The Failure of Chinese Real Estate

Most of us think of real estate as a solid investment, and a good chunk of the Chinese population thought the same, but things aren’t always what they seem.

There’s a massive housing bubble in China, the kind that makes the ’08 housing crisis in the US look like child’s play. There’s not a whole lot of options for Chinese citizens to invest, so real estate saw a huge boom. All that money flooding in was great, but declining population growth and urbanization slowing has led to a collapse in demand. So, now there’s way too much inventory, no one to live there, and complex ownership arrangements make liquidation nearly impossible.

This got started in the 80s, as local governments began to rely on the national government for funding…naturally they started lying about their populations and economic status to ensure they secured more funding. On top of that, local governments started selling land to fund themselves, which fueled the real estate bubble. As these revenue streams dried up, it revealed the consequences of all this fraudulent activity in the form of ghost cities.

Now take all those local issues and add in the macro trends throughout China, like demographic collapse, global trade challenges, debt crisis, and more, and the Chinese have a very scary decade ahead.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey, everyone. Peter Zeihan here coming to you from the Kepler track in New Zealand. Today I’m going to tell you a story in three parts about one of the disasters that is waiting China in the months and years to come. Let’s start with, yeah. Let’s start with how private folks save their money. This isn’t like the United States, where you have a wide variety of stocks and bonds and go international. 

No, everything’s pretty tightly regulated, and the money can really only go easily into the big state banks. The reason for this is this is how the Chinese government maintains social cohesion. If the big state banks have access to the entire deposit base, they can then shove below market rate loans well below the level of inflation into whatever company they want, in order to make sure that there’s enough capital flowing through the system to employ everyone. 

It doesn’t matter if it’s productive, just matters that people have jobs so they don’t protest. By doing this, they maintain full employment. But it means that people get very, very, very low rates of return. So people are always looking for other ways to get their money into something more productive so they can make an investment for themselves. 

So from time to time, there’s a fad. From time to time, there’s a way to get money out of the country, whether it is foreign direct investment or Bitcoin or some sort of weird bond or gold, and you see money surging to these things until the government figures it out and then they clamp it down. But about ten years ago, Chinese people found something that the government didn’t mind, and that was real estate. 

You could buy yourself a condo, put your money into it. And because the country was rapidly industrializing and rapidly urbanizing, there was always going to be demand for more housing. You could see upward of price appreciation. So this continued on for a while and prices did great. 

And the people who were early investors did great. But eventually, people started buying second homes. Now most people in China can’t afford a second home. So what happens is they get together with their friends, their relatives, their neighbors and people they’ve never met, and they pool their capital to purchase a unit. And then sometimes they sell slivers of that unit to someone else. 

Now, anywhere else in the world, we call this asset backed securities. And this is one of the many things that triggered the 2007 financial crisis in the United States. But in China, it’s pretty par for the course. However, it’s done at the private level, for individual savers, as opposed to corporations or banks. So, you know, no fiduciary responsibility involved there. 

Well, you play this forward to today. And what’s happened is that the story’s changed. There are no longer people in the countryside who can come to the cities. There is no population growth. In fact, with the exception of a handful of top tier cities, every major urban area in the country has seen significant population decline since just 2020, much less 2010. 

The reason for that? The birth rate has now been so low for so long. There are no longer enough people in China under age 40 to have kids that we’re seeing a collapse in population, which means a collapse in housing demand. How bad is it? Don’t really know. There’s no good data. The Chinese government stopped collecting data on this topic years ago because they were afraid that chairman G wouldn’t like the results. 

So they’re kind of flying blind private analysts who are not subject to the CCP’s whims. The Chinese Communist Party’s whims estimate that there’s probably sufficient spare housing to house more people than Brazil has. About 180 million people, government folks who are estimating say that the real number could be more than ten times as high, perhaps enough to house 3 billion people. 

Bottom line is, you can’t break these things down. You can’t really sell the properties because they’re not owned by just one person and they’re not owned by the same consortium of people. So just finding the ownership network is kind of strange. You can’t just knock them down, even though there’s just such huge excess supply. And a lot of people think that, you know, maybe when the economy turns, demand will come back, but there are no longer people to generate the demand in the first place. 

So probably most real estate in China is worth maybe $0.10 on the dollar. And in terms of even the controlled limited pricing signals that we have in China indicate that officially, prices have already dropped by about one sixth in just the last five years, which in any market. But China would be a disaster. But here, the numbers don’t necessarily mean the same thing. 

So that is part one. Part two is a real doozy. 

Okay. Part two. Still on the Kepler. I’ve got, hanging value on my right and some cosmic death on my left. Okay. Where were we? Oh, yes. Part two. So another story. The Chinese government is, extraordinarily paranoid. And that’s not just the Communist Party that rules the place. Now that has been true since the time of the emperors of old. 

The problems geographic, China’s a huge swath of territory, and any policy that is set in the center is going to be. How should we say, loosely interpreted by the time you get to the frontier? And so China has always flipped back and forth between two extremes. 

Centralization, where the emperor or the chairman of the CCP, basically says everything has to go his way. And if it doesn’t, everybody dies. That’s, for example, the attitude that killed over 20 million people in the Cultural Revolution back in the 60s, 70s, recently. That was Mao or, the territories. The provinces grab too much autonomy and go their own direction and generate their own militaries, and warlord ism erupts. Which is the story through the vast majority of Chinese history. 

Chinese like to talk about how they’ve got a continuous history stretching back millennia. But in terms of actually being united in more or less its current borders, with the government that is actually functional. Actually, they have less than 300 years of experience, and half of that was under Mongol occupation. So, yes, the Han Chinese are an ancient, ethnicity. 

But, let’s just say they’ve never managed to hold themselves together into a meaningful government or be a meaningful power until, the Cold War, when the United States basically took all the foreign powers off the deck and allowed the Chinese to export themselves to wealth for the first time. Anyhow, back and forth, back and forth over unification, over regionalization. 

That’s the needle that the Chinese government is trying to thread. So after a series of reforms in the 1980s, the central government under Xi’s ding, I believe, basically realized that, Mao was and that was a fuck. And so they needed to unwind everything that he had done while still leaving his poster on the walls. 

Yes. This video will totally get banned in China. Anyway, so what they did is they centralized revenue generation. So all tax authority rests at the national level. But they regionalized spending on the day to day things like, you know, infrastructure, public works, income support, their equivalent of Social security, all that good stuff. And in doing so built a split system. 

The idea that Deng was after it was try to avoid the over centralization while also avoiding the over regionalization. Unfortunately, they did this without rooting out the fraud that is endemic in the Chinese political and economic system. And so the local governments just basically started lying about everything. Generating statistics that indicated faster economic growth than they were really having. 

Generally, statistics said they have more population than they were really having. And if you remember, the one child policy started not too much longer, actually, by about the same time that this split happened. And so we have had almost 50 years of a disconnect in reality between what China’s population really is and how the funds get appropriated. 

So that’s problem one, that we have a half century of bad data about how many people there really are in China. According to the official statistics, it’s somewhere between 1.3 and 1.4 billion. They have recently revised that down to between 1.1 and 1.2 billion. Most independent estimates put it 100 to 200 million below that. And there are a lot of private ones that say it’s 2 to 300 million below that, something in the realm of 700 and 800 million. 

I don’t really have a number that I swear by. But, you know, it’s obviously bad. All right. So if you’re a local government and you’ve been lying through your teeth for decades to get more money out of the central government, you’re trying to justify getting more money. And so you have to come up with new ways to get it in order to do everything from building railroads to having more mistresses. 

And so what you do, since you can’t tax, is you borrow, the two main revenues are you take loans from state banks, the same ones that are oversaturated with capital because the private citizens don’t have anywhere to turn or you sell land, and if you sell land, you get a nice little pop. Also, if you sell land to, say, a development company and the development company puts up houses, or more likely, high rise condos get a pump from that. 

So I think you’re starting to see the problem here. A level of government whose entire existence is based on a degree of fraud has now established a vested interest in encouraging real estate investment in order to generate more income for itself. You play that forward to the current day, and two things have happened. Number one, they’ve so encouraged this in places where no one ever had any intention of living. 

That you’ve got, ghost cities or ghost suburbs. It’s probably better to phrase it in every major Chinese city. With, as a rule, as you move down the tiers. So not so much Shanghai and Beijing or even, Chongqing, but, much smaller places. That only have a population of a few hundred thousand or a few million have entire swaths of their skyline that are occupied by entirely empty residential high rises. 

