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Page 5

Congressional Committee
Examines Relationship
Between Rising Prices
& Monetary Policy

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    Higher prices at the pump along with an increase in the cost of many items on grocery store shelves make clear inflation has reared its ugly head, despite the Federal Reserve’s claim to the contrary.

   One congressional committee recently held a hearing to examine the correlation between these rising prices, and The Fed’s monetary policy.

 

    The March 17 hearing took place before the Monetary Policy Subcommittee of the House Financial Services Committee. Chaired by Congressman Ron Paul (R)-Texas, the subcommittee invited three witnesses to offer testimony and field questions from those subcommittee members interested in discussing inflation.

 

    “When a money supply is increased, the value of that currency goes down,” said Paul, in his opening statement. “And inevitably, it will lead to rising prices. I believe the inflation of prices is most damaging to the poor and low middle income people because they suffer the consequences much more so than those that can protect themselves.”

 

    Labeling inflation a tax on the poor – on those who can least afford it - Paul said inflation hurts the lower middle class by diminishing their purchasing power, essentially reducing their real income relative to the cost of living.

 

    “It is a reasonable assumption to say…that if you destroy a currency you will destroy the middle class. A sound currency encourages a middle class,” said Paul.

 

    The Texas Republican warned against government intervention in the form of price controls, something tried as far back as ancient Egypt thousands of years ago and as recently as the 1970’s by the U.S. government under President Richard Nixon. Paul reiterated his belief that rising prices are a symptom of bad monetary policy.

 

A Dollar as Good as Gold

 

    The first witness to speak was Lewis E. Lehrman, Senior Partner of L.E. Lehrman & Co. Lehrman is an advocate for returning to the Gold Standard. In his opening statement Lehrman blamed the Federal Reserve’s first round of Quantitative Easing (QE) in 2008 – an increase in the money supply – for the almost tripling of oil prices and doubling of the cost of a gallon of gasoline.

 

    The Fed’s credit expansion from late 2008 through March 2011 created almost $2 trillion new dollars on the Fed balance sheet, explained Lehrman, leading to commodity and stock inflation.

One social ramification of rising prices on middle income workers, those on a fixed income or on pension, according to Lehrman, is little to no return on savings.

 

    The way back to prosperity for Americans is through reinstituting a dollar convertible into gold, Lehrman proffered. “The gold standard puts control of the supply of money into the hands of the American people, as it should in a Constitutional Republic. Because excess creation of credit and paper money can be redeemed by The People for gold at the fixed statutory price, the monetary authorities are thus required to limit the creation of new credit in order to preserve the legally guaranteed value of the currency. As President Reagan said: ‘Trust The People,’” said Lehrman.

 

    Returning to the gold standard requires a three-step process, according to Lehrman. The first step in monetary policy reform is for the government to announce the future convertibility of the U.S. dollar on a date certain and to define the dollar as a weight unit of gold; second, convene an international conference to establish mutual gold convertibility of the currencies of the major world powers; and third, prohibit by treaty the use of any currency but gold as official reserves.

 

    Lehrman said the Gold Standard “is not perfect, but it is the least imperfect monetary system tested in the only laboratory we human beings have available to us: the laboratory of human history.”

 

    The second witness, James Grant, Editor of Grant’s Interest Rate Observer, began his opening statement by reminding the subcommittee that the Federal Reserve Act of 1913 did not mention zero interest rates, Quantitative Easing, inflation targeting, stock price manipulation, or paper money; all realities today as The Fed approaches its centennial in 2013.

 

    Grant then read from the Federal Reserve Act of 1913, specifically, its original mandate to furnish an elastic currency, afford a means to discount commercial paper, provide for the more effective supervision of banks, and “for other purposes.”

 

    “We should have known,” said Grant. “’Other purposes’ was the operative phrase. Mission creep is endemic to bureaucracy, of course, but few government departments have crept, indeed galloped, faster, further, or in a more unhelpful direction than the Federal Reserve.”

 

    Central banking has morphed into central planning, explained Grant, and today, the chairman of The Fed, the Ben Bernanke, has become “the self-appointed booster of stock prices.”

 

    The last witness, Joseph Salerno of Pace University in New York, and also vice president of the Ludwig von Mises Institute, attacked the notion that the inflation is necessary as opposed to the deflation. Modern central bankers confuse the deflation with the depression, said Salerno, and these are two very different phenomenon.

 

    Deflation, or falling prices, in most circumstances, is a natural outcome of a prosperous and growing economy, argued Salerno. Deflation-phobia lacks any rational basis, said Salerno, who illustrated his point by citing costs for consumer electronics and goods produced in the high tech industry – sectors where products improve and prices fall with each passing year.

 

    Salerno explained that a main frame computer, about the size of the chamber where the hearing was held, sold for about $4.7 million in 1970. Today, a PC twenty times faster sells for less than $1,000, according to Salerno. A hand-held calculator introduced in 1971 was priced at $240. By 1980, similar calculators were selling for $10 despite the fact that the 1970s were the most inflationary period in U.S. history, explained Salerno.

