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…

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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.

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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.

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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.

The Question of Leadership…And Management

Donald Trump and Xi Jinping at the G20 Summit

Everyone gets mad at me for critiquing the leader that they like, but listen…I’m out here roasting everybody. Whether it’s Obama, Trump, Xi Jinping, or Grandma, nobody is safe. Okay fine, we’ll leave Gram Gram out of it for today.

Each of these three leaders has damaged long-term functionality of their respective governments. Obama was incredibly intelligent, but lacked the managerial skills to achieve bipartisan cooperation. Xi Jinping is paranoid and obsessed with preserving his power, which led him to purging the Chinese system and creating an overly centralized system that is disconnected from reality. Trump has adopted the worst qualities of both of these other leaders and brought them to his second term in office, results are obvious in daily news…

At least the US only has to deal with Trump for four years. The Chinese have no end in sight for their leadership crisis and are rapidly approaching demographic collapse. Hopefully the US can learn something from the chaos that will ensure in China, and avoid a similar fate.

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Transcript

Hey all. Peter Zeihan here. Coming to you from Colorado at the Denver, Colorado airport. Today we’re talking about leadership. There are a few things going on. But I want to talk about three of my least favorite, leaders that are on the public stage right now. A lot of people. And all of a sudden. First, to establish my bona fides, I consider myself to be a political independent, which means that I think that I can look at politics in objective manner.

It’s even handed. What that really means is that everyone assumes that I’m partizan for the other side. You know, it’s just my personal cross to bear. But let’s start with somebody who is no longer in power, and that’s Barack Obama. Barack Obama is one of my least favorite leaders of the modern age, largely because of his lack of managerial skills.

Now, it’s not that he’s not intelligent. I would argue that he is the smartest president we’ve had since Jefferson. And he gave a lot of kind of exit interviews in his last year as president, where he demonstrated that he really did grasp how everything works, like why the Israeli-Palestinian conflict really had no meaningful conclusion that could ever be resolved.

Why green tech in its current form actually increases carbon output rather than decreases it? Whether it was economics, politics or strategy, he really did understand how everything fit together. But he really hated people. He hated being in the same room as people. He hated having conversations with people. It was a constitutional law professor. He wanted to lecture from the front.

He wanted that to be the end of it. So we actually thought when he was elected, that just because he was there, that we’d have bipartisan cooperation on everything and everything would be easy. And since he didn’t have meetings with anyone, that just didn’t work out. So of the presidents who served full terms going back to Foundation, no American president met with his cabinet or went to Congress fewer times than Barack Obama.

And so for eight years, we basically didn’t have a president. But that didn’t stop him from thinking that he was the smartest person in the room. So in his first meeting with the Joint Chiefs, he basically told everyone that he could do all of their jobs better than they could. You know, let’s let’s assume that that’s true for a moment.

So, you know, my understanding is the presidency is not a part time gig. So even if you were the best person for every job, you can’t do them all at the same time and do your own. And so he never delegated or sealed himself in the white House, basically built an information wall around him and just sat there for eight years, and he’ll go down in history as one of the worst managers in the worst presidents we’ve ever had.

Next up is chairman Xi of China, who, like all world leaders, is a bit narcissistic, but his issue is power preservation. Whereas Barack Obama always insisted that he was the smartest person in the room and was so confident in his arrogance that he basically just could be in a room alone. He is always concerned about what the next threat happens to be from internal services, because if you look back on the long stretch of Chinese history, lots of coups, lots of assassinations, and he knows that in a ossified political system like the Chinese Communist Party, it’s only a matter of time before somebody else decides to kick him off.

So his policy was to preemptively stop that. So he purged. He started with the local regional governments. He worked with the federal bureaucracy. More recently, he’s taken on academia and the business community in the military. And really, the last time he had a meaningful advisor who would tell him the truth has been 6 or 7 years ago now.

And so he’s been making policy in a box all that time. And federal policy out of China has become more and more erratic and less and less connected to reality. You know, part of this is in the geography of China, it’s a big place with a lot of variety. And the saying is that the emperor is far away.

