America’s Processing Crisis: Racing China’s Decline

Photo of workers in a manufacturing shop

One of the biggest challenges to US reindustrialization isn’t the raw materials, it’s the lack of processing infrastructure to convert those raw materials into intermediate products. Let’s break it down.

The US needs to (roughly) 20x its processing capacity to support the industrial buildout; however, the tariffs from the Trump administration have complicated things a bit. Importing already processed materials has become harder and the buildout of domestic processing capacity still needs years to ramp up.

Sure, we’ve been content getting all this stuff from China for decades since it was cheap and easy, but all that is changing as the Chinese system collapses. If the US doesn’t have the processing infrastructure ready, we’ll be in for a rude awakening.

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Transcript

Hey all. Peter Zeihan here, coming to you from Dead Horse Point State Park. Weird name. Looking over here at the Colorado Basin. That is a potash facility, which means it’s time to talk about processing. One of the biggest problems the United States faces in its re industrialization effort isn’t necessarily mining the minerals. It’s turning them into something useful, putting them into an intermediate form that can then be used in manufacturing. 

One of the things that Donald Trump administration has done by acting tariffs on everybody is make it more difficult for us to get the intermediate and finish materials that we need in order to do the industrialization process. What should have been done first, and this is not simply a criticism of the Trump administration, but also the Biden administration and the Trump administration before that, the Obama administration before that, and on and on, is that, North America is very rich in any number of raw materials, but we need things like this in order to separate the ore, in order to get at the minerals that we are after. 

And then you turn them into an intermediate product like, say, semi-finished aluminum or copper, whatever it happens to be. We basically need to increase processing on the continent by roughly a factor of 20. It’s different based on whatever mineral you’re talking about. But the problem we have is that the Chinese have basically massively subsidized their processing industry. 

So China is not nearly as rich in the raw materials as we are here in North America or the Western Hemisphere writ large. But they’ve expanded their money supply. They’ve funneled everybody’s private capital into whatever projects generate employment. And so if there’s something that technically that they can achieve, even if they’re not the low cost producer, they subsidize the crap out of it in order to corner the market in whatever it happens to be. 

And then because no one can compete with these subsidized prices, they basically drive other processors around the world out of business. And that’s before you consider that the environmental regulations in China are significantly less intense than they are in any third world country, much less first world country. So cheap capital. Turning a blind eye towards environmental damage, they’ve tended to corner the market. 

Well, we only now have a few years to undo and rebuild, some of our mistakes in order to have these materials locally. And unfortunately, it’s very difficult to consider being a manufacturing power, much less an industrial power, without having these things in place first. So we are now set up to have kind of the worst of all worlds. 

The Chinese system is breaking. It’s going away. We’re losing access to everything that they’ve been subsidizing for us these last 30 years, and we have yet to build enough of that capacity at home to begin a serious re industrialization program, much less provide enough manufactured goods for our own population. So expect to see a lot more things like this in the future all over the continent, because without them we don’t have anything to work from.

The Future of Piracy (ARRRGH!)

Photo of a pirate ship on the seas

As the US withdraws from its position as global protector of the seas, will the age of pirates return once more? Okay, maybe Blackbeard won’t be making a comeback, but piracy will have a role in the future of trade.

Countries are likely to fall into one of two camps: combating piracy or embracing it. And it will largely depend on self-sufficiency. Places that need a little outside maritime help (especially for energy imports), like France, Italy, Japan, and Southeast Asian nations, will oppose piracy and protect shipping routes.

For places like Turkey, where trade happens over land, and they are largely self-reliant, more aggressive policies like protection rackets might become the norm. We could even see a bloc between Turkey, Israel, and Egypt form, leveraging the different strengths of each nation.

And of course, there will be some exceptions. A country like India might oppose piracy to its west but tolerate it to the east.

The decline of global maritime stability will lead to the regionalization of control, with different powers making the rules in each route. And if there was a place to watch, keep an eye on critical energy routes in and around the Persian Gulf.

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Transcript

Hey, Peter Zeihan here coming to you from Kodachrome State Park in Utah. And today we are taking a question from the Patreon crowd about piracy. Argh. And the idea is, as it becomes obvious to everyone that the United States is incapable of maintaining freedom of the seas for commercial shipping. What sort of states fall on which side of the divide? 

Pro pirate or anti-pirate? Great question. Okay, so, the dividing line between those two groups, those who will become pirates and those who will fight the pirates basically comes down to the degree of self-sufficiency that they have. So if you have your own food, your own energy, your own manufacturing capacity, and you’re not dependent upon the seas for transport for any of those things. 

Then all of a sudden, piracy looks like a really interesting option. And you can do this as a group with other countries that are like minded or part of a network. However, if you’re on the flip side where you are dependent upon cross seas transport to maintain anything, then all of a sudden pirates are the bad guy. So let’s start with the folks who are going to need to maintain a degree of connection. 

At the top of that list are going to be France and Italy. These are countries that are regional powers, have reasonably powerful navies that are about right size to their needs. But far more importantly, they are going to need at least limited degrees of interaction with other regions. In both cases, you’re looking at countries that, for example, need to import almost all of their oil and natural gas and that absolutely has to come, from the water. 

So the French Navy, the Italian maybe are going to look, very negatively at things like pirates when it comes to their national security. Let me continue with that list of countries, Southeast Asian Japan, countries that, for a mix of reasons, are going to maintain, a naval presence. Japan is pretty self-explanatory. 

It’s very poor in natural resources, most notably energy. Southeast Asia is a cluster of countries that I think are actually going to do really well moving forward. Their agricultural conditions are pretty good, their energy conditions are pretty good. And there a series of peninsulas and mountains and highlands and jungles and islands. That means that they have to integrate via water, as opposed to integrate via land. 