 

    The first HD TV was introduced by Sony in 1990 and retailed for $6,000, he said. By 2003, when HD TVs first became widely sold in the U.S., the price dropped to between $3,000 and $5,000. Today, an HD TV of a higher quality than in 2003 can be purchased for as little as $500, Salerno explained. He then compared Lasik eye surgery, a medical procedure first approved by FDA in 1998, dropped from $4,000 per eye its first year to as low as $300 today.

 

    “Not even a Keynesian economist would claim that the spectacular price deflation in these industries has been a bad thing for the U.S. economy,” said Salerno.

 

    Under the Gold Standard, Salerno said prices naturally tend to decline over time because the money supply grows gradually. He said that in the 1800s up until World War I, a mild deflationary trend prevailed in the U.S.

 

    “A consumer in the year 1913 needed only 79 cents to purchase the same basket of goods that required $1 to purchase in 1800,” said Salerno – a 27% increase in purchasing power over 113 years. “Contrast this,” said Salerno, “with the current day’s consumer who must pay $22 for what a consumer in 1913 paid only $1 for.”

 

    After each witnessed delivered their opening statement, the subcommittee moved to questioning. Chairman Paul stated monetary policy was an important factor impacting the business climate then asked Salerno to speak in detail about deflation and which segment of the population would benefit most from deflation.

 

    Deflation as measured by falling prices would most benefit those on fixed incomes and pensions, explained Salerno, because falling prices essentially translate into an increase of income – a raise.

 

    Paul asked Lehrman to expand on stable prices over the long-term when a nation relies on a gold-backed currency, as opposed to the diminishing value of fiat currency – paper money prompting Lehrman to hold-up a graph, the same graph submitted as part of his written testimony, showing the value of a dollar relative to an ounce of gold since 1913.

 

    His graph showed that on March 15, 1910, one ounce of gold sold for $20. On March 15, 2011, 101 years later, one ounce of gold cost $1,396. When the dollar is measured by a Consumer Price Index (CPI), the 1913 dollar is worth five cents.

 

    It was the Coinage Act of 1792 which made the dollar convertible to precious metals, primarily to silver at first, explained Lehrman, and by 1834, the nation was on the Gold Standard. “If you take the price level under the Gold Standard from 1834, and of course make the exception for the Civil War…until 1914, you will find under the Gold Standard that the general price level for the CPI was exactly in the same position,” said Lehrman. “Over the long run, near a century, there was neither a fall in the general price level - deflation – nor was there any general inflation.”

 

    Republican Representative Blaine Luetkemeyer of Missouri asked Grant to elaborate on his opening testimony when he spoke on a fiat currency; specifically that the only thing holding up the dollar is faith in it since it isn’t backed by anything else.

 

    Grant said every monetary system is faith-based to a degree and never before, until present day, has the world “been on a system of pure paper” adding, “The dollar is the Coca-Cola of monetary brands.” This Grant called “a remarkable achievement.”

 

    The dollar is treated as “good money the world over though the cost of production is essentially nothing,” Grant said. “This is a pretty flattering expression of confidence by the world in America and in its institutions.”

 

    Grant warned, however, that faith, unlike gold, must be continually refreshed and is not perpetual. He explained that in the language of modern finance the dollar is a derivative and it once derived its value from the collateral behind it, namely gold. Today the dollar is a derivative without an underlying asset, except for faith.

 

    Luetkemeyer asked Grant to explain the impact on the U.S. if other nations no longer use and recognize the dollar as the world’s reserve currency. Grant described it as a “unique privilege” for the U.S. to be in the position to create a currency accepted the world over and one “that only we can lawfully create.” This, said Grant, is officially called “the reserve currency privilege.”

 

    Grant said the nature of “American franchise” is to import foreign goods purchased with dollar bills - currency created at no marginal cost – then send those dollars overseas to, as Grant put it, “Wal-Mart suppliers in Asia.”

 

    Because suppliers do not necessarily need dollars, “they wind up on the balance sheet of the central banks of our Asian creditors,” said Grant. Then our Asian creditors purchase Treasury Securities “as if the dollars never left the 50 States.”

 

    Once the world loses their confidence in the Federal Reserve, the United States will lose the aforementioned franchise, warned Grant, and our nation will suffer a lower standard of living as a result.

 

    Arizona Republican David Schweikert mentioned the two U.S. trading partners responsible for buying the most U.S. debt - Japan and China - and then asked the panel if inflation in either or both of those nations would affect inflation in the U.S. and also the current balance of trade.

 

    Salerno said if China were to have a period of inflation, U.S. made goods would be more affordable for the Chinese consumer, increasing exports to China, and would make Chinese goods more expensive in the U.S., decreasing imports - a scenario Salerno labeled “a good thing.”

 

    Congressman Schweikert asked what the impact would be, considering the devastating crisis in Japan, if that nation – our second biggest buyer of debt - were to keep its money at home to finance reconstruction instead of purchasing Treasury Securities to finance U.S. debt. 

 

    Lehrman suggested China would fill the breach left by Japan and if that was not to be the case, then the dollar would fall on the foreign currency exchanges until countries whose interest it is in to not have the dollar fall any lower - thus become increasingly competitive in the export market - intervene by buying Treasury Securities. If neither of these scenarios were to play out, Lehrman said The Fed would have no choice but to contract the money supply.