Second, the Chinese population bomb is now so advanced that no one will ever move into these places. And third, the development companies whose interests have kind of been in lockstep with the local governments for the last couple of decades, no longer have anyone to draw upon. There aren’t enough young people coming up to provide the seed capital to generate a new wave of investments. 

And, since most of this was built in a pyramid scheme style, we have a whole wave of recently started condos within the last three years that will never get finished, because there’s no longer enough people coming into the system to generate the capital to provide, what’s necessary for the base of the pyramid. So we’re stalled, and we’ve seen home sales in China dropped by somewhere between 70 and 80%, again, using Chinese data. 

So take it for what it is. Over the last 18 months. So that is that’s phase two. So book one here, we’ve got an economic system that is wildly built on, how should I put this as yet unrealized losses? As the population moves into collapse and people haven’t yet quite realized that the investment that they’ve put every cent they have into, is dead. 

And we’re talking here 70% of private savings is involved in residential real estate. So and then second, we’ve got a level of government at the local level that’s based on fraud. That has been encouraging that bubble that no longer can encourage it and has no way of generating income because, you know, you can only sell land once and you can only sell it if there’s somebody who wants to build anything and the land has all been sold in the cities, and nobody wants to build anything anymore. 

So next phase three. 

Okay. Phase three. I’m guessing some of you might be able to see where this is going, but anyway, so we’ve got a housing bubble that is in the process of popping and that popping is going to take out the 70% of private savings that is locked up in real estate. And we’ve got a local government system that provides all the services that everybody needs to survive that is utterly bankrupt. 

And we don’t even have a really good feel for just how bankrupt. Best data available, which is wildly incomplete, suggests that the total debt for local governments is about 90% of GDP. So roughly the same for just local governments in China as the entire American federal debt. In relative terms of that, about half is money that they have borrowed through something called a local financing vehicle or local government financing vehicle. 

If you want the full acronym, which is murky, to say the least. And most folks have even stopped collecting data on it because the central government and the local governments have been trying to obstruct it. So if you happen to be, lending money to the Chinese local governments in that you’re never getting any of that back, sorry. 

So what has happened now is we’re entering into a fundamentally new structure internationally for the last 25, 35 years. The Chinese have done well in mobilizing their workforce, which was the world’s largest to sell product, processed, low end manufactured goods for the most part, to the wider world. Basically, they bring in the inputs, process them, add a little value, send it back out. 

Well, that’s no longer an option. The steadily decreasing birthrate means that they no longer have a labor advantage. So labor costs in Mexico are now less than half what they are in China. And Mexican labor is over twice as qualified for whatever they’re doing. And the Chinese are, on average. That’s before you consider that courtesy of the Ukraine war, we’re likely to have some problems with shipping internationally in the not too distant future. 

And since the Chinese are completely dependent on freedom of the seas to get their raw materials in and the product out, that’s a problem. And then third, the entire world, and especially the United States has turned sharply protectionist versus the Chinese specifically to the point that under the Biden administration, we saw a massive ramp up in tariffs on top of what Trump did in his first term, with electric vehicles and green tech being, the more recent things added to that list. 

And with Donald Trump coming in, who says that the word tariff is the most beautiful word in the English language and is threatening a 60% tariff on day one? Some version of a tightening of restrictions on Chinese exports is sure to happen. And since there’s really no one left in China under age 40, there’s not a lot of consumption left in the system. 

So all of this is happening at once. But the real cherry on this cake. Is that the new news is that so many development companies are going bankrupt, that they’re trying to pay off their outstanding debts with finished and partially finished apartments that no one’s ever lived in. And a lot of these end up eventually in the hands of local governments who have started to accept them as a sort of secondary currency, and they’re starting to use them to pay off debts. 

So you’ve got you’ve got this completely bloated market where most of the products are probably only worth $0.10 of the dollar. They end up in the hands of a local government who can no longer raise capital by borrowing or, what’s nice can no longer race. I’ve got a nice little spring here. I can no longer raise capital by borrowing. 

That jig is up. It can no longer brings capital by selling land. There isn’t any left. And now that the demographic situation is so obvious, they are having a harder time lying to the central government about what their populations are. So we’re seeing a freezing, slowing, declining ability of the local governments to provide basic services, which only encourages more people to move out, which only puts downward pressure on the property markets, which only pushes down the cost of all this stuff in the first place. 

So we are at like step two of a really nasty, vicious cycle with every bit of bad reinforcing the next. And under normal circumstances, which probably never applied to China, you could look to national government, to come in with a bailout, take some of these apartments off the market level, some buildings. 

But because of the deliberately complex nature of ownership. Anything that you take out, especially in a building that has a few occupants, is going to completely destroy the life savings of a not small number of people. So there’s no really clean way out of this. The bottom line is that the local governments have gone from something that serves the needs of the Chinese nation and the Chinese state to something that’s just simply dead weight. 

And now we’re looking at private savings and local governments basically breaking more or less at the same time that we have a national economic catastrophe because of the degrading trade situation. So lots of fun will be had in the months and years to come. I’ve been saying that by roughly, 2034 that this is all going to be over, that there won’t be, China. 

But this situation has gotten so out of hand and so big that it’s entirely reasonable for me to bring that timeframe forward. I’m not going to do that because I don’t have good data to work with the situation at the federal level, and China is now not deliberately suppressing data that’s been collected, but suppressing the people who would have collected the data. 

So it’s never collected in the first place. So this is becoming ever more of a black box and little glimpses that we get like this with, the secondary market for, apartments as a mode of local governments paying off their debts. Just show how much rot is in the system and how deep it has gone. Okay. 

I’m done. 

The Geopolitics of Climate Change

Photo of a tree withered in dry land

With a glacier as the backdrop for this video, I figured it only appropriate to discuss resource exploitation, Arctic shipping, and agriculture as it relates to climate change.

Places like Canada and Greenland hold immense resources, but extraction isn’t straightforward. Given the harsh conditions (an ice sheet in Greenland and permafrost in Canada), these resources will remain where they are until some new tech comes along or some drastic changes occur. The use of the Arctic Ocean as a shipping route is another hot topic. Given that the Arctic won’t be ice-free in the winter for a while, this route poses some big challenges: lack of icebreakers, infrastructure limitations, and demographic issues in the countries that could make this happen.

However, a more immediate impact will be felt on global agriculture. Wheat thrives in extreme conditions and depends upon globalized supply chains for fertilizers and irrigation. These supply chains will weaken in the coming years and could even collapse, leading to widespread famine in several places.

Sure, there will be some new opportunities tied to climate change, but the crises that will follow should be of much greater concern.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey everyone. Peter Zeihan here. Coming to you from New Zealand at the Earnshaw glacier, Ernst falls. Ernst. Ursula mountain. You get the idea. Considering the location and considering the popular request, I’m going to use this as an opportunity to talk about the geopolitics of climate change. Everyone, including team Trump, is now talking about the effect that it’s going to have on the system. 

Of course, everyone is dealing with their own way. The Trump administration, the incoming Trump administration, is of the belief that as seaways and minerals become available, the United States preemptively reach out and grab the relative in territories. Ergo, a lot of the talk about Greenland and Canada specifically, but it’s not that clear cut. And it’s not that short term. 

Well, the Ursula Glacier here, like almost all in the world, is in rapid retreat. It’s still going to be around for a few decades. And when you look at things like the permafrost in northern Canada or the ice in Greenland, you have a much more durable climate zone. So, for example, in the permafrost, it’s a mess. In the summer it’s a swamp, it’s mushy, it’s hard to build things on. 

And there is only one road leading from mainland Canada, where populated Canada up above the Arctic Circle to Yellowknife. Actually, that’s not even above the Arctic Circle, I don’t think. I’m not sure about that. Anyway, one road open seasonally. Anything north of that is a mushy frozen mess. And they basically, if they’re going through mineral extract, they have to build a runway with things that the air drop in and then fly in supplies. 

And there aren’t a lot of materials on the world that you can produce and then fly out because there’s a processing step. So meaningful climate change, it allows for the exploitation of northern Canada isn’t going to take years or even decades. It’s going to be a couple of centuries. Greenland, maybe a little bit faster there. You’ve got an ice sheet that’s over a kilometer thick. 

