one needs only to look at some of China’s recent deals to see where the tables are turning as China weans itself off USD and onto its own denomination. Watching China’s increasing reliance on currency swaps is the strongest signal that China is diversifying its portfolio especially since they all center on the Yuan. Since December 2008 China has concluded the following currency swaps, which do nothing but benefit Beijing and enhance the Yuan as the rising currency against the USD.

China’s Recent Currency Swaps (7)
.nobrtable br { display: none }

Currency Swap Value 70 Billion Yuan 20 Billion Yuan 200 Billion Yuan 100 Billion Yuan 80 Billion Yuan 180 BIllion Yuan

Country
Agentina
Belarus
Hong Kong
Indonesia
Malaysia
South Korea

1 Chinese yuan = 0.146351 U.S. dollars

What these swaps boil down to is that it enables these countries to pay for Chinese goods and services in Yuan instead of USD and more importantly its success will serve only to highlight to other countries that agreements like this are beneficial as the US economy stumbles and remains insolvent. Like any good investor it’s not exactly a good idea to put all your eggs in one basket and countries will begin to use the Yuan as a secondary currency to the USD. China is not only looking at its own backyard as evinced by its swaps with Argentina and Belarus and it is going to be interesting as it expands these programs around the world to see whom they are targeting. Like it took the USD almost a century to supplant the Pound, these moves are a harbinger to come as China asserts itself against the US.

Currency swaps are only one area where China is beginning to change the global dynamic. While the world has been stunned by the financial crisis into a period of hoarding whatever capital they have on hand China’s state enterprises are shopping like it’s Christmas spending billions of dollars in global companies that are resource based. In fact, China’s rise in commodity spending and deals is making those prices rise even though Europe and the US are cutting back in this sector. China is acting like a kid in a candy store, buying up or investing in foreign companies while their market value is dirt cheap – think worldwide fire sale here.

These market investments are truly global as in the last six months alone China has completed or is about to complete deals with Australia, Brazil, France, Iran, Russia and Venezuela. These are not minor deals but are long-term investments that will provide a steady flow of future raw materials to the Middle Kingdom. The deal in Brazil was a $10 Billion USD investment in the oil company Petrobas to provide 100,000 barrels of oil per day for the next 10 years. In Russia, China has poured in approximately $25 Billion USD to Rosneft and Transneft in return for 300,000 barrels per day for 20 years. Clearly, this is a new phase in Chinese acquisitions that is beginning to mirror Japan’s expansionist phase in the early 80s that saw them gobble up foreign companies.

Speeches and essays on the turgidly boring and less sexy topic of monetary policy might make headlines buried somewhere deep in the business section but they rarely top prime time news. This is no surprise as the labyrinthine world of global finance is as exciting to the public as watching a cross-country race between two snails. However, some more overt moves by China definitely showcase her growing clout.

Rewind to April 1, 2001 a scant few months after George W. Bush took over the office of the President as a foreign policy flashpoint flared up between the US and China focused on a mid-air crash between a Chinese fighter jet and an American surveillance aircraft resulting in the death of the Chinese pilot and forcing the American plane to make an emergency landing on the Chinese island of Hainan. The Chinese government summarily detained the 24-member crew as they basically went through the spy plane with a fine toothcomb in order to discover whatever technology they could. Obviously, tensions between the two countries escalated as both sides accused the other of breaking various laws but in the end the American plane and crew were returned after the US agreed to send a letter of apology for the incident.

Flash forward to March 8, 2009 and in an incident eerily similar to that which greeted Bush, another military confrontation occurred just shortly after Obama took office this time involving the US spy ship USS Impeccable which was sailing approximately 70 miles away from the Chinese navy port on Hainan Island that was harassed by a few Chinese fishing trawlers. At face value these two incidents might seem to do nothing but raise suspicion on the Chinese actions but considering that they take place only 70 miles away from China’s major southern naval base and the picture becomes clear.