 

    Steering the conversation to the Consumer Price Index (CPI), or inflation, Paul explained there are two CPIs. The old version, and the new, and said government likes to focus on “Core CPI” or the new CPI, which does not include food and energy prices. Paul then asked the panel how they measure inflation.

 

    Salerno paraphrased Ludwig von Mises, saying the housewife keeping track of prices at the supermarket is a better judge of inflation, and employs a more scientific method, than any economist and his arbitrary methods of calculation inflation. He then added he himself looked at the “Median CPI” as calculated by the Cleveland, Ohio, Federal Reserve Bank, although he admitted this method is not perfect. In addition, Salerno said he looks at the raw prices of goods and their changes over time.

 

    Before answering, Lehrman noted if the Department of Labor today abided by the CPI methodology they used to calculate the CPI in 1980, inflation today would be at an 8% annual rate. The Fed chairman, Ben Bernanke, pegged 2010 inflation at a 1.2% annual rate in testimony last month before the full Financial Services Committee as part of his semi-annual Humphrey-Hawkins Monetary Policy Report.

 

    Ultimately, Lehrman answered, to more accurately ascertain inflation one should look at the actual cost of products in the market – indicators of the cost of production - and ignore the monthly CPI as set by the Department of Labor.

 

    Congressman Schweikert asked if the national debt could have an impact on inflation and Lehrman said there should be a substantial amount of worrying on this issue because the average maturity on the U.S. Treasury debt is approximately four years – a short time period, according to Lehram, especially for a nation in our predicament. Specifically, the uncomfortable truth that the level of U.S. direct debt is fast approaching the amount of total national output. 

 

    If the interest rates were free to rise as dictated by the market, instead of The Fed’s artificially set lower, current rate, the level of debt service payments paid by the taxpayer to service the debt would rise “by an order of magnitude,” said Lehrman, and could eventually consume the entire federal budget.  

 

    Congressman Paul asked the panel their advice on what they believed is the best way for politicians to move forward on The Fed and the economy. Grant answered it would be a good idea if politicians admonished The Fed to “speak in plain language” suggesting The Fed not use the term “Quantitative Easing” and instead say “money printing.”

 

    The Fed should not use the phrase “Portfolio Balance Channel,” to convey their intention to manipulate stock prices higher, added Grant, but instead The Fed should more accurately call it “Thimble-Rigging” an old-timey Wall Street term for a shell game.

 

    “If we talk about money printing and manipulation, the public can understand what is afoot. These three dollar words [Portfolio Balance Channel and Quantitative Easing] signify nothing,” said Grant.

 

    Lerhman said he wised not to assail the motives of any man and suggested a better way to look at things is to recognize that the academics and central bankers have been trained to think and believe that the Federal Reserve System is the rightful manager of the national economy, and the world economy.

 

    “They have been trained to think that way in economics departments of almost every graduate school,” said Lerhman, adding in his view the system is flawed and the best approach when comes to The Fed is discuss policy, “Without attributing base motives to the individuals who are operating in the set of institutions which were bequeathed to them, sort of by chance or by historical developments, rather than by any satanic design.” 

 

The House Financial Services Committee is at: www.financialservices.house.gov

 

Mises Institute is at: www.mises.org

 

 

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-------- 

 

Can’t Find a
Copy of
The Political
Observer
?

 ----

Pick-Up a Copy of
The AV News
Because We’re
Probably Underneath

                     ---

    When it comes to local print publications our philosophy is, "The More, The Merrier!" 

    Unfortunately for our advertisers and readers alike, the fine folks down at the AV News apparently do not share this newspaper’s love and admiration for the free marketplace.

 

   Instead, someone at the AV News has chosen to promote their fledgling newspaper at our expense.

   Nothing quite like stepping on someone else to make oneself feel taller.  

 

   During our November distribution we noticed for the first time, at more than a dozen locations - Fox Field and Lancaster City Hall to name two - that a single copy of the AV News had been strategically placed upon our stack of Political Observers.

 

   There’s really no way of knowing how long the solitary copy of the AV News had been there covering the Political Observer since the AV News doesn’t move very fast.

   A single copy may do the trick for a week or two. Now that’s economy!

 

   The AV News’ underhanded maneuver not only deprives our regular readers the opportunity to find the latest copy of The Political Observer, it also prevents people from discovering and enjoying our publication for the first time.

   On the business end of things, the employ of this unethical and malicious tactic injures the Right of our paying advertisers to receive full value for their purchase.

 

   That’s bad for business.

 

   Later into the month of November during our restocking of distribution points we learned the seedy scheme of placing a lone copy of the AV News atop the Political Observer was not a one-time event, so this editor, along with the publisher, paid a friendly visit to the AV News at their downtown storefront on Lancaster Blvd.

 

   There we spoke with a cordial Chris McGuinness, with whom we kindly registered our complaint and consequential demand that his organization cease the practice immediately.

   Chris took written note and promised to pass the message along to his editor, my dear, old friend from Antelope Valley College, Tom Bryant.

 

   Mr. Bryant and I got to know each other well during our few years together on campus  - he, the brave and honorable campus police chief, and I, the enterprising editor of the college newspaper hot on his trail.