And so anyone who could be sand in the gears is going to be a problem. And I can absolutely see the Japanese and the Southeast Asians for any number of reasons, collaborating moving forward. Again, somebody who would be the sand in the gears. Now, the problems that these groups Italy, France, Southeast Asia, Japan are going to face are unfortunately fairly close to home because in both cases, you’ve got blocks of powers that really don’t fall into these categories. 

Most of their interests are on land. And at the top of that list, if you’re looking from the west side in the Mediterranean, that’s Turkey. Now, Turkey is already a massive industrial power, and it has been moving in the direction of a more coherent industrial policy for the last 20 years, as the Europeans have basically started to age out. 

The Turks know in their bones that over the next generation, any product that they’re going to need, they’re going to have to produce themselves. And they’re probably going to do this with some countries, like I say, in Southeast Europe, most notably Bulgarian Romania. But when it comes to say, energy Iraq and as a region are right there, you don’t need to sell to get to either of those places. 

So you can see the Turks being very, very aggressive in enforcing basically protection rackets in the eastern Mediterranean. The only real question is whether or not Israel and Egypt are going to join them or be hostile to that sort of effort. It would make so much more sense for all three powers to be aligned in a bloc, because Israel has the air power and the intelligence capabilities. 

Egypt controls the canal and just has a sheer mass, as well as not insignificant energy reserves of its own. The three of them together would be a very powerful bloc that be very hostile to anyone who is on the outside, most notably the French and the Italians. And if this starts to feel like Middle Ages political alignments, you’re not wrong. 

On this other side of the equation in the Indian Ocean. The power to watch, of course, is India. India is, self-sufficient in its food. It’s becoming a massive industrial power already that’s going to probably double as the Chinese system collapses. But the real fun thing to keep in mind is, while the Indians do need to import a lot of energy, they’re really the first major market out of sight of the Middle East. 

So I can see them being a hybrid position to their west. They’d really frowned upon piracy to their east. I think piracy is a wonderful idea. So I actually see India as being the country that’s most likely to get into privateering. And privateering is basically state sponsored piracy. They would just have a very geographic area where they would support it, and then a very specific geographic area where they would not. 

So that’s kind of the sum up. It’s all about how you regulate energy going to and from the Persian Gulf, because when it comes to big global manufacturers trade, that’s pretty much dust in the wind at this point. And anyone who is anyone is going to be looking for a more stable partnership. And if you’re in Europe, that means you have to basically make do with what you have. 

If you are in Asia, you might be looking across the Pacific towards the Americas, but you’re certainly not going to look at going through zones that are interrupted with places like Turkey or India who are going to be out for their own good. All right. That’s all I got. You guys take care.

Did Trump Just Wreck US-India Relations?

The Attari–Wagah border ceremony at the border crossing

With tensions rising in India and Pakistan, it was only a matter of time before Trump had to step in and put his foot in his mouth. Basically, what happened is the Trump administration announced a ceasefire and peace talks between India and Pakistan…seemingly without consulting either side.

The tit-for-tat military exchanges between India and Pakistan were bound to end in peace talks anyways, but having a third-party (i.e., the US) step in, goes against everything in the “how to engage with India” handbook. And given the extreme disparity between India and Pakistan’s demographic and economic situations, external mediation undermines the Indian position. So, feelings were hurt.

And when feelings get hurt, relations and policies will suffer. That means US-India relations are at their lowest point in decades, and all those years of developing a closer relationship with India went up in smoke.

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Transcript

Hello, Peter Zeihan here. Coming to you from Canyonlands National Park. And today we’re going to talk about India and Pakistan and how it intersects with what the Trump administration has recently done. Specifically, India and Pakistan recently had a near war exchange. Some Pakistani militants who may or may not have been loosely affiliated with the very weak Pakistani government, launched an attack inside Indian territory in Kashmir and killed a lot of people, and took their time about it. 

It showcase the general security incompetence of the Indian government. So the Indian government felt that it had to respond. And it hit some targets in Pakistan, some of which were military. And then we got tit for tat back and forth attacks that were just gradually escalating, hitting more and more sensitive issues. Until such time as we got peace talks, brokered by the Trump administration. 

Now, Trump being Trump, he made peace talks all about him. And he announced that there was now a ceasefire without really consulting either the Pakistanis or the Indians. I made it very clear in the situation to come that all three parties would be involved in the talks, blah, blah, blah, blah, blah. Nothing that sounds too incendiary unless you know anything about India. 

The Indians have had the firm position for over a half a century now that any negotiations between Pakistan and India should be that negotiations between Pakistan and India, with no third party involved at all. And so the very involvement of the Americans was something that New Delhi saw as an insult. And the reason is pretty straightforward. 

India has a population that’s roughly nine times the size of Pakistan, an economy that’s closer to 12 times the size of Pakistan. And that’s probably being overly favorable to the Pakistanis. So in any real negotiations on anything, the Indians feel that they should hold all the cards because they do hold almost all of the cards. And if you bring in a third party, they’re going to tilt towards some degree of equality between India and Pakistan, which India rejects on principle. 

And that’s exactly what has gone down. And so we now have arguably the worst relationship between India and the United States that we have seen in the last 30 years. Now, that might seem grossly overexaggerated, but think back to what we’ve been doing for the last 30 years. In the aftermath of the September 11th, 2001 attacks, the United States found itself needing to be involved in a ground war in a landlocked country. 

And the United States is a naval power. So we found ourselves doing things that we don’t like to do in places we don’t like to do them, and we had to rely on countries for transit. And Pakistan was the most important of those. During the Cold War, it was okay to side with Pakistan against India because India was relatively pro-Soviet. 

