Boomers, Xers, and Budgeting

Photo of old commodore computer and retro items

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

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

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

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

Prefer to read the transcript? Click here

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

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

Learn about medshare here

Transcript

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

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

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

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

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

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

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

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

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

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

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

To be continued. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Milei One Year On

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

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

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

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

Prefer to read the transcript? Click here

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

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

Learn about medshare here

Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Intel Keeps Playing Catch-Up with TSMC

Photo of an INtel microchip

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

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

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

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

Prefer to read the transcript? Click here

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

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

Learn about medshare here

Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Next Recession Isn’t Here Quite Yet

Photo of man holding empty wallet

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

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

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

Prefer to read the transcript? Click here

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

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

Learn about medshare here

Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Russia Is Failing Not Failed

Photo of St Basil Cathedral in Red Square, Russia

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

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

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

Prefer to read the transcript? Click here

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

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

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Transcript

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

Romania and the rest of NATO will be fine. 

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

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

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

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

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

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

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

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

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

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

Trump 2.0 – Reindustrialization

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

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

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

Prefer to read the transcript? Click here

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

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

Learn about medshare here

Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I know which one I’d rather see. 

Trump 2.0 – Iran

Flag of Iran

Next in our Trump 2.0 list, we have Iran. This is one of those countries that is quite isolated from the US, so Trump can have a bit more fun with his policies.

Places like Russia and China are complex and require jumping through hoops to have anything stick. Naturally, Trump’s big-talk-no-walk strategy didn’t work so well against these powers, but Iran is different. The country is isolated from the US and the risk of blowback from actions against them is limited.

So, in his first term, Trump put the pressure on Iran by cutting off oil exports. However, they quickly developed a “shadow fleet” to circumvent that. Trump’s next step would be to impose secondary sanctions to disrupt the “shadow fleet”. There’s the option to involve the military with blockades, but that risks destabilizing the global maritime system.

Until Trump and his administration show the capacity to come up with policies that manage the fallout of any new actions against Iran, let’s hope that Trump doesn’t start swinging his sledgehammer too hard.

Prefer to read the transcript? Click here

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

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

Learn about medshare here

Transcript

Hi everyone. Peter Zeihan here coming to you from Blenheim, New Zealand. And today we’re going to do the third in our open ended series of the challenges awaiting the incoming administration of president elect Trump. We’ve already dealt China, Russia. Today we’re going to tackle Iran. And unlike China and Russia, who had a great record of manipulating the former and future presidents in their first term, which really set back American strategic policy in both regions quite a bit. 

Iran is on the opposite side. And the reason is pretty straightforward. If you want to reign in Russia, it requires a coalition of powers to cut off technology and transfer and energy purchases. It was integrated into the system and the sort of coalition building that is required to contain or beat back a country like Russia is extreme. 

And Trump isn’t a builder. He can’t manage his own government. He can’t, direct things. He’s not a guy who has a command of the details, or allows the people who have the command of the details to influence policy. It’s a one man show with Trump and the details that are required. The breadth of expertise that is required just isn’t allowed to function in his administration in China. 

Same general topic. But instead of allies, although you do need allies to contain China, the technical expertise that is required is is extreme. The American Chinese relationship is one of the deepest economically in human history. And the idea that one person, no matter how intelligent, could see the INS and the outs and the consequences and even perceive the tools is kind of silly. 

So Trump would go for a big deal and then he’d walk away. The Chinese would never implement the deal. And there we were. So even at the height of Covid, when we realized that something like half of the medications that Americans use every day, especially the cheaper ones, were being made in China, even when there was bipartisan support to do something about it. 

He could not lead in order to bring that stuff back. Same with protective gear. Anyway, it made policy on China very difficult. Policy on Russia. Very difficult because there was never any consistency. There was never any follow through. None of that really applies to Iran, because ever since 1979, when the Iranian revolution occurred and the mullahs came to power, ever since then, the United States has basically separated Iran from everything that it cares apart bit by bit over the last eight presidents. 

