The following article is an example of the free email articles that I get from Stratfor.  I strongly believe that most of the readers of this blog would be very interested in the free emails that Stratfor sends out, so if you haven’t signed up for their free email updates I suggest you do so.  Just click on any of the links in this post.  You will then go to a page where you can choose to sign up or read some of their sample articles.  If you click on an article you can then see the page where you can sign up for the free email updates.

Below I am going to post the article that Zeihan wrote about the coming Chinese collapse.  I think he hits the nail right on its made-in-China head.

“This report is republished with permission of STRATFOR”

China: Crunch Time

The global system is undergoing profound change. Three powers — Germany, China and Iran — face challenges forcing them to refashion the way they interact with their regions and the world. We are exploring each of these three states in detail in three geopolitical weeklies, highlighting how STRATFOR’s assessments of these states are evolving. First we examined Germany. We now examine China.

U.S.-Chinese relations have become tenser in recent months, with the United States threatening to impose tariffs unless China agrees to revalue its currency and, ideally, allow it to become convertible like the yen or euro. China now follows Japan and Germany as one of the three major economies after the United States. Unlike the other two, it controls its currency’s value, allowing it to decrease the price of its exports and giving it an advantage not only over other exporters to the United States but also over domestic American manufacturers. The same is true in other regions that receive Chinese exports, such as Europe.

What Washington considered tolerable in a small developing economy is intolerable in one of the top five economies. The demand that Beijing raise the value of the yuan, however, poses dramatic challenges for the Chinese, as the ability to control their currency helps drive their exports. The issue is why China insists on controlling its currency, something embedded in the nature of the Chinese economy. A collision with the United States now seems inevitable. It is therefore important to understand the forces driving China, and it is time for STRATFOR to review its analysis of China.

An Inherently Unstable Economic System

China has had an extraordinary run since 1980. But like Japan and Southeast Asia before it, dramatic growth rates cannot maintain themselves in perpetuity. Japan and non-Chinese East Asia didn’t collapse and disappear, but the crises of the 1990s did change the way the region worked. The driving force behind both the 1990 Japanese Crisis and the 1997 East Asian Crisis was that the countries involved did not maintain free capital markets. Those states managed capital to keep costs artificially low, giving them tremendous advantages over countries where capital was rationally priced. Of course, one cannot maintain irrational capital prices in perpetuity (as the United States is learning after its financial crisis); doing so eventually catches up. And this is what is happening in China now.

STRATFOR thus sees the Chinese economic system as inherently unstable. The primary reason why China’s growth has been so impressive is that throughout the period of economic liberalization that has led to rising incomes, the Chinese government has maintained near-total savings capture of its households and businesses. It funnels these massive deposits via state-run banks to state-linked firms at below-market rates. It’s amazing the growth rate a country can achieve and the number of citizens it can employ with a vast supply of 0 percent, relatively consequence-free loans provided from the savings of nearly a billion workers.

It’s also amazing how unprofitable such a country can be. The Chinese system, like the Japanese system before it, works on bulk, churn, maximum employment and market share. The U.S. system of attempting to maximize return on investment through efficiency and profit stands in contrast. The American result is sufficient economic stability to be able to suffer through recessions and emerge stronger. The Chinese result is social stability that wobbles precipitously when exposed to economic hardship. The Chinese people rebel when work is not available and conditions reach extremes. It must be remembered that of China’s 1.3 billion people, more than 600 million urban citizens live on an average of about $7 a day, while 700 million rural people live on an average of $2 a day, and that is according to Beijing’s own well-scrubbed statistics.

Moreover, the Chinese system breeds a flock of other unintended side effects.

There is, of course, the issue of inefficient capital use: When you have an unlimited number of no-consequence loans, you tend to invest in a lot of no-consequence projects for political reasons or just to speculate. In addition to the overall inefficiency of the Chinese system, another result is a large number of property bubbles. Yes, China is a country with a massive need for housing for its citizens, but even so, local governments and property developers collude to build luxury dwellings instead of anything more affordable in urban areas. This puts China in the odd position of having both a glut and a shortage in housing, as well as an outright glut in commercial real estate, where vacancy rates are notoriously high.