To put it in simple terms, China sees a range of 200 miles from its coastline as sovereign Chinese territory and uses the UN “Law of The Sea” treaty as its justification. The problem is that the treaty merely states that an “Exclusive Economic Zone” exists 200 miles from the coastline and doesn’t go into much detail as to what is allowed to travel in the zone. The Chinese government reads that it means no foreign military vessel should breach the zone whereas other countries do not. Of course, this is all moot since the US hasn’t signed onto the treaty in the first place. Who is right and who is wrong is a murky question best left to lawyers who can get into the nitty gritty but let’s frame this argument in another way — How would the US react if China sent either a sophisticated spy plane or vessel to monitor the US navy only 70 miles from Pearl Harbor or the west coast of California?

Dull discussions on fiscal and monetary policy send people straight to sleep but a military incident gets their adrenalin flowing like a good Hollywood blockbuster.

As Chinese naval ships join the international forces off the Gulf of Aden, the first global dispatch of China’s navy in over 600 years, to protect shipping from pirates to open calls to start building indigenous aircraft carriers, China’s military is expanding at an enormous rate, so much so that members of the American military industrial complex are beginning to get seriously worried. Not since the Cold War and the Soviet Union has an adversary managed to even come close to America’s military might. Since the collapse of the Iron Curtain, America has enjoyed unfettered military global dominance but most historians and indeed citizens from around the world are probably dismayed that instead of being a compassionate stakeholder and restrained global police man, the policies of right-wingers such as George W. Bush have plunged America into two disastrous wars and greatly diminished its moral standing. It is no surprise that America’s aggressive foreign policy has irked many nations and bares its roots in the “Manifest Destiny” historical belief that the US was destined and indeed blessed by God to colonize America from the East to West Coast. It seems some politicians have morphed this to even include the rest of the world as well.

With America focused on the war on terror and bogged down in two theatres of operation, the Chinese have been steadily modernizing their military with sweeping reforms that touch all three major segments of the army, navy and air force. Some Americans are astounded that though China remains far back of the US in all aspects of military power it is catching up at a much higher rate than previously expected. I doubt there’s any expert out there that would say that China is on even grounds with the US but what China lacks in tech it makes up in sheer numbers. That is not to say it would win but China is basically the only nation on Earth which is modernizing with the specific goal to thwart, deny or delay American forces in case of a conflict. Nations are obviously weary of a rapidly modernized Chinese military which will undoubtedly tip the balance of power in the Pacific in the years to come.

With a huge naval base on Hainan Island (akin to Pearl Harbor) that gives it easy access to the South China Sea to its rapidly growing fleet of modern surface warships and both nuclear and diesel submarines, China is embarking on a massive military build-up to counter American sea dominance. Add in a few aircraft carriers and you have the makings of an effective blue water battle group, which can project Chinese power far away from China’s coast. Throw in the ability to hit satellites, a huge cyber warfare department, the development of a true 5th generation fighter that includes stealth technology, an ambitious ASBM program designed specifically to take out carriers and the soon to be completed GPS system of its own and it’s no wonder that the world is watching with anxious eyes. Don’t forget the planned moon-landing that is scheduled to happen anywhere between 2015-2020. Whatever mission China has in store for its growing military muscle there’s no doubt that it will result in a tectonic shift in geopolitics. Whatever the future entails it is imperative that the US and Chinese military counterparts create and open meaningful lines of dialogue in order to prevent accidental incidents from occurring and raising tensions between the two nations.

Top Military Expenditures by Country (8)
.nobrtable br { display: none }

Military Expenditures (in USD) 651,163,000,000 70,242,645,000 61,571,330,000 61,280,890,000 50,000,000,000 48,860,000,000 45,930,000,000 40,050,000,000 32,700,000,000 31,050,000,000

Country
United States
China
France
UK
Russia
Japan
Germany
Italy
India
Saudi Arabia

China’s political, economic and political might is growing in leaps and bounds. How it uses its newfound power is something everyone should keep an eye on. As we move from a unipolar world to a multipolar one which might encompass Russia and eventually India, these are certainly interesting times to be sure.

“Only Thing We Have to Fear Is Fear Itself”, Franklin D. Roosevelt.