So by the time you got to the Trump’s first term, there was no fear of a blowback to the American economy if you were just to crush Iran completely. And so we got what we called a maximum pressure campaign, which was nothing of the sort. But it did succeed in driving almost all of Iran’s oil exports out of the normal financial system, meaning that the Iranians could still export, but they had to use alternative means. 

They had to build a shadow fleet. 

And it’s not somewhere between 10 and $30 a barrel off of their margins for all the crude that they did export. So a lot of it did go underground. 

It didn’t go away. But the profits that the Iranians were able to reap from it dropped precipitously. And all the while in the background, the American Revolution was churning the pace, displacing some of those barrels on the international market and certainly dropping the price of global oil prices to hit the Iranians with a double blow. Now, since then, the Iranians have taken a lot of hits. 

Hezbollah and Hamas are in a box. Basically, Syria is gone. These are all proxies and allies of the Iranian system, the most capable militant force that is allied with Iran right now outside of Iran’s own borders or the Houthis, which I would argue are some of the most incompetent militants in the world. If it wasn’t for the equipment that was coming in from Iran, we wouldn’t care about them at all. 

And so taking Donald Trump’s sledgehammer approach to, to, diplomacy and strategy probably doesn’t work very well in places like Russia and China. But in Iran, it really could. Because if you were to somehow remove Iran’s crude from the market, which, based on the data, is somewhere between a half 1,000,001.5 million barrels of exports, there would be a ripple through global energy markets. 

Yes. But this isn’t the 1980s when 4 million barrels suddenly disappeared. And this isn’t China, where it’s the largest trading partner of a number of countries in the world, including, most of our allies, in Asia. So you smash China, everyone feels it for years, especially if they’ve been prepared. 

If you smash Iran, the global outcome is relatively limited, and it’s concentrated on countries like China that import the bulk of the crude that the Iranians send out. So you’ve got this weird situation where it’s an atypical power that is not heavily internationally invested. The United States is not involved with it in economic matters. And the tools that Trump would bring to bear. 

While they seem simplistic and in many ways, they are would actually work. So there’s two things that you should expect to see. Number one, you should expect to see the Trump administration come up with a series of secondary sanctions to target Iranian oil on a broader scale. Now, it used to be that the biggest hole in all of this was the Europeans. 

So the United States was established sanctions and maybe even a degree of secondary sanctions. But then the Germans, the French, would basically ignore them and claim that the Americans were exercising extra territoriality with which they were, and find ways to deal with Iran independently. But ever since things, that have boiled up in the Middle East with Hezbollah and Syria, the Europeans are taking a very different stance, taking a much stronger stance against Iran, are more likely to cooperate this time around. 

That just leaves countries like India and China, especially on the other side of this, which is something that the Trump administration isn’t going to care about all that much. But if you basically get the entire Western world, participating in the financial section’s sanctions and then start playing secondary sanctions to China, we’re in a situation where you can actually move the ball down the field quite a bit. 

The second thing, the more important thing is to go after the oil itself. Now, if you remember the term shadow fleet, these are older tankers primarily, that operate without transponders, that don’t use the US dollar system, that are basically operating under the radar of global finance. Oftentimes they deal with physical transfer of gold and or cash, typically US dollars or euros, to send money directly from the, country that is doing the buy in to the countries is doing the selling. 

So normally when you are buying or selling crude, the country that is doing the buying does basically fancy wire transfer. I’m oversimplifying here, but it’s basically goes through the financial system so it can be regulated. Most of that has been shut off. So now you either have them using the yuan as an intermediary or them literally physically transporting cash from point A to point B. 

Most of the countries that are participating in sales, with the shadow fleets, want the physical currency because it is more, exchangeable for everything else that they would need. You can only do so much with. You want to anyway. This means that the only way to really disrupt the Shadow fleet is go after the fleet itself. 

Now, in the case of, say, the Russian shadow fleet that’s going through the Baltic, the Scandinavians can always make up an environmental reason to grab a ship and dock it. But that means eventually they have to let it go. If you want to go after runs, you have to go after the ships themselves and not let them go. 