There is also the issue of regional disparity. Most of this lending occurs in a handful of coastal regions, transforming them into global powerhouses, while most of the interior — and thereby most of the population — lives in abject poverty.

There is also the issue of consumption. Chinese statistics have always been dodgy, but according to Beijing’s own figures, China has a tiny consumer base. This base is not much larger than that of France, a country with roughly one twentieth China’s population and just over half its gross domestic product (GDP). China’s economic system is obviously geared toward exports, not expanding consumer credit.

Which brings us to the issue of dependence. Since China cannot absorb its own goods, it must export them to keep afloat. The strategy only works when there is endless demand for the goods it makes. For the most part, this demand comes from the United States. But the recent global recession cut Chinese exports by nearly one fifth, and there were no buyers elsewhere to pick up the slack. Meanwhile, to boost household consumption China provided subsidies to Chinese citizens who had little need for — and in some cases little ability to use — a number of big-ticket products. The Chinese now openly fear that exports will not make a sustainable return to previous levels until 2012. And that is a lot of production — and consumption — to subsidize in the meantime. Most countries have another word for this: waste.

This waste can be broken down into two main categories. First, the government roughly tripled the amount of cash it normally directs the state banks to lend to sustain economic activity during the recession. The new loans added up to roughly a third of GDP in a single year. Remember, with no-consequence loans, profitability or even selling goods is not an issue; one must merely continue employing people. Even if China boasted the best loan-quality programs in history, a dramatic increase in lending of that scale is sure to generate mountains of loans that will go bad. Second, not everyone taking out those loans even intends to invest prudently: Chinese estimates indicate that about one-fourth of this lending surge was used to play China’s stock and property markets.

It is not that the Chinese are foolish; that is hardly the case. Given their history and geographical constraints, we would be hard-pressed to come up with a better plan were we to be selected as Party general secretary for a day. Beijing is well aware of all these problems and more and is attempting to mitigate the damage and repair the system. For example, it is considering legalizing portions of what it calls the shadow-lending sector. Think of this as a sort of community bank or credit union that services small businesses. In the past, China wanted total savings capture and centralization to better direct economic efforts, but Beijing is realizing that these smaller entities are more efficient lenders — and that over time they may actually employ more people without subsidization.

But the bottom line is that this sort of repair work is experimental and at the margins, and it doesn’t address the core damage that the financial model continuously inflicts. The Chinese fear their economic strategy has taken them about as far as they can go. STRATFOR used to think that these sorts of internal weaknesses would eventually doom the Chinese system as it did the Japanese system (upon which it is modeled). Now, we’re not so sure.

Since its economic opening in 1978, China has taken advantage of a remarkably friendly economic and political environment. In the 1980s, Washington didn’t obsess overmuch about China, given its focus on the “Evil Empire.” In the 1990s, it was easy for China to pass inconspicuously in global markets, as China was still a relatively small player. Moreover, with all the commodities from the former Soviet Union hitting the global market, prices for everything from oil to copper neared historic lows. No one seemed to fight against China’s booming demand for commodities or rising exports. The 2000s looked like they would be more turbulent, and early in the administration of George W. Bush the EP-3 incident landed the Chinese in Washington’s crosshairs, but then the Sept. 11 attacks happened and U.S. efforts were redirected toward the Islamic world.

Believe it or not, the above are coincidental developments. In fact, there is a structural factor in the global economy that has protected the Chinese system for the past 30 years that is a core tenet of U.S. foreign policy: Bretton Woods.

Rethinking Bretton Woods

Bretton Woods is one of the most misunderstood landmarks in modern history. Most think of it as the formation of the World Bank and International Monetary Fund, and the beginning of the dominance of the U.S. dollar in the international system. It is that, but it is much, much more.

In the aftermath of World War II, Germany and Japan had been crushed, and nearly all of Western Europe lay destitute. Bretton Woods at its core was an agreement between the United States and the Western allies that the allies would be able to export at near-duty-free rates to the U.S. market in order to boost their economies. In exchange, the Americans would be granted wide latitude in determining the security and foreign policy stances of the rebuilding states. In essence, the Americans took what they saw as a minor economic hit in exchange for being able to rewrite first regional, and in time global, economic and military rules of engagement. For the Europeans, Bretton Woods provided the stability, financing and security backbone Europe used first to recover, and in time to thrive. For the Americans, it provided the ability to preserve much of the World War II alliance network into the next era in order to compete with the Soviet Union.