And so you get China spinning between these two extremes of over centralization, which is definitely what we have now, or when the emperor or the chairman loses control, all of the regions take out power and basically become five terms of not nations to themselves. There’s really no good middle ground. At least there hasn’t been since, Chairman Deng back in the late 70s. Throughout the 80s. into the 90s. Well, sorry. Ding. Lived a long time. Anyway, what this means is that leadership in China is completely broken, completely isolated from the wider world. And the federal bureaucracy in China has seen so many of their messengers shot, in some cases, literally, that they’ve basically not just started to self-censor, but to self guide.

So if you look at the statistics the Chinese system collects, it’s not as robust as you would expect for a country of China’s level of size or sophistication, because if they present a data point to the Chinese premier that he doesn’t like, the Chinese simply stop collecting that statistic. So there’s no longer any information on things like local political biographies, because that would allow people to start climbing the ladder and getting into the system.

Same for college dissertations. Same for death rates. Same for the bond market. It might generate bad information. It’s not that they collect it and sit on it. It’s it. They don’t even collect it anymore. So they can never have that awkward moment with the boss. And then finally you’ve got Donald Trump. Now, normally when a leader loses an election and spend some time out of power, they try to hire some new people who fill in the gaps of their knowledge base, have skill sets that they don’t have, especially built around things that they want to achieve.

They build up a cadre of legislation so that when they get back into power, they can hit the ground running, modify the laws and Congress, and make sure that the vision this time outlasts the president for at least his current term.

That’s not what Donald Trump did. Instead, Donald Trump purged his inner circle of anyone who knew anything about anyone, including his outer circle, including the leadership of a Republican Party. So it’s just a yes man crowd, and a very thin one at that. You see, when he became president the first time around, he really didn’t expect to win.

And so he tapped the Republican Party apparatus quite strongly, as well as the military for his circle. And when they would inform him of things that he didn’t like to hear, he would fire them. That’s why he went through more cabinet secretaries than any American president in history. By a significant margin this time around, he’s made sure that that can’t happen.

He hasn’t brought in anyone who knows anything. So we have a vengeful, incompetent running the FBI. We have a TV host running the Defense Department and so on. What this means is that Trump has achieved in just a few months, what is taking Chairman XI of China almost 13 years to achieve?

And so what he’s done is basically seal himself in the white House. Obama’s style built a hermetic seal around, and more information can’t penetrate Obama’s style. But then he’s also gutted all of the sources of information that leadership would normally rely upon Xi style. In many ways, we’ve gotten the worst of all worlds. About the only thing I can offer as hope here is that really, most of the purging is at the top of the federal bureaucracy and all of the people down below, you know, the 3 million people in the military, in the bureaucracy that do the day to day.

There’s still there. There’s still a cadre that over time can regenerate the leadership. But that’s going to be a 5 to 15 year process. So take this for what it is. We’ve got three world leaders. Two of them are active that are actively destroying the ability of their states to function, not just during their administrations, but long term.

Now, in the case of the United States, there’s a use by day here. Trump will be gone one way or another within four years. Who knows what’s going to happen next. But in China, who even before the trade war, their demographic situation was so atrocious, they probably only had about eight years left. And now they have to do it without a functional government.

So Xi will be the last Chinese leader, and he will ride this system into the ground, and he will destroy the People’s Republic of China. And hopefully here in the United States on the other side of the Pacific. We’ll look at how that goes down and learn a few things about what to do and what not to do with your government.

The Fire Hose of Chaos: American Brands

Image of the iconic Nike swoosh logo

Many of America’s most beloved brands rely on Chinese manufacturing, but what happens when that goes away?

The impacts and shortages faced will vary based on how dependent each company is on China. There are three groups these businesses fall into: tech firms, consumer brands, and mid-tier companies. Tech firms like Apple, Dell, and Microsoft have complex and integrated supply chains that would be difficult to pick up and move; these companies will need years to rebuild, and they’ll face shortages in the meantime. Consumer brands like Nike, Mattel, and Keurig can be easily replicated. Middle-tier companies like Whirlpool and GoPro will face lots of competition and will need heavy investments to recover.