Now, from a tactical point of view, an operational point of view, this is very, very easy. The Iranians don’t have a navy that is more than speedboats. And the Indian Ocean basin is a pretty big place. So if the United States decided it wanted to blockade Iranian crude coming out of the Strait of Hormuz, it would really be child’s play from an operational point of view. 

The question is, what then happens to the broader maritime experience? Because if you get the global naval superpower, the one that’s several times as powerful as everyone else’s navies combined, even before you consider that the second and the third most powerful navy in the world are tight American allies in Japan, in the United Kingdom. If you get the U.S. Navy involved in taking civilian ships out of the system, we’re entering a new world. 

And while the Trump administration certainly could do that, it would then have to come up with a replacement system, because once the ocean blue is no longer safe, the way we handled shirts changes and the way we handle patrols changed because other countries will start doing it, too, when we very rapidly get a breakdown in global agriculture, energy and manufacturing. 

I’m not saying this won’t happen. I’m saying that I don’t think the Trump administration or the Trump administration has thought through what the next step is. So I did a piece a few days ago talking about how events with the shadow fleet in Russia, events in Scandinavia, events in the Middle East were all pushing us towards this world where the maritime system simply shatters, and most of the ships that sail the ocean blue, especially long haul ships, simply won’t be able to function. 

If you really want to go after Iran’s shadow fleet, if you really want to do a true maximum pressure campaign, that also means breaking the system. The question is whether or not the Trump administration come up with some way to soften the blow, so it doesn’t automatically wreck everything else. I’m not sure that’s a circle that can be squared. 

But if there is a way to do it, it will require some significant policy creativity, which, Trump team has never really shown. And it’ll show the ability to adapt to changing circumstances, which the Trump team has never really shown. And it will require coming up with an alternate system in which all of the major powers of the world naval powers of the world are in broad agreement as to what this should be, and diplomatically, that requires action that the Trump administration previously has not shown. 

And I don’t mean this so much as a condemnation of the Trump team specifically. I don’t think Team Biden could have figured out. I don’t think Team Obama had certainly no Team Obama couldn’t figure it out. The last president might have had the gravitas and kind of the command of the details to it was George Herbert Walker Bush. 

He obviously wanted to go a different direction that we didn’t follow. So we’ve always known that globalization was going to break sooner or later. This is one of those things that could do it. In the meantime, if you’re Iran, things are about to get rough because there are very few reasons for the Trump administration not to swing the sledgehammer. 

This isn’t Russia where there’s some strategic implications that involve nukes. This isn’t China where you’ve got a very deep interlaced economic relationship. This is a country that the Trump team knows from previous experience that it can really hurt. And now they’re looking for ways to hurt it more. The question is whether or not it gets to the point that has broader implications. 

And that will only be determined by the steps that the Trump team takes in its opening weeks. What I can tell you for sure, though, is that unlike China, unlike Russia, which are thorny issues and require a degree of collaboration, Iran doesn’t and team Trump knows that, and they are looking forward to this with giddy anticipation. 

Trump 2.0 – China

Great Hall of the People, Rendahuitang West Road, 前门 Xicheng District, China

In this video, Peter mentioned a total fertility rate (TFR) of 0.5. While this may be the case for certain urban cores, China’s national TFR is closer to 1.0. Still abysmal, though slightly less catastrophic. —ZoG

Everyone knows where I stand on China, but how will Trump’s second term play into that?

Let’s run through China’s situation. The Chinese economic model is dependent upon continuous capital flows. Should that be interrupted, China’s industrial economy could collapse. The demographic picture is bleak too, as birth rates continue to decline and the population ages. And Xi Jinping’s master plan to fix all this is to push workers harder, tighten state controls and micromanage reproduction.

Trump is fixated on reducing trade deficits, but China has been able to sidestep previous deals due to lack of enforcement. Trump needs to work with our other Asian allies to counter China’s influence, and some more faith in defense institutions wouldn’t hurt either.

