So far, this is a guess.
Viewing and playback of a video is a medium difficulty task for a computer. Taking the same file into an editing situation is a high difficulty task. Editing AVCHD video, is an extra high difficulty task for a computer. It is doubtful you will work your computer harder doing anything else.
The real time preview in the monitor during editing can be improved with what is referred to as "real time rendering". You know when it is necessary when a yellow colored bar shows up above the time line. When you see it, press Enter and wait a bit.
Can you provide more information about the computer and how you got the short video to YouTube? Also, how did you open the project? And can you check what the project settings are? The YouTube looks nothing like what I have uploaded using my two Sony camcorders.
I think this is fixable. Lots of people get great results from PrE11.
The YouTube video was taken with my iPhone off my computer screen just to show the effect, not quality. My computer is a very powerful home built desktop. The video plays perfectly fine in other players - WMP and Sony's software - so I don't understand why there would be an issue that is non-Premiere related. The only time I see any defect is when playing the video in the Premiere Elements viewer. I haven't gotten past this first step to get to rendering because of this image issue. As I indicated, I opened the project by selecting New and then using drag and drop to insert the file.
The project settings are:
General - most every item is grayed out except Frame Size (1920) and horizontal (1080). Display Format is 30fps Drop-frame Timecode
Capture - HDV
Video Render - all grayed out except for Optimize skills which is checked.
The iPhone/YouTube sample was to fuzzy for me to see the effect you are concerned with.
I too have a strong computer. I dropped a Sony 1080i clip into the timeline and get smooth preview and get the same project settings.
There is a mismatch somewhere. I may not be able to help you find it.
The weekday regulars will typically start with suggesting video driver updates and ensuring you have a late version of Quicktime, which is used for the playback engine.
I'm too much of an amateur to know where to point you. I know from personal experience that it does work well for most.
I turned the volume up and it made more sense.
PrE has multiple times it "renders". One is for real time playback. The other is final output where it does it all over again for the required output settings. My suggestion is to try to output to YouTube with a YouTube preset and see if you get the same problem. You may or may not. I don't know.
Project mismatch: Drop "only" the video clip in question into the timeline and see if it "fits" into the project. There should be no lines on top of the clip on the timeline. Now check the playback. The clip properties should match the project settings (there will be no mismatch for MTS files in PrE11).
Playback: Right click on the playback monitor and select "Highest Quality" for playing back
Ah ha! It was only a play back issue. Once I right clicked and selected playback as "Highest Quality" the pic cleaned right up. So evidently the actual video content is good. Thanks for your help!