   Along with his deputy - Codename: Kick-Stand - we three shared the privilege and opportunity to become “close” on one particular, special occasion.

 

   Mr. Bryant trading his gun and badge for a pen and notebook is an amusing thought. It’s the very definition of irony and would serve well as the premise for a cleverly-crafted column.

   Just the facts! I’m sure Mr. Bryant gets my drift.  

 

   Political Observer staff – all two of us – are thrilled the AV News is fully-staffed, up and running in business publishing a newspaper.

 

   Until the above-described interference from that newspaper is successfully brought to a halt, readers remember: when in Lancaster, if you can’t find a copy of The Political Observer, pick-up a copy of the AV News, because we’re probably underneath.

 

   And by all means, we encourage you to grab a copy of the AV News too! It isn’t hard to miss.

   Most likely you’ll find it atop a stack of The Political Observer.

 

   To be continued…? Mr. Bryant?

 

 

 

 

 

China Promoting Policy
of Peaceful Multilateralism
as Strategy to
Diminish U.S. Power

----------

Building U.N. Coalition to Thwart,
Block U.S. Foreign Policy Aims
----
 Examining China’s
International Behavior

---- 

Activism, Opportunism
& Diversification

--- 

The Rise of a 21st Century Empire
~

MOSCOW STATE UNIVERSITY: Then-President and current Russian Prime Minister, Vladimir Putin with former Chinese President Jiang Zemin in 2001 while meeting with University
entrants, students and lecturers. Photo published with permission, courtesy:
www.kremlin.ru

 

      “It can be said that the 21st century cannot be the ‘American century.’ It is not that the Americans do not want it but that it is not possible. This has been proven by the Iraq issue. The United States wants to engage in unilateralism but it cannot dominate the world. . . . Speaking about international relations in the new century, one has to talk about China. China is the most vibrant force in the world today. The rapid growth of our country has led to widespread attention in the international community.”

    -- Former Chinese Vice Premier Qian Qichen

                   ------------

   Read between the lines. On April 1, 2001, less than 90 days into a new U.S. administration, a Chinese J-8 fighter jet was sent to intercept a U.S. Navy E-3 electronic surveillance aircraft over international waters. The Chinese fighter bumped the E-3 causing enough damage to force the U.S. Navy plane to land on Hainan Island. The 24 crew members were interrogated and detained for ten days and released only after the United States government issued a letter of apology.

 

   Fast forward to early March 2009, less than 60 days into the next new U.S. administration and China was at it again, this time harassing U.S. Navy ships over several days. On March 4, a Chinese Bureau of Fisheries Patrol vessel used a high-intensity spotlight to illuminate the entire length of the ocean surveillance ship USNS Victorious multiple times, to include its bridge crew.

 

   The following day, March 5, without any notice or warning, also in international waters, a Chinese frigate approached ocean surveillance ship USNS Impeccable and crossed its bow at a range of roughly 100 yards. This event was followed less than two hours later by a Chinese Y-12 aircraft conducting eleven fly-bys of Impeccable at an altitude of 600 feet and a range from 100-300 feet.

 

As reported on at the time by FOX News, “The frigate then crossed Impeccable's bow yet again, this time at a range of approximately 400-500 yards without rendering courtesy or notice of her intentions.” Two days later, on March 7, a Chinese military intelligence collection ship challenged USNS Impeccable over bridge-to-bridge radio, calling her operations illegal and directing Impeccable to leave the area or “suffer the consequences.”

 

   There is no doubt among political observers that China has established a pattern of militarily challenging the United States within 100 days of a new U.S. administration.

 

   One of five permanent members of United Nations Security Council empowered with the veto, China, a nation of over one billion people, seems intent on filling the void left by the Soviet Union to become the United States’ main global rival in the 21st century.

 

   A RAND report, commissioned by the United States Air Force, examined China’s international behavior and concluded that the expanding scope of China’s international activities is one of the newest and most important trends in global affairs.

 

   China’s rapid rise in global activism has raised numerous questions about that nation’s intentions, and the implications for U.S. security interests, to include the possibility China may successfully undermine the foreign policy goals of the United States.

 

   RAND described China as “a global actor of significant and growing importance” involved in regions and issues once peripheral to her interests, such as Latin America and the Middle East, and through its international behavior China has single-handedly altered the dynamics of the current international system.

 

   According to RAND, Chinese policymakers view its current rise as a world power as a “revitalization and rejuvenation” after 100 years of shame and humiliation at the hands of Western powers, and in particular, its neighbor, Japan. China’s defensive posture stems from historical fears that foreign powers will continue to try to contain and coerce her through the exploitation of her internal weaknesses.

 

   RAND revealed contemporary Chinese leaders have concluded that the next 15 to 20 years represented a strategic window of opportunity within which China can achieve her objectives of national revitalization through economic, military and political development.

 

 

A Multi-Polar World

 

   After the end of the Cold War, Chinese analysts predicted a quick evolution away from a U.S. and Soviet Union dominated bipolar world to one of a brief period of U.S. domination in the 1990s to be followed by the emergence of a multi-polar system early in the new century.