Overall, the Chinese view Trump as a disruptor and relatively easy to manipulate. While there is some historical truth to that, Trump has shifted US sentiment to be broadly anti-China, so tariffs and supply chain diversification get bipartisan support. The question remains, what will Trump actually accomplish? Tariffs are one thing but planning and developing an alliance network and alternative industrial capacity are a completely different beast.

Prefer to read the transcript? Click here

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

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

Learn about medshare here

Transcript

Hey, everybody. Peter Zeihan here. Coming to you from Blenheim, New Zealand, where I am walking through a vineyard, because that’s just what I like to do. Anyway, today we’re gonna do the second part of our open edit series on the issues that’s going to be facing President-Elect Trump on his first day of office, not the ones that he wants to face, the ones that are going to face him. 

And today we’re going to talk about China. First things first, let’s review what it is that the Chinese are dealing with. Before we talk about how Trump plugs into that, China has an economic model that is based on central state control, and that means the state controls the financial system and uses the financial system to shove money into whatever economic sector they feel that they need to. 

Now, they use this to achieve technological control of certain areas where they feel they can master the tech. They use it to subsidize development of technologies that they don’t master in the hopes that they will be able to. And they do it to build out the supply chains locally so they can drive competitors internationally out of business. But all of that pales to the primary goal, which is to make sure that everybody has a job so that nobody goes out in protest and gets together in a large group and goes on a long walk together, because that’s how the government got its job in the first place, and they don’t want that to happen to them. 

So you get this system that is over capitalized or capital is remarkably cheap. And as long as the capital keeps flowing, everything’s happy and for those of you who have ever been part of an economic sector that has busted, whether it’s, say, energy during a bust period or a boom bust period, or Enron or real estate back in the 2007, the 2009 crisis, you know this very well. 

As long as the capital keeps flowing, as long as the capital is cheap, then the system keeps running. But if for whatever reason, capital access dries up, then this artificially inflated sector basically withers away to nothing in a very short period of time. And the Chinese have been doing it. So long in so many subsectors that if that capital stopped flowing at any time, you’d basically see the end of China’s industrialized state at this point. 

That’s problem one. Problem two demographics. When you tell everyone that what you’re supposed to do as a Chinese is just work 12 hours a day, six days a week, well, there’s not a lot of room for anything else. When you pull people off of the farm and put them into the city so they can work 12 hours a day, there’s not a lot of time in their lives or physically in their apartment for kids. 

And so the birth rate drops and drops and drops and drops. And according to the most recent data, from December of 2024, the average woman in China is now having less than a half a child. So in most of China, we have a repopulation rate that is one quarter what is necessary just to sustain the population? We probably almost certainly have a lot more people in China over age 50 than under. 

And the place is looking at demographic collapse. And if you remember back to my earlier demographic work, most of the consumption that is done in the society is done by people who are under age 45, who are raising their kids and building homes. And that population is basically becoming an endangered species in China. And now that birth rate has been so low for so long, it’s been lower than the United States since the 1990s that we are looking at the dissolution of the heart of city around the end of the century. 

And there’s no way that the Chinese state will last very long. I’d say a decade or less at this point. So that’s their starting point. In order to make their system last as long as possible. Sherman Ji believes three things. Number one, everyone just has to work harder, which is only compounding the demographic situation because no one really sees a hope that this is going to change. 

Number two, he believes that the Chinese Communist Party, which let’s be specific here, it’s not the parties interested, it’s him, should face no challenge to its authority, and it should be able to micromanage every aspect of everyone’s lives. In fact, we now have the agency that used to enforce the one child policy making unannounced house calls to see if couples are having sex without contraception to make sure the birthrate goes back up, because that’s what the state wants now. 

You can imagine how well that goes over. And third, he has to keep export markets open because all of this production, all of this forced production, all of this over subsidized production can’t be consumed by the population because most of them are now over 45, which means it has to be exported. So they have to be able to shove the products they produce down everyone else’s throats just to keep their country alive. 

