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The Death of US-China Trade + LIVE Q&A Starts Soon

An AI generated image of connex boxes with American and Chinese flags on them

The Live Q&A Is Here!

Our next Live Q&A on Patreon is here! In a few hours Peter will join the Analyst members on Patreon for question time! In order to get in on the fun, join the ‘Analyst tier’ on Patreon now.

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This is a bonus video that Peter recorded this AM!

Trump and Xi got into a pissing contest with their tariffs and you guessed it, everybody lost…

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.

Peter Zeihan here it is April 9th. Yesterday, the Trump administration added another 50% to the tariff on China, which brings the official total to 104. And we’re probably only days away from a secondary sanction being placed on China for its trade with Venezuela, which will bring it to 129%. Also overnight, the Chinese raised their retaliation on tariffs to, for imports from the United States from 34% to 84%.

So the largest bilateral economic relationship in human history is, for all intents and purposes, over now. And the decoupling is going to proceed with massive pace on the American side. This is highly inflation here because there just isn’t enough industrial base elsewhere on the planet. Even if we had good trade relations with everyone else to replace the manufacturing capacity that is in China.

And if we’re going to build it here, we need all of the raw materials steel, aluminum, lithium, cobalt, all of it that China is the primary processor of. And all of those now does cost twice as much. So we’re looking at a minimum 10% inflation for the remainder of the year. And hyperinflation is something we need to start considering as a possibility.

We’re also looking at a recession, because the increase in costs for the basic things that allow your life to function is now beyond the point that the lower third of the American population can afford without significant external support. And the federal government is already in a massive debt situation that Donald Trump has promised to make worse, with additional spending and tax cuts on the Chinese side, they just lost their largest customer, their largest source of capital, their largest source of technology.

And, the implicit support of a country that provides the military security, that allows their shipments to move. We now need to start considering what happens when the US military is tasked to economic issues, which will disrupt Chinese shipping to the rest of the world. And that very quickly leads not just to a recession and a social breakdown in China, but something potentially far worse that could technically include things like military conflict, and is a disassociation of the Chinese system and everything goes with it.

It is a very quickly evolving and degrading situation. We have to cult of personality on both sides of the Pacific, who basically ignore what few advisors they have left. It is now a battle of egos, with the rest of us caught in the middle, and it will not end well. There is no one who can mediate here. This is no one who can talk either side down.

This is going to go until something breaks. And what is going to break is the current economic expansion in the United States. We are firmly in recession territory now, and probably the Chinese system as a whole. And there’s no way that those two things don’t happen without a cavalcade of additional issues. Now, at very we’re having our question time here on Patreon for subscribers.

If you haven’t signed in already, I suggest you do it because we’re starting at 10 a.m. mountain. Noon eastern. And for those of you who are not in Patreon, we’re sending this video out to everyone. So you have some idea of what’s coming down the pipe. We’re going to be answering questions for a good long time.

I’m going to do my best to be ready for everything you’ve got. Sign up. Links are at the end of this video. See you soon.

The Chinese Attempt the Impossible

A group of people on a hill hoisting up a Chinese flag

The long-term outlook for China is bleak. I’ve discussed it plenty. However, the Chinese are getting a little lovin’ from an unexpected source.

At China’s National Congress, Xi got to hear all his biggest fans clap in unison and then listen to him spout off about his unrealistic 5% GDP growth target. And as a reminder to just how unrealistic this is, go ahead and look through China’s demographics, housing crisis, and overall economic stagnation.

Despite all those factors working against Xi, he’s getting some lovin’ from the place he least expected it. With Trump’s tariffs on Canada and Mexico, the mass exodus of manufacturing from China has slowed. This won’t save the Chinese, but the Trump administration just put a couple more quarters in their parking meter.

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.

Hey, everybody. Peter Zeihan here coming to you from Colorado? We’re gonna take a break from all the Trump stuff and talk about how China screwed, because that’s an oldie but a goodie that everyone likes to hear. So over the last couple of weeks, the Chinese have been having their national congress, which is basically a rubber stamp group of the Chinese Communist Party that gets together to slow clap.

Now, it was literally sort of hilarious when Sharon ji walked in like a thousand people slow clapped in unison. I mean, it was some creepy Orwellian shit. But it underlines just how tight the cult of personality is that, Ji is kind of a little bit like Trump, and now he requires these public displays of affection from people who aren’t allowed to speak.

Anyway, the big thing that was proclaimed was we’re going to stick with the 5% GDP growth target, which they can’t make, and they’re going to bend the will of the state, I believe, is the specific offic, quote, to robustly expand the consumption of the people, the idea that the state is going to get the people to spend, you know, has clear misunderstanding of how markets work.

It’s also not going to work. Most of the consumption that is done in the society is from people who are aged roughly 20 to 40 5 or 50. The people who are having kids, they’re building up. They’re accruing the assets that they’re going to have in life. And they’re going to college and they’re buying cars and they’re buying homes.

Once you hit that 45, 50 point, the kids are usually no longer a factor. The house is probably going to be downsized and they’re done accruing material or wealth. And so they then start building financial wealth, which is a different sort of economic activity. So for China to get people to expand consumption, he needs to make life easier for people who age 20 to 40 5 to 52.

Problems with that? Number one, China just went through the fastest urbanization process in human history, and it’s local governments in order to get more funding from the national government as well as more local tax revenue in the like, basically sold a bunch of land, built a lot of condos, which created housing that most people can’t afford. And each individual housing unit is typically owned not by one person, by it, by a cluster of neighbors and friends and associates, with each condo being owned by a different cluster.