But in the post-Cold War environment, we found ourselves dealing with a jihadist government that was fighting a jihadist insurgency in order to transport gear through jihadist territory, to get to other jihadist territory to fight different jihadis. It was a pain in the ass, and we had to do it for 20 years. And at every step of the way, we found ourselves at odds with the government in Islamabad as Pakistani militants were attacking every aspect of the American operation, oftentimes in league or at least informed by the Pakistani government. 

We hated every single second of it. And so, as the United States has gradually removed itself from Afghanistan over the last 15 years now, we’ve been bit by bit by bit, edging towards a better relationship with the country that we would rather have the relationship with. Not Islamist Pakistan, not weak Pakistan, not militant Pakistan, but a democracy in India that has a lot more shoreline and is a much more logical partner for us long term, and holding off China and protecting sea routes and making a partner with the country of the future that has a much bigger market. 

Or that’s how it was until this week. Basically all of that work has now been unwound, because we took the one thing that the Indians cared about and basically took a big steaming dump on it. So this is something that the Trump administration would have known if they had talked to people in the CIA or the NSC or, the State Department. 

But all of those people have been fired. And so we basically now have a new foreign policy that has partnered with the wrong side and the partner that we have been trying to get away from since 2002. Blehhh.

Iran Snuggles Up with the Houthis in Yemen

Photo of Houthi rebels in Yemen

Yemen, despite all the odds being stacked against it, has recently become strategically significant. If you’re not familiar with Yemen, it is geographically isolated, mountainous, hard to govern, only has a small pocket of fertile land, and has a long history of being unimportant.

The Egyptians and British can attest to how ridiculously difficult it is to control Yemen, but the Iranians are trying a new tactic. Iran is leveraging Houthi militants in Yemen by supplying them with missiles and other military support, as a way of replacing the influence they lost in places like Gaza, Lebanon, and Syria. So, Red Sea shipping gets disrupted without having to commit major Iranian resources.

Most terrorist organizations are hard to uproot, but the Houthis might take the cake. However, that doesn’t change the fact that Yemen itself doesn’t matter much, just that it’s currently serving as a platform for an Iranian proxy conflict.

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Transcript

Hello from Dead Horse Point State Park in Utah. And this is Peter Zeihan coming to you from 2000ft above the Colorado River. And today we’re going to talk about why anyone cares about Yemen. Now, Yemen is one of those places that I’ve gone out of my way to denigrate. I’ve called the Houthis who which are the primary militant group. 

They’re the most incompetent terrorists and alive today. So why does anyone care? Why should anyone care? Well, the topic, of course, of the moment is that the Houthis are using Iranian missiles in order to target shipping in the Red sea as part of their effort to show solidarity with the Gazans. 

But the history of Yemen is more than just that. Basically, if you wonder why anyone has ever cared about this zone, you just have to look at a precipitation map. Most of the Middle East is shockingly desert. Most of the places in the Middle East that where we’re familiar with the history is because the put simply, you can have civilization. 

There’s water. So you have the Fertile Crescent, Mesopotamia, you have the Levant, maybe the Hatay going up into Anatolia, and of course, the Nile. These are the places where civilizations can exist. Well, Yemen is a little pocket. Basically, you’ve got this knot of mountains that rises up at the southwestern point of the Arabian Peninsula that gets just high enough to wring a little bit of moisture out of the air. 

And as a result, you have a sea of desert with this island of green in the middle, and that green is Yemen. And so when whenever any regional empire rises up and starts to establish themselves, they look around for the parts that are worth conquering. And Yemen, because it actually has green makes the list. The problem is twofold. 

Number one, there’s a lot of brown around Yemen. So you have to project a lot of power just to get to it. And then second, there’s nothing near Yemen. So you can’t really project from Yemen anywhere else. Actually let me throw in a third one. Mountains. Brown people are ornery. And the same thing happens in Yemen as happens in West Virginia or jets near you. 

They become tribal, almost Scottish. Actually, it’s a lot like Scotland, but surrounded by brown. So if you can actually project power there, you then spend all of your time at the end of a very long supply line trying to maintain control. And it has never worked out well for anyone. You can go back to the time of the Pharaohs, when the Egyptians first tried and basically got a finger cut off. 

Then the Romans tried. They got some fingers cut off. Later on, the Arab empires based out of Damascus are back. But that tribe didn’t end up very well for them either, although they did at least nominally, maintain control. Then the Ottomans, then the Brits. Everyone has basically gone through who has tried to build an empire in the region. None of them have had a great time. What is different this time around is that no one is trying to control Yemen. 

Someone is trying to use Yemen as a lever. And so Iran, having lost in Gaza, having lost in Lebanon, having lost in Syria, losing very quickly in Iraq, is discovering that most of its tools for triggering paramilitary operations throughout the region have collapsed in on themselves, and they don’t have much left. 

But then there’s Yemen. The Iranians don’t care at all what happens to the Yemenis. But if you provide them with a little technical equipment and some hardware, they can cause some problems. And anyone who wants to then subdue the Yemeni discovers just as many problems as everybody else. So what’s happened most recently is the Iranians have basically provided missiles, a little bit of anti-aircraft. 

And, you know, the technologies of how to dig a hole in order to build bunkers. And the Yemeni are proving sufficiently entrenched that an air campaign cannot root them out. So the Trump administration comes in, is looking for a quick and easy military operation. And Trump gives the U.S. military 30 days to get results. Well, shocker, if after 2500 years, no one is functionally subdued Yemen, it wasn’t going to happen in 30 days by air. 