Enter Donald Trump. Donald Trump is singularly obsessed with the trade deficit, which is probably not the best way to look at the issue. But that’s how he sees it. So it doesn’t matter what I think. And as a result, he likes to think that he can make deals that will force things in the United States, his direction. 

For the most part, the Chinese, especially at the top, are not worried about this because they’ve dealt with him before. They see him as an eminently lateral person. And so they basically give way in negotiations, knowing that the day after the negotiations close, that there will be no enforcement and they never have to worry about him again. 

Why do they feel this way? They’ve already done it before. The phase one trade deal that was negotiated by the Trump team back in. Who was it seven, six years ago, committed the Chinese to buying X number of dollars of various products and by the end of the Trump term, he hadn’t met any of the criteria at all. 

In fact, they never intended to. All they did was make sure that whenever there was a product like what they needed available anywhere else in the country, they went to that first. So actually, we saw the trade deficit in a structural sense, go up because of trade talks with the Trump administration. The other reason that the Chinese are really not concerned about Trump is that they don’t take him seriously as a strategic thinker. 

The Chinese understand, as everyone in Asia understands, that if you want to him in China, you can’t do it alone. It can’t be just a trade. You can’t just be a strategic issue. It has to be holistic. You have to bring in all the other countries, from Indonesia to Malaysia to Singapore to the Philippines, to Taiwan, to Korea, to Japan. 

And if you don’t do that, the Chinese will easily find a weak link in the chain and be able to push out. And they see Donald Trump as being more danger to the alliance than they are now, whether or not that is accurate enough of that. That’s how they see things. And again, they’ve done this before with Trump the first time around. 

They don’t see anything different in round two except the Donald Trump is trying to wreck, law enforcement and the Defense Department and, the intelligence agencies with his appointees, which are the things that generally keep China in check as well as, if you’re going to have any sort of meaningful policy against China that deals with security and culture and technology and theft and trade, you need everyone working together. 

And they see Donald Trump as the best possible candidate for wrecking that capacity within the American system. So they’re actually broadly looking forward to Trump two, because they think they’re going to be able to get even more out of the United States than they did under Trump. One, much like the Russians are feeling and like the Russians, I think they’re miscalculating. 

This is not 2017. We are in a very different world now. And the single biggest difference on the Chinese front is that Donald Trump did succeed in changing the conversation in the United States, and there is now a competition among all factions in Congress about who can be the most anti-Chinese. Now, translating that sentiment and policy, that’s a lot easier said than done. 

But there’s no longer this core disagreement within the parties because the business community has been ejected from the Republican coalition. So the faction that used to be the most organized and calling the shots in the Republican Party on economic policy is no longer even part of the conversation, which leaves everybody else to fill the gap. And no one else is as concerned with economic stability as the business community was. 

So we’ve already seen in the last five years a significant outflow of investment from China, foreign firms and even of Chinese firms as everyone tries to get away from this country. That is facing economic implosion because of its demographic issues. And while Donald Trump certainly isn’t the guy to build a broad coalition within his own government, much less across multiple governments, to have any sort of coherent policy towards China, dude knows how to do tariffs. 

And that is certainly something that’s going to hit the Chinese on the headline. Now, as a rule, I would say tariffs are a really bad tool for shaping policy. So for example, the terror that Trump has threatened, not that I think are going to happen, against China and Mexico would be the fastest way to trigger an inflation induced recession in the United States, because most of the trade among the NAFTA partners goes back and forth across the border every time. 

And if you do a flat tariff, because doing anything about a flat tariff would require administration, Trump is not very good at that. You’re going to basically tax every product multiple times and drive each industry out of business and allow Chinese products to fill the gap. That’s not how things work in China. China, they have as much of the supply chain system in one country as possible. 

So if you do a big flat tariff on it, it actually does hurt the question is whether Trump can realize that if the goal is to actually break the trade relationship with China, you have to do more than tariff them. You have to actually take that income and build alternate industrial plant within North America. So there’s actually another option. 