This disruption was inevitable, but Trump moved it up on the calendar and left companies no time to adapt. So, get ready for shortages, bankruptcies, and inflation. There might be one upside here though, we may not have to see Crocs around anymore…

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Transcript

Peter Zeihan here. Coming to you from Colorado. Today we’re talking about some of the impacts of the Trump tariffs on the American corporate space. There are a lot of companies that sell consumer goods in the American market, American companies primarily, that have outsourced most of their manufacturing to China. And with the tariff policy, we’re basically getting two things. 

Number one, people can’t afford these products anymore. And so most shipments from the United States to China already stopped. And you’ll see that hitting the shelves at some point in the next 3 to 6 weeks, based on where you live in the country. From the point that the Trump administration were to cave on all of these tariffs and just say, you know, bygones, and the Chinese just say, okay, it will then be another six weeks before product starts to return. 

So, let’s say that, June 1st is when that happens, you’re talking about three months without product. For most of these companies, that’s enough to kill them. And even if it wasn’t, the Chinese basically have the technical capacity to take over a lot of the supply chains themselves, because all of the equipment is already in China. 

Most of the intermediate products are already in China. So these are companies that in some form are just going to die in the not too distant future and vanish from American shelves forever. Now, not all of them are the same. They fall into three general categories. The first are products that are more advanced, where the Chinese do a lot of the assembly, but a lot of the product in the intermediate product comes from outside of China. 

These companies have at least a chance to rebuild their supply chain in other countries. But you’re talking about hundreds of billions of dollars of sunk cost for some of them. And you don’t do that in a year or two years or three years. This is five years or more minimum. And that just means that these products are going to disappear until that happens, or they’re just vanished from your lives for probably five years, maybe a little bit more. 

And most of those fall into the category. Apple, Dell, Microsoft and Hewlett-Packard. So if you haven’t gotten your backup computer, do it now, because the inventory that is in the country right now is all that is left. Yes. Electronics have been at least partially exempted, but it’s already too late. And the Chinese are moving to take this stuff over. 

Second, these are products that are on the other end of the spectrum. Things that the Chinese can take over now. There’s nothing that’s particularly sensitive about them. From a technological point of view, it’s just a the brand is what’s special, and it’s the brand that’s going to disappear, or they’ll misspell it and they’ll just make it a Chinese brand. 

And this this is a very long list that includes a lot of consumer products and a lot of clothing. So Nike, Levi’s, Hasbro, Mattel, Ralph Lauren, Skechers, Under Armor, Estée Lauder, Columbia Sportswear, Patagonia, Yeti, KitchenAid, Black and Decker, Stanley Tools, shark, Ninja of At-Home Appliance Fame, Keurig iRobot Ray-Ban Pvt. That’s Hilfiger and Calvin Klein. Newell, which is Rubbermaid and Sharpie and Crocs. 

So I guess there’s at least some bright spot here. Crocs will finally fucking go away anyway. They’re gone. There is absolutely nothing they can do at this point to salvage the production that they have in China. I do not feel all that guilty for any of these companies. Everyone who has been paying attention has been seeing some version of this coming for a long time. 

And I’ve been warning companies like this that the Chinese were going to vanish from the space anyway because of demographic collapse, and they should get out while they can. Anyone who is left has basically lost. And then we’ve got companies that are somewhere in the middle. These are companies where, you know, they’re halfway between Apple and Crocs. There are some parts of the supply chain for some products that are more advanced that the Chinese can’t just walk in and take over. 

So we could see these companies come back after some significant reinvestment. Not as much as will say for somebody like Apple, but they’re going to be dealing with a massive amount of competition in the international space from the Chinese, who can make their lower end products exactly as they used to. That’s fossil, the watch company whirlpool, other white goods companies, GoPro and Fitbit. 

It’s a long list and this is only partial. Now again, some version of this was always going to happen, but Chinese were always going to go away. But the way that the Trump administration has done, the tariff policy basically front loading the penalties and not giving people a chance to adapt means that all of these companies and more are going to break in the American space. 