 

   Such an order was not to be as the United States maintained its supremacy well into the new century, to the dismay of China. RAND reports the continued U.S. dominance and preference for unilateral use of military force under President Bush had become a source of concern for Chinese strategists and policymakers.

 

   In a 2004 speech given by Qian Qichen, China’s former vice premier and long-time foreign policy doyen (senior member of a group regarded as an authority because of superior knowledge), Qichen said, “The United States wants to engage in unilateralism but cannot dominate the world.”

 

   In a 2008 Chinese defense white paper, China referred to “hegemonism and power politics” - a common phrase and Chinese reference to U.S. foreign policy - as destabilizing forces in international security affairs.

 

   However, Chinese scholars and policymakers argue, multi-polarity is on the rise as U.S. influence diminishes, and cites as evidence the global financial crisis and relative decline of the U.S. economy on the one hand, and international resentment and alienation fostered by the lengthy U.S. intervention in Iraq and our nation’s militaristic prosecution of the global war on terrorism, on the other hand.

 

   A senior Chinese diplomat was quoted by RAND as saying, “The uni-polar hegemonistic strategy of the United States has met setback after setback.”

 

   Many Chinese scholars now believe a multi-polar world will emerge over the next 20 to 30 years. China cites the strength of emerging powers, such as India, Brazil, Mexico, and related organizations such as the G-20 as evidence of an accelerated move away from U.S. dominance and toward multi-polarity.

 

 

Energy Insecurity

 

   In 2001, China’s economy began to grow faster than projected, mainly due to exports to the United States, which led to a surge in energy demand for both industrial and transportation use. Although China became a net oil importer in 1993, she was unprepared for her accelerated growth and the growing energy intensity that followed.

 

   The result was shortages in oil, coal, and electricity and prolonged power shortages in many Chinese provinces that created a situation forcing China to make energy security a major objective of China’s foreign policy agenda – like the United States.

 

   Demand and reliance on imported crude oil grew from 1.6 millions barrels per day (b/d) in 2001 to 4.1 million b/d in 2007; consumption levels some Chinese leaders projected for their nation not until 2020.

 

   China became the world’s second-largest consumer of oil (after the U.S.) in 2003 and the world’s third-largest importer (after the U.S. and Japan) in 2004. The U.S. imported an estimated 60 percent of our oil in 2008, according to the Energy Information Agency, and China is not far behind, nearing the half-way mark, importing 45 percent of her oil that same year (45 percent of their total from the Middle East).

 

   The International Energy Agency projects China’s dependence on imported oil will meet and then surpass U.S. demand in the not so distant future, increasing to 63 percent in 2015 and 77 percent in 2030.

 

   Chinese leadership, like the United States, define energy security in terms of two issues: price volatility and security of delivery, in which China feels vulnerable on both fronts, although the Chinese directly benefit from the United States’ commitment to keep sea lanes open and oil moving safely and freely around the globe.

 

   About 90 percent of Chinese oil imports arrive by ocean tanker, which has made China focus recently on obtaining energy resources closer to home (Russia) to be delivered by pipeline or ground transport. The heavy U.S. presence in the Middle East has also concerned China and made it feel vulnerable to any future supply cut-offs enforced by the United States.

 

 

Taiwan

 

   Long a thorn in the side of Chinese prestige is Taiwan. The island nation, referred to as “Free-China” by some, is recognized by and has diplomatic relations with 23 nations (Latin America: 12 nations; Africa: 4 nations, South Pacific: 6 nations, and the Vatican). The 23 nations that recognize Taiwan are: Belize, Burkina Faso, Dominican Republic, El Salvador, Gambia, Guatemala, Haiti, Honduras, Kiribati, Marshall Islands, Nauru, Nicaragua, Palau, Panama, Paraguay, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Sao Tome and Principe, Solomon Islands, Swaziland, Tuvalu, and Vatican City.


   China
seeks to reduce, and eventually eliminate other nations’ ability to confer status or legitimacy on Taiwan through her interaction and subsequent influence in major multinational organizations, such as the United Nations and the World Health Organization (WHO), thus denying Taiwan a level of participation that may bring the island nation the slightest hint of legitimacy.

 

   The strategy to prevent Taiwan independence is a long-standing one with the ultimate goal being reunification with the mainland. As part of her Taiwan strategy, China has adopted “Dollar Diplomacy,” a method where China uses large aid packages and other financial incentives to switch a nation’s diplomatic recognition from Taipei to Beijing.

 

   Examples of Dollar Diplomacy include the construction of a sports stadium in the Dominican Republic and an agreement with Costa Rica in 2007 where Beijing pledged to provide $130 million in aid and agreed to purchase $300 million in Costa Rican government bonds.

 

   China’s ability to practice Dollar Diplomacy rests on its sizable foreign currency reserves, a significant amount of U.S. dollars gained through a massive imbalance of trade with the United States. RAND reports, “Since 2003, Costa Rica, Chad, Grenada, Malawi, Liberia, the Dominican Republic, and Senegal have all switched to diplomatic recognition of China. A few countries in Latin America, such as Paraguay and Panama, are thought to have seriously considered such a shift.”