Otherwise you get an inflation pulse, you get a consumer crisis, and you don’t actually change anything on the back end. You just make everything more expensive. Now, whether or not his ultimate appointees are people who can convince him of that. I don’t know. But what I do know for sure is that if we do get into a situation where Trump basically waltzes into East Asia with a sledgehammer, yes, the U.S. is going to take a lot of hits. 

Yes, it’s going to hurt. Yes, he will go down in history as triggering the highest inflation the United States has ever had. Yes, it will be ugly, but there won’t be a China on the other side of that. There are easy ways to do this. There are smart ways to do this. But that doesn’t mean that there are only 1 or 2 ways to do this. 

If the goal is simply to smash China and move on, I have no doubt that Trump can do that. If the goal is to smash China, move on, and have America in a much better place domestically. That requires a skill set that I have not seen Donald Trump wield just yet. All right, I’m done. See you tomorrow.

China Has No Chance

Chinese flag over a building

The Chinese are stockpiling resources – food, fuel, and materials – to help it endure a protracted conflict with the US. Is this something to be concerned about?

If China wants 120 days of stockpile, good for them, but it’s not going to help. China is completely import dependent; they rely on imports for energy, food, and raw materials and their economy is tied to the global supply chain. As soon as war breaks out, all that is going away.

Even if China has a 120-day stockpile, it’s not going to be very secure. Oil will be vulnerable to attacks. Food will be subjected to poor storage infrastructure and will likely spoil. So, that 120-day stockpile isn’t looking so strong anymore.

And if you start to factor in naval blockades, no access to US markets, and the power projection of the US, this stockpile quickly turns into the same smoke and mirrors that the Chinese are so great at.

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Transcript

Hey, everybody. Peter Zeihan here. Coming to you from a toilet in New Zealand. I just had to do a video here for The View, which I will share with you now. 

So you’re not going to have my ugly mug on this one. But just keep in mind the theme of where I am and what I’m doing. Anyway, the question from the Patreon page is pretty straightforward. China is stockpiling all kinds of things foods, fuels, materials, in order to survive a protracted conflict with the United States. 

Is that something that will work and the short version is no. China is the world’s largest importer of energy, food stuffs. The materials they need to grow food, as well as every mineral in the world. There really isn’t a lot of raw material that is produced within China. It’s brought in, it’s processed, it’s turned into value added goods, mostly manufacturing, and then export it. 

So China is vulnerable to cut offs at all stages of production chain of every industry in the world. Now they are. Yes, storing lots of stuff. But let’s assume for the moment they get to the goal of having 120 days of import cover for oil. Well, number one, so that would last them 120 days. Number two, they don’t have the salt domes at the United States has. 

So storing has to be largely done above ground, which means it’s something you can hit with a missile, which means that in a hot war, it’s all going to be gone within the first couple of days anyway. And keep in mind, the Chinese are vulnerable to the United States sea power, not just on the Chinese coast, but anywhere that can interdict anything, with the Strait of Malacca arguably being the most sensitive spot, because that’s where about 80% of their oil imports come from. 

Same basically goes for food. Storing food requires storage facilities. So a while ago, the Chinese built a massive corn storage facility, but all it was was giant piles of corn piled up along the side of the road. And they all rotted within a year, and it all went to nothing. Some version of that will happen for everything. 

And even if I’m wrong about energy and food and all the material inputs, they still have to export stuff. And their number one customer is the United States. So the Chinese battle plan literally is for the United States Navy to all sail within sight of the shore so that the Chinese can hit them with their air force. And then for the United States to continue to patrol the global ocean. 

So they can still import all the food and energy that they want, and that the United States will still keep its market open so that the Chinese can pay for everything. It’s a stupid, stupid, stupid plan. And so if there ever is a real fight between the Americans and the Chinese, not saying there will be, I honestly don’t think there will be. 

But if there ever is. Then the Chinese will be in the same situation. I am in the shitter. Although the view won’t be nearly as good.

Can Venezuela Help Out with a Middle East Oil Shortage?