Most of them will end up filing for bankruptcy, and someone will probably come and buy up the pieces and then do limited restarts of the production lines and other places. That does mean that in the interim, and we’re talking here for the lower tech stuff, a period of 1 to 3 years for the higher tech stuff, probably four or more. 

We just don’t get the product. So one of the big challenges that we’re going to be having in the United States is inflation driven not just by tariffs directed not just by higher capital costs directly, not just by higher labor costs directly, but high tariffs caused by extensive product shortages in the consumer space, whether that is electronics, home goods, apparel, you name it. 

We can recover from this. We can recover from this faster if we have Mexico and Canada and our other trading partners involved. But it’s not going to be quick and it’s not going to be free.

The Russians Continue Stirring the Romanian Pot

Romanian flag

Romania just held its second attempt at the first round of presidential elections, after the initial round was invalidated due to Russian interference. Looks like the Romanians are having some major déjà vu.

Both elections yielded an unqualified pro-Russian candidate surging to the top. Translation: the Russians are meddling, and frankly don’t care about hiding it. The question that must be asked here is why do the Russians care so much about Romania?

Think of Romania as the next steppingstone after Ukraine. If the Russians prevail in the Ukraine War, the next logical target would be fortifying the southwestern flank – aka Romania. The scariest part of all this is that Russia already has a political foothold in all the other countries in the region. Should they push into Romania, they will be at the doorstep of Vienna.

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Transcript

Hey. Peter Zeihan here. Coming to you from Chicago. And before I go and get some pizza, because, we’re going to take a break from American politics and economics and, for the moment, and we’re going to talk about a country that doesn’t come up very often, and that is Romania. Now, Romania just had their second run, second attempt of the first round of the presidential elections. 

The first round a few months ago was canceled. We’ll link a video to that piece here. After basically, the Russians massively intervened to the point that it was just stupidly obvious. And it appears on the surface like that has now happened again. The Romanians do a two round system where everybody gets to run the first round, and then they were to have to have a run off for the second round. 

Now, last time around, the guy in play was a guy by the name of Georgia Screw, who was kind of a nobody. He had been a minor cabinet minister, back in the 1990s, and that was it. Then he vanished from the political scene, barely held down a real job, and all of a sudden, wow, he’s back on the political scene and came in first in the presidential election. 

The Russians basically made up 20 million fake accounts in a country that doesn’t have 20 million accounts on social media. And, canvass the country for him, this time around. The guy’s name is Simeon, and something similar has happened. Semyon is even more of a nobody. He was never in government before, has never had a real job. 

He was a professional protester. So imagine AOC in the United States, if she hadn’t had that job of being a bartender and she just went straight into the presidential election and did well. That’s basically this guy. Anyway, he actually, he sued the government a couple of years ago for accusing him of being a Russian agent. And in the court case, they actually proved that he was a Russian agent. 

So the fact that he’s even allowed to run, you know, Romania, who knows? Who knows what’s going to happen with the specifics, whether or not the Romanians are going to try to do this a third time? I have no idea. But why the hell are the Russians so focused on Romania? Well, it’s a geographic thing. There are two pieces of geography that define this part of the world. 

The first is the Eurasian steppe, just this broad, wide open, about the same size as the United States is in total. That’s flat and it’s open and it’s arid, and you just can’t get much economic activity about it. And that is in essence, Belarus, Russia or western Russia and Ukraine. And so the Russians, being from the Eurasian steppe, the only way they’ve ever figured out that they can be secure is to conquer all of it and eventually get to the zones where you can’t just run across the great wide open and punch them in the face to to a place where there’s a geographic barrier, and that barrier is the second of those geographic items. 

And that’s the Carpathian Mountains, which starts in the northwest at roughly the gates of Vienna, and then wraps along the Slovak Polish border, curving south through the eastern parts of Hungary and the western parts of Moldova and Ukraine, and eventually ending up in Romania and Romania, is where the southern anchor of where these two great features of the space come together. 

And so what the Russians have been after, what the Russians have always been after, is once they conquer the stepped anchor in the gap between the Carpathian Mountains and the Black Sea, where the Eurasian steppe ends. And so if and when the Russians succeed in conquering Ukraine, they’re just going to turn their sights further west and go for the line of countries that basically make the entire periphery of the Eurasian steppe. 

So getting to Finland and the Baltic states right up against the Baltic Sea, getting through Poland up to Vistula, that’s the river that separates the Eurasian stuff from the northern European plain. And then getting up into Romania and Moldova in order to plug the gap access from the southwest. That’s what the goal has been. That’s what it’s always been. 

And they’re using politics as a way to soften up opposition, of which Romania is part of this. Romania is actually the state in the region where they’ve had the least success, if you can believe that. So Hungary is ruled by a neo authoritarian, the name of Viktor Orban, who has been blanket pro-Russian for the last several years, to the point he’s actually using his position as president of Romania to sabotage NATO and EU operations from the inside. 

Next door, you’ve got Robert Fico in Slovakia, who’s trying to become Slovakia’s Orban. But the democratic traditions in Slovakia are a lot stronger than they are in Hungary. And so far it’s very back and forth. You’ve got Bulgaria, where about a quarter of the parliament is so tightly in Russian’s pocket they don’t even have to be directed. They do what the Russians want before the Russians even say. 

And then you’ve got Serbia, which Serbia is kind of a mess, but it’s Slavic and it has been pro-Russian, really, for the better part of the last 200 years. All that’s left is Romania. And if Romania falls, then not only would the Russians have no problem pushing into the Carpathians, there’s a very distinct possibility they might be able to push all the way to the gates of Vienna. 

And that would obviously get a lot of attention from a lot of places. So this is an election and a place that most of you have probably never heard of. That matters hugely, because if Romania falls the entire southeast quadrant of the EU and NATO falls with it, splitting Turkey and Greece off on their own. And we are in a fundamentally different game.

The Fire Hose of Chaos: Agriculture

A tractor working in crops

US agriculture is heading towards a major crisis, and yes, Trump’s trade policies are to blame for this as well. Many of the US ag export markets are closed off, and farmers are feeling the heat.

China has already cut purchases of US agricultural products to (nearly) zero, and this market is likely gone for good. Not long ago, China was the largest buyer of US products, meaning US farmers are losing a huge chunk of change and output will need to shrink accordingly.

The meat industry is reeling. Demand is falling, per-animal profitability is tanking since there’s no export market for byproducts, and overexposed beef producers are in for it. Row crops like soy are in trouble as well since China was the largest market for much of this. Specialty crops like pistachios and cherries will face devastating losses.

The only path to recovery is through an extensive, long-term government support. Think France’s permanent ag welfare. Without it, American farming will face a collapse worse than the 1980’s farm crisis.

Prefer to read the transcript? Click here

Transcript

Hey, y’all. Peter Zeihan here. Coming to you from Colorado. And today we’re going to continue our Firehose of Chaos series about how the Trump administration’s domestic and international policies are affecting the US economy. And today, it’s the agriculture edition. Agriculture in the short to mid-term is probably the sector that’s facing some of the sharpest challenges. And it’s entirely feasible for me that over the course of the next 3 or 4 years, we’re looking at somewhere between a quarter and a third of U.S. producers just going out of business because of the trade war. 

The issues pretty straightforward. Trump has basically picked fights with America is number one, number two, number three, number five, number nine, number 11, number 12, number 14, and number 17th largest trading partners when it comes to agricultural exports. And as a rule, agricultural importers fall into two categories. Number one, those who don’t have a choice, they just can’t grow the food themselves. 

And then those who do have a choice, who can always switch products or switch consumers. And when it comes to export destinations like, say, China or the European Union, they’re definitely in the latter camp. And so what usually happens is that whenever there’s a trade spat for any reason, anywhere, agriculture is usually the sector that is targeted first. 