So selling one is almost impossible. And, they don’t want to rent them out. Because once somebody moves into a condo, the feng shui changes. Never underestimate how superstitious the Chinese can be. And so they’re just sitting empty. So there’s a crisis of cost of living in China. That’s problem one. Problem two. Rapid urbanization means a rapid drop in birth rate.

We are now 50 years of that process. And the Chinese now have more people age 52 and over than 52 and under. There no longer is a big demographic of people under the age of 50 who can potentially consume. So the open question here, of course, is, has China had any real economic growth in the last five years because we flipped into this 50 to having more people over 50 than under during Covid, which is when the Chinese stopped collecting a lot of statistics on their population because you didn’t like the way that they looked.

So we don’t really know. But just working from what we do know, it does look like exports have expanded while consumption has contracted faster, generally leading to a stagnation across the system. When in terms of the headline figure, that would be problematic enough as it is, but we now have 20% terrorist from the United States on the Chinese system.

And with every incremental step up, the case for investment in China drops, which is not the same as saying that the case for moving out of China has improved because by threatening tariffs on Canada and Mexico, which is where most of the stuff would go, and then withdrawing and threatening and re withdrawing and re threatening. Donald Trump has basically introduced a huge amount of geopolitical and regulatory risk into the North American system, and no one who feels that they can afford to wait is going to move into that environment until that has some clarity one way or another.

We are now in the sixth or seventh week, the Trump administration, and we have already had five different tariff policies just on Canada and Mexico. So we are nowhere close to that settling. So ironically, this is providing the Chinese with something that they are in desperate need of. And that’s a bit of a breather, because before Trump came along, we were looking at record rates of slight of industry from China to other places, most notably North America.

Because the cost structure wasn’t there, the risk was there, and North America was risk free. Now, the risk in North America has risen to the level to counter out those other Chinese issues. So we’re kind of in a holding pattern waiting to see when Trump calms down.

Are Rare Earths Really That Rare?

Rare earths are back in the headlines, but is all the hype worth it? Let’s breakdown what these are and how “rare” they actually are.

Rare earths are byproducts of mining for other metals like nickel, copper, and uranium. While not rare on Earth, they are rarely found in sufficient abundance in a single location for their mining to be economically viable. The only real challenging aspect lies in the refining process, which is just dirty, time-consuming, and expensive…but not all that difficult to do.

China dominates rare earths because they have subsidized production (artificially lowering the price) and they’ve been doing it for decades. So, other countries haven’t had any incentive to turn on their refining capacity, yet. Once the Chinese overplay their hand or the system crumbles, other nations will just ramp up production.

This isn’t really something to fear, other than a few months of issues. However, the US should be more concerned with other critical supply chains like aluminum, steel, and lithium, where the US has yet to build out sufficient infrastructure.

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.

Hey, all, Peter Zeihan, coming to you from a very, very chilly Colorado. Today we’re taking a question from the Patreon page that’s been popping up a lot in the news about rare earths. There’s a lot of angles to this, but basically, it seems that the Trump administration is really interested in getting some production of the stuff. And the question is, how does it work?

What do we need? Where do we go? You may recall recently Trump, falling to Russian propaganda again said that, Ukraine owes the United States $500 billion and it should pay for it with rare earths and not get a security guarantee in exchange. By the way, total USA to Ukraine at this point, according to US government sources, is less than $100 billion, of which two thirds is weapons that were just sitting in warehouses that we were going to blow off anyway.

Anyway, rare earths, unlike the name rare earths are not rare. They are produced as a byproduct of mining. When you’re doing nickel or copper or platinum? Uranium? Palladium. That’s a platinum group. Coal ash, phosphates, sometimes lead.

I said iron ore already. Aluminum. Bauxite. Anyway, there’s like 20 different, macro metals that you mined for, plus coal ash, that produce Rees as a small soda product.

And so what usually happens is you produce the primary thing that you’re after. And then with the waste from your refining process, you maybe do another run of that in order to concentrate the earths a little bit more. But then that next stage of taking that kind of slag that’s been partially refined and turn it into useful rare earth metals, is very dirty.

It’s very polluted, and it takes a lot of time. So usually what happens is you take that slag and you to ship it off to China. Because back in the 1980s and 90s, the Chinese were looking for industries that they could corner and their technology was not very good. And they settled on rare earths because it was expensive and it was dirty.

But they have a very capital flush system where they basically print currency and confiscate everybody’s bank deposits to pay for whatever development plan they want. So what they do is they you build a couple hundred vats of acid and you dissolve everything in the first bout, and then you get the remnants. You put that in a second batch, and then the remnants from that third, that remnants of the fourth that intruded.

And over the course of months, starting with tons of slag material, you might end up with an ounce of a rare earth metal. Anyway, the Chinese cornered this market because it was something that no one else was like, oh, I want to do that. And so they ended up super saturating the market because Chinese economics are about throughput rather than efficiency.

And they continue to subsidize the industry today, which is why, based on the Earth, somewhere between 50% and 95% of it comes out of China, the refined metal. And then, of course, in the last 10 or 15 years, they tried to go, downstream, into processing and building product out of those things. Be even less successful in that.

Anyway, this technology is based on the 1920s. So there’s nothing that’s difficult about this, and it doesn’t really take a lot of time to set up. It’s just that once you actually start putting your slag into the acid, it’s going to be months before you get any material. So the problem is not rare earths per se. The problem isn’t even production.