So the Trump administration has declared a truce. And the real talks with Iran are progressing. Whether or not they will succeed in anything too soon to know. The talks, however, are real. And the Yemeni are nothing but a tool for the Iranians. And so something that without Iranian support, the Americans can simply ignore. And that’s where we are now.

The Fire Hose of Chaos: How Do You Lose 100 Million People?

Chinese men and women walking in the street

Over 100 million people are missing in China!? No, the Chinese aren’t playing the world’s largest game of hide and seek, instead there’s widespread fraud in their data collection system. Yay! Government officials are admitting that they’ve been fudging their population numbers for quite some time, overcounting by at least 100 million (with some private estimates up to 500 million).

This starts from day one. Births often go unregistered, then local officials inflate vaccination and school enrollment numbers to secure funding. And by the time these imaginary people would theoretically enter the workforce, start paying taxes, and provide their first reliable data point to the government…there’s already been two decades of faulty statistics baked into the system. Now, the Chinese have a cohort of 20-somethings that’s over 100 million smaller than initially believed.

The future of China’s demographic stability and workforce is now in question, and there’s no plausible fix. While the US has better systems in place, the recent cuts to data collection under the Trump administration risk sending the US down a similarly dysfunctional path.

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Transcript

Hey, all. Peter Zeihan here. Coming to you with a woodshed edition of our daily videos. Today we’re taking a question from the Patreon crowd about China. Specifically, over the last couple of years, the Chinese have steadily revised down their estimates of their total population, with Chinese statisticians, government statisticians regularly opining now that they’ve over counted the population by at least 100 million people. 

And a lot of private estimates say that the over count could be as many as a half a billion. And, well, this is not my, projection. I have no way of doing a snout count of the Han Chinese. The question is, you know, how how do you lose that many people? 

Really? If you want to sum it up in one word, it’s fraud. Which the Chinese are very good at, especially at the government level. There are certain points in your life where the government becomes aware of your existence. In the United States, that’s when you’re born. That’s when you die. That’s every year when you pay taxes is or when you get a Social Security number, when you get a driver’s license, things like that. 

China is not nearly as economically developed as the United States. And government services are not as robust. So there are fewer points where the government becomes aware of your existence. And birth is not one of them. A lot of people in China are still born in either rural hospitals or maybe not in hospitals at all. 

The first time the Chinese become aware of you is when a doctor gives you your initial set of vaccinations. That is a census point. The second time they become aware of you is when you show up for your first day of primary school, think kindergarten, and then the next time they become aware of you is not until you pay taxes for the first time, which if you’re going to be blue collar, it’s probably around 16 to 19 and it’s going to be white collar. 

That’s probably going to be around 21 to 24. So those three points, well, here’s the issue. The doctors have falsified their documents for the immunization, saying that they’ve given more immunizations than they have because they get paid per shot. And then when you get to primary school, the local governments have lied about how many people have showed up for school because their government subsidies are based on the number of people in their province, and this is the primary method that they have for collecting census data. 

So these two first points at, when you’re an infant and roughly age five, the data has been fabricated on a massive scale. And the thing is, the national government in China did not figure this out until their own data didn’t match up. And remember, if you dial back about 25, 30 years ago, that’s when China was in the midst of the early stages of its industrial boom. 

Everyone was working in manufacturing, and they had just started in a big way, building out their white collar workforce, starting with their educational system. So since roughly 1992, but really not picking up until roughly the year 2000, the Chinese went very big into white collar training and thinking that they were going to evolve into a services economy. Now, that didn’t work out for them, but that’s a different issue. 

Bottom line is they established a system of training, tertiary education, college and grad school where a huge number of people were drawn out of the workforce and stayed in education for two, three, 4 or 5, six more years. And so the Chinese didn’t get their first data point as to how many people they had. The federal government didn’t get their first data point until how many people they had, until these people turned 21 to 24. 

Well, if this process started in roughly 2000, they didn’t get their first real data until 2021 to 2024. And that is the window when the Chinese started looking at their data at the national level and realizing it didn’t match up with the data they had been getting for 20, 25 years from the local level, that the number of kids that they’re supposedly born of blacks 20 years actually worked. 

And the result is a difference of at least 100 million people. Which means if the Chinese want to fix this problem today, they won’t get more workers for another 25 years. Because first, you have to encourage people to have more kids, and they have to have more kids, and then they have to grow up and 

Fixing the statistical system is a little late. That should have been done, you know, 20 years ago, but bygones. Now, the result here is that the Chinese data 25 years out of date, basically grossly overestimated the number of people that they have that are 25 and under. Suggests that the Han ethnicity is, well, to be perfectly blunt. 

Do they have not had enough live births to even continue it? And now that they’ve discovered it, basically everyone in China who’s over or under age 40, so roughly 25 to 40, they’d have to basically have five kids if they were going to save the ethnicity this century. It’s that bad at this point. Can’t really fix that with policy. 

And for those of you is like, oh, those stupid Chinese. That could never happen here. Well, yes, we have more data points. Things like driver’s license. Yes, we collect better data at the local level because in the United States, local and state authorities have the authority to tax in a way that local governments in China cannot. 

So local governments basically just get a big subsidy from the federal government every year here, there’s different stages of income at different stages of government. So the data is much better. But one of the things that the Trump administration is doing with all of its cuts is basically going after statisticians because it’s perceived as something that is kind of a waste. 

Now, I personally find that horrific. So we’re not collecting data anymore on disease transfer. We’re not collecting data anymore on energy, inventories. We’re not collecting data anymore on fraud. And we’re not even enforcing white collar fraud laws that are on the books. So we are setting ourselves on a path towards Chinese level statistical dysfunction. There are a lot more safeguards. 