As for the average global citizen this fundamental shift of power from Washington to Beijing is making many have sleepless nights wondering how this will affect their life. For me, this inherent fear is none the more prevalent when reading numerous comments on various Internet news articles which do nothing but cause me utter grief as I shake my head wondering if everyone in the world is so close-minded, racist and moronic as they seem. These are not words I use carelessly but sometimes reading comments from all sides of the political spectrum is just incredibly infuriating. Everyone has a different point of view. This is totally expected and indeed should be a sign of a robust discussion on any topic but once it veers into outright lies, jeers, rampant patriotism or demagoguery then it’s time to step back and do some old-fashioned chastising.

No matter your point of view there’s no reason to resort to playground name calling or outright racism and I find that many posters are just plain bullies who have a distinctly narrow view of the world. They only know what is around them and have never tried to expand their boundaries by truly learning other cultures or venturing past the town limits. This sort of sheltered mentality that refuses to discover the world leads to wanton disrespect and even basic understanding of your fellow man. Reading a comment like, “Death to all yellow chinks!” or “All Americans are stupid-ass motherfu***rs who think they rule the universe!” is NOT helpful in the least. Come on people, we live on this same blasted rock in space and we can do better than let simple prejudice rule over us.

China is not going anywhere and neither is the USA. Times might be bad but fear of each other should ease not increase during these trying times. This is hard, as we’ve all been pre-programmed to think suspiciously of things and people we don’t know but really let’s at least make an attempt. Reading a Chinese blogger launch into an acidic invective against the crumbling US infrastructure and way of life but discovering that they had never set foot outside of Shanghai is as convincing an argument as saying that the Sun revolves around the Earth. Conversely, going over an American posting that evil Chinese communists will never amount to anything since the US can bomb them back to the Stone Age does nothing but highlight the incredibly moronic lack of insight into such a ridiculously uninformed statement – the poster doesn’t realize that a conflict with another nuclear nation will lead to M.A.D. (Mutually Assured Destruction).

Change is tough but it comes from within with a desire to expand one’s horizons and see things from another perspective. Can we do it? To take a line out of Obama’s playbook, “Yes we can.” Since the G2 is going to be the biggest story of the coming decades it’s about time that both Chinese and American citizens educate themselves about one another and see the inherent pitfalls and successes that both countries can offer the world.

I am a dreamer and like I said in my previous, “The Times They Are-A-Changing” post I truly wish people will see the world as a singular entity and realize that only by working together can we achieve true greatness. If that sounds like some silly televangelist preaching then so be it. Perhaps I have had more opportunities in my life to see other cultures but I find that incredibly fascinating. I have gone all over the US and also China as well visiting many towns and cities for differing reasons and like good old Shylock, it’s not hard to say that everyone is alike with the same core wants and needs.

I am reminded of many images that I have ingrained in my mind during my trip to China that have given me a perspective on the truly massive change that the country is going through but always tempered by the equally gigantic work that has to be done to bring the bulk of the country out of the poverty line. I remember driving from Beijing to the Great Wall, a trip which lasted about 70-90 minutes and watching in awe as I witnessed a new highway being built along the entire stretch of road all at once. Living here in the West it’s more common to see roads built section by section but to watch an entire highway popping up along the 70-90 minute drive was jaw-dropping. Walking through Beijing’s undeniably shirt-drenching streets in mid August you couldn’t turn your head in any direction and not see a ton of construction cranes peppering the skyline. The skyline itself is almost totally changed since I was there in 1998. I don’t even remember Beijing’s CBD (Central Business District) as being anything more than low level buildings but now it’s filled with glittering steel and modern architecture.

Juxtapose those sights to the one I saw in the ancient capital of Xian when I asked why so many dishevelled and downtrodden people were lined up at the side of the road doing nothing by sitting down, seemingly dazed or staring blankly at the surroundings. This sea of people went on for a block and it turned out that they were migrant workers who had arrived in the city trying to find work but had as yet failed to secure employment.