The strategy proved so successful with the Western allies that it was quickly extended to World War II foes Germany and Japan, and shortly thereafter to Korea, Taiwan, Singapore and others. Militarily and economically, it became the bedrock of the anti-Soviet containment strategy. The United States began with substantial trade surpluses with all of these states, simply because they had no productive capacity due to the devastation of war. After a generation of favorable trade practices, surpluses turned into deficits, but the net benefits were so favorable to the Americans that the policies were continued despite the increasing economic hits. The alliance continued to hold, and one result (of many) was the eventual economic destruction of the Soviet Union.

Applying this little history lesson to the question at hand, Bretton Woods is the ultimate reason why the Chinese have succeeded economically for the last generation. As part of Bretton Woods, the United States opens its markets, eschewing protectionist policies in general and mercantilist policies in particular. Eventually the United States extended this privilege to China to turn the tables on the Soviet Union. All China has to do is produce — it doesn’t matter how — and it will have a market to sell to.

But this may be changing. Under President Barack Obama, the United States is considering fundamental changes to the Bretton Woods arrangements. Ostensibly, this is to update the global financial system and reduce the chances of future financial crises. But out of what we have seen so far, the National Export Initiative (NEI) the White House is promulgating is much more mercantilist. It espouses doubling U.S. exports in five years, specifically by targeting additional sales to large developing states, with China at the top of the list.

STRATFOR finds that goal overoptimistic, and the NEI is maddeningly vague as to how it will achieve this goal. But this sort of rhetoric has not come out of the White House since pre-World War II days. Since then, international economic policy in Washington has served as a tool of political and military policy; it has not been a beast unto itself. In other words, the shift in tone in U.S. trade policy is itself enough to suggest big changes, beginning with the idea that the United States actually will compete with the rest of the world in exports.

If — and we must emphasize if — there will be force behind this policy shift, the Chinese are in serious trouble. As we noted before, the Chinese financial system is largely based on the Japanese model, and Japan is a wonderful case study for how this could go down. In the 1980s, the United States was unhappy with the level of Japanese imports. Washington found it quite easy to force the Japanese both to appreciate their currency and accept more exports. Opening the closed Japanese system to even limited foreign competition gutted Japanese banks’ international positions, starting a chain reaction that culminated in the 1990 collapse. Japan has not really recovered since, and as of 2010, total Japanese GDP is only marginally higher than it was 20 years ago.

China’s Limited Options

China, which unlike Japan is not a U.S. ally, would have an even harder time resisting should Washington pressure Beijing to buy more U.S. goods. Dependence upon a certain foreign market means that market can easily force changes in the exporter’s trade policies. Refusal to cooperate means losing access, shutting the exports down. To be sure, the U.S. export initiative does not explicitly call for creating more trade barriers to Chinese goods. But Washington is already brandishing this tool against China anyway, and it will certainly enter China’s calculations about whether to resist the U.S. export policy. Japan’s economy, in 1990 and now, only depended upon international trade for approximately 15 percent of its GDP. For China, that figure is 36 percent, and that is after suffering the hit to exports from the global recession. China’s only recourse would be to stop purchasing U.S. government debt (Beijing can’t simply dump the debt it already holds without taking a monumental loss, because for every seller there must be a buyer), but even this would be a hollow threat.

First, Chinese currency reserves exist because Beijing does not want to invest its income in China. Underdeveloped capital markets cannot absorb such an investment, and the reserves represent the government’s piggybank. Getting a 2 percent return on a rock-solid asset is good enough in China’s eyes. Second, those bond purchases largely fuel U.S. consumers’ ability to purchase Chinese goods. In the event the United States targets Chinese exports, the last thing China would want is to compound the damage. Third, a cold stop in bond purchases would encourage the U.S. administration — and the American economy overall — to balance its budgets. However painful such a transition may be, it would not be much as far as retaliation measures go: “forcing” a competitor to become economically efficient and financially responsible is not a winning strategy. Granted, interest rates would rise in the United States due to the reduction in available capital — the Chinese internal estimate is by 0.75 percentage points — and that could pinch a great many sectors, but that is nothing compared to the tsunami of pain that the Chinese would be feeling.