There are more points of contact with the population in government than there are in China. The sense of fraud has not become ingrained in society here like it has there, but we are absolutely going the wrong way. Does this mean we’re going to be missing 100 million people in 50 years? I doubt it, but the idea that a government can function if it blinds itself, that’s a bit of a stretch.

The Fire Hose of Chaos: Xi’s Power Chokehold

Photo of Xi Jiping

Xi Jinping continues to push China closer and closer to that scary edge they’ve been staring at for quite some time. So, what will the fall of China look like?

History shows that over-centralized authority leads to progressive breakdowns, fragmenting the regions, and eventually warlords pop-up all over the place. But things are different now. China has industrialized, allowing it to sustain its large population. Once this infrastructure begins to falter, mass starvation and depopulation could follow in short order.

Xi’s extreme centralization has kept him insulated from the truth and unable to make informed decisions, which will likely speed up the rate at which China falls.

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Transcript

Forthcoming….

The Fire Hose of Chaos: China’s First Domino

As the pressure within the Chinese system continues to mount, you can expect to see signs as the first few things begin to crack. Those first pieces to slip will be manufactured goods, processed materials, and services.

The manufactured goods we all think of first are the consumer goods – aka all the crap that you use daily. Sure, we will face shortages on these things, but they can be replaced with time. The more critical side of manufactured goods are industrial components, like machinery and transformers. These will be harder to replace and are key to the reindustrialization that needs to take place in the US. Exports of processed materials like aluminum and lithium are dominated by China, and the US will face massive headaches if that goes offline. China’s lesser-known global tech role will erode if there were disruptions to hardware imports or further tightening of trade restrictions.

In a normal system, we would be able to see this collapse coming. However, thanks to Xi’s cult of personality, the rest of the world has a bag over its head and is in for a rude awakening.

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Transcript

Hello. Peter Zeihan here coming to you from Arches National Park. Continuing on with the fire hose series, looking at China specifically, I thought it would be good to talk today about the things we need to look for as the Chinese system cracks apart under the strain. First up is manufactured goods. 

Basically anything that’s assembled, but you can break this from our point of view, into two big categories. The things that we’re most likely to notice because they’re consumer products and those that are not on the consumer products. We’re gonna feel that now, the last vessel that was carrying, pre tariff shipments has already docked in Tacoma. Another one similar has already docked in Los Angeles. And Houston. Savannah and New York will get their last ones over the next 2 or 3 weeks. 

So we’ll be seeing product shortages, start in the West Coast, moving to the Gulf Coast than the East Coast over the next three weeks, and they’ll basically cover the entire country within five weeks. So we’re going to have significant shortages of pretty much all of the day to day stuff that you’re used to getting. There is one exception there, and that is electronics because the, U.S. tech world was able to convince Trump to put an exception on things like, you know, iPhones and all that good stuff. 

New tariffs are coming on. Those things just hasn’t happened yet. That’s a issue for another day. And while I say that this is, most noticeable, it’s probably the less important of the things that come out of the Chinese system from a manufactured goods point of view, because there are substitutes, they may cost more. It will take upwards of three years, for them to saturate the market the way that the Chinese products have and will take probably longer for the United States to make their own. 

But most of these things aren’t mission critical. A much bigger issue is the more invisible products that are manufactured that do not go onto your shelves, but help the system run. This is really machinery is going to be the biggest category. If you’re going to build out your own industrial plant, you have to build the things that allow you to make the things. 

And while the United States is the world’s largest producer of machinery overall, if you’re going to double the size of the industrial plant in a short period of time, we would basically need to see Houston do three and four times the amount that it’s doing already. That just can’t happen on anything less than a 5 to 10 year time frame. 

Some product in there that you are really, really going to notice. Is anything in the electrical space, most notably transformers. The Chinese are the world’s largest exporter of transformers, typically at the low end. But you know, if you need the power grid to expand. None of this works without that. So the US is in this weird the situation where the Trump administration has basically forced us into a very, very, very, very, very quick industrialization. 

Plus, something that would normally take 10 to 20 years. We now have to do in 4 to 5. And that means expanding the grid by a minimum of 50% in three years, which I think is technically impossible. And now we have to do it without the stuff that was coming out of China. About the only bright spot on this particular subtopic is that with the tariffs at the moment in abeyance because of the short term deal that was recently struck in Geneva, those parts will start moving again. 

But again, there’s going to be a three month lag before we can get any of it in, which means a three month lag before we can do any serious re industrialization. 

Okay. Second topic. Processed materials, intermediate goods, aluminum, lithium, things like that. Chinese is the world’s largest producer of all of them. In many cases, controls the majority of the global market for exports. Now, I have no reason at the moment to think that any of this is in any meaningful danger. But it’s more of a warning. 

The Chinese system was terminal before this trade war began. The trajectory has definitely steepened, and we need to start thinking about what a world without the Chinese inputs looks like. And that is one where we really just don’t have them on a global basis. And specifically here in the United States, where we’ve basically been giving out of that business for a very long time. 

Similar situation in Europe, not quite as extensive, in the negative in Japan, but not far off, when that happens. And I don’t think that’s going to be this year. But when it does, we’re going to find ourselves in a lurch, because all the things that we need in order to build out, the industrial plant that we’re going to need post globalization, post Trump, whatever you want to call it, will be gone. 

And we’ll have to start from scratch with almost nothing to work from. So when that happens, that is when the product shortages get severe. That is when the inflation gets like crazy. And that’s when the U.S. industrial experience goes from one of growth to one of stagnation on a secular basis until it’s fixed. 

And finally services. Now this is another one of those that isn’t going to be very visible to Americans, but it is going to be visible on a global basis. China is not a services economy, but it still has a billion people. And that means it has a robust services to service its own needs. Really, all we see on the American side of things are, very, very visible exceptions like, say, TikTok. 