 

   According to RAND, China and Taiwan reached an agreement late in 2008 to freeze the diplomatic competition in order to create an environment more favorable to confidence building between the two nations.

 

 

Military Diplomacy

 

   In their 2004 national defense white paper, China elevated the value of military diplomacy to the strategic level. The People’s Liberation Army (PLA) has been used by China in bilateral and multilateral military-to-military interactions to broaden political relations with her Asian neighbors, as well as in Africa and Latin America.

 

   According to RAND, Chinese military diplomacy has been successful, for the most part, in reassuring Asian nations of China’s peaceful intents, to demystify the PLA, to expand China’s influence with neighboring militaries, and to gain experience and knowledge from more capable militaries.

 

   The content of these exchanges have been limited because of the PLA’s penchant for guarding national defense information and capabilities. However, China’s military exchange efforts are growing, having established military ties with over 150 nations, and having military attaché offices in 109.

 

   Ninety-eight countries have reciprocated and maintain military attaché offices within China. In 2006–2008, PLA delegations visited over 40 nations and defense ministers and chiefs of general staff from more than 60 countries visited China.

 

   In the same three-year period, China sent over 900 military students to over 30 countries while about 4,000 military personnel from more than 130 countries have come to China to study at Chinese military educational institutions.

 

   China now conducts annual defense exchanges with all her Asian neighbors. From 2002 to 2008, China’s PLA conducted over 40 joint military exercises and joint training exercises with over 20 nations – a new and growing practice.

 

   The export of conventional weapons to a collection of regular customers – Burma, Cambodia, Pakistan, Thailand, Sudan, Algeria, Egypt and Iran – has made China the fifth-largest arms exporter to developing nations, estimated to be valued between $500 million to $1 billion annually.

 

   RAND cautioned that Chinese arms exports (five percent of global market share) are not a major source of political influence, rather, a form of opportunism by China because many buyers lack access to other suppliers, or lack funds to shop for weapons elsewhere.

 

   Chinese conventional weapons are described by RAND as “inexpensive but often unreliable” and RAND stated Chinese arms shipments go to smaller, poorer countries, with the exception of Pakistan, and to nations such as Burma and Sudan whose access to the global arms market is restricted.

 

   RAND reports, “China has sold to the same set of countries for the last decade, with the occasional one-off deals. The limited competitiveness of Chinese arms exports could change if, in the coming years, China develops next-generation systems and then decides to export the more advanced weapon systems that currently populate the PLA’s arsenal. If this shift occurred, then arms sales could become a more significant part of China’s security cooperation with other countries and a source of political influence.”

 

 

U.S.-Sino Relations

 

   Chinese leaders, since the early 1990s, have articulated three principles to guide their nation’s relations with major powers: non-alliance, non-confrontation, and not directed against any third party. EDITOR’S NOTE: The two incidents reported on at the beginning of this article belie the non-confrontation principle espoused by Chinese leadership.

 

   U.S.-China relations are of paramount importance to Chinese policymakers who have historically treated relations with the U.S. as their most important because the U.S. is seen as a critical source of trade, investment and technology.

 

   Of equal importance, China believes if their relationship with our nation were to deteriorate, China’s period of strategic opportunity to obtain the next level of national development would be disrupted. Our relationship with China is also unique because it is characterized by both intense competition and cooperation on both economic and security issues. Outright conflict, all experts agree, would be costly for both nations.

 

   Mainly by U.S. insistence, no leaders from either side refer to U.S.-Sino bilateral relations as “strategic partnerships,” rather, leaders use terms as “positive,” “constructive,” “cooperative,” “candid,” and “comprehensive,” RAND noted.

 

   Yet, RAND stated, Washington D.C. and Beijing’s efforts to restrain North Korean nuclear ambitions have been overshadowed by a growing disagreement over Iran’s nuclear efforts.

Ultimately, China seeks to create conditions under which U.S. policy could not frustrate nor hinder China’s top foreign policy objectives.

 

   China seeks to implement policies that reduces the U.S. geographical encirclement and containment of their nation, then to constrain the U.S. freedom of action in the region, particularly with Taiwan, according to RAND.

 

 

Russian-Sino Relations

 

   China’s relationship with Russia promotes greater multi-polarity and multilateralism, thereby lessening U.S. global influence. In 1994, China and Russia formed a “cooperative partnership,” followed by a “”strategic cooperative partnership” in 1996. A full treaty on “Good Neighborliness, Friendship, and Cooperation” was concluded in 2001.

 

   Since 1996, Chinese and Russian leaders have held annual summit meetings, and Hu Jintao’s first trip abroad as China’s head of state in 2003 was to Russia. In 2004, a long border dispute was resolved and in 2005, the two nations, for the first time, conducted a large and sophisticated joint amphibious landing exercise along China’s coastline.

 

   A second joint exercise involving land forces was conducted inside Russia in 2007 with a third military exercise conducted this year.

 

  At the end of the Cold War, Russia became China’s principal supplier of sophisticated weapons systems that included air defense, advanced jet fighters, destroyers, submarines and supersonic anti-ship cruise missiles and in 2007, Russia became China’s fourth-largest supplier of crude oil imports at nine percent, satisfying a part of China’s desire to receive crude oil delivery overland instead of by sea.