Rare earths are a byproduct of any number of industrial, mining and purification processes. The problem is building out that processing capacity. Now, how long does that take? I would argue that in Australia, Malaysia, France and the United States, most of that work has already been done. But nobody wants to turn it on because you’ve got several months where you’re not getting any product.

And the Chinese continue to super saturate the market and provide the world with below cost rare earths. So at some point, a switch is going to be flipped, and everyone’s mind when they realize either that the Chinese are overplaying their hand with their control of the processing capacity or trying to just brakes. And everyone realizes that if they still want the stuff, they’re going to have to make it themselves.

Once that happens, all of this spare refining capacity around the world will spring up. And the problem we solved in six months to a year. Until then, we are in the unfortunate position that the US government seems to be beholden to Chinese and Russian propaganda on the rareness of rare earths, and that, unfortunately, is shaping policy in a number of places.

It’s like if you want to be paranoid about things that the Chinese dominate. This isn’t where you go. You should be concerned of other types of processing, such as turning bauxite into aluminum, turning iron ore into steel, turning lithium concentrate into lithium metal because those are places we’re setting up the, replacement infrastructure. The United hasn’t really started at scale yet.

And if the Chinese break before that’s done, we will then have to build out that infrastructure in an environment when we can’t get the intermediate product. And that will generate the mother of all inflation pulses. So, you know, one miracle at a time, I’d argue that this specific problem, rare earths, is not all that much of a problem.

There’s plenty of streams coming from plenty of places. We just have to turn on a few things to solve it.

Trump Takes on China…or Not

Donald Trump and Xi Jinping at the G20 Summit

China is on its last legs. Its demographic picture is far past terminal. Its financial system makes Enron look responsible. Simply feeding its people is far beyond Beijing’s capacity without legions of outside assistance. And with the wider world ever-more-firmly turning against Chinese manufactured goods, there is little reason to expect an industrial recovery. If you don’t care for China, now is the time to nudge the country into history’s ash heap.

And so Donald Trump is picking trade fights with Mexico and Canada, the two countries indispensable to the United States if the goal is to create a world independent of the Chinese. In doing so, Trump is granting China that most precious of all commodities: time.

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.

Hey, all. Peter Zeihan here coming to you from Colorado. We’re doing the latest in a series on what Trump is up to in the world. And today we’re going to talk about the Chinese. Now the Chinese are having a shit time. The demographic situation keeps getting worse. We’re at the point where we’re probably only a few years away from the general collapse of their labor market, and we have seen their labor costs go up by a factor of roughly 15 since the year 2000, which is, one of the 3 or 4 fastest increases in human history.

Financially, they’ve expanded their credit pool by a factor of 3500 at least since the year 2000. For point of comparison, the U.S has tripled. So we have an Enron style bubble. And basically every economic subsector they have, it’s probably a lot more than that 35 times, because they change the way they look to statistics when it comes to local government debt.

And they just cut it out of the system altogether. Stopped reporting. That probably adds another, times five. So, you know, 40 times anyway, so massively overexposed, massively leveraged. In terms of manufacturing, that means their labor costs have gone up. And so they’re not nearly as competitive as they once were. The Mexicans are now more competitive in almost every major manufacturing sector in terms of agriculture.

They’re the world’s largest importer in absolute terms, and they’re the least efficient producer in terms of the input per calorie that they get out. And almost all of those inputs are imported as well. From a security point of view, yes, they’ve got a lot of ships, but they need to be able to control global sea lanes if they’re going to protect their commerce.

And that is the job of the US Navy. So if you ever have a fight with the US, there goes their entire economic and development model. It’s just a series of bad upon bad upon bad. And at the very top, their government has become completely ossified, as chairman G has basically put the finishing touches on his cult of personality.

So it’s very difficult to get anything done in terms of policy. Not to mention that he’s pretty much blind to what’s going on because he’s shot the messenger so many times. Nobody brings him anything. You put all that together. Now is a great time to push against the Chinese and just knock them over the edge so they can fall into

The dustbin of history. So, what is going on with U.S. policy towards China is almost the opposite of what Donald Trump said he wanted to do during the election campaign. He took a very hard anti-China line, and one of the many impacts that Donald Trump had in his first term is he changed the conversation in the United States about China from potentially being a partner to definitely being a perceived threat or a foe.

But since he became president a second time, we haven’t seen really much on China. There’s been a blanket 10%, tariff on everything. And that’s about it. Instead, Donald Trump has reserved most of the fights that he’s picked for our allies and especially our close neighbors in Mexico and Canada. From the Chinese point of view, this has been not just a reprieve, but it’s allowed them to continue doing what they’re doing and shoving products into the American market.

Because ultimately, in a world without China, the United States is going to have to build out a massive amount of industrial plant in order to produce the things that we used to get from East Asia. And there is no way that that can happen unless it’s hand in glove with the Canadians and the Mexicans in the NAFTA system.

And so by picking tariff fights with the closest neighbors, what Trump has done is strongly disincentivize anyone from relo hating their operations from China to the United States. And that was in full swing calendar year 2024 and 2023 saw the greatest declines in foreign direct investment into the Chinese system that we have seen in ages. In fact, last year, total new investment in China was only $4.5 billion.

We haven’t seen a number like that since the early 90s. Companies were running to get out and getting to the North American market. But at a stroke, Trump’s tariff policy has frozen that in place, which is setting us up for a combination of factors. That is really problematic because if we haven’t built out enough industrial plant to replace the Chinese system when it crashes, we’re just not going to have stuff.