But on a global basis, the Chinese provide a lot of the backbone technical services that make the developing world run, especially in the poorer states, most notably Africa. So while the United States has Apple and Microsoft and Meta and all the rest, the Chinese have their own ecosystem. And that ecosystem dominates a lot of the international space. What the Chinese cannot do is keep it running in a trade war, because the Chinese are wholly dependent upon the hardware that is imported from the rest of the world, especially the high end stuff that allows them to make low and mid grade semiconductors with some degree of foreign involvement. 

Now, the Chinese have made exemptions to their tariff policies so they can keep importing that stuff, which is primarily coming from the United States. But it’s only a matter of time before someone as prickly and transactional as Donald Trump ends those exports completely. And at that point, you’ll see a not so slow degradation in the ability of the Chinese to service their own population as well as everyone else’s. 

Unfortunately, we’re not going to be able to anticipate any of these breaks until they actually happen. Part of the deal with Chairman G’s cult personality is he’s shot the messenger so many times at the bureaucracy when they come across some data that they don’t think their boss is going to like. It’s not that they collect it and just don’t share it with them. 

They just stop collecting it. So we don’t have good death data. We don’t have good employment laid out by province or by sector. We don’t have information on land sales, which is the primary method that local governments use to raise, funds. We don’t have good agricultural production data because, you know, if it goes bad one year, that looks bad. 

So they just start collecting it. And so the government no longer has the core awareness that is necessary to help shape decisions. And for those of us on the outside, even independent efforts to generate information have been broken down. Most consulting firms in China have been closed down, especially the foreign ones. And people are basically left trying to kind of come up with a proxy. 

So they look at to see what electricity generation looks like, to extrapolate what economic activity might be. And my personal favorite, they’re using gym memberships as a proxy for population numbers and for employment because unemployed people don’t go to the gym, apparently. Anyway, that sort of disconnect because of ideology and ego and cults as making it almost impossible for us to figure out what’s going on under the hood in China and everything that’s going on international affairs and everything with the Trump administration, everything with trade is simply pushing us closer and closer to the edge that we can’t even see anymore.

Aging Populations and Which Countries Look the Worst

Note: This video was recorded during Peter’s last hiking trip

Many countries are on the brink of crisis. No, I’m not talking about political issues or potential wars. Instead, I’m looking at the aging population crisis facing a number of countries around the globe. Let’s start with Japan.

Japan is the oldest country globally, with 10% of its population over 80, yet they’ve managed to mitigate the impact this has had. The Japanese have adopted policies that extend working lives, improve health care, and encourage younger generations to have children…and there are plenty of other countries who could take some lessons out of Japan’s playbook.

Italy and Germany are aging more rapidly and could put some strain on the European monetary union. China could very well face a civilization crashing event due to its inability to handle its older population with poor social security and weak health care system. Korea is also aging quickly, but I’m optimistic about their ability to innovate their way out of this pickle.

While there’s not a lot of positive in this one, those countries that are bit behind in the aging process will at least have some guinea pigs. And If anyone is looking for a career with solid job security, I suggest pursuing something in hospice or elderly care…

Prefer to read the transcript? Click here

Transcript

Hey, everybody. Hello from Lewis Creek. Today we’re going to talk about demographics, specifically old people. The stereotypical case is Japan, where today 10% of the population is over 80 and fully one quarter of the population is either retired or qualifies for retirement. They are by far the oldest country in the world. However, they saw this coming back in the 1980s after having a birth rate that had been really low for nearly a century. 

And so they started extending working lives, better health care to make people keep their minds rather than fall into dementia, better child care. So the people who do want to have kids can try, and above all, ways to keep older folks at least engage part time within the workforce. All of that has allowed them to extend the useful working life of your average citizen, while also increasing the birth rate to a degree that they are no longer the fastest aging society in the world. 

There are now, like 20 other countries that are aging faster, including Thailand, Korea, China, Italy, Germany, Spain, Poland. It’s not that these countries are past the point of no return, but it’s time for them to start thinking about what happens next. Because while they may have seen this coming decades ago. They haven’t done squat about it. A couple of countries to keep your eyes on. 

Number one Italy. Here is a large country with an ancient population that’s getting older by the second. The oldest in Europe, and they’re in a monetary union with the rest of the Europeans. At some point, the additional outlays that are required to maintain an elderly population are going to crack the European system apart. Germany is just a couple of years behind Italy. 

So we’re going to see the Germans go from a minute payer of Europe to a net pay. That changes everything about what makes Europe work. Another country to watch is China. Every time they update their data, it gets worse and they may well now have a demographic structure that’s not too far behind Italy. And this is a country that doesn’t have a social security or pension system worth knowing, or a decent health care system. 

So when this goes, you basically had the Chinese lose their entire workforce in a very short period of time. I would expect that to be a civilization crashing event. And then finally there’s Korea, which is also aging very, very quickly. Maybe even just a touch faster than Italy. The reason I would say Watch Korea is if any country can figure out how to adapt to this, it’s the Koreans. 

This is the country that when they decided to get into the supertanker business, didn’t bother building a supertanker drydock. First they built the supertanker in two halves, in two different drydock and then welded together. The Koreans have a habit of defying physics to make things happen. And if anyone can find a path out of this, it’s them.

The Fire Hose of Chaos: The “Deal” With the Chinese

Trade tensions are taking their toll on an already fragile Chinese system. The US is dealing with self-sufficiency problems, but for China, it is an existential question. Will this new deal change that?