 

   A Chinese assessment declared that “U.S. strategic bullying has served as a catalyst in the development of China-Russia relations,” and “The more the U.S. is worried about the Sino-Russian relations, the more China and Russia should fortify their relations. By doing so, they can effectively stand up to the unilateral behavior and hegemony of the U.S.

 

   In the United Nations, Russia and China are two of five permanent members of the Security Council with veto power and RAND reports how the two nations play the United States, “On North Korea nuclear issues at the U.N., China takes the lead, with Russia’s support; and on Iran nuclear issues, Russia takes the lead with support from China. In 2006 and 2007, there was a near 100 percent similarity in Chinese and Russian votes in the UNSC (Security Council), including vetoes.

 

   “As a reflection of their common concern about U.S. power, many Chinese also hope that Russia would be willing to support China in a conflict with the United States over Taiwan; Chinese analysts point to the 2005 joint amphibious exercise as an indication of growing military cooperation, which could be leveraged during a cross-Strait crisis,” RAND reported.

 

   In Central Asia, both Russia and China fear a prolonged U.S. presence and seek the reduction and eventual withdrawal by the U.S. military - both Russia and China support a timeline for a U.S. withdrawal - and an end to U.S.-led democracy-promotion efforts in the region.

 

   Regardless of the unity of effort between Russia and China in opposition to United States’ meddling in Central Asia, each nation still looks upon the other with caution. Russia fears Chinese regional dominance as does China fear Russian regional dominance.

 

   Although RAND found that most Central Asian states have learned a lesson watching China and Russia together attempt to stymie U.S. efforts, and, in turn, play Russia and China off one another to maximize benefits for themselves.

 

   Despite increased governmental and military ties, there exists low-level social and cultural contact between the peoples of China and Russia, which has fed negative stereotypes on both sides, RAND reports.

 

   In 2007, about 40,000 Chinese college students and 80,000 middle school students were learning Russian, while more than 200 million students were learning English. In trade, Russia has never been, and still is not today, a major trading partner with China or major investor in her economy.

 

    In 2007, Russia-Sino bilateral trade reached an all-time high of only $48 billion dollars, compared to $356 billion with the European Union, $302 billion with the U.S., and $236 billion with Japan. Bilateral trade between China and Russia has been a source of tension since Russia wants to export more value-added goods to China (equipment and machinery) while fearing having its market flooded by China dumping cheap Chinese-made consumer goods, as China has done to the United States.

 

   Arms shipments to China from Russia have dropped by about one-third in 2008 ($1.4 Billion total) from 2006 levels because China has succeeded in filling critical gaps. Known for pirating goods, Russia is also concerned with China’s copying of Russian defense equipment and technologies.

 

 

China in the U.N.

 

   Observers need look no further than the United Nations – the center of China’s support for multilateralism - to discover China’s affinity for using international organizations to advance her objectives.  In a 2005 speech before the U.N. at the organization’s 60th anniversary celebration of world government, Chinese President Hu Jinato identified multilateralism as the appropriate mechanism to achieve to a common global security and said the role of the U.N. must be strengthened and “must not in any way be weakened.”

 

   Although China does not favor a democracy at home, she favors a “democracy in international affairs.” Chinese leadership is keenly aware it is in the U.N. where United States military and economic power and influence is diluted among an international body with more than 190 voting nations, leveling the playing field in China’s favor on world affairs.

 

   However, China proves to not be all that democratic in the U.N. when it suits her needs. One of five veto-wielding permanent members on the U.N. Security Council, China opposed the democratic expansion of permanent membership on the Security Council by regional rival Japan, Germany, India and Brazil.

 

   During the 2005 debate on Japan’s possibly election to become a permanent member on the Security Council, China stood fast on her contention that Japan’s perceived unwillingness to atone for her brutal occupation of China and other Asian nations during World War II invalidated Tokyo for permanent membership on the Security Council.

 

   Supporters of Japan argued that Japan’s contributions justified her membership: Japan pays 19 percent of the U.N.’s budget, the U.S. taxpayer pays 21 percent, while China pays only two percent.

 

   To kill the proposal for Japanese permanent Security Council membership, China enlisted support from African nations with whom she has grown close. According to RAND, China encouraged African diplomats to insist a minimum of two African nations also join the U.N. Security Council and also be given veto power.

 

   China also views the U.N. as a primary venue to reduce international support for Taiwan and prod member nations to transfer formal diplomatic relations to Beijing. According to RAND, among China’s six vetoes to date, two have been related to denying U.N. peacekeeping support to nations - Guatemala in 1997 and Macedonia in 1999 - that recognized Taiwan. On both occasions, China cast the lone veto against the resolution.

 

   The four other occasions where China vetoed U.N. Security Council (UNSC) resolutions: In 1972 China cast the lone veto on the application by Bangladesh to join the U.N. because China considered Bangladesh to be a breakaway province of Pakistan.

 

   Also in 1972, China, alone again, vetoed amendments to a UNSC resolution that deplored terrorist acts in the Middle East and called for their cessation. China was supporting Arab states and the Palestine Liberation Organization and said the resolution was not balanced in not naming Israel for violence against Arabs.