Another time I was in Nanning, a major city in Guangxi province in the south. I had checked in to a massive five star hotel with opulent marble floors and ornate trappings that would be the envy of any hotel in New York, Tokyo, or London. Then again, right across the street was a row of run down shop houses and shanties and the pavements were filled with cracked concrete belying their ragged condition. As I watched weathered citizens milling about with bare feet, their skin a sinewy leather from staying out amongst the harsh sunlight and tropical climate for too long, a stunning leggy Chinese woman dressed to the nines in a couture red dress, five inch heels and trendy sunglasses sauntered into my view along with her husband/friend decked out in something like an Armani suit. If ever there was a contrast between the old and the new China, this was it.

During these depressed economic times it is easy to turn cynical and wonder just what hardships lie around the corner. As the financial news worsens, unemployment skyrockets, frustrations and anxiety are ought to rise. Still, the world is not ending anytime soon. Listening to the expert economists, political analysts and other gurus drone on that society as we know it is ending is just plain irresponsible fear mongering. No doubt there are tons of challenges ahead but we’ll all chug along and persevere. The world is undergoing one of those massive shifts in power politics and China’s ascendency to reclaim the prominence it lost is going to be the story of the next half century.

“Let her sleep, for when she wakes she will shake the world.” Emperor Napoleon Bonaparte.

Napoleon once warned about China. He was right. The 20th century was American. The 21st may or may not be the Chinese century but if we’ve learned anything from the past few months it is that China is back and she’s gunning to reclaim her lost #1 status.

Veronica Mars, the television show finished after a brief three seasons as ratings were too low for the network to renew it. As the last episode played out it showed our nubile and perky young heroine brazenly plough forward in her goal to expose a nefarious shadowy organization called The Castle that had collected dirt on many powerful members of society. She succeeds but in doing so her complete stubbornness and tunnel vision mentality cause her father, the Sheriff, to break the law and destroy evidence that could send her to jail. Upset at her actions, the final shot is of her walking away from the camera as pouring rains pummels her as she heads forward to an uncertain future.

What has come to pass can never be changed unless someone manages to invent a spiffy new time machine that looks like a DeLorean. Until then, pardon the pun, but America’s bull-in-a-china-shop mentality has left her in the current predicament with crumbling global clout, massive debt and a truly negative image of a power who has overstepped its authority with wanton disregard for the rest of the world. Now, critics are emerging almost daily chastising the US for many of its past deeds and some of these voices are rising from within lamenting how such a great nation managed to squander away its massive political capital. There’s still time to fix these problems but they are going to take much pain and tough decisions that are anathema to your common politician. However, it surely can right the ship but that’s up to President Obama to brood over as waiting much longer for true reform is going to plunge the US further into a hole it might never crawl out of. Much like Veronica Mars trudging through a torrential downpour after ruining her father’s career, the future of the US appears bleak but there’s always a ray of hope.

Watching the American Empire gradually wane and China rise to fill the void might be akin to seeing a battered and worn boxer attempt to get into the ring for one last bout, not content to let the whippersnapper newcomer take the center stage and steal the spotlight. Empires on their decline are prone to be at their most dangerous as they attempt to do anything to retain their relevance. However, change is unavoidable.

As the G20 meets in London this week the only message I can hope for is that both Obama and Hu Jintao realize the unique opportunity that history has provided for them to forge a comprehensive bond between these two nations to not only solve the crisis but bring both countries closer together. It is okay to offer differing opinions but we all need the G2 to work because if they don’t and more radical and opinionated politicians take over on both sides the Earth is going to be in for a world of hurt.

The country is destroying itself outside your window
Hear the pulsing machines breaking down
See the buildings crumble to the ground

You, perched on the edge of your comfortable bed
Like a beautiful songbird
Singing tender songs
Of melancholy hearts
All love and lost

Drowning at the horror
Drowning at the horror
With honey dripping from your open mouth
It’s funny how you buried all the doubt

Your cooing warble cover other sounds

– “Western Meadowlark”, Brown Recluse Sings

————————————————————————————-
1. William Shakespeare’s “The Merchant of Venice” – II.i.58
2. Source: http://www.treasurydirect.gov/NP/NPGateway

3. Source: http://www.reuters.com/article/domesticNews/idUSTRE50I2OH20090119

4. Source: Associated Press

5. Source: http://www.cnbc.com/id/29500179

6. Source: IMF (http://www.imf.org/external/np/sec/memdir/members.htm#2)

7. Source: http://www.bloomberg.com
8. Source: http://en.wikipedia.org

© 2009 The Galactic Pillow

6 Comments Post a comment
  1. Apr 1 2009

    I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.Joannah< HREF="http://easypowerpaint.com" REL="nofollow">http://easypowerpaint.com<>

    Reply
  2. evie
    Apr 1 2009

    This is a very deep and serious post. I enjoyed reading it! I have learned quite a few things about Economics, Military, and Veronica Mars. :-)) It’s an interesting combination, I think the prologue ties in nicely with the rest of the article. Very nice. :-))In my opinion, people are ‘inherently’ racist but it ‘may not’ be our fault. We always deny that we are racists, but deep inside, maybe we are a little bit afraid of the people who are different from us. I guess, maybe this fear has been ingrained into our DNA? People of different tribes, sometimes from the adjacent neighboring villages, have fought each other through time immemorial! So, it becomes a natural instinct to be ‘wary’ of the people who do not look like us, or speak like us because they might come and rampage our village, if we are not careful. Probably the same mentality is carried forward till this day, but that’s just my hypothesis, it’s my 2 cents of human psychology. ;-))And you are right! Everyone should live harmoniously amongst one another on this ‘small’ planet earth. We have to learn to be tolerant of other nations (except the fanatical ones). But anyway, we only hear one side of the story, we have never heard their side of the story before, so they are always the ‘bad guys’, eh? Why are the people in the political and economics forums throwing nasty remarks at each other? I don’t understand it either. It’s so childish!! And it is so politically incorrect! grrrrr…I think it is about time China rises up again. The Chinese people have suffered in poverty for too long. It breaks my heart to read about the people who have and those who have-not. Like my grandfather said, “it is cruel to be poor”. And I truly hope that the gap between the rich and poor will become smaller in the near future.Maybe China will be my next itinerary when I plan my vacations. Hahah 😀

    Reply
  3. Apr 1 2009

    Contrary to your statement abut the Law of the Sea Convention, the convention is quite clear that high seas navigation rights apply within the exclusive economic zone. You might not recognize it, but the paragraph that says “Articles 88 to 115 and other pertinent rules of international law apply to the exclusive economic zone in so far as they are not incompatible with this part.” Articles 88 to 115 are the provisions of the convention that define the rights of free navigation on the high seas.China made unsupported claims over the EEZ and gained press coverage that benefited from a lack of media and blogosphere knowledge of the Convention and its negotiating history. Fairly quickly, though, it became clear that China wqas in the wrong. As this happened, china began to backpedal and quiet their claims. They knew that their claim was wrong, much as they wish otherwise, and that not only the US but regional states would rely on the Law of the Sea Convention to block the Chinese claim of excessive control over the EEZ.

    Reply
  4. evie
    Apr 1 2009

    CaitlynA,I bet you are a lawyer, right?Does “Articles 88 to 115” give the right for Americans to spy on Hainan Island??? What if the Chinese boat come close enough to the coast of California to do something silly? Don’t you think the Americans will be upset about it too? I’m sure they will!

    Reply
  5. Apr 1 2009

    No, I’m not a lawyer, but I have dealt a lot with law of the sea for the navy and for seabed mineral development. . While avoid using ‘spy’ for a legal activity, the answer is yes, the convention, as customary international law before it, does allow us to observe Chinese naval activities from the EEZ. And don’t think we wouldn’t allow China to do the same to us. We didn’t stop Russian ‘trawlers’ from watching us from outside our territorial sea and you must known that Russian submarines odserve our fleet actities from our own EEZ.

    Reply
  6. Apr 2 2009

    Thanks everyone for posting a comment here and reading this blog. I intended to post a reply in this thread but I ended up being long-winded and had to turn it into a post. I hope you all check it out.

    Reply

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