For those of you on the Americans, that’s point six miles. It will probably be well over a century before technology exists to go after it, or for the ice to slow off. By then, the West Antarctic Ice sheet will probably already collapse. We’ll be in a functionally different sort of situation anyway. So are there minerals up there? 

Undoubtedly. Are they accessible in a human lifetime with today’s technology? Absolutely not. And anyone else is trying to sell you some snake oil or is just dumb. Okay. Second shipping. The idea is that as the ice retreats on the seas in the Arctic Ocean, you could then open up a direct route from Northeast Asia to Western Europe. 

But let’s be honest about what we’re talking about here. This is a China play. So the theory would be that the Chinese are going to build infrastructure along this multi thousand mile coastline, so they can then open the shipping route. Well let’s talk timing. If you want to do that you have to wait for the Arctic to be ice free in the winter. 

That’s not ten years. That’s not 20 years. That’s 60 or 70 years. Most likely because the Eastern navigation will be gone every single time the moving sea ice comes through. Far more importantly, 

It’s all Russian territory that is on that sea bridge. And I don’t know if you knew this, but building roads in Russian Siberia is just as difficult as building them in Canadian tundra. 

So there is one, exactly one road that goes from populated Russia north of the Arctic Circle to the city of Murmansk. That’s it. And that’s all the way at the northwest part of Russia, almost to Norway. The rest of the coastline is either unpopulated or unlinked to any physical infrastructure. So once again, you have to wait for summer to get things in there. 

So things, simple things like search and rescue just can’t happen. Also, newsflash two problems. Number one, the Russians are dying out. And when it comes to the point where they have to choose what to abandon, the Arctic will probably be at the top of the list because there’s not a security threat from the Arctic. Second newsflash the Chinese are dying out, and China as a country won’t be long gone before the Arctic is ice free. 

And one final point on the maritime transport issue. Do you want to patrol the Arctic Ocean? You either have to wait for it to be ice free decades from now, or you need an icebreaker fleet that can handle moving sea ice that’s thick. There are only a handful of ships that can do that in the world. Most of them are Russian. 

They’re nuclear. Oh, but a surprise. The Russians can’t build them anymore. They need parts from the West. And surprise the equipment they need to try to assemble. Everything just sank in the Mediterranean about a month ago. That just leaves Canada, which has icebreakers that are decent, but it’s not enough to control their own territory. 

You want to do this for real? You not only are subsidizing the Chinese, you have to build dozens of ships that are purpose built for one thing and have no use anywhere else in the world. We only have a 300 ship navy. You’d need at least 50 of these things cruising around the Arctic Circle if you want to do anything meaningful. 

And there’s nothing meaningful to do. 

Good thing that we’re going to steal first from climate change isn’t about transport, and it isn’t about minerals. It’s about agriculture. Because right now, the single largest calorie crop in the world for human consumption is wheat. And wheat is a weed. It grows anywhere. The places that are too hot or too wet or too dry or too cold for anything else. 

You can still grow wheat. But in a globalized system where you can access things like fertilizers and industrial irrigation. What we have done over the last 80 years is progressively push wheat to the margins, in places where only wheat will grow, and everywhere else we grow. Everything else that is worth more money. Citrus, avocado, soy, cannabis, you name it. 

So if we had a globalization scenario with or without climate change, you can count on those supply chains that provide us with all the raw materials and all the machinery and all the logistical support that allows us to grow wheat in places. Nothing else will grow to break. And large portions of the world that today grow wheat won’t be able to anymore. 

The places I’m most concerned about Kazakhstan, Russia, China and those are three of the big six producers. So we will see famine long before we see meaningful traffic on the Arctic Ocean, long before we see meaningful mineral extraction from Canada or Greenland. Yeah, that.

Trump, Cartels, Terrorism and…Increasing Migration

Photo of man in gloves opening cocaine package

Trump had a fat stack of executive orders waiting to be slammed down onto his desk as soon as he took office. One of those was his designation of Mexican cartels as terrorist groups, which will have some unintended consequences.

This new designation does little to address the networks which smuggle drugs into the US, and is largely irrelevant to the deepening fentanyl crisis. But perhaps the biggest hmmm of Trump’s order is that certain victims of terrorism can qualify for asylum in the US, which means millions of Mexicans and Central Americans could now immigrate. Legally.

This kind of “oopsie” is nothing new for Trump, as his border wall inadvertently facilitated illegal immigration by creating new routes to access the US. While Trump claims one thing, his actions may be doing the exact opposite of what he intended (TBD whether it’s deliberate ignorance or incompetence). As we all expected, Trump’s time in office will be nothing short of a wild ride…and I’m going to need some more popcorn.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey, all. Peter Zeihan here, coming to you from a Lake Wakatipu in Queenstown, New Zealand. It’s a 21st locally, which means it’s the 20th in the United States, which means that Donald Trump was just inaugurated. And we’ve had several dozen, executive actions, quickly thrown in there. There’s a lifetime of material for me to work with in there, but I’m going to focus on the one that I think is actually most significant to how most Donald Trump supporters view the world. 

And it has with, designating the Mexican cartels who traffic illegal narcotics into the United States as terror groups. 

Okay. Let’s talk about what it does. Let’s talk about what it doesn’t do, and let’s talk about where it’s going to lead us. So what it doesn’t do is strictly loosen the tools of the US military can use on foreign soil, because Mexico is not a country that we are at war with. 

So designating the cartels, sponsors of terror doesn’t really do much unless you also designate the Mexican government as a sponsor of terror. What it does is allows the US government to very easily move against any entities who are associated in any way with the cartels, especially from a financial point of view, especially if they’re victims. So, like if there’s a 

Taqueria in Mexico City that pays protection money to the cartels, this action would target them because of the financial transfers, but it’s not actually going to encourage us Apache helicopters to be flying south of the border and blowing shit up. Keep in mind that, the number one drug that is of concern from my point of view is no longer cocaine. 

It is fentanyl. And fentanyl as a synthetic has a very different supply chain. What happens with cocaine is it starts in Colombia. It’s turned into a leaf. It’s pressed into a brick, it’s refined with gasoline. It’s turned into the white powder that we all recognize. Well, hopefully we don’t. All cocaine is bad. Don’t do cocaine. Anyway, it is smuggled by plane, train or automobile north and eventually makes the jump by water or air to Central America, where it gets on land and it goes into Mexico and up north. 

So interrupting cocaine flows. This is a good thing. We like this. That is not what we’re dealing with. We’re dealing with fentanyl. Fentanyl is a synthetic. And what happens is in China, you get a chemicals company that makes a precursor, which is then processed into another precursor. That precursor is put in the mail and is mailed to the United States. 

And then it is smuggled south across the border to a mom and pop shop that processes a few kilos of this stuff a month, and then that stuff comes north. That is where the money is. That is where the danger is. And this does nothing for that, because the mom and pops aren’t big enough to justify classification as terror groups, because there’s literally thousands of them, as opposed to just a few, cartels anyway, so it’s going after the wrong thing. 

More importantly, when you identify a group as a terror group, you have also identified the people that they prey upon as victims of terrorism. Right? We all agree with this, right? Well, if you identify someone as a victim of terrorism, then they automatically qualify for asylum status within the United States. So what Trump has done with this designation is designate 130 million Mexicans and 50 million Central Americans as automatically qualifying for U.S. immigration protection. 

Now, if you dial back 4 or 5 years ago, I said that Donald Trump will long go down in history as the most pro illegal migrant, president in American history because by building a wall, what he has done is built 50 roads, construction roads that bypass the most robust natural barrier on the North American continent, the Chihuahuan and Sonoran Deserts. 

And lo and behold, it came to be true. And we eventually got 2 million illegal migrants a year. What he has done now is generated the largest inflows of illegal migration of the asylum clause of any American president in American history. Now, normally I would argue that this would mean the end of him, because his supporters will immediately abandon him because he’s done exactly the opposite, or achieved exactly the opposite of what he said he was going to do. 

 But this is Donald Trump, and he defies convention all the time. But it will set the stage for a very different conversation in the United States. And I can’t wait to see how that comes out. 

Oh, one more thing that I would be remiss and saying, this is my last day in New Zealand. I have been drinking, I’ve been doing some wine tastings, and this is not what I would call great analysis. There’s nothing that I just communicated with you that would be any sort of secret to the national security community, the law enforcement community, the folks who are interested in immigration at Pro or Con, or anyone interested in generally security of the border in general. 