 

   In 2007, China, joined by Russia and South Africa, vetoed a call for and end to violence against ethnic minorities and for political freedom in Burma. China argued that Burma’s problems did not “pose a threat to international peace and security” and thus were outside the UNSC mandate. 

 

   In 2008, China was joined by Russia, South Africa, Libya and Vietnam in their veto on Sanctions against Zimbabwe that included an arms embargo, and travel and financial restrictions on top military and government officials. China declared that Zimbabwe’s internal problems, as with Burma the year before, were outside the UNSC mandate, and sanctions would interfere with negotiations and cause the situation to worsen.

 

   In 2003, China complicated the U.N.’s ability to deploy a peacekeeping stabilization force to Liberia until Beijing was assured that the new host government would shift recognition to China. The old government, run by Charles Taylor, had diplomatic relations with Taiwan since 1997.

 

   Many Chinese analysts see the U.N. as a mechanism to moderate U.S. unilateralism, particularly on the imposition of sanctions. The U.N. also provides China the venue to be passive-aggressive in opposing U.S. designs, although, with each passing year since 2003, China has become a bit more aggressive and less passive in her opposition.

 

   For example, according to RAND, China took a low-key approach but principled opposition to American efforts seeking U.N. authorization for the 2003 invasion of sovereign Iraq, letting Moscow and Paris lead the charge in opposition.

 

   RAND reports, since the Iraq War, “China’s tolerance for disagreeing with the United States at the U.N. seems to have grown. Beijing has shown increased willingness to assert itself in high-profile UNSC debates and to openly contradict Washington.

 

   “This is largely a function of several factors: China’s growing confidence in its own capabilities; its willingness to tolerate negative U.S. reactions and a related view that the United States needs China more than before; Beijing’s perception that the U.S. image and influence were in decline during the Bush administration; its expanding global economic interests; and China’s ability to work with other nations, such as Russia, to avoid isolation in its disagreements with the United States.”

 

   China has quantitatively and qualitatively expanded her participation in U.N. peacekeeping operations (UNPKO) since the United States’ invasion of Iraq. As of 2008, China was the largest contributor among the five permanent members of the Security Council.

 

   The five permanent members of the U.N. Security Council are U.S., Russia, France, United Kingdom, and China. China first began contributing to UNPKOs in 1990, and by 2008, China became the 12th largest contributor to UNPKOs among all 192 member nations, deploying 1,861 troops, 88 military observers, and 208 police to 12 UNPKOs worldwide.

 

   Roughly 75 percent of China’s  contributions are in Africa, and this number is set to increase as China gears-up to begin augmenting deployments to Darfur, Liberia and Congo.

 

   China has increased her contributions on 20 occasions since 2000, while those of the U.S., Russia and United Kingdom have declined over the same period. For the first time, a Chinese General has been appointed as the primary commander for a U.N. Mission.

 

   RAND concluded that “China is not trying to tear down or significantly revise the current constellation of global rules, norms, and institutions on economic and security affairs.”

 

   Rather, on balance, China is seeking to master them to advance its international interests—an approach that has proven quite productive for Beijing. However, it must not be overlooked that China is currently involved in places and topics previously marginal to her interests and has become a major global player, shaping nations, institutions and processes around the globe.

 

   China has been successful in drawing a particular contrast to U.S. foreign policy as practiced under former-president George W. Bush; a policy viewed as unilateral, coercive and military-oriented by too many nations. The Bush policy of go-it-alone while discounting international institutions opened a wide door for another policy, through which China entered.

 

   As a result, to many nations, China now is viewed as more cooperative and predictable than the United States, especially when she shrewdly fills the vacuum created by a war-like United States and takes a leadership role by promoting non-intervention into the internal affairs of nations.

 

   Through her diversification – entreaties into Africa, Latin America and the Middle East - China has lessened her reliance on stable and positive relations with a few powers, such as the U.S., and has generated leverage that helps her avoid restraints on her behavior by major powers in the U.N.

 

   RAND concluded that China does not directly seek to replace the U.S. as the global superpower, recognizing the enormous cost to a nation to maintain a U.S.-style global Empire, but instead China is content with a strategy that diminishes U.S. power, thus increasing China’s power and influence relative to that the United States.

 

   RAND reports, “A core Chinese objective is to hinder the U.S. ability to constrain China; that is, China seeks to maximize its freedom of action and leverage as means of countering perceived U.S. efforts to limit Chinese choices. China seeks political influence to increase the costs, for the United States and its allies, of constraining China.”

 

   This approach is described as “gravitational” rather than confrontational, meaning, China seeks to pull nations toward China rather than push them away from under the U.S.-sphere of influence.

 

   RAND reports, “Chinese leaders are mindful of the past mistakes of rising powers and want to avoid repeating them. They have studied the negative experiences of Imperial Japan, Weimar Germany, and the Soviet Union as well as the positive experience of the rise of the United States after World War II. They have concluded from these experiences the importance of not relying on military power to ensure international stature and of not confronting the dominant power.”

 

   Although RAND described China as not yet a true global power, per se, their report declared confidently that it was only a matter of time before China does become one.

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