The Chinese economy relies on cheap capital to keep people employed and distracted; the idea is that social stability will keep people busy enough to avoid unrest. Surprise, surprise, that system is unsustainable. Throw in all the other issues plaguing China and you get a sticky situation. Now, enter Trump.

Round after round of extreme tariffs might be hurting American consumers, but that’s nothing compared to the death blow it is dealing to China. The entire Chinese model depends on exports, especially to the US, and the rest of the world can’t make up for that. But this new deal that’s emerged has walked back tariffs a bit (even if it’s largely symbolic).

This temporary relief from the tariffs will buy China a little time, but the fundamental issues haven’t changed. Oh, and the US is still going to get hit with a recession. Sorry to burst your bubbles.

Prefer to read the transcript? Click here

Transcript

Hey, all. Peter Zeihan here coming to you from the car. The snow is gone. So that means it’s hiking season. 

The first stop is, Utah. Anyway, we’ll be doing some more pieces as the trip continues. But right now, we need to get back to China. So we have seen a number of policy shifts out of the Trump administration in its first few months in office. 

And by far the most significant one is, of course, in trade. And we’ve spent the last couple of weeks going through the impacts of that on the US economy, and now we’re going to shift to the second largest economy in the world, which is the People’s Republic. The situation here is not minor. I mean, in the United States, we have been on the edge about industrial production and import self-sufficiency and all those good things that are worth having conversations about. 

But for China, the situation is far more existential. You see, the Chinese economic system is based on political stability. The, bribing the population. Basically, anyone who has cash, whether it’s a central bank or a mom and pop operation, that cash is forced into certain investment vehicles so that there can be cheep, cheep, cheep, cheep, subsidized cheap capital available for any entity that is capable of employing anyone. 

The theory is pretty straightforward. China has a history of being part of the region’s coming, their way of rebellions, and since the system has never had a way to transfer power from one generation to another, that has really worked. The best way to make sure that everything holds is to make sure that everyone is gainfully employed and it doesn’t have to be a real job. 

It just has to be something that keeps people doing something for most of the week so that they don’t get together in large groups and go on long walks together. Something the Chinese government is very familiar with because that’s exactly how they got their jobs anyway. So the capital structure is deliberately tilted towards this sort of robust, artificially cheap capital system. 

It means that the rate of returns on capital are very low, which means the entire system is kind of creaking along everyone’s style. But it means everybody’s got a job. The thing is, is if you invest a bottomless supply of someone else’s money into an industrial plant, it’s not going to be particularly efficient. And B is going to produce a lot of stuff that is not geared towards the local economy. 

And C, the local economy doesn’t have the capital that it would be needed to purchase it anyway. And that’s before you consider China’s demographic problems. Now, that they have more people over age 53 than under 53. Simply having consumption at all is kind of hilarious and so no shock. 

We’ve actually seen consumption go down in the last six years. One of the fun things about Covid is it kind of put everything on hiatus for a few years in China, because of the lockdowns, and none of the statistics really matched up with what we had before. And it’s only in the last 18 months that that’s far enough in the rearview mirror that we have some idea of what the numbers actually look like in China, and they’re all really bad. 

So along comes Trump and puts up a series of tariffs that basically function as an embargo, 185% was the peak in that sort of environment. Trade between the United States and China basically arrests. And while that is a problem in the United States, from a consumer point of view, it will absolutely trigger a recession in China. It’s the kiss of death, because the United States is China’s number one consumer of Chinese exports. 

Exports that they can’t consume themselves, which means that China has to be export lead no matter what else, because it can’t consume the stuff itself. Now they will they have they will continue to try to dump that product on other markets to get the income. But the rest of the world combined simply doesn’t have enough spare consumption to absorb what once went to the United States. 

And that’s before you consider that a lot of these countries are becoming more protectionist anyway as the world globalized. So you dump the product, they start putting up their own tariffs. We saw that last year with the electric vehicle craze, where the United States was one of the first countries to put up barriers, but then the Europeans followed the Canadian style. 

Basically, anyone who has an auto industry at all, including the Brazilians and the Indonesians and the Russians, and we basically just saw China cut out of all of the markets, and they started chopping up the cars to get the battery packs to put into other things. We’re gonna look at something like that on a much larger scale this year, and we’re already hearing reports of companies closing, factories shutting down, warehouses already being full across the length and the breadth of the Chinese system. 

Not so much in electronics, because the Trump administration issued a waiver for that specific subcategory. But that’s only about a fifth to a quarter of the products that the Chinese used to produce. So there is no version of the deal that the Trump administration would accept that addresses the issue as Trump defines it. And that’s a trade deficit issue that would also allow the Chinese to solve their problems in the way that they define it, which is a mass employment and export problem. 

So we really do have the irresistible force meeting a unmovable object here, and there’s no clean way forward. And yet and yet and yet a couple of days ago, we got a deal. Well, let me explain what that deal was. The deal is to dial back most of the tariffs to roughly where they were the day before Trump announced Liberation Day. 

And that’s the entire. Oh, and this is exactly what we should expect from the American side, because the Trump administration still wants it hasn’t staffed up. And your typical real trade deal with a country that does not have an agricultural sector or anything particularly sensitive, which to say that China takes about 18 months and we’re only getting started on this process. 

What the Chinese are hoping for is they can do some version of a repeat of the phase one trade deal that was done by the Trump administration the first time around, and in that deal, there were product quotas. There were changes to intellectual property laws. There’s a long list of things that the Americans considered irritants in the relationship that the Chinese agreed to. 

And so they signed a deal and then ignored it completely because the Trump administration had no bandwidth to actually enforce the deal. And things just went on their way this time around, the Trump administration doesn’t have 5% of the senior staff that it had last time. One of the reasons it’s taking us so long, just to get to the point where they’ve agreed to talk, is that there’s no one on the US side to even answer the phone, and so real talks maybe will now begin. 