For Beijing, few alternatives exist to American consumption should Washington limit export access; the United States has more disposable income than all of China’s other markets combined. To dissuade the Americans, China could dangle the carrot of cooperation on sanctions against Iran before Washington, but the United States may already be moving beyond any use for that. Meanwhile, China would strengthen domestic security to protect against the ramifications of U.S. pressure. Beijing perceives the spat with Google and Obama’s meeting with the Dalai Lama as direct attacks by the United States, and it is already bracing for a rockier relationship. While such measures do not help the Chinese economy, they may be Beijing’s only options for preserving internal stability.

In China, fears of this coming storm are becoming palpable — and by no means limited to concerns over the proposed U.S. export strategy. With the Democratic Party in the United States (historically the more protectionist of the two mainstream U.S. political parties) both in charge and worried about major electoral losses, the Chinese fear that midterm U.S. elections will be all about targeting Chinese trade issues. Specifically, they are waiting for April 15, when the U.S. Treasury Department is expected to rule whether China is a currency manipulator — a ruling Beijing fears could unleash a torrent of protectionist moves by the U.S. Congress. Beijing already is deliberating on the extent to which it should seek to defuse American anger. But the Chinese probably are missing the point. If there has already been a decision in Washington to break with Bretton Woods, no number of token changes will make any difference. Such a shift in the U.S. trade posture will see the Americans going for China’s throat (no matter whether by design or unintentionally).

And the United States can do so with disturbing ease. The Americans don’t need a public works program or a job-training program or an export-boosting program. They don’t even have to make better — much less cheaper — goods. They just need to limit Chinese market access, something that can be done with the flick of a pen and manageable pain on the U.S. side.

STRATFOR sees a race on, but it isn’t a race between the Chinese and the Americans or even China and the world. It’s a race to see what will smash China first, its own internal imbalances or the U.S. decision to take a more mercantilist approach to international trade.

-Wesley Pruden

I haven’t yet written about Obama receiving the Nobel Peace Prize.  For all of those who say that he doesn’t deserve it, you haven’t been paying attention to his foreign policy.  After all, what better way is there to promote peace than making dramatic concessions to our peaceful allies, the Russians.  A few weeks ago, Obama made the decision to forestall the development of missile defense shields in Poland and the Czech Republic.  It is nice to see Obama snub these warmongering Israel-wannabes, in favor of strengthening our relationship with our peaceful allies, the Russians.  After all, we are going to need their help if we are going to enforce sanctions against Iran for pursuing their peaceful nuclear weapons program.  You would think that with all of the conciliatory overtures that Obama has made towards Russia, that our peaceful friends in Moscow would reverse their position on Iran and promote a peaceful solution.  Which is why when Hillary, our fortuitous Secretary of State, was in Russia this week she came back with this news:

Russian Foreign Minister Sergei Lavrov restated at a news conference with Clinton Russia’s long-standing position that any talk of sanctions against Iran at this stage was counter-productive.

Counter-productive indeed.  That is if you are referring the to the peaceful interests of our friends, the Russians.  I guess the world would be a pretty peaceful place already, if it wasn’t for those warmongering Israelis who will probably be forced to conduct a military strike on Iran’s nuclear facilities.  Maybe Obama and our friends the Russians hope that Iran can first “wipe the Israel problem off the map,” then nothing can get in the way of all this peacefulness.

Lean on Me

On second thought, Obama certainly deserved the Nobel Prize, but I am a little disappointed that the prize wasn’t a shared one – with Vladimir Putin.  Sure, Obama has done a lot to change the atmospherics of how America is viewed in the world from a country of bellicose, arrogant strength to one of peacefully ignorant weakness.  But Putin, he is the man with the plan.  He is the one exploiting Obama’s peacefulness to change the actual power dynamics on the ground that will result in the next decade being either characterized by peace or conflict.  Given Russia’s long history of exporting peace and Putin’s inherent peacefulness, I am sure the world has a bright and peaceful future in store.  Something for Oslo to consider.