A couple reasons for this number one, agricultural interests around the world tend to be very politically powerful, and they, can make their desires known to the local political system. And second, people have this wildly inaccurate view of how farmers work that they might be a little bumbling, that they’re a little backwards. But of all the audience that I ever speak to, they are always the most sophisticated and always the ones that look for the most because they have to. 

Everything that they do is dependent upon supply lines and manufacturing and finance Trends go out a year, five years, a decade because of the decisions that they make now are going to reverberate throughout their operations for years to come. And this is true everywhere. So when there’s a trade fight, the other side knows that if they can damage agriculture, they can take producers off for the long term. 

And that’s exactly what is happening now. Specifically, the United States, number one export partner for agricultural produce and meats is China. And because we now have in excess of 100% tariff going both ways on products, U.S. sales to China have functionally gone to zero. And they will not be coming back this year or next year or the year after. 

And considering China’s export dependency and its demographic decline, it is highly unlikely that American farmers will ever have access to unified China again. China will break before that is fixed. And so you’re looking at an industry that is basically tapped out. Pretty much all the growth that has happened in American agriculture since the year 1995 has been from export markets. 

They’ve been a direct beneficiary of hyper globalization, arguably the sector after tech and finance in the United States that has benefited the most. And now that some of their major consumers are simply beyond them, either because of economic stress or the trade war, they’re looking at basically needing to reduce overall output by something around 20 to 25% on a nation wide basis. 

Now that’ll change specifically based on region based on crop based on season. But that is a horrific headline number that the industry now has to deal with. Let me break this down into three general categories. So first, meats, as the world has become richer, they want more protein, whether that is chicken or pork or beef or, fish. 

And the sector that sells the most into the Chinese market is not pork. I’d like to take a little bit of credit for this one. I have been warning the pork guys for years that if they bet the farm on China, they will lose the farm. And in the aftermath of the last trade war with the Chinese during Covid, when, Trump was president, we had our phase one trade deal. 

The Chinese decided that they were going to try to slim down their exposure to the US system. And the pork guys suffered, and they learned their lesson, and they’ve diversified into other markets. Well, the beef guys were like, oh, there’s a protein shortage in China. We can help with that. And they just surged into China and they made themselves exposed in a way they had never had been before. Well, now they’re kind of screwed, particularly those who are operating in the industry. 

That is more export geared. And that’s where the slaughterhouses in Nebraska, South Dakota and Missouri kind of fall in, Texas. There’s a little bit more insulation because most of their market is either domestic U.S. or Mexico. 

And hopefully, hopefully, hopefully, the Trump administration will ultimately salvage NAFTA in some form, in which case their primary export market will be okay. But if NAFTA goes away, then Mexican industrialization goes away and then the Texas agricultural sector goes away. That is still much a TBD, but the kind of stuff that’s locked in at this point. Also keep in mind that not everybody eats the same things. 

So the United States does the select cuts the rump, roasts the tenderloins, or we grind it into ground for burgers, things like that. We we do that for all of our meats. But there are other parts of the animal that Americans like that other people are like, oh, that’s delicious. So chicken feet, for example. Entrails. Oh, Menudo. Or the Koreans are big fan of ass sphincters. Yes, yes. They cut out that little bit, they flip it in and they prepackaged it and microwave it. And they’re just like, know. And I’m just like, love me some Korean food. But no. Anyway, based on the animal and the region, somewhere between 10 and 30% of the proceeds from the sale of an animal comes from those. 

What we would consider undesirable parts that are sent to foreign markets where they just yak it up. Well, that’s gone. So we’re now looking not just at a headline reduction in the number of head of cattle or swine or number of chickens that we need. Also, the profitability per animal just dropped by about 25%. If your business had a drop in income of 25%, what would that do to you? 

And that’s a secondary effect to what’s happening to the agricultural folks in the meat production sector, a second row crop. Primarily, we’re going to talk here about corn and soy. In the short term, soy is the really big hit here. The Brazilians had a great production year last year, so there’s plenty of soy in the global markets. 