And if the real talks follow the pattern last time, it’ll be a year before we get the phase one trade deal that the Chinese will then proceed to ignore. The Chinese are betting that the Trump administration is bad with so slow out of the political environment at home is so toxic that the Trump administration will simply be tangled up in other things, and they can go back to some version of what they would consider normal, which is where they were on April 1st. 

Now, does this save the Chinese system? God, no. Everything about the Chinese system is terminal. The demographics alone suggest that this is a country with, at best, eight years to run. And we’ve already had a number of trade policies out of the Trump administration targeting China. We are now in our 128. Oh my God, a trade policy. All for all for this administration. 

So the rules are changing. Investment is stalled in the United States because nobody knows what to do. But as far as the Chinese are concerned, this does give them a little bit more bandwidth, allows them to stall and perhaps a little bit more. If the 145% tariffs would have stuck, we would’ve been looking at for maybe five years. 

Tops of the Chinese system could exist before the employment system simply imploded on them. They needed something, and the Trump administration has given them something. The question is, how long will it last until we have our next hiccup at the white House? 

Oh, and one more thing. This doesn’t deflect the, forecast that I have of a recession in the United States at all. Assuming that Trump means what he said with the return to some version of normal tariffs that we had a few weeks ago, and assuming that everyone in China gets right back to work immediately, and assuming that all of the ships that haven’t crossed the Pacific are still there waiting. 

And remember, we’ve had three times as many ship cancellations on the Trans-Pacific route so far as we did during all of Covid times. Three assuming everything goes back to normal. The first product that leaves China now isn’t going to actually hit shelves throughout the United States until the first week of October. So we have at least been where we have a problem with inflation, where we have a problem with lack of growth. 

And that’s before you consider all the other factors that are going on, because it’s just this is just one thing, that has changed a little bit and everything else is going full bore.

The Fire Hose of Chaos: Chinese Edition Intro

Chinese flag over a building

Today, we’re launching into the next phase of our “Fire Hose of Chaos” series, shifting our focus from the US and onto China. Trust me, there will be no shortage of chaos in this series either.

The Chinese have built themselves up to be one of the most powerful countries in the world, but there are cracks in the foundation. The demographic issue is the largest crack, thanks to rapid industrialization, urbanization, and the one-child policy. And then the other issues start to pile on.

An aging and shrinking workforce has left Chinese manufacturing uncompetitive. Decades of financial mismanagement has created a fragile and unsustainable economy. Chinese agriculture is massively inefficient. And don’t get me started on the Yuan and the capital situation.

Get ready for a whole lot of dysfunction and chaos, because China was heading towards this scary collapse long before Trump came into the picture.

Prefer to read the transcript? Click here

Transcript

Hey all. Peter Zeihan here come to you from Colorado. For the last couple of weeks, we’ve been doing a series. I’ve been calling the Fire Hose of Chaos about how the Donald Trump administration’s policies are changing the American economic outlook sector by sector. And, short version is, now, a lot of you on Patreon have written in and said, hey, hey, hey, we don’t want to talk about the United States anymore. 

Think about the rest of world. I’m just like, you know, patience, grasshopper. We start at the top with the future of the most powerful country and the most powerful economy. And then we’ll move on to number two. And that’s what we’re gonna do this week. We’re going to start talking about China. Now, for those of you who need the refresher before we go into all of the details of the day, China is in a really bad spot. 

There are many, many, many problems, but the dominant one is demographics. Birth rates have been so low for so long for a mix of reasons fast industrialization, fast urbanization, and the one child policy that China’s birth rates have now been below that of the United States since 1991. Their population probably slipped below India, sometimes between 10 and 15 years ago. 

China’s own statisticians think now that they’ve over counted by at least 100 million people, maybe as many as 300 million. And best guess is, at the moment there are more people over age 53 than under, and all kinds of things come from that. But for the purpose of the firehose series, I think the single biggest one is that the Chinese are longer economically competitive in any manufacturing subsector. 

Once you factor out the fact that they’ve actually built the industrial plant, which is $37 trillion, that’s not nothing. But their labor force has gotten older and smaller without getting enough better. And so now we have labor costs per unit of production in China that are two and three times what they are in Mexico. And the Mexican labor is more highly skilled. 

So anything that leaves China doesn’t come back and the tariffs are absolutely going to accelerate that process. And this carries on into everything else. And there are many other problems. Consider finance for example, the Chinese have increased the amount of credit in their system by a factor of 40,000, since 2000, which is like far more than Enron ever did. 

And that leads to a collapse sooner or later, probably sooner, now that we’ve got the trade tensions and that shapes everything else. So, for example, if you just continue to expand your money supply, like China has, to the point that it’s triple in absolute terms what the U.S. money supply is, and they’re not even a traded currency. 

You start turning capital into a political asset rather than an economic one. And when you spend an economic assets like it’s a political force, you don’t do it on anything that is really worthwhile. So the Chinese use it to ensure mass deployment so that their people are quiescent. That only work so long is that there’s something for them to do. 

It also creates the housing sector, which is a legion of ghost cities, and it makes every economic sector they have remarkably in efficient, with the worst one being agriculture on a capital rated basis. The Chinese agricultural sector is the least efficient agricultural sector in human history. And it’s completely dependent on foreign inputs. You put all this together, and there was no way that the People’s Republic of China was going to survive as a unified government. 

And there’s no way that China, as a state would survive as a unified country just like 8 to 10 years from now. And that is before Donald Trump arrived. Now they have a lot less time. We’ll go through some of the specifics starting tomorrow.