But clearly the new president, the president is unaware, otherwise he would not have done it. Because this is going to generate exactly the sort of crisis that he says he wants to solve. The reason for this is very simple. Donald Trump has made sure that there is no one in his inner circle who is capable and competent in the issues that really matter. 

And his cabinet nominations reflect that, the only other two leaders in modern history that I can think of that kind of fall into this category of deliberate blinders, reshaping of China, who is rapidly leading his country into a full out national collapse, and Barack Obama, who hated having conversations with other people to such a degree that he basically hermetically sealed himself into the white House for his eight years. 

Donald Trump now joins those other two as one of the three most deliberately unaware leaders in modern history, which means that of the dozens of executive orders that were just handed down, there is undoubtedly more that fond of his general category of going directly against what Donald Trump says that he stands for, which means that we are in for an incredibly interesting period over the next four years, as, Donald Trump’s leadership or more accurately, the lack of competence in his circle leads to some wildly interesting outcomes. 

And I am here for it.

It’s time for an update on the war in Ukraine

Photo of Ukrainian soldier in front of flag

There are two primary trends that continue from this past summer: the Ukrainians are maintaining their offensive in the Russian region of Kursk, while Russian troops are continuing their slow slog toward the Ukrainian city of Pokrovsk. Kyiv has also intensified its attacks against Russia’s oil industry—particularly refineries and storage depots, and by extension its broader petrochemical industry. The Biden administration’s resistance to directly targeting Russia’s export capacity seems to have vanished along with his chances at reelection.

Outside of Ukraine, the Americans and Europeans have announced further sanctions on Russian crude exports, targeting Russia’s fleet of shadow tankers. While Chinese and especially Indian refiners have indicated that they will be abiding by sanctions…at least for now.

Closer to the front line, NATO—led by the Northern European states—has intensified naval patrols in the Baltic Sea. Sweden and Finland are new members of the alliance but old hands at stymying Russian interests within their maritime neighborhood, and have already started taking Russian and Chinese ships to task.

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Boomers, Xers, and Budgeting

Photo of old commodore computer and retro items

Today, we’re talking about America’s Gen X, aka the best generation, and our role in the US economy moving forward. Let’s look at the current situation and what to expect in the coming decade or so.

It all starts with the Boomers biting off more than they could chew. They built a welfare state but couldn’t fund it and are leaving massive deficits as they retire into their beachfront mansions. Now, me and my fellow Xers, despite being the second smallest generation, are going to have fix all those problems.

As the Boomers retire, Gen X will come into its economic peak, meaning it controls the wealth, property, and investments. This means a nice period of record wage growth for Gen X, but that won’t last forever. Eventually, the Millennials and remaining Boomers will burden Gen X and force them to make larger contributions to bail out the economy.

So, all my Xers should be “getting that bread” while they can because Uncle Sam is going to come knocking at your door soon enough.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey, everybody. Peter Zeihan here. Coming to you from just outside of longs Bay in New Zealand. Coromandel region, taking a question from the Patreon crowd today, which is one near and dear to me because it talks about two issues that I care about a lot demographics and me. And the question is, what is the future of America’s Gen X? 

Are we simply doomed to pick up the trash after the boomers kegger party? Yes and no. So, the back story, demographically speaking, you can cluster people into different financial groups by age. So folks under age 18 are typically dependents. People age 18 to 45 are the big consumers. They’re spending a lot of money raising kids and buying homes, but their incomes are low. 

So high outflow, high consumption, high growth, high inflation, but low capital generation, low tax base. Then once you turn 45 and until you retire at 65, you are saving for retirement. Your income is at it’s the highest it will be in your life. The kids have largely moved out. The house has been paid down. You’re starting to think about downsizing different economic model. 

in this sort of system. The tax base is huge. There’s a lot of capital running through the system. Capital cost, borrowing costs are low. The government gets lots and lots of income that it uses to expand the state technical training, infrastructure, that sort of thing. But consumption has dropped off. And then you turn 65 and you retire and you liquidate most of your financial assets and go into low risk stuff. 

No stocks, no bonds. Typically T-bills, cash and real estate. That money is no longer available for the tax base. It is no longer available for investment capital. And then you whittle away on that as you retire. So the baby boomers have been the largest generation ever in American history for two reasons. Number one, when the GIS came home, they basically founded modern America. 

They had large families and they moved to establish new territories that we now know was the suburbs. In addition, they were the first generation born during a period when the country had already been industrialized. And what happens when a country industrialize is it’s not just that you get rail lines and electricity, you also get antibiotics and hospitals. So the highest death rate for any age group preindustrial is 0 to 5 years old. 

Newborns and young children who, tend to die off. And so people always have replacement children. If that sounds familiar. Anyway, doesn’t really happen for the boomers for the first time. And you combine health care with a new generation that’s large, they live longer. And so we got a double population bulge with the baby boomers. And it was so huge relative and remains so huge relative to all other population groups that they have basically dominated American economic and cultural life ever since. 

So when they were going through their, early adulthood years in the late 60s to the early 80s, labor costs were low because we they supersaturated the labor market. Inflation was high because of their demand. And all of the American pressures were demand based. Then from the late 80s until roughly 2015, when they had their kids had moved out, and they were generating all that capital inflation dropped quite a bit. 

Growth slowed, too. But all of that investment capital that they were generating pushed things forward, like, say, the tech revolution. That also allowed for the expansion of the government under Johnson and Nixon and Reagan. And during this time, the boomers, because the cash flows were robust, built a larger and a larger welfare state, primarily looking at themselves. 

You fast forward today. Now two thirds of them are retired. They’re taking their money. They’re going home. The taxes that they’re paying have dropped off. And we are left with a welfare state to fund their retirement without their income to pay for it all. And the next generation down, the one now entering the capital rich part of their lives is generation X, which is the second smallest generation the United States has ever had. 

So simply on the numbers between the exiting boomers and the entering Xers, we’re looking at chronic budget deficits. Assuming the government was relatively circumspect in its spending. But our last few boomer governments Trump, Biden, Obama, w Bush have been the most fiscally proliferate in American history. And so we’re looking at absolutely massive multitrillion dollar deficits every single year. 

To be continued. 

Okay. Continuing from Buffalo Beach and city on go. So anyway, deficits, massive locked in as long as the boomers live, which is going to be on average, you know, another 15 to 25 years based on who’s doing the math. And during that whole time, the boomers have created a social welfare state for themselves. So they have had never had any intention of paying for. 

And since the next generation down, that is now and coming capital riches, Gen X and the boomers have always outnumber Gen Z by substantial margin. So you financial burden will fall on them. In this, the boomers can count on getting voting backstop against any sort of fiscal reform from their children. Who are the millennials who are maybe the second most selfish generation in American history? 

So you can count on these two voting blocs agreeing that extra should pay for everything. So assume me if at some point there is any effort in Congress to actually rationalize the budget, you’re going to have these two voting blocs, the two largest voting blocs in American history, forcing that rationalization on the group that is most capital rich Gen-X. 

Now, that’s the bad side. That’s the cleaning up the solo cups argument. But there is a positive side here. For some people, specifically with the boomers leaving, we have a lot of tension and tightness in our labor market. They were the largest generation ever. Which means they were the largest work cadre ever. And because there were so many of them in the 60s, 70s and 80s, they pushed down the cost of labor, which made the labor market hyper competitive. 

From a global point of view, and we had inflation due to their consumption from any number of points of view, but from their earning potential was actually fairly low. So most of the hand-wringing during that era about wage increases being too low for the inflation rate was totally rooted in the size of the boomers. 

And that disconnect, in order to make ends meet, that made the boomers the most mobile generation we’ve ever had in history since the time of the pioneers, because it was all about going to wherever they could get a little bit more income. And it also pushed, women into the workforce in order to get a second income. 

Now, you play that forward for a couple of decades and you change the labor market. You change social norms, you get the sexual revolution, you get the women’s rights movements. All of these things were because there were so many boomers. But now that all of that labor is leaving the market. We have something that from a global point of view, is a lot more typical, and we’re just not used to it. 