Flag of venezuela over some homes

With the increasing possibility of disruptions to the Middle East oil supply, I was asked an ~interesting~ question on how to solve it. Could foreign intervention in Venezuela open its oil supply as an alternative to Middle Eastern oil.

Before we look at Venezuela, we need to know who might be interested first. The US has its oil needs figured out, so it’s really only the Europeans that would consider this. There’s plenty of crude in Venezuela, but years of mismanagement have left infrastructure and fields in poor condition. Couple that with a host of security issues, political instability, and a heavily armed civilian population…and it’s definitely not a cakewalk.

Even if the Europeans were willing to make the massive investment to revamp the oil industry in Venezuela and put forth a substantial military presence to establish the order needed to make this possible, they would still need the sign off from the US…and that’s probably not going to happen without some major incentives.

Prefer to read the transcript? Click here

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

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

Learn about medshare here

Transcript

Hey everybody, Peter Zeihan here coming to you from the Golden Horn above Denver and it’s probably my last snow free day of the season. Anyway, We are. Oh. 

Oh, deer. 

Today we’re taking a question from the Patreon crowd. Specifically with everything in the Middle East starting to look very Middle Eastern again, would it be worth considering some sort of operation in operation? 

To remove the government of Nicolas Maduro of Venezuela so that the world has another source of crude available for when the Persian Gulf becomes a place you really don’t want to be? Might sound a little neo imperialist, but that’s a pretty good question. You got 20 million barrels a day of crude that comes out of the, the Persian Gulf states. 

And any meaningful conflict that involves Iran or Saudi Arabia, clearly is going to take a substantial percentage of that off line. And even if the oil fields in the United Arab Emirates and Saudi Arabia take no damage, and even if those two countries stand, and even if the bypass pipelines that get around Hormuz or go to the Red sea, operate at full capacity, you’re still talking about roughly how 12, 12 to 13 million barrels per day that’s under severe threat. 

So the idea of being able to get some more crude out of Venezuela is a solid idea from a supply point of view. In addition, if you look back at history, the original oil embargoes that OPEC did, were Arab. They were not they didn’t involve all oil producers. And back in the day, Venezuela was not a participant in them. 

So we saw more production out of Venezuela, which didn’t simply, cushion the blow. 

But I would argue that over the period of several weeks to months, it actually broke the back of the embargo. So having Venezuela in play is obviously great. That said, the country that would do something like that is 100% not the United States. 

While the United States does prefer heavy crude, Venezuela has been such an a sneaky producer for so many years, more than a decade now that, with the exception of a few incidental cargoes, U.S. refiners just don’t even want to take delivery of the stuff because they can’t plan on it. You tool your refineries step by day, week by week, by month, by month, year by year, based on what you anticipate, the blend of crudes coming in going to be. 

And so if you can’t rely on a particular supplier, it’s better for you simply not to use it at all. And ever since the early days of Hugo Chavez, maybe going back to 2007, there have been very, very few refineries in the United States who have chosen to use Venezuelan crude. I know that doesn’t match the rhetoric. 

It’s always about, oh, we’re not going to ship to the Americans anymore. Well, the Americans weren’t buying anymore. So if Venezuela were somehow magically to come back into the mix, its specific grade, a very heavy, very sour crude would have a hard time finding a local buyer. That’s problem one. Problem two. The middle row government is well, it’s like Zimbabwe levels of incompetent, Zimbabwe being a country that was one of the world’s great breadbasket until the government of Mugabe and his successor just drove it into the ground and made it a food importer, under first Hugo Chavez. 

No, Nicolas Maduro, we’ve basically seen the, cronies of the government literally rip up everything, even if it was nailed down, and sell it oftentimes for scrap. So the country now imports 80% of its food. It used to be a food exporter. And, its total oil output is kind of bouncing back and forth between 500,000 million barrels per day based on what happens with, Chevron, the American company, which is really the only one that’s still operating there. 