Taking down communism with a dinner knife

I grew up playing the game, Rush ‘n Attack, on my 8-bit Nintendo Entertainment System.  Basically this was a game where you were an American soldier fighting your way across Russian landscapes killing Commies with a knife.  From this game alone I think I am pretty much brainwashed to distrust Russians.  The nice thing about Nintendo is whenever the Russians got the upper hand, I could just push the reset button and start over.

Barack Obama has proven with his phony Hallmark video card to the Iranians that he knows how to engage foreign powers through shortsighted Western paradigms such as multiculturalism.  Apparently, multicultural overtures to hostile regimes must have run its useful course, because the Obama administration has decided against using such tactics, and has resorted to another shortsighted Western paradigm: brazen insensitivity and ignorance towards foes and friends alike.  Obama can be considerate of Iranian holidays, but when it comes to snubbing allies, he chooses the anniversary of Russia’s invasion of Poland to announce the decision to discontinue an important strategic defense alliance with the Poles.  For those who thought Obama would bring a nice departure from Bush when it comes to foreign policy, this must be extremely disappointing.  For those of us without hopeychangey stars in our eyes, this would be a welcome turn of events, but to couple Bush’s insensitivity and ignorance, with Obama’s ineptitude and weakness isn’t the kind of synergy that is becoming for any U.S. president.

Reset with the push of a button

Where resetting a Nintendo game when things don’t go your way with the Russians was a good strategy for an 8-year-old playing a game, bringing a plastic reset button to diplomatic meeting with the Russians as a symbolic gesture indicating that we would like to return to the good ole days when Russia was the irrelevant rubble of a former empire is an indication that it wouldn’t hurt to have a Secretary of State with a brain.  Or, as George Friedman from stratfor put it, “It is hard to imagine anything as infuriating for the Russians as the reset button the Clinton administration’s Russia experts — who now dominateObama’s Russia policy — presented the Russian leadership in all seriousness. The Russians simply do not intend to return to the Post-Cold War era Western experts recall so fondly.”  Instead the Russians seem to be enjoying the era they are in.  The one where they control the energy spigot to Europe, where they have puppets in Iran and North Korea that they can lever against American interests, and where they get to deal with the first American president since Jimmy Carter that has no balls when it comes to foreign policy.  There have been two significant bull-markets since Obama took office: one in guns and bullets as ordinary Americans sense the weakness of their president and have rushed to take the matter of protecting themselves into their own hands, and one in concessions to the foreign powers that have most recently been our biggest enemies.

Where Obama’s foreign policy has mostly focused on changing atmospherics with our enemies, which our enemies perceive as a weakness to exploit, this strategy has enabled Obama to live up to his pre-presidential reputation of “voting present” when it comes to foreign policy rather than make decisions.  Unfortunately for Obama and the United States, Iran, the Taliban, Russia, and China aren’t just voting present when it comes to advancing their strategic foreign policy interests.  Unfortunately for Israel, Saudi Arabia, Iraq, Jordan, Turkey, most of Europe, Poland, and the Czech Republic, America under Obama’s leadership seems no longer interested in aggressively pursuing its strategic interests.

It is not long before Obama is going to have to make a decision on what to do with Iran and Afghanistan.  According to George Friedman from Stratfor:

Every president is tested in foreign policy, sometimes by design and sometimes by circumstance. Frequently, this happens at the beginning of his term as a result of some problem left by his predecessor, a strategy adopted in the campaign or a deliberate action by an antagonist. How this happens isn’t important. What is important is that Obama’s test is here. Obama at least publicly approached the presidency as if many of the problems the United States faced were due to misunderstandings about or the thoughtlessness of the United States. Whether this was correct is less important than that it left Obama appearing eager to accommodate his adversaries rather than confront them.

No one has a clear idea of Obama’s threshold for action.

In Afghanistan, the Taliban takes the view that the British and Russians left, and that the Americans will leave, too. We strongly doubt that the force level proposed by McChrystal will be enough to change their minds. Moreover, U.S. forces are limited, with many still engaged in Iraq. In any case, it isn’t clear what force level would suffice to force the Taliban to negotiate or capitulate — and we strongly doubt that there is a level practical to contemplate.