And so we have labor inflation eating into the system. Now. Now something to remember about the boomers when you have a two income household because you have to for financial reasons, the pressure on the family unit and the pressure on married couples is really robust. And so the boomers also had the highest divorce rate ever in American history. 

Now Gen X coming up behind them looks at this. It’s like, no, we’re not doing things that way. The boomers have always said that they value their money more than their time. We see the pain of that and we are not going to make that mistake. We are far more likely to value our time over our money. So unlike the boomers, who have lots and lots and lots of two income households, and high labor rates as a result actually went the other direction and have a relatively low labor participation rate with a lot more single income households. 

That puts you under a lot of financial pressure, because not only is there half as many people working and earning, it also means that you’re less likely to move and you’re also at the bottom of the totem pole with all these boomers above you. So you Xers were working in a super saturated labor market that they couldn’t really affect because they were down at the bottom, and they were less likely to work in order to preserve their families. 

Gave us a much lower divorce rate, much more stable relationship rate than anything that the boomers had. But wow, did we pay for it.  

We saw the lowest increases in take home pay on an annual basis of any worker generation in American history, until about five years ago, when one third of the boomers had already retired. And now in the last five years, we’ve seen the greatest increases in take home pay of any American generation ever. Because all of the skilled, all of the upper level management jobs are becoming available at the same time. 

And even if everyone in Gen X wanted to work, and I guarantee you we do not, there would have never been enough of us to fill all of those boomers shows shoes anyway. And so from the extra point of view, we’re seeing record increases in take home pay for the first time in our adult lives. Now, the rest of the world knows that as labor inflation. 

But honestly, the rest of you can suck it because we’re finally having our moment at some point in the next 10 to 15 years, when the axes are at the peak of their income and the peak of their wealth. Because of this delayed gratification, there is going to be a conversation in the United States led by these six millennials who can do math about rationalize the budget. 

So Larry, Moe, curly, Thelma Louise, and Lafond are going to sit down and run the math and realize that the only way they can make the budget make sense is to basically gut Gen X, and they’ll have the voting power to do it. Now, until we get to that point. It’s a X world. We’re going to control all of the money. 

We’re going to throw the majority of the property, we’re going to dominate the stock market. And we’re in a situation of supply and demand. If capital is available, unlimited supply if demand is robust at a time when the millennials are having their kids and building their homes, large generation demand and we need to re industrialize the United States, doubling the size of the industrial plant. 

Whoever has the capital, Gen X is going to be able to demand exorbitant rates for it, and it’s going to be a great time until such time as the millennials actually run the numbers. So if you’re an Xer, our time has finally arrived. But it’s only going to be a moment. So make the most of it. Get your money where it’s going to be protected, because sooner or later the millennials will figure this out and we will find a way to get the budget back into some degree of balance. 

 And it will be Gen X. It’s paying for it, but not today.

Milei One Year On

Alberto Fernández awarding Milei the presidential scepter during the inauguration on 10 December 2023

Javier Milei, Argentina’s President, has been leading the country for a year now. So, let’s review what he has been able to accomplish in that time.

Milei is looking to overhaul the country’s economy after decades of mismanagement under Peronism. He’s tackled inflation, but eliminating Argentina’s dominant socio-political-economic system has increased poverty. Economic recovery and wealth generation take time, so we’ll continue to watch how this evolves.

Argentina has all the natural resources and geography to be successful, but years of Peronism and the recent drought have made a recovery difficult. Foreign investors are showing optimism, but true progress will only come once Argentina can begin to generate its own capital. Argentina has strong bones, but adding meat to those bones is going to be a long process.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey everybody. Good morning, Peter Zeihan here, coming to you from near the head of Matthew Key to Key West, Mateu key to Key Valley and Mount Aspiring National Park. We’re going to pan around a lot on this one. It’s going to take a quest. Oh, yeah. New Zealand obviously. Going to take a question from the Patreon page that I’ve been getting a lot and it’s what do I think of the president of Argentina, Melaye, who has been going through a series of reforms. 

It’s been a year now since he took over. And when I said it a year ago, he’s like, he’s got a lot of work ahead of him and we’re not going to see results soon that people are looking for an update. And the update is he’s got a lot of work in front of him, and we’re not going to see results soon. 

Let’s talk about the good things that have happened that are his, that he should get credit for, and the good things are about to happen, then he probably shouldn’t. And then we’ll go into the other stuff. So first things first. Last year was really bad for growth in Argentina, Argentina because of its old government system. Peronism, has a horrible economy and it shouldn’t. 

The Argentine system has naturally having waterways overlaying great arable land. In fact, the second largest chunk of those two things combined in the world after North America. It should be a superpower. And at the turn of the previous century, actually at the end of World War one, it was the fourth richest economy in the world. And now it’s back then it was maybe 90% of the wealth of the United States, per capita. 

Now it’s less than 30%. The reason is we had this guy come in in the late 40s and ruling until about 55 by the name of Peron, who formed a new type of political, economic ideology that combines the worst aspects of fascism and socialism, where the government owns all kinds of things and runs them badly and into the ground. 

And whoever gets political power can basically do whatever they want. But they also control the labor unions, and all the, the export system. And there’s a lot of other messy things going on. It’s, it’s kind of a nonsensical ideology, but it is the dominant ideology of Argentina, and it has systematically destroyed the ability of the country to generate capital and wealth. 

Instead they do oversimplification here. They concentrate power in the hands of a few people within the political class and then print a lot of currency to artificially increase demand for their supporters. So everyone feels rich, which only generates hyperinflation. So Melaye came in and tried to rip all of this up from the roots, and considering he didn’t have majority in Congress, that was kind of a heavy carry. 

But he did a pretty good job and that artificial demand is now gone. And so inflation has gotten back down to more normal levels. And he absolutely deserves all the credit for that. The other side of that, unfortunately, is that when most of the country, at least half of it is thriving on that sort of system where the government throws money into the system to generate that artificial demand, and then the money goes away, the demand goes away that, yes, that takes care of inflation, but it puts a lot of people into poverty. 

So when it comes to things like poverty, amelioration and generating the sort of economic activity at home that is necessary to then use a more capitalist structure to bring wealth back. And that takes a lot more than a year. And we’re only in the very early stages of it. Second, things are going to get better for Argentina this year, independent of malaise reforms. 

Last year there was a drought. Argentina is primarily. That’s a key, right there. It’s, Argentina is primarily a commodities producer, especially soy. And there were droughts last year. So we saw a significant contraction in the primary extraction economy. It looks like the weather forecast coming up for the next year looking to be positive. So simply a return to the median for agricultural production is going to generate pretty strong growth. 

But what we really need to see is capital start getting generated at home. Now, foreign investors are starting to express more optimism in what Malaya is doing, and they’re starting to buy up Argentinian government bonds again. But we’ve been in this cycle before where you get a reformist government that tries to fix a few things, make some progress foreign to start to come back in and you get another Peronist government that comes in and wrecks it all again. 

A little word of caution. Until such time as Argentina is generating its own capital and until such time as Millais or someone like him can actually win more than one term in a row, it’s really hard to say that Argentina has emerged from its funk. If it can pull that off, it’s going to be doing very, very well because the bones are very good. 

And I would just put a little bit of caution in there for anyone who’s trying to compare Argentinian politics to anywhere else. For example, there’s a lot of people in the United States, who are in the Trump field who look at Millais and how he’s kind of taking the ax to the government and they say, oh, yeah, we should do that. 

Keep in mind that most of what Donald Trump says he wants to do actually has more in common with Peron when it comes to centralization of control, especially when it comes to things like labor, than it does with Millais, who is more of a libertarian. So, you know, there are lessons here. We should study it, but we shouldn’t get crazy with what sort of parallels we try to draw. 

Oh, and one more thing, because I know people are going to ask. Careful. The parallels you draw between what’s going on in Argentina now and really anywhere else, especially the United States. The U.S. and Argentina may have similar geographies, but their political systems diverged a long time ago. So, for example, there are folks in the Trump campaign who are looking at L.A. and him taking an ax to the state as something that they would like to do in the United States. 

But there is no stomach for that in Donald Trump at all, because that would mean going after the single largest budget items. And those are entitlements Medicare, Medicaid, Social Security, and maybe, maybe even defense. If you don’t take an ax to those four things, you’re not going to make any meaningful progress. In fact, under Donald Trump, we went the opposite direction. 