And the Chinese will never buy soy from the United States again unless they have no choice. So we’re basically looking at that sale drop very close to zero. The decisions for planting for this year have already been made. So if you are a soy farmer, you are. You’re kind of fucked. There’s really nothing you can do at this point. 

It’s too late in the season. Longer term, soy will do fine because it’s a cheap protein. And as the world, globalized as people are going to do, the switch the other direction for meat back to plant protein. So soy long term looks great. It’s there that corn’s a problem because if you’re exporting corn, it’s really only being used for animal fodder. 

About the only, good thing I can put there is that if you grow corn, you can also grow soy. You actually need fewer inputs for it. You have to worry about a different sort of crop rotation, but you’ll ultimately be okay. But for this year. Ouch. For the soy folks. And then finally, specialty crops. This is mostly an issue for the West Coast, especially for the California Central Valley, but really, there are pockets of specialty crops all throughout the United States. 

Michigan is known for its cherries, for example, apples out of New York. Any time you’re sending a specialty crop anywhere, you’re going to be sensitive to things like currency changes, which the United States isn’t doing so hot. So the prices have gone up, so sales have gone down, or climate, or especially politics. And in the case of China, they have basically underwritten the development of the US specialty crop industry for the last several years. 

The Chinese follow a hyper financialization model where they basically print currency like mad, expand their money supply like mad in order to underwrite their industrialization. They treat money as a political good because that is what is necessary to keep the population employed and therefore not rebelling. Well, that also means that they’re relatively cost in sensitive, because for them, money doesn’t have an economic value like it has in a Western system. 

And so they will pay anything for anything. Well, that means that they have paid for the development of specialty crops throughout the United States, especially on the West Coast, and doubly so in California’s Central Valley. And if you look at what the Central Valley produces, for example, things like pistachios, which I am doing my personal best to establish an American baseline for that. 

Most of it goes to China. And now that is going to zero. So if you’re looking for a zone that is particularly screwed, there is very, very little in California’s Central Valley that is going to survive the next two years because their primary source of demand, the majority of the demand has just gone away completely. Now, can we save all this? 

Well, like I said, agriculture is politically powerful. Trump considers rural communities to be part of his core constituents. But you have to keep in mind a couple things. Number one, Trump has not so far in his term treated his allies particularly well. He’s demanded a lot, but he hasn’t offered a lot in return. So if the farmers are going to get bailed out in a way that they were the last time around, Trump has to go back to Congress and get more money. 

That hasn’t happened yet. I’m not saying it can’t happen. I’m not saying it won’t happen. I’m saying it hasn’t happened. And if you’re going to keep all of American agriculture above water, it’s going to take a lot more money than last time. And more importantly, it’s going to take it for a lot longer. China is not coming back. 

Globalization is not coming back. The ability of the global system to absorb American agricultural production is not coming back. And until such time as we are on the other side of globalization and other agricultural producers, most notably Brazil, have shattered. We’re looking at a really hard transition time for anyone in American AG, especially if you’re producing protein or specialty crops. 

The only solution. Is to become France. France gets a lot of crap for good reason for supporting its agricultural sector, even when it is wildly disconnected from demand trends. They see it as a cultural issue. And if we’re going to keep our current slate of ranchers and farmers alive, it’s going to take tens of billions of dollars a year from now on, 

Or we get something about twice as bad as the 1980s farm crisis, which drove ultimately about 20% of agricultural producers out of business in a five year period. Those are our choices.

The Fire Hose of Chaos: The Fed

Seal of the federal reserve on a 0 bill

Jerome Powell has been on the receiving end of Trump’s threats and the markets have reacted negatively to the undermining of the Fed’s credibility. Here’s the full picture.

The Fed is raising rates to combat inflation driven by Trump’s tariffs. Higher rates = more expensive borrowing = slower economic activity. A necessary evil to prevent an inflation spiral. Trump wants rates lowered to encourage economic growth, counter to the Fed’s mandate. There’s no legal ground for Trump to fire Powell unless he wants to alter the Fed’s charter through Congress. Which, to be frank, is a feasible route given a weakened Republican party unlikely to resist.

