China’s “Diversionary” War with Taiwan: The Good, Bad and Ugly

China invading Taiwan isn’t a new topic, but would China ever use this war as a diversion or distraction? This is an unlikely scenario, but as long as Xi is in charge, we must consider every possibility.

Despite challenges to China’s political and economic system, with a leader like Xi, there isn’t a need to “rally support” for a war. In addition, capturing Taiwan wouldn’t provide China with a strategic advantage, and it would likely lead to hefty economic vulnerabilities.

The odds of a “diversionary” war happening are never zero, though. In a system like China, all it would take is a miscalculation on Xi Jinping’s part or some dark realizations setting in…

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And then there’s you.

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Transcript

Hey everybody. Peter Zeihan here coming to you from Colorado. Now, last week, I released a video on why none of us should be really surprised if the Chinese system falls apart. We’ll leave the link here for those of you have not seen it. But the most common follow up question that I’ve received from viewers has been wouldn’t this justify in the Chinese mind a diversionary war or distraction war to increase public support?

I can’t rule it out, but I don’t think that’s going to go down for three reasons. Number one, this is not a democracy. This is an autocracy where the CCP has control of the public space is huge and their ability to shape public opinion is massive. And in that sort of an environment, you don’t get the same relative effects and you also don’t have the same in stability from economic problems that you might have in a more pluralistic society.

So I don’t want to say no, but the government’s ability to shape public opinion and to stir up nationalism is pretty robust. If anything, the government sometimes has a bit of a problem containing the nationalism, not not getting it going. So from a legitimacy point of view, I don’t think it’s really necessary. Second, anyone in China who can read a map and do math knows that if they launch a war for Taiwan, it will it will not end well, not the war itself, but what happens to the next day.

China is dependent upon the international community for roughly three quarters of their energy sources, and most of that comes from a continent away. On top of that, China is in terms of absolute volumes, the most dependent on imports and exports of any country in the world. And they import the vast, vast, vast majority of the materials that allow them to grow their own food.

So if you have even a moderate effort by a small number of countries to go after Chinese commerce in the aftermath or because of a war, this country will be facing a industrial collapse in just a matter of months and a famine that will kill half the population in a couple of years. And I have no doubt that at least several years ago that the Chinese leadership understood that.

And so they primarily used Taiwan as a rhetorical issue. And most of the threats that we’re seeing now are not necessarily coming from the decision makers. Well, a third let’s assume that the Chinese can capture Taiwan in a matter of weeks with minimal damage. That doesn’t really give them anything. I mean, yes, it technically is a break in the first island chain, but the Chinese are still dependent on the international system to get everything that they need, and they’re dependent on the U.S. Navy to patrol the global oceans so that their commercial cargo can come and go.

In fact, this would actually put their potential sea lanes by Taiwan in greater risk from the Japanese, who have a better, longer range navy than anything that the Chinese have. And then there’s talk of the semiconductor industry that the Chinese would be able to scoop. But the Chinese can’t operate their own semiconductor industry. It’s not just run with foreign equipment and software.

It’s run by foreign personnel. And the Taiwanese facilities are the most advanced in the world. And honestly, the Chinese wouldn’t know what to do with it. I don’t mean that as a slam to the Chinese. I don’t think any country that took them over would be able to operate them in anything less than a decade timeframe for the Chinese would take a lot longer than that.

So it really doesn’t check any boxes now saying that it wouldn’t work, saying that a diversionary war would be unwise and would achieve nothing for the Chinese is not the same as me saying. I don’t think it would happen, but the rationale would be very, very different. So two things. Number one, it could be a miscalculation, not in the traditional sense that, you know, we don’t think anyone will do anything but a miscalculation by JI.

Remember that JI has formed such a tight cult of personality that no one’s bringing him information. So he’s literally making information, making decisions in a box without any idea of the information that flows in or the reality of the world around him in that sort of decision making structure. Sure, he could pull the trigger, but it wouldn’t be because of any of the reasons that you would normally expect.

So whether it’s economic, strategic, political or whatever, whatever we would say, you know, this might force a country to pull the trigger. None of that applies to Xi because it’s all in his head. And it’s not something that we can really guess at because we don’t know what’s shaping his decision making, because we know he’s not being fed the information he needs to run the country.

The second reason is quite darker. If you’re like me and you believe that we’re looking at the end of the Chinese system over the next decade for demographic reasons alone. Forget politics, forget energy, forget vulnerability, forget the debt, forget trade wars, forget everything else. Then there’s something to be said for pulling the trigger. Because if the Chinese system is facing that same industrial collapse and that same population collapse for other reasons, and there’s nothing that the Chinese government can do to stop that, maybe buy a little bit of time, and that’s it.

Then pulling the trigger, choosing the time and the place of a war, even if you think you’re going to lose, even if you know it’s going to result in the death of half of your countrymen, if it allows you to command the narrative of the future. Well, that means that the CCP for the low, low price of half the country’s population might be able to rule into the next era of Chinese history.

And if you’re completely amoral about it, you got to admit that might be a compelling reason to launch a war that you know what will destroy you for dark. Not saying that’s happening, but we can’t rule it out at this point.

Don’t Be Surprised by China’s Collapse

It’s time to come out from under your rock and face the music – China is collapsing. If that comes as a shock to you, I have two recommendations. First, it might be time to refresh your news feed. Second, the Chinese have concealed this fairly well, so watch this video to get up to speed.

Whether you look at it from a domestic, international, heck, or even extraterrestrial point of view, the Chinese system is riddled with issues that are becoming increasingly apparent. Between economic issues, a crumbling political system, awful demographics, and a long list of other problems, China’s collapse should no longer surprise anyone.

Now that you’ve been warned, you need to ask yourself: are you ready? Between disruptions to global supply chains and a myriad of other issues, the world better be prepared to manage the fallout.

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Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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Transcript

Hey everybody. Peter Zeihan here. Coming to you from home in Colorado. And if you haven’t been blind and immune, be marginally aware of international news. You know that the information out of China these past few weeks through July and August and into September has just been atrocious. Consumer spending is down. Lending is down, which should never happen in a country that is just capitalist driven.

The Chinese basically force feed capital into everything, and so lending should always be going up. And it’s not. We’ve had the foreign minister go missing and then be dismissed, the same as now happening for the defense minister or the head of the missile forces. Information that’s coming out about youth unemployment is atrocious, so they just stop collecting the data altogether.

Information on bond transactions is gone. And if you’re going to try to get into a more sustainable economic structure, you obviously need a bond market. They’re not collecting information on patterns anymore. So supposedly the moving up, