February 11, 2010

Obama's Reaction To China's Reaction To Obama

My latest post on China's reaction to the latest U.S. arms deal with Taiwan and the economic implications, only has a couple of ways it can play out. China's further actions depend on President Obama's reactions to their threats. And Obama's reactions, depend as always, on what makes sense for him politically, and also what fits his agenda.

The choices for Obama are pretty simple. Obama can relent to China's threats, or he can press on with the sale of arms to Taiwan.

The case for relenting is straight forward. The U.S. economy would not be subjected to an unquantifiable dollar devaluation shock and possible plunge back into a recession as a result of increased interest rates and further savings and reduced spending that would result. Chinese relations would be less strained simply because China would get what they wanted - a weakened Taiwan and a facing down of the other Superpower. That said, it avoids the dollar correction that is needed to combat the ever-present trade imbalance.

Nevertheless, the economic shock isn't the biggest deal for the President. He's said in the past he wouldn't care if the price of gasoline went to $5 per gallon, but he'd wished it went more gradually and wasn't such a shock to consumers. So, he's indicated he's not in favor of shocks to the system per se, but that corrections are okay. What his real drivers are his agenda. He wants to spend that money. He's got social programs to foist upon the unwilling unwashed mases, like health care. He wants that debt to have money to spend. He doesn't even see the point in getting "savings" from Medicare to pay for Health Care is not real. When you cut Medicare all you are doing is reducing the debt you are going to incur over time. But he sees that "savings" as money he can spend on his health care plans. All he's doing is changing the name of the debt. What's driving him is that urge to spend.

How does that relate to Obama's Taiwan deal? Well, arms sales do represent revenue, a small amount. And they do represent geo-political obligations that must be addressed, since the U.S. doesn't have the resources to defend Taiwan from China.

But really the implications come from China's threat. How does the President react? Backing down is bad geo-politically in the Asian theater. It emboldens China and leaves not only Taiwan, but South Korea, and Japan feeling a bit stranded. There are domestic implications too. A further sign of weakness would hurt Obama's job approval in the national security area. The right already sees him as soft, but no one, save the far left, would see backing down as a cause for celebration. It's a sign of weakness and Americans would recognize it for just that.

The case for not relenting is almost the mirror image. The dollar would not be safe. But it would curb the appetite for imports. Taiwan, South Korea and Japan would all be thankful. But domestically the president would certainly score points for having some backbone with China. It would be a welcome change. But would China then carry through on it's threat? It would almost have to do so, or it would be weakened in the eyes of itself and it's neighbors. And if China starts undercutting the dollar by flooding the market with U.S. debt, you'll see interest rates rise, spending decline and the recession return. The President would face a November with unemployment at 12%. That's just not feasible.

So it would seem the logical course for President Obama is to back down. That is unless he believes China is bluffing. After all, it was a military suggestion to try using economic activity to stifle a military issue for them. It didn't come from the ruling Communist Party directly. Not yet. So it could be merely posturing. President Obama finds himself in a poker game here, with the weaker hand and no easy way out. The best he can hope for is the opportunity to do nothing as the situation blows over on it's own. If it's not on his agenda list, that seems to be his favorite approach (like voting present on bills, like going with the flow). I don't know if that can work here, unless Chinese officials first come out and denounce their military's opinion. But don't hold your breath. As the Chinese military has just brazenly pointed out - geo-politics is just as economic as it is martial. And China isn't looking to get saddled with another trillion dollars in U.S. debt.

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