Now, the road from here to there was always going to be difficult. We’re talking about an environment that is not particularly conducive to industrial expansion, and the issue is a capital and labor. It’s largely a baby boomer story. When you retire, you liquidate your savings, you move out of stocks and bonds into cash and T-bills and the money that used to fuel economic development and credit in the broader system shrivels up.

Well, two thirds of the boomers have already retired. Two thirds of that money has already shifted over. So I’d argue that the rough tripling of capital costs we’ve seen in the last 5 or 6 years is largely demographic driven. That has very little to do with the economic cycle or policies of the Fed or Trump or Biden.

It’s just demographics. And on top of having now basically a capital shortage, that we need to somehow use what’s left to metabolize and build up this industrial plant. Trump has pledged to increase the annual budget deficit of the federal government by over $1 trillion a year. Now, you might say, well, he’s going to get some savings out of the federal government with all these mass firings.

But keep in mind that the vast majority of federal spending is Medicare, Social Security, defense, and, Medicaid. Those four together are the 7,080% of the total. If Trump does what he says he wants to do and fires a full one quarter of the federal workforce, that actually only reduces the government budget by about 2%.

So it’s a lot of sound and fury without a lot of movement. And on the backside, he’s going to add $1 trillion to deficit spending. That’s going to make everything else a lot more expensive and a lot more difficult. There’s also the labor situation. The United States, if it needs to double its industrial plant, needs a lot of blue collar workers to fill those jobs, and a lot of construction workers to build the plant in the first place.

Well, most construction workers are undocumented in some way. And so a mass deportation program not only stalls our ability to build in the first place, it shrinks the labor market overall. And at a time when we’re already at record low unemployment levels, all of this is making the Re industrialization more difficult. And now the tariff policy is forcing companies to take a pause and what they were already doing and give the United States kind of a side eye, because we now have something that we’re not used to hearing here.

Regulatory instability. And the Chinese at the moment look more stable than we do from that measure. And this is obviously a problem unless you’re a Chinese, of course, because what Donald Trump is doing right now is granting the Chinese that most valuable of geopolitical commodities time.

Photo of Donald Trump and Xi Jinping at the G20 Summit from Wikimedia Commons

Generational Divides of Other Countries

An elder woman plays basketball with a child

I’ve talked extensively about the generational divides in the US, but what about other countries? Let’s look at the unique demographic trends in Russia, China, and Iran.

We all know the US generations – Boomers to Zoomers – but that model can’t be applied everywhere. Russia is more so divided by major political events, like the Brezhnev era or the Putin era. In China, the primary divide is pre and post One-Child Policy, where instability and famine ruled before and economic boom occurred after (the younger gen now faces economic downturn, high costs, and Xi). In Iran, the main split is the 1979 Islamic Revolution, where those before and after have very different perceptions of the country, leaders, religion, and more.

The main takeaway is that each country has unique political and economic events that have shaped generational divides. While the US model helps breakdown domestic trends, we can’t use that framework for everyone.

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.

Hey everyone. Peter Zeihan here coming to you from the southern headlands of the Wanganui Inlet on the northwest coast of New Zealand’s South Island. Today we are taking a question from the Patreon page on, demographic specifically, that I talk about Gen-X and the boomers, the millennials and all that of the United States quite a bit. What about the generational blocks for other countries, specifically Iran, China and Russia?

There’s a little bit of a danger here because all demographic lines are a bit artificial. So the ones I use for the United States, specifically people who were born between 1946 and 1964, in the United States. Those are my boomers. These are people who were, born in the post-World War Two boom years in very large numbers.

And as they went through their childhood and adult lives, they’ve basically remade American culture in their image after them. 1965 to 1979, roughly. You have, Gen X. That’s my generation. Birthrates dropped off precipitously. One of the reasons the boomers were so many is you still had some old gender norms. By the time you get to Gen X, their parents had become a little bit more, I mean, the female revolution happened in there.

Dropped the birthrate a little bit. The suburbs had already been largely populated, dropped the birthrate a little bit, raised cost of living. Drop the birthrate a little bit, a little bit. Energy prices, all that good stuff. So Gen X until recently, was the smallest generation in American history. After that, you got the millennials born roughly 1980 until 1999.

These are the kids who had never seen or remember seen a, circular phone and basically were the generation that made the transition to a digital world. And then the Zoomers, kids who were born since 2000 are the ones who were, doing penpal emails rather than written correspondence and have never looked back. All right. Like I said, it’s a little artificial.

Whenever you’re looking to another country, you need to look at the gross economic trends, and physical conflicts that have shaped their worlds, because oftentimes you’re not going to draw the lines in the same place. So, for example, if you’re going to look at Europe, there is a boomer generation in about the same window for about the same, reasons, but because the cost of living was so much higher and because Europe is so much more urbanized.

They didn’t have a lot of kids. So American boomers had the millennials, the European boomers did not. And so the demographics just kind of fall apart after the 1960s. So you got to be careful about how many trendlines. You try to extend. So, for example, in the case of the Russians, the really definitive break is pre and post Brezhnev for when your adult life was because if you were born and had a memory of Brezhnev years, you remember how bad central planning can be and you were probably a little bit more open things like perestroika and glasnost.

But then when you get into the post-Soviet system, you got an equally bad thing to compare to. So Brezhnev, stagnation, economic doldrums, post-Cold War collapse, democracy for you probably equals chaos. And so you’ve always known that there’s or always felt in your gut that there’s a choice between stagnancy but stability and opportunity, but free fall. And it’s not a pretty choice.