When he was president, we had the largest budget deficits in American history in peacetime, a feat that was admittedly, topped under, Joe Biden. But if Trump does what he says he’s going to do, and he’s going to reclaim that mantle in the very near future, so think of, when it comes to the centralization of power, that’s really what Cronin is about. 

And that is something that both Biden and Trump exercised. I would argue that they are the two most Peronist presidents. The United States has ever had. And, Argentina is led not by a conservative. It’s led by a libertarian. O’Malley would not fit in with the American Republican Party of today or yesterday at all. The two countries are moving in different directions, with Argentina moving away from Peru, Amazon and the United States moving towards it.

Intel Keeps Playing Catch-Up with TSMC

Photo of an INtel microchip

We’ve discussed what TSMC is up to in a recent video, so let’s look at what another big name in the semiconductor space -Intel- is doing to keep up.

Intel was once the big dog of the industry but fell behind due to delays in adopting new technology (aka they got complacent and didn’t think anyone could surpass them). Then TSMC pulled the rug out from under them and Intel has been playing catch-up ever since.

The semiconductor production process is complex and there are lots of different steps along the way. One of Intel’s unique advantages is that it controls more stages of the production process than TSMC does. So, Intel has a bit more protection against single point failures, which in the geopolitical landscape we find ourselves in…could prove to be an essential layer of security in the long run.

So, TSMC remains the industry leader, but they could take a page out of Intel’s book and bring some steps in their supply chain a bit closer to home.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey everybody Peter Zeihan here today we’re going to talk about the semiconductor sector, specifically the American company Intel. Now Intel has had a rough few years. 20 years, ten years ago, 20 or 25 years ago, they used to be the industry leader, and they were so far ahead that they would release designs that were nowhere near the most sophisticated, because they knew it would take forever to the market to catch up. 

So they had years of work plan in front of them. Unfortunately, they rested on their laurels and they failed to invest in the technology called extreme ultraviolet that instead a Taiwanese from TSMC picked up on, which allowed for much faster fabrication and much more accuracy. Much less waste. And in a few years, TSMC overtook Intel become the world leader. 

Intel did get on the extreme ultraviolet bandwagon eventually, but it took them a while to master the technology, and they’ve been behind ever since. Now, that said, the semiconductor industry is really weird and that we really do only have that one world leader, TSMC, that makes almost all of the high end chips. Intel is trying to catch up from behind. 

And Samsung out of Korea has picked up some fabrication facilities, from a merger and is doing their best to play, but they’re a distant, distant, distant, distant, distant distant second. So I thought it would be worth understanding where this technology is going to evolve and where the corporations are going to evolve. American politicians like to focus on the fabrication facilities, the places where the semiconductors are actually, grown, attached, doped and, built. 

But that’s really not the hard part of the process. I mean, know, no offense to the fabricators. They do amazing work in difficult condition and technologically challenging fields, but the harder work is in design. A basic design for a high end chip can take upwards of 24 months to really get going, and that’s assuming you’re not really incorporating any fundamentally new technology into it. 

And most of this design work is done in the United States, with a lesser degree in Japan, but that makes it sound like it’s just some guy with a protractor basically scribbling on paper. And that’s not what it is. You’re bringing together literally tens of thousands of elements into a design to try to do something new, process faster, manage heat better, use electricity, use less electricity, use different materials, and so on. 

And all the new technologies have to be incorporated into this theoretical construct, which is then taken to Taiwan, where they work with TSMC in order to basically make an instruction booklet that the TSMC staff will follow. And then you have to worry about all of the inputs coming from around the world, because it’s not like you just take some silicon and you’re off to the races. 

No no no no no no. There’s copper, there’s palladium. There’s all kinds of different inputs, things like transistors that have to be very, very specially designed and produced. TSMC doesn’t do any of that. The logistics and the design companies in the United States do so even today, with TSMC producing 90% of the world’s high end chips. Most of the real work, most of the value added work, most of the high paying jobs are actually done in the United States, and operating a side facility while it’s still highly skilled work. 

It’s not nearly as highly skilled as what happens on the other side of the Pacific. The problem that brings me back to Intel is what happens on the other side of the equation, once you have all of your raw semiconductors, you then break them into their individual components and test them and package them. And then you have to put them into an intermediate product, like a motherboard or a memory drive or, a chip within a sensor system. 

And only then can you go into the proper manufacturing process where it is put into a car or a plane or a satellite or whatever else. So this one step fabrication, obviously unavoidable, obviously important, but it’s not really where the money is. Now, TSMC is a little obsessed with its security because it is a Taiwanese company. And you can understand why. 

And so the concern a lot of people have in the sector and more broadly is that if something happens to Taiwan, we lose all the iron semiconductors, and that is true. But if something happens to South Africa, we lose a lot of the rare materials that go into it. If something happens in North Carolina, we lose the ability to purify the silicon that goes into it. 

God forbid something happens to San Jose, we lose the ability to do a lot of the software work on the back end. There are thousands of single point failures throughout the system. What makes Intel unique, from my point of view, is that they have a number of these other steps under the umbrella. There are still literally thousands of single point failures throughout the Intel system, but probably about a third to have less than what TSMC has. 

So in a world that is on the verge of rapid globalization, the idea that we’re going to be able to make these high end chips at all is kind of a stretch to me, because there’s just too many places where a single break means the whole thing falls apart. But Intel has three advantages. Number one, more of the steps are under the umbrella. 

Number two, its fab facilities are in the United States. And number three, if we’re going to have to rebuild this environment anyway, easier to do it if you only have to replace 3000 steps instead of 4500. So one way or another, regardless of the corporate success or failure of Intel in the months and years ahead. The fact that more of this stuff is concentrated in Intel and in the United States suggests that some version of Intel is actually going to be a bigger part of the semiconductor future globally than TSMC over the long run. 

Of course, we’re all dead in the long run. So this is all about timing.

The Next Recession Isn’t Here Quite Yet

Photo of man holding empty wallet

A potential US recession or depression is always in the back of our minds, but how close are we really?

A major downturn is unlikely to happen in the next 5-10 years for a number of reasons. Consumer spending is still strong, since the millennials are in their prime spending years, so demand is staying high. But when they age out of these years by 2032-2033, it will be a different picture. With the need for a major industrial buildout, construction will support economic activity and reduce the risk of a recession further. And of course, higher capital costs and less speculative behavior has kept the risk of a bubble low and ensured financial stability.

Like all good things, this too shall end…but when? After 2032, things will get a bit hectic. Consumption will crash as a smaller Gen Z will try to replace the millennials in the “big spender” category. And around that same time, we’ll get to see if all those investments into the industrial buildout paid off. And the cherry on top is if the US fails to expand industrial capacity before China collapses, inflation will skyrocket, and supply shortages will be the norm.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey everybody. Peter Zeihan here. I am green rooming it before presentation and I am going through some of the questions from the Ask Peter Forum, and I’m picking out a couple, specifically this one is do I think there’s going to be a recession or depression in the next 5 to 10 years? Economic forecasting like that is easy. 

Of course, there’s going to be, but I don’t think it’s going to be soon, and I don’t think it’s going to be bad. So let me kind of run through my logic here. Roughly 70% of the US economy is based on consumption. So if nothing happens to the consumer, it really doesn’t matter what happens everywhere else. 

And the United States doesn’t have to worry about a food crisis or an energy crisis, or at least not in the traditional sense. So it really comes down to whether or not you’ve got enough people in the young age groups that are doing the consumption 20 to 45, roughly, to generate an ongoing pulse of consumption that will drive away the doldrums. 

And the group that is in that block are the millennials. Now, the oldest of them are 45. So over this time period, 5 to 10 years, we are looking at them start to kind of ease back as the kids start to leave home. They’ve reached that point in their lives. Keep in mind, though, that a lot of the millennials did everything that every generation has ever done before have kids, buy cars, built homes. 

But they did it with a bit of a delay. So it’s probably not going to be until the older millennials are turning 55 years from now, where we start to see that slow down a little bit, which means that probably for the next eight years, going into 2032, 2033, that this consumption should be fine. In fact, if you look back in the last decade, we’ve had three periods in that period where we would have had an industrial recession. 

But consumption, primarily from the millennials, was more than enough to keep the US system chugging along. And today we have record low unemployment because we’re trying to do an industrial build out without the baby boomers labor. That would suggest the millennial labor is going to be very well compensated and the consumption picture should be fine. The second question is industry. 