Most of the reservoirs have suffered extreme damage. The infrastructure hasn’t been maintained. And don’t get me started on the refineries. Oh, there’s like chunks in their gasoline now. But just for the record, chunks of gasoline is a bad thing. So, if you could wave a magic wand and change the government and change the investment strategy and, make them not klepto those. 

Oh, yeah. Important detail. The Venezuelan government is not socialist. It is not communist. It’s a kleptocracy. And of course, we should be scared of that anyway, 

If everything was perfect, it would still take probably an investment of 40 to $50 billion upfront just to get back to where they were five years ago when they were exporting, like, a million barrels a day, maybe producing something close to a million and a half. 

Keep in mind that the fields that Venezuela has are old, they’re technically challenging, and they produce a very sludgy type of crude. So you really to know what you’re doing. And today, there’s only a handful of companies that have any experience working with that. One of the Chevron, the other ones, Conoco. And then there are some companies that say in Canada that work with the oil sands, which is probably the closest analog, but it’s even not a very good one. 

And as a rule, the Canadian oil sands operators don’t operate anywhere except for the oil sands. So simply building up the skill set that would be necessary to attempt this would be huge. Third, most of the oil is in one of two places in the western part of the country. You’ve got a region called Maracaibo, which is about as anti Maduro and anti-trade as you can get, but the government’s efforts to basically destroy their own state have had a big impact there. 

And Maracaibo itself is lawless, complete with pirates operating offshore. And in Maracaibo a lot of the crude is produced from offshore wells, most of which are in the process of going down to zero. So you have a split politically in the country that you’d have to deal with. The second part of the crude comes from the southern belt, the Orinoco Belt, which is super heavy, far more technically challenging, and a lot of that is just vanished from the market completely. 

So if you want to bring either of these in, you don’t simply need to change the government. You need to restore basic security to the country. And then you’re talking minimum, bare minimum. Something like 50,000 troops. Remember, one of the things that Hugo Chavez did is he paid people to be on his side. And he didn’t just pay them with food and with fuel and with cash. 

He paid them with AK 47. So arguably, of the countries in the world that are not actual war zones, the densest footprint of assault rifles in the population is in Venezuela now. So anyone who’s going to come in for any reason, even if the locals in general are welcoming the stability and they be able to get food, they’re going to be dealing with the significant population that is armed to the teeth and not with little pop guns. 

Okay, you put all that together and the US is like, no, sir. The United States is now not just a net exporter of crude oil, but by the end of this calendar year, probably is going to be exporting 5 million barrels of refined product. That’s a greater volume of refined product exports than all but three countries in human history have ever produced as raw, crude. 

So the idea that the United States is going to launch a war for oil is just silly. It’s going to happen. It’s going to be because countries in Europe realize that the Russians aren’t coming back to the table, not in the way that matters in the Middle East is as unstable as ever. Ergo, this conversation that means that we are left with the Europeans basically thinking, well, where else can we go? 

And one of the very few options that is not West Africa or North Africa is going to be Venezuela. So they’re going to have a choice. Do they go into Libya, which is basically a stateless zone now on its own. Can’t even call it a civil war. Civil war requires a state. You can go into Nigeria where with over 100 million people, the chances of imposing a security environment on Nigeria that the Nigerians don’t want is silly. 

So we’d have to be even done with partnership with them. So even with a lot of cash, you’re going to be dealing with a very corrupt system and slow growth of output, or you’re talking about a military occupation and enforceable reconstruction of Venezuela. Leaving aside the little issue that the Europeans are a little bit out of practice at that, they would have to get American permission as well. 

Monroe Doctrine and all that. And for the United States to give the Italians, the Brits and the French and the Germans approval to invade, basically a country in the Western Hemisphere, let’s just say that whatever was being offered in exchange would have to be really nice. And I’m not sure there’s anything in Europe that we want that badly at the moment. 

So interesting idea. The crude is there, but the country that would have the capacity to do something but the United States really doesn’t care. And the countries that do really care would have to build up a whole fresh set of tools and then bribe Washington in order to make it happen. So it’s an interesting exercise, but nothing that I think is going to go down this decade, next decade though, everything’s game.