But if you were born just a little bit later, then you have no political memory of life under the Soviet Union. You may remember the free fall of the 1990s, but then for the next 25 years, Vladimir Putin, despite his many, many, many flaws, has been leader. And Russia has been relatively stable from an economic point of view for that entire time, and especially if your first adult memories are post 2000.

You don’t know a life without Vladimir Putin. And yet that’s everybody under age 40 in Russia today. So it’s not really a boomer or millennial zoomer kind of thing. It’s a Brezhnev issue. It’s a Putin issue. It’s a fall of the Soviet Union issue about where you draw the lines. Now, something to keep in mind is the freshness generation was the last one to really have kids in numbers.

We had a little blip during perestroika when people thought that the Soviet Union could be reformed, but it didn’t last. And since then, the birthrate has just been awful. So the generation that has been growing up since 2000, in Russia, you know, the the millennials and the the Zoomers of Russia, if you will, are really the last generation that is going to exist and significant enough number to make anything happen in Russia.

And so what they do from their small numbers will shape a large part of a continent for the rest of the century as they die out. All right. What else? China. Hu. Okay. China. It’s a little bit simpler. It’s pretty. And post one child policy. If you’re born before the one child policy kicked in, you know, famine, you know, a lack of electricity, you know, outdoor plumbing, and you know that the world can be a very nasty place.

You also know political leadership that is murderous and mercurial. And you yearn for something better if you were post one child, not only was there a floor put under the chaos, but the internationalization of the Chinese system after Mao, generated a degree of economic opportunity that had never existed. Now, part of this is indeed policy, because it was after Mao that you got things like roads and electricity and meaningful amounts of steel and high rises and health care and all the other things that go with modern life.

But having only one child means for grandparents support, two parent support, one grandchildren and those grandchildren. The people who were born in the later decades, you know, 1990 and after, they have no nothing but an economic boom because all of the wealth of the country has been focused on industrial expansion, and there has not been a large generation from below that needs to be clothed, fed and educated.

So all of the social spending that was done in China was spent on very few people, relatively speaking, and you were one of them. So for young Chinese, it’s been glorious until the system started to break about seven years ago. And now we’ve got all the worst aspects of capitalism, things like, conspiracy theories throughout the public space, massive amounts of shell games, real estate booms and that have not yet gone bust.

Putting the money into the wrong things over investment, but no longer investment that generates growth when you do investment on the front end, when you don’t have roads or power lines, you get roads and power lines, and that’s great. But if you start with roads and power lines and you do a lot of state investment, you’re just building more roads and power lines and you only need so many of those.

So the lesson that the Japanese learned in the 1990s and 2000, the Chinese have now learned it as well. And so the Chinese need to adapt to a new economic model, but they’re still dealing with the distortions of the old capitalized, over invested system. So if you’re a 20 something Chinese citizen today, you’re of a small generation.

You hear the stories from your parents about how good things got, how fast it got, how stable it was. But everything has too much money chasing too few goods within the country, and everything is too expensive. So your chances of ever starting a family are nil. Your chances of ever being able to afford an apartment, much less a house, are almost nonexistent.

And it’s a very different political view. And if you were to put a label on it, these would be the zoomers of the Chinese system. And they are the last generation that will grow up in a centralized China, and they will definitely have some visceral memories 20, 30 years from now about how the Chinese system crashed around them.

And no one could seem to do anything because the political system is too ossified to function. Those people are going to be making some very interesting political and personal decisions as the system fails. Because if there’s anything we know about Chinese history in the past, when the center breaks, people leave if they can and a country that has at least 800 million people, that’s like the low end for estimates and maybe as many as 1.2 billion, if only 5% of them get out.

You’re still talking about the greatest migrant surges in human history. All right. That just leaves Iran. And Iran’s is even simpler. Yet it all depends upon how old you were when the Shah fell. And the mullahs took over and close to the water here. We’re going to turn around. There we go. Okay. This is just a really cool pocket beach.

I found. You practically have to repel down to it. Okay. Iran. So if you were are old enough to remember Iran as an adult before 1979. So you’re in your 60s for this category. The boomers, if you will. You remember just how corrupt the Shah was, but how there was opportunity for anyone with an education up to and including women.

And then the Shah fell and the mullahs took over. Women were disenfranchized and the intelligentsia and the engineers and everybody with a set of skills who could left the country. The people who left the country tended to have the money, and they emptied out the inner cities. Sorry. Inner cities in Iran, not the same as inner cities.

And like Chicago, you’re they emptied out the wealthier parts of Iran’s cities, took their money, took their kids, took their skill set and left. And you had a 15 year period where Iran was basically drowning and an inability to function because it didn’t have the skill set anymore. It had lost most of its educated youth, and most of the efforts the Iranian government, past and present, had made to educate another generation left the country and instead they had eight years of a grinding war with Iraq.

And after that, a series of on again, off again confrontations with the United States. Now, if you fast forward a little bit to a break point of around whole 2008, 2010, you had a shift in government with, the rise of a guy by the name of Mahmoud Ahmadinejad or a dog, as we used to call him at my old job, and a man at a job, was the first leader of Iran who was not a cleric since the fall of the Shah.

And he was deeply conservative, and he was deeply anti-American and anti-Western. But he wasn’t a man of the cloth. And he thought there should be room in public life for people who didn’t go to seminary, to be perfectly blunt. And so there’s now a split in Iranian society between the mullahs. On one hand, these conservatives who are, secular on the other hand, and then a wider disenfranchized group who has to basically take whatever’s on offer.

And that has made the country significantly more politically unstable. And in light of ongoing hostility with not just the United States, but the Western world in general, significantly less well off, because one of the mistakes that Ahmadinejad made is in order to get people over onto his side versus the clerics, he just bribed everybody. And so the state budget exploded, debt exploded, the currency crashed.

And then when a new round of sanctions came in and they could no longer underwrite everything, it all went to hell. Now we even have the strategic steps that the Iranians have taken to spawn paramilitary groups around the world falling apart. And so all of the money that Iran has spent on political consolidation, political evolution, education and increasingly strategic cost have all gone to nothing.

And so if you were 20, 15 years ago, for the last 15 years, your entire adult life, you have simply seen one state failure after another out of Tehran and you start to get a little pissed off. I’m not going to say anything simplistic like Iran is poised for a revolution or is ripe for change. What I’m saying is that the old pillars of stability that allow it to function don’t exist in the young adult generation, and that is a very nasty combination of factors.

Because remember when the old people who lived under the Shah left, they took the kids with them. We had a 20 year baby bust in Iran. So this younger generation is Disenfranchized is angry and is poor, relatively speaking, to Iran’s long history that that can turn violent very, very quickly, even if it doesn’t generate political change. So bottom line, there’s a generational story everywhere, but in before you can tell it, you have to really look at the local history and the economic trends that have shaped the people have grown in that areas.

It’s not going to be a cut and dried. It’s going to be different everywhere. But there is definitely lessons to learn. Okay. That’s it.

Can Tariffs Replace Income Taxes?

Imagine never paying income tax again. Sounds damn nice to me too. That’s until reality kicks in and you start looking at the math on how large the tariffs would need to be to replace those taxes…

Tariffs on imported goods would need to be roughly 50-65% and you could imagine the fallout that would have. Trade with key partners would collapse, prices would surge, supply chains would be disrupted, and energy supplies would take a hit. Tariffs once worked as a revenue source for the US, but with all the current programs and expenses, they barely scratch the surface.

In theory, there could be a way to make this work; like implementing entitlement programs, so a lower tariff would suffice. However, that would require some massive political changes that the US just isn’t ready for.

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.

Hey, all, Peter Zeihan here. Coming to you from a windy Colorado. We’re taking a couple of questions from the Patreon page today, specifically. A lot of talk in Washington these days is about replacing all income taxes with import tariffs. Is this possible? What do you think about what it would look like? Great question. The proposal dates back to something that predates the income tax, which was really adopted only about a century ago.

But you have to keep in mind the volumes in question. Today, the United States imports about 1.14. trillion dollars of goods and services, about, three quarters of that as goods. And the tax generates about 2.6 to $2.7 trillion of income. So if your goal is to zero out the income tax, you need a tariff on everything, not just from China, everything that is in the range of 50 to 65%.

I guarantee you, if you increase the price of things by half, it’s going to change how we live. For example, we bring in a lot of Canadian crude, heavy stuff that is then refined into, distillates such as gasoline and diesel, which are the primary fuel source for most of, say, the Midwestern part of the United States. That would go to zero almost overnight with a 50% increase. So we’d have lots of reshuffling. We’d have to basically shut down trade relations with all of our major countries that participate. Link supply chains with us. And, anything that is electronic come to Asia would get very expensive.

So you’d have some big impacts. The reason why you’d have this, such as mismatches. We don’t have the same economy that we had back during the times in the 1800s, when tariffs were our primary source of income. So we have built out the social welfare state with Medicare, Medicaid, Social Security and defense now being our four biggest line items in the government.

So if you were to zero out Social Security, Medicare and Medicaid, then you could perhaps talk about doing an equalization with a tariff that’s only around 20 or 30%. But I would argue that that would require a lot of political evolutions in the United States that we are not quite ready to cope with at the moment. So it’s an interesting idea, but as a, as an income tax eliminator, we’re nowhere near to tariffs, being the solution to that particular problem.

Dealing With Chinese Drones

Drones are all the rage right now and China is jumping on the bandwagon. With Chinese plans to create over 1 million combat-ready drones within two years, should the US be worried?

Drones may seem like a foolproof option, but that’s not the case. There are range, payload, and speed issues to consider, as well as ensuring an accurate guidance and targeting system is in place. The Chinese haven’t quite figured out all of those pieces. You must also factor in the US space and tech capabilities, which could render Chinese drones useless if it came to that.

If you want to make the argument that these drones open new doors for the Chinese, consider these factors. China’s drones would likely limit US naval operations near the mainland, but the Chinese air force already does that. Sure, there might be opportunities to make a little cash by offloading these drones in foreign markets, but not enough to move the needle. The only way I see these drones really impacting much would be if a drone-mothership was created and deployed (which the US is working on, not the Chinese).

All this to say, China’s drone production is impressive in scale, but their effectiveness in naval combat will be limited.

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.

Hey everybody. Peter Zeihan here. Coming to you from the air in slow burn. And a glacier in New Zealand just to the north of the town of Glenorchy. Today we are taking a question from the Patreon page. And it is how is the United States going to deal with the absolute scads of drones that the Chinese say that they’re going to build?

The Chinese official plan, which I have no reason to doubt that they cannot achieve it, is to have over 1 million combat ready drones within two years. First, let’s talk about the nature of that sort of threat. And then second, what the US Navy has to do differently from what it’s uphill, might have to do differently.

I’m just climbing the marine here.

First of all, a million is a lot. But keep in mind, as we are learning from the Ukraine war, whenever you’re going to have a weapons platform, you have to choose, largely between payload and range. So the farther you’re going to go, the less of a warhead you can carry. And there’s always detection issues too. So even the new rocket drones that the Ukrainians have been using, which have more weaponry and more kinetic force, really only have a range of, low number of hundreds of kilometers.

So if you got a million weaponized systems and you can only throw them, a couple hundred kilometers or less, it’s, never going to even enter the defensive envelope. Of an American destroyer, much less an aircraft carrier. Second, in addition to the balance between range and warhead, there’s also the issue of speed.

For example, the Iranian Shaheed drones, which have been causing a lot of havoc in the Ukraine war, only fly had about 150km a hour. It’s roughly 9100 miles an hour. So, you know, I don’t if you knew this, but naval ships, they move, so move pretty fast. So as in the words of the great man, Mr. Miyagi, best way to avoid a punch is no be there.

Which brings us to guidance. Something we have discovered over and over in the Ukraine war is it doesn’t matter how many drones you have and how fast they are and how big their warheads are. If they can’t see the target. Most drones today require eyes on. They require a controller. And so if you don’t have a controller with a constant telemetry link to the weapon system, the weapon is just going to spin out of control and crash harmlessly.

And you know, when you’re talking about naval combat, that, harmlessly means in the ocean, you might like you can have a lot of collateral damage. Now, there are two ways around this. The first is a problem that the Chinese are struggling with, with all of their other weapons systems. The Chinese have a number of long range systems, especially when it comes to, ballistic missiles.

The problem is targeting. So the United States is really good with its missile forces. If we’re doing something like a ballistic against a land target, you know, you have coordinates. It’s really hard to do anything about that. And if you’re going to use something like a cruise missile, the United States basically loads in geographic information into the brain of the cruise missile.

And the follow is a programed route to hit its target. When you’re dealing with moving targets, it’s a lot harder. You have to have eyes on. And the problem that the Chinese have is while they do have a whole lot of weapons systems and people and manufacturing capacity, it’s really hard to have eyes on something that’s over the horizon that is moving.

So everything is dependent upon maintaining that telemetry link and having eyes in the sky, probably in the form of a reconnaissance satellite. And while the Chinese do have the ability to launch and maintain their own satellite fleet, their space weapons systems are woefully nascent. They’re new. And if we were to have a conflict with any of the technologies that the Chinese currently have in place or deployed, you basically have the United States who’s been playing this game for 60 years, take out every Chinese satellite in the sky in a matter of a few days, if not even a few hours.

And then all of a sudden, all of these longer range weapons systems that the Chinese have are blind and can’t hit anything that can move. And again, that’s way to avoid a punch movie there. Okay. With drones, this is even more problematic. The only way that we have technology today where a drone can reliably get around jamming is to have a fiber optic spool where you literally have a physical cable connecting the drone back several kilometers to the operator.

But several kilometers is like, you know, the range of seeing the horizon when you’re at sea level. You put it on a boat, you might be able to go a little bit further, but nothing weighs nothing. And you’re going to have a spool that goes out 50 K. You know, that’s already beyond the technology that we have today.

So like everything the Chinese do, they do it at scale. But that doesn’t necessarily mean it’s a game changer. It may limit what the US Navy can do within sight of the mainland. But I would argue that all this talk about Chinese drones when it comes to naval combat, does not do anything for them at all. That their air force doesn’t do better already.

So it’s a lot of talk and, it’s interesting because it is a new technology. It will keep evolving, but I think the field where it’s going to be more of an issue is arms exports, because of the Chinese can make lots and lots of these things. They may not be useful, in a sea fight or even in a land fight.

Although if they decided to invade Russia, I could get curious. But they might be useful as an export product. If the Chinese started sending all kinds of stuff in to say, just to pick something out of random, the African theater and arming groups to achieve this or that, that could go some interesting directions. But make no mistake, the places where the Chinese are going to find customers here are not places that are.

How should I put this civilization strong? It’s more likely to be in semi stateless areas, which is going to limit the amount of income that they can get from them. And if they start deciding to supply weapons to quote unquote countries. Who’s it going to be? I mean, no one in Latin America has a territorial dispute. We haven’t seen a war in Latin American, not counting the soccer world worth a bunch of people got lost in the jungle.

I think you have to go back to, like, the 1880s.

They get involved in Europe. The Russians, you know, might buy this stuff in scale. But if the Chinese start supplying hundreds of thousands of weapons systems that are finished to the Russians, we’re in a very different world already. Southeast Asia could be fun, but drones with today’s technology really don’t do well in heavy forest or jungles.

I mean, I tried it. That was an expensive experiment. That just leaves Africa and the opens of places like, say, the Sahel. A booming arms market for a country the size of China. That is not so with today’s technology, with the likely evolution of this technology over the next several years. This is not something I worry about too much.

What would make this change is not just a general improvement in the range and the payload and the accuracy and all that good stuff, but being able to make, a drone mothership, that has all the normal aspects of a military vessel, but also has the ability to manufacture drones at scale, with its own facilities.

And that’s something that at the moment, the Chinese are not working on because they haven’t figured out the tech. That is, however, something that the United States is working on with the replicator initiative, which should be operational by the end of 2026.

AI Drama: DeepSeek, Nvidia, and China

A Chinese firm, DeepSeek, claimed to develop an AI model at a fraction of the cost used to develop competing models. This has caused quite the stir, but what is actually going on?

China’s domestic chip manufacturing is dated and their attempts to catch up have fallen short. I’m always skeptical when approaching topics involving Chinese tech claims, but if the DeepSeek breakthrough is true, it would mean a massive AI leap has occurred. This would reduce the reliance on high-end chips and drastically mitigate supply chain vulnerabilities.

Nvidia had designed downgraded chips for China, but even those were banned by the Biden administration in late 2023. So, even if DeepSeek’s breakthrough turns out to be real, the Chinese will struggle to fully capitalize on the opportunity due to hardware restrictions and access. And Trump could make those restrictions even tighter.

But again, I’m doubtful that we’re getting the full picture out of DeepSeek and I suspect we’ll know what actually happened very soon.

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.

Hey everybody. Peter Zeihan here. Coming from Colorado. Lots of people have asked me to comment about recent things that are going on with artificial intelligence from a market point of view. Let me begin by saying I never comment on market movements, and this is not going to change today. What is going on is we’ve had a bit of a rout in the United States for a company called Nvidia, which designs the ultra high end GPUs, as are graphics processing units, which are the advanced chips that are used in almost all artificial intelligence training and applications.

Specifically, a Chinese company called Deep Seek says that it managed to generate an artificial intelligence model, at 1/20 of the cost of what Nvidia has been able to do or what companies had been able to do with Nvidia chips. And in doing so, we basically saw more market value, bleed off of Nvidia in about eight hours than most countries have economies.

It was ridiculous. It’s also probably completely fabricated. Keep in mind that almost anything that comes out of U.S. high tech is proprietary. So the information is circumspect, and almost anything that comes out of China has a degree of fraud involved. And if you’re using either of these two things to color your trading decisions, I can’t help you at all.

But what I can do is talk about where this leaves the industry and what it would mean one way or another. So let’s assume for the moment that this is all fraud, in which case this just all blows away really quickly. And a lot of people who have been trading money and trading stocks feel really stupid in the not too distant future.

I think that’s the most likely outcome. But let’s assume for the moment that it’s real. And this Chinese firm working with subpar chips has been able to make superior, large language model trained AI systems to what the American bigwigs like OpenAI can do. 1/20 of the cost with dumber chips. That would be significant. One of the big problems that we have with the chips right now is the supply chain is so grossly vulnerable that it doesn’t take much of a disruption anywhere in the world to break the ability of the world to make these high end chips at all. And if that happens, then we’re going to have to decide how to ration our chip usage. If you can drop the cost of training these new models by 95%, obviously, that makes, that concern a little bit less of a problem.

But even within that, there’s going to be some very clear breaks geopolitically. So again, assuming that this is for real, let’s look at the chips that were used. The high end chips that are basically three, four and five nanometers that provide the backbone of most AI operations. The ones that we think could be used for training AI models are all under sanctions as of 2022, and the chips that were used by deep seek to do their operation were custom built chips, basically.

Nvidia looked at the sanctions, said that they still wanted a market in China. So they worked with the Chinese company Deep Seek to design a chip that would comply with sanctions, and they dumbed it down, if Deep Six announcements are true. Clearly Nvidia did not dumb it down enough, but the Biden administration, in one of its last actions, decided a couple months ago that, Nvidia has not been playing in good faith and basically banned all of these chips as well.

So if deep secret was able to do this with the dumb down chips, those dumb down chips are no longer accessible to the Chinese economy writ large anyway. Moreover, the most advanced GPU that the Chinese system is capable of manufacturing is about a 14 nanometer. So you’re talking about a dozen generations behind where we are right now?

It’s worse than it sounds, because even to make those 14 nanometers, they have to use imported equipment and a lot of imported labor to do the quality checks. Yes. Yes, yes. We have had a couple Chinese firms make something in the seven nanometer range, but it’s been really clunky. It’s been a massive power hog. They get something only like a 20% success rate.

And most commercial chips, if they’d have anything less than 90%, are considered failures. So if they push and push and push and push and push and throw in an exorbitant amount of resources into it, they can make a chip that is still half a dozen generations behind what would be necessary to do an AI model. So if if Deep Seek is not lying, then we would have a breakthrough in AI that the Chinese would be utterly unable to participate in, and that would generate a very interesting world.

But we’re going to know how this is going to go either way in the not too distant future, because everything that Deep Six says that it did is open source. And we’re going to be able to try to recreate it, in any number of companies, in any number of countries in the not too distant future. One other reason that I’m really doubtful the DPC actually did this.

There are basically two ways you train AI. You basically you teach it like in school, like, you know, x plus two equals y three plus four equals seven. And once you’ve done that and built this kind of catalog of basic information, and you then let it loose on bigger problems, what deep seek is saying is they just skipped the first step, saying that you don’t need to teach basic math to the computers.

You can just set them loose on calculus, if that’s true, which I find exceedingly unlikely. This can be replicated in a matter of weeks to months, not years. So we’re going to know, in the not too distant future, just what actually happened and how many people in the financial world jumped the gun. In a really silly way or not? And even in the, you know, worst case scenarios, the right term, even in the situation where deep secret really, really did generate a bit of a revolution, everyone’s going to be able to play except for the countries that can’t get the chips. And if there’s one thing that we understand about the Trump administration versus the Biden administration, is they have no problem taking sledgehammers to specific companies.

So if it is the understanding of the Trump administration that Nvidia has been playing fast and loose with sanctions, you can count on Nvidia having much bigger problems than simply a Chinese company coming up with an a more efficient model.

The Failure of Chinese Real Estate

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So next phase three.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I’m done.

Intel Keeps Playing Catch-Up with TSMC

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.

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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.

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The Live Q&A Is Here!

This is a bonus video that Peter recorded this AM!

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