Stagflation is just the tip of this iceberg. A deep recession is lying just beneath the surface, and Trump’s undermining of the Fed’s independence would only surface more problems.

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Transcript

Peter Zeihan here. Coming from Canada….Coming to you from Colorado. Sorry. It’s been a long week. One of the big things that happened in the week ending April 25th. On a number of occasions, Donald Trump indicated that he planned to fire the Federal Reserve chairman, Jerome Powell. Eventually he backed out and said it was just a joke. 

And he never really considered it. But the damage has been done in the markets are kind of on fire in a bad way. So why does this matter? Well, the Federal Reserve is responsible for determining the monetary policy of the economy. And the tool that is generally gets the most publicity and is most directly relevant to most of us is interest rates. 

When the fed raises interest rates, everyone else in the economy that is involved on the credit side of things raises the cost of everything. Whether it’s your mortgage rate, your car rate, or your credit card rate. And so higher rates means that it costs you more to do whatever it is you want to do, and your mortgage will go up. 

Well, if you get a new mortgage, you’ll be more expensive. You get a new car, it’ll be more expensive if you do a purchase on layaway, it’ll get more expensive. And when you do that, you slow down economic activity. And that is the intent to slow down economic activity, because what they’re trying to do is suppress demand. 

Because if you suppress demand, enough inflation goes down. And courtesy of the Trump tariffs, we have a significant inflation problem that is only going to get more intense in the weeks to come, as the product that used to come in from China is no longer arriving. So we have product shortages. And the fed is anticipating that the Trump tariffs on China, in addition to all the other Trump tariffs, are simply going to generate shortages in supply, and they want to reduce demand to match it. 

So we don’t have an inflation spiral. Trump doesn’t like this. He wants economic activity to be robust. And so he’s pressuring Powell and the fed to drop interest rates in order to reduce those credit costs. 

So the consumption remains stable or even better, goes higher and generates faster economic growth. But if you do that, you get higher inflation. So three things come from this. 

First of all, the Federal Reserve is not going to bend the knee to Donald Trump because it legally cannot. The Federal Reserve Charter as established by Congress is very clear. The Federal Reserve is supposed to achieve a balance between inflation concerns and growth and employment concerns. 

But when the two sides clash, it always should go with inflation, because getting inflation under control can be very difficult and in some cases can take years and trigger massive recessions. But boosting growth is easy. You just make the credit easier and it can come back roaring in weeks to months. So Donald Trump is not going to get his wish here. 

So the threats against the Federal Reserve chair probably going to continue. Which brings us to the second thing the president can fire the Federal Reserve chair for cause. And for cause does not include doing your damn job. So if Donald Trump were to fire Jerome Powell, two things. I mean, number one, it would go through the courts over and over and over again. 

And the federal charter is pretty clear or so. It’s pretty obvious to me that the Trump administration would lose that fight and would be very public and would be very humiliated. And I think Donald Trump knows that. In addition, power would still be on the Federal Reserve Board for another two years. So it’s not like it’s going to generate some sort of activity that is all of a sudden going to be in Donald Trump’s favor. 

And I think he realizes that now. That’s one of the reasons why the threats have stopped a little bit. Which brings us to the third issue. If this is what Trump wants to do, if he really wants lower interest rates, if he really wants a looser monetary policy, he can get that without replacing the fed chair. 

He just has to change the Federal Reserve Charter. And that just requires an act of Congress. In that, considering that he’s basically ripped the backbone out of the Republican Party that is normally in favor of fed independence, it would be a much easier route. So as the economy starts to slow, as inflation starts to tick up to levels that are incredibly uncomfortable, expect a Trump to slam his head in the fed a few more times, and then just go to Congress, and we will find out at that point whether or not there’s anything left in the Republican Party that can stand up to Trump when he makes a very, very, very bad economic decision, because we’re already in an environment where stagflation is our best case scenario. And if the tariffs continue in their current form, much less get expanded as Trump says they’re going to be. We are looking at a very deep, dark recession, just a few weeks from now. 

And gutting the independence of the Federal Reserve will only make it deeper and darker.