We need to prepare for the fall of the Chinese system, which means we need to roughly double the industrial plan to the United States in just the process of building that is going to be highly stimulatory. So on the industrial scale, we will obviously have rises and falls. That’s just the nature of the business. 

It’s a little bit cyclical, but against a backdrop of massive amounts of construction. And we have seen industrial construction spending, increase by a factor of ten over the last five years in the United States. There’s nothing about that that suggests a recession to me in the next 5 to 10 years, because this is a pace we have to keep up for quite some time, even in the most aggressive period where we frontload all of it. 

You’re talking about a six year process, probably going to be more. And third is finance. When finance is too cheap for too long, people start making bets on things that maybe in their retrospect, weren’t the best idea or they overplay their hand in certain sectors. So think of the dot.com bust or the subprime bust. That’s not the environment we have today. 

We don’t have 0% interest rates. We have the most expensive capital we’ve seen in about 15 years. We’ve seen capital cost because of the retiring boomers, roughly triple over the course of the last five years. And it’s just a demographic issue. When you move into retirement, you liquidate a lot of your high velocity investments and things like stocks and bonds, and you move into low velocity stuff like T-bills and cash, because if you don’t and there’s a currency correction or a market crash, you no longer have the income to recover. 

Which means capital costs are more expensive. And so we’re not seeing bubble activity really anywhere. And even though capital costs have increased, they were so low for so long that most folks are in a pretty good credit condition. One of the things we’ve noticed is that, while delinquency rates on loans are up, they’re up from multi-decade lows. 

We have yet to get anywhere near the average delinquency rate. For the post-Cold War environment, and now the capital costs are higher. You see a lot of slowdown in things like housing, because people who are locked in a mortgage at 2%. Hello? Have no reason to move, but it also means that the debts are very, very serviceable, especially against the, very positive employment environment. 

So we’re not looking at a consumption led recession. We’re not looking at an industry recession, and we’re not looking at a bubble, financial led recession. These are all really good things. 

So if there is a risk, it’s certainly not in the short term. And it would probably fall into one of two general buckets. And I’m talking here like 20, 32, 2033. And on number one, we get on the back side of all of this. And the millennials start to edge out of that consumption year. 

And so we see a drop off of consumption because the next generation down Gen Z is the smallest ever. And they’re just not going to be able to buy as much as the millennials have. They’re also a little bit more anti-social. But that’s a different topic. So if you get that far, then you can start talking about some sort of consumption led recession, possibly. 

The second one is an industrial bust. There’s no way that you double the size of the industrial plant in a country and get it all right. And so when you fast forward to the other side of this, we will have a shakeout where things that we may be built the wrong thing in the wrong places don’t look all so hot, especially with higher financing costs. And correcting that is the I mean, basically that’s what a recession can be in the industrial space. So again, when we get to the other side of this, we will have to rationalize some of the things that we have done over the last several years. And that won’t be a lot of fun for anyone who’s in the space. 

But I think the biggest concern, and I really don’t think it’s all that big of a one, is that we, we fail to rise to the occasion. The primary reason we need to double the industrial plant is because the Chinese are literally dying out. Now, let’s assume for the moment that we fail to do that, we don’t build out our capacity in electronics and material processing and electricity and everything else. 

If we fail to do that and the Chinese go away during this time frame, which is highly likely. Then we have a goods shortage and then we will be trying to double the size of the industrial plants. So we will have a massive inflation story as well. One of the advantages of moving early on this is you can use the Chinese industrial plant to build the stuff that we need to build our own industrial plant. 

That’s the cheapest, fastest, easiest way to do it. If we fail to take advantage of this moment in time, we will then have to do it without the Chinese. And everything will cost more and labor will be under more pressure and finance will be under pressure, and we will have shortages of manufactured goods. It will be a wildly inflationary story. 

It’s still technically a growth story, but it would be an environment where inflation would probably be faster than growth. And that might not technically be a recession. But oh boy howdy, it would feel like one. So I would say that that is the biggest risk, but that would be a risk if we just decide that we don’t want to do anything that we’ve said, we’ve wanted to do for the last 20 years, and I have a hard time thinking that that’s the path the Americans are going to take.

Russia Is Failing Not Failed

Photo of St Basil Cathedral in Red Square, Russia

Although Russia’s military performance in the Ukraine War has been underwhelming, that doesn’t mean we can write off the Russians quite yet. This conflict, and what could follow, should still be a top concern for the West.

Russia still has some gas in the tank. They haven’t fully mobilized yet and could still leverage allies like China should they need to, so if Western support in Ukraine waivers…the Russians could see significant gains. If Russia wins in Ukraine and reaches NATO borders, nuclear threats could come into play and that’s a spooky scenario. On top of all that, Russia’s decline means it doesn’t have anything to lose, so leadership may take extreme actions to cement themselves in the global sphere.

This means that the war in Ukraine should be a top priority for the West, as holding off the Russians in Ukraine is the best chance that NATO countries must avoid more catastrophic outcomes.

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For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

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Transcript

Hey, everybody. Peter Zeihan here. Coming to you from the mid Tukey Tukey Valley in Mount Aspiring National Park in New Zealand. We’re pulling an entry from the Patreon page today, specifically if the Russian military is doing so creepily and it really is. Why do I still worry about what happens after the Ukraine war? Won’t they spend themselves in Ukraine and then Poland? 

Romania and the rest of NATO will be fine. 

Let me give you three reasons. Number one, miss worrying over. And just because the, Russians have not performed to what they would consider snuff and have definitely proven themselves to not be the second most powerful, military in the world. They’re not done. We have yet to have a general mobilization. 

We have yet to see the Russians move up to a full war economy. And we have yet to seek outside countries like, say, the Chinese really put their thumb on the scale. I mean, yes, yes, yes, the Russians are going through barrels much faster. They can then they can replace them probably, 20 to 1 and the same with tanks. 

And the Chinese are stepping in with replacements, especially with drones. But the Chinese have resisted any sort of meaningful sanctions on themselves in order to collaborate with Western countries. So there’s still a lot of things that could be put into the Russian column for force that, as of yet have not. So we unfortunately may well still be in the, the opening act of this conflict, especially if we see a withdrawal of any major countries support for Ukraine moving forward. 

I mean, the Ukrainians have absolutely punch above their weight. They’re actually doing far better than anyone had any reason to expect. But they’re still the underdog by every measure, and they need a lot of outside help to stay in the game. So that’s one. Number two, it’s going to sound trite, but nukes, if we get to a position where one, two, three, four years from now, the Russians do prevail and they roll up to the NATO border. 

Putin and his team are going to have absolutely no reason to expect that they can take on Poland to Romania in a conventional fight, if they’re backed up by the Germans, the French, the Brits, and especially the Americans. But there still that ace in the hole nuclear weapons. So the scenario that Western capitals are stressing about is that the Russians do prevail in Ukraine. 

They roll up to the border of Estonia, Latvia, Lithuania, Poland and Romania, and they basically bring in the French, British, German and Italian leaders on a conference call. Just say, just FYI, we’ve already targeted your capitals. The missiles will launch at noon tomorrow. We’re going to hit you with at least a couple dozen missiles each. So that missile defense really can’t play a major role or you could withdraw any support for Poland, Romania whatsoever and start a visible evacuation of all your forces in the area. And now I’m going to leave the conference call open and leave you guys to discuss. It’s really a scenario we don’t want to face. And then there’s the third issue that’s much more visceral. Russia’s dying demographically. This is their last century for sure. 

And the question is whether they die fast or die slow. But make no mistake, the people at the top realize that death is now inevitable. The Russian ethnicity itself is fading away, and when a country feels it has nothing to lose at all. They’re going to be willing to do things that other countries normally wouldn’t, because they will live to fight another day. 

So think back to all the brilliant Russian engineers who existed during the Soviet period, who pioneered things like computer science and space travel, nukes, chemical biological weapons, all of that can potentially come into play, based on the time frame of Russia breaking. So this war, unfortunately, absolutely needs to be fought. 

And there are still many, many paths that it can follow, not a lot of which are overly positive. But what I can tell you is that every day that the Ukrainians manage to hold the line is a day that we don’t have to worry about those other scenarios, because a Russia that can’t conquer Ukraine is one that becomes strategically unmoored and is vulnerable at a thousand points. 