In Iran, Ahmadinejad clearly perceives that challenging Obama is low-risk and high reward. If he can finally demonstrate that the United States is unwilling to take military action regardless of provocations, his own domestic situation improves dramatically, his relationship with the Russians deepens, and most important, his regional influence — and menace — surges. If Obama accepts Iranian nukes without serious sanctions or military actions, the American position in the Islamic world will decline dramatically. The Arab states in the region rely on the United States to protect them from Iran, so U.S. acquiescence in the face of Iranian nuclear weapons would reshape U.S. relations in the region far more than a hundred Cairo speeches.

There are four permutations Obama might choose in response to the dual crisis. He could attack Iran and increase forces in Afghanistan, but he might well wind up stuck in a long-term war in Afghanistan. He could avoid that long-term war by withdrawing from Afghanistan and also ignore Iran’s program, but that would leave many regimes reliant on the United States for defense against Iran in the lurch. He could increase forces in Afghanistan and ignore Iran — probably yielding the worst of all possible outcomes, namely, a long-term Afghan war and an Iran with a nuclear program if not nuclear weapons.

On pure logic, history or politics aside, the best course is to strike Iran and withdraw from Afghanistan. That would demonstrate will in the face of a significant challenge while perhaps reshaping Iran and certainly avoiding a drawn-out war in Afghanistan. Of course, it is easy for those who lack power and responsibility — and the need to govern — to provide logical choices. But the forces closing in on Obama are substantial, and there are many competing considerations in play.

Presidents eventually arrive at the point where something must be done, and where doing nothing is very much doing something. At this point, decisions can no longer be postponed, and each choice involves significant risk. Obama has reached that point, and significantly, in his case, he faces a double choice. And any decision he makes will reverberate.

Given the gravity of the decisions that Obama now faces, and given the fact that these problems can’t be solved by giving a speech, it is too bad that we don’t have a reset button.  This doesn’t appear to be a game that we are going to win.

Chinese Finger Trap

It is typical for Americans nowadays to be increasingly pessimistic about the future prosperity of our nation.  After all, the current economic recession is blatant proof that free market capitalism is fatally flawed and that centrally-planned economics is the way of the future.  It is also typical for Americans to believe that we are increasingly forfeiting our sovereignty to countries like China, who used to sell us much of our debt.  Their appetite for American debt is shrinking, so they pretty much have us over a barrel.  I wonder if American sentiment towards China might be exaggerated.  The following analysis is from Stratfor:

 

Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn’t have to worry about the United States seceding.

Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China’s legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China’s geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.

China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.

 

We therefore shouldn’t be surprised that there seem to be signs that China is falling apart.  The current Uigher uprising can probably be passed off as an irrelevant regional conflict, or it can be interpreted as a symptom that the Chinese economic wonder of the last decade is screeching to a halt.  The problem for China is that if the dollar is significantly devalued, it might set off a financial crisis in China that will make our crisis look insignificant.  It’s hard to say who has who over a barrel.  It is probably more likely that the relationship between the Chinese and American economies is more like a Chinese finger trap.

Iranian Elections are Like This

Iran’s election results are in, and the winner of this election cycle’s Rock ‘em Sock ‘em tournament is Mahmoud Adiminijad!  Man what a fight!  And folks, things are just starting to heat up!  Even though the Grand Ayatollah was at the controls of each fighter, spectators are now claiming the fight was rigged.

Taking a play right of their previous colonial oppressors playbook, Persian punks are taking to the streets.  They’re burning buses and fighting with police, just like a good old fashion English soccer riot.

On the other side of the globe, leaders in the West who had doubled down on Mousavi, are discussing the results with the media like those who just lost a bet discuss the results with their bookie.

-George Friedman

In one of my weekly email updates from Stratfor, there was an analysis of Obama’s trip to Europe.  Of course the American media has been distracting us from what was really going on there.  The left wing media (pretty much all of the media) couldn’t stop telling us how “successful” this trip was, but it was certainly hard to find evidence of what they were referring to.  The right wing media found a few pieces of evidence that Obama was completely obliterating our national sovereignty.  However, no one was talking about what really happened.  Which is why I am becoming a big fan of Stratfor, and George Friedman in particular.

Consider the following analysis from the email I received with my input in green:

The Russian Dimension

Let’s diverge to another dimension of these talks, which still concerns Turkey, but also concerns the Russians. While atmospherics after the last week’s meetings might have improved, there was certainly no fundamental shift in U.S.-Russian relations. The Russians have rejected the idea of pressuring Iran over its nuclear program in return for the United States abandoning its planned ballistic missile defense system in Poland and the Czech Republic. The United States simultaneously downplayed the importance of a Russian route to Afghanistan. Washington said there were sufficient supplies in Afghanistan and enough security on the Pakistani route such that the Russians weren’t essential for supplying Western operations in Afghanistan. At the same time, the United States reached an agreement with Ukraine for the transshipment of supplies — a mostly symbolic gesture, but one guaranteed to infuriate the Russians at both the United States and Ukraine. Moreover, the NATO communique did not abandon the idea of Ukraine and Georgia being admitted to NATO, although the German position on unspecified delays to such membership was there as well. When Obama looks at the chessboard, the key emerging challenge remains Russia.  Since we don’t know if Obama is much of a chess player, I will translate this into a better metaphor.  ”When Obama looks at the basketball court, the key emerging challenge is a big, tall, bearded Russian center…”

The Germans are not going to be joining the United States in blocking Russia. Between dependence on Russia for energy supplies and little appetite for confronting a Russia that Berlin sees as no real immediate threat to Germany, the Germans are not going to address the Russian question. At the same time, the United States does not want to push the Germans toward Russia, particularly in confrontations ultimately of secondary importance and on which Germany has no give anyway. Obama is aware that the German left is viscerally anti-American, while Merkel is only pragmatically anti-American — a small distinction, but significant enough for Washington not to press Berlin.  In addition, Germans aren’t that good at basketball, so tying them into the metaphor is pretty difficult.

At the same time, an extremely important event between Turkey and Armenia looks to be on the horizon. Armenians had long held Turkey responsible for the mass murder of Armenians during and after World War I, a charge the Turks have denied. The U.S. Congress for several years has threatened to pass a resolution condemning Turkish genocide against Armenians. Barack Obama along with Nancy Pelosi have been big supporters of this resolution. The Turks are extraordinarily sensitive to this charge, and passage would have meant a break with the United States. Last week, they publicly began to discuss an agreement with the Armenians, including diplomatic recognition, which essentially disarms the danger from any U.S. resolution on genocide. Although an actual agreement hasn’t been signed just yet, anticipation is building on all sides.

The Turkish opening to Armenia has potentially significant implications for the balance of power in the Caucasus. The August 2008 Russo-Georgian war created an unstable situation in an area of vital importance to Russia. Russian troops remain deployed, and NATO has called for their withdrawal from the breakaway Georgian regions of South Ossetia and Abkhazia. There are Russian troops in Armenia, meaning Russia has Georgia surrounded. In addition, there is talk of an alternative natural gas pipeline network from Azerbaijan to Europe.

Turkey is the key to all of this. If Ankara collaborates with Russia, Georgia’s position is precarious and Azerbaijan’s route to Europe is blocked. If it cooperates with the United States and also manages to reach a stable treaty with Armenia under U.S. auspices, the Russian position in the Caucasus is weakened and an alternative route for natural gas to Europe opens up, decreasing Russian leverage against Europe.

From the American point of view, Europe is a lost cause since internally it cannot find a common position and its heavyweights are bound by their relationship with Russia. It cannot agree on economic policy, nor do its economic interests coincide with those of the United States, at least insofar as Germany is concerned. As far as Russia is concerned, Germany and Europe are locked in by their dependence on Russian natural gas. The U.S.-European relationship thus is torn apart not by personalities, but by fundamental economic and military realities. No amount of talking will solve that problem.  What about trash talking?  For as good as Obama is at listening, I bet he can talk smack.

The key to sustaining the U.S.-German alliance is reducing Germany’s dependence on Russian natural gas and putting Russia on the defensive rather than the offensive. The key to that now is Turkey, since it is one of the only routes energy from new sources can cross to get to Europe from the Middle East, Central Asia or the Caucasus. If Turkey — which has deep influence in the Caucasus, Central Asia, Ukraine, the Middle East and the Balkans — is prepared to ally with the United States, Russia is on the defensive and a long-term solution to Germany’s energy problem can be found. On the other hand, if Turkey decides to take a defensive position and moves to cooperate with Russia instead, Russia retains the initiative and Germany is locked into Russian-controlled energy for a generation.

Therefore, having sat through fruitless meetings with the Europeans, Obama chose not to cause a pointless confrontation with a Europe that is out of options. Instead, Obama completed his trip by going to Turkey to discuss what the treaty with Armenia means and to try to convince the Turks to play for high stakes by challenging Russia in the Caucasus, rather than playing Russia’s junior partner.  “Pick n’ Roll baby!”

This is why Obama’s most important speech in Europe was his last one, following Turkey’s emergence as a major player in NATO’s political structure. In that speech, he sided with the Turks against Europe, and extracted some minor concessions from the Europeans on the process for considering Turkey’s accession to the European Union. Why Turkey wants to be an EU member is not always obvious to us, but they do want membership. Obama is trying to show the Turks that he can deliver for them. He reiterated — if not laid it on even more heavily — all of this in his speech in Ankara. Obama laid out the U.S. position as one that recognized the tough geopolitical position Turkey is in and the leader that Turkey is becoming, and also recognized the commonalities between Washington and Ankara. This was exactly what Turkey wanted to hear.

The Caucasus is far from the only area to discuss. Talks will be held about blocking Iran in Iraq, U.S. relations with Syria and Syrian talks with Israel, and Central Asia, where both countries have interests. But the most important message to the Europeans will be that Europe is where you go for photo opportunities, but Turkey is where you go to do the business of geopolitics. It is unlikely that the Germans and French will get it. Their sense of what is happening in the world is utterly Eurocentric. But the Central Europeans, on the frontier with Russia and feeling quite put out by the German position on their banks, certainly do get it.

Obama gave the Europeans a pass for political reasons, and because arguing with the Europeans simply won’t yield benefits. But the key to the trip is what he gets out of Turkey — and whether in his speech to the civilizations, he can draw some of the venom out of the Islamic world by showing alignment with the largest economy among Muslim states, Turkey.  

Where the American media seemed mostly concerned about the messages that were being sent to Islam, Apparently, the messages that are being sent to Russia are more important.  Managing geopolitical relations with Turkey to offend the Russians and develop leverage against Europeans, might be something that Obama could actually be good at.

Hellfire II Missile

It looks like over the last few months, we have found a strategy for fighting Al Qaeda that works pretty well: Shooting them with missiles.  Who would have thought that having intelligence operative locate high value targets in their operation and then have the same intelligence operatives arrange for Hellfire missile strikes on the target would be so effective.  The author of this article from the LA Times is almost as good as I am at expressing surprise that this strategy is working so well.

I am sure that Barack Obama is happy that this strategy is working, because he hasn’t done anything yet to prevent these attacks from being carried out.  However, I bet he is a little disappointed that the success of this program made it unnecessary for him to make and send a video eCard to Osama bin Laden to wish him Happy Birthday back on March 10.  Of course, if Obama’s actions to disarm airline pilots, are any indication of his attitudes for preventing terrorism, then we shouldn’t put it past him to start disarming aerial drones.  If pilots of jet airliners aren’t responsible enough to carry weapons, then who is to say that the video game warrior class that controls the fleet of aerial drones should have access to hellfire missiles.  I know, I know, I am ignoring the extraordinarily high number of shooting rampages performed by disgruntled airline pilots since September 11, but we can’t let the actions of the tainted few affect our attitudes toward the entire group.

Armed Drone

Anyway, if you thought that blowing up Al Qaeda terroris… I mean operativ… I mean enemy combatants.  There I said it.  ENEMY COMBATANTS!  If you thought that blowing up enemy combatants with missiles was an effective strategy, apparently blowing them up is only half the battle.  Surprisingly, when you stop trying to get the Pakistani government’s permission, no one is able to tip off the terrorists, so they are unable to escape from pending attacks.  With such a high number of Al Qaeda leaders getting blown up, the organization is falling apart.  Apparently, not knowing who to trust is destabilizing to an organization like Al Qaeda.  At this point they are doing a pretty good job of killing each other off, since someone has to be informing on them to the Americans.