The bad stuff happens if the Russians do succeed in gobbling up all of that territory and can press directly on the Western alliance. And that ultimately is what the Western countries are fighting for. Ukraine’s motivations are a lot simpler.

Trump 2.0 – Reindustrialization

Another layer of the challenges facing the Trump administration is the fallout from a Chinese collapse and what it will mean for US reindustrialization.

China is the world’s manufacturer, but just about everything is going wrong for them. Between demographic and economic decline, trade blockades, and a collapsing workforce, China won’t be around for much longer. So, everyone else will have to find another way to get their stuff.

That means reindustrialization and the US is nowhere near being ready to take on that load. We’ll need to rebuild industrial capacity, expand the electrical grid, and address labor shortages. If Trump fails to do that before China goes off the deep end, we’re going to experience product shortages and record inflation, cementing Trump’s legacy as the man who made American something less than…great. Or maybe, just maaaaaybe, the old/new president can address these issues and shepherd the United States into a new golden age.  fingers crossed

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey, everybody. Peter Zeihan here. Coming to you from the top of French Ridge in the Motoki Tuki Valley of New Zealand. This is the first place I ever went backpacking in the country. And I haven’t been back in 27 years. So just as hard as I remember it when I was 23. Okay. We are going to continue on with the Trump 2.0 series today, specifically the sort of domestic issues that are going to be waiting for the president. 

Really, this is a China, China, China situation. But from an economic point of view, rather than a geopolitical one. Let’s review, China’s dying, birthrate has dropped by over half in the last six years. They now have more people over age 50 than under. And their workforce is in the early stages of collapse. Their population has been in a state of collapse for over 20 years. 

But, when you run out of people aged 0 to 20, you really don’t feel it in your consumption or your investment or your tax base. You’re just paying for less education. Well, that has now been going on for 45 years, and they’re running out of new people to bring into the system. At the same time, they print currency like mad. 

Like, you know what the gold bugs say that the US Federal Reserve does, China actually does. But like times five, they expand their money supply by about 500% more than the United States has on a monthly basis. And so that drives up asset prices, which makes it for more difficult for the young people to do anything because, think about if everyone in the United States was over 40, was buying a vacation home, how hard it would be to start out if you were in your 20s. 

Now, I’ll apply that to China. So you’ve got all this massive real estate build and absolutely no chance that someone young can get in on it. So we are looking at a national collapse here and a population collapse and probably a civilizational collapse. The only question is time frame. If I was to, put a date on that and yes, yes, yes, putting dates on things like that is hard. 

And that is, the most difficult part of what I do. I would expect a complete economic breakdown within a decade and then probably a national breakdown. What’s the ten years after that, anyway? One way or the other, the Han ethnicity is not going to survive in this century under Donald Trump. Donald Trump absolutely is. Rare. 

And to pick a fight with the Chinese on trade issues, he’s been talking about massive tariffs to stack on top. He and Biden actually are pretty close together on these issues. 

Trump enacted a lot of Selective tariffs on specific items as well as blanket tariffs. Biden didn’t peel any of those back. 

Biden went in and did tech tariffs to prevent technology transfer. And now that Trump is back, I find it very unlikely that he’s going to peel back anything that, Biden did. If anything, he’s going to double down on it. So the way that China has traditionally dealt with its demographic collapse and making sure that the economy can go is again printing lots of currency, building lots of industrial plant and then exporting it. 

Well, under Trump, that worked. But it’s no longer working under Biden because Biden has basically marshaled the entire Western alliance to act against things like tech transfer and most notably, electric vehicles and automotives. And so the Chinese don’t have any place to dump it. It’s gotten so bad that even the Russians and the Brazilians and the Turks are basically blocking Chinese imports. 

So we have all this new productive capacity coming online in China, nowhere to send it. We’re getting an inflationary and a deflationary pulse in China at the same time, which is like the worst kind of bad. Anyway. Bottom line is that Trump is very clearly wanting to pick a trade fight, but it doesn’t appear that his incoming administration has given any thought to what happens should he win. 

China is the workshop of the world, and while there are certainly sectors that Americans would like to keep the Chinese out of, they are the single largest presence in almost every industrial sector and their sudden disappearance. And it probably will be sudden because it will be, involving a degree of government and economic collapse. Then what? 

Because we still need the stuff. And if the Chinese are incapable of building it, suddenly we are in a very, very new sort of economic cycle. So, you would fix this by massively expanding the industrial plant and the manufacturing base in the United States. But you don’t do that quickly. You don’t do it overnight, and you don’t do it cheaply. 

So the smart play, if you’re looking for recommendations here, is to take whatever income comes in from tariffs, regardless of how they’re sourced, and actually use them to underwrite the construction of an industrial plant, starting in industrial processing, things like turning, bauxite into aluminum, things like steel, and then moving into, more and more sophisticated manufacturing. 

That requires a degree of organizational build out that the United States doesn’t have. The United States hasn’t had an industrial policy like that since World War Two. Luckily, Joe Biden and Donald Trump are the only two Americans left alive who remember any of that day. Yes, yes, yes, they’re about the same age. So hopefully, somebody on Team Trump will know what to do with that. 

But we’re starting from almost scratch. Everything that the Biden administration did along those that path was dealing with environmental issues in some way EVs, solar panels, that sort of thing. And I’m not saying that that was bad, but that’s just a one very, very narrow niche for what is necessary to be done. We need a multitrillion dollar build out as quickly as possible. 

Second, powering it. It’s not that the United States needs oil or natural gas. We are awash in that. And energy policy under Trump suggests that he wants to build up that advantage even more. The problem is electricity. It takes a lot of power to stamp and mold and move things that you don’t need when you’re basically doing digital work. 

So we need to expand the grid on a nationwide basis by at least half, and places that are likely to see the biggest industrial build out, places like the Rocky Mountains, the classic South, and Texas, they probably need to double the grid within five years, which is just a massive task. But I haven’t seen anyone from Team Trump even breathe the word electricity when discussing the energy situation. 

It’s all about oil. It’s all about natural gas. It’s even about taking things like windmills out of the equation, which I think would be unwise since, you know, Texas gets 15% of their electricity from now. The easiest way. There’s nothing easy about it, but the easiest way to do that is to make it much, much easier for electrical cooperatives and electric companies to import and export power across jurisdictional boundaries, whether that is across the, the seams that separate the three big grids in the United States, whether it’s among states, whether it’s within states that cross from, say, a co-op to a city’s, power system, we need everyone who has a competitive advantage, whether it’s in capital, in labor, in sourcing because of green tech, in sourcing, because of natural gas, to be able to put up a power plant and send that power to where it is needed. Doing that, of course, requires significant reform of the electrical grid in its current form and a whole lot of build out. And Donald Trump is famous for many things, but managing what is functionally a new department, creating it from scratch is not something he seems to have considered at all. 

Third is labor. If we’re going to expand the industrial plant by half, that’s a whole lot of workers that the United States doesn’t have right now. In fact, the United States, since, Covid is facing a worker bust for two reasons. Number one, we have started this re industrialization. We are seeing expanding, labor in all of us. 

Sorry. We are seeing an expanding labor demand in all of these sectors. But too far more importantly, the baby boomers are leaving us two thirds of them have already retired. The oldest ones are starting to die. They’re leaving the labor force in numbers, like when they entered the labor force back in the 1960s. And we have to basically do almost all of this work with just a fading remnant of labor from the boomers. 

There is no indication from Team Trump that, workforce training for blue collar workers is something that’s particularly high on the list. And if anything, all this talk of mass deportations of, illegal workers from the United States is going to actually tighten the labor supply. So basically, we’ve got two scenarios here, and it’s going to be up to Donald Trump and his team to decide which one to go. 

Number one, you smash China while they’re down. You kick them in the face, you break them, but you fail to build up the industrial capacity. You fail to build up the electrical capacity, and you’ve got the labor force at the same time that will generate a shortage in every possible consumer and industrial good at the same time, while also generating the fastest inflation that the United States has ever experienced. 

And Donald Trump will go down in history as the president who broke it all, or you build up the electrical grid, you find a way to square the circle with illegal migrants, you expand workforce training, and you repurpose the capital that was coming in from tariffs to actually build up the industrial plant faster. And Donald Trump goes down in history as both the president who broke China and set the stage for a new fundamental age of American economics. 

I know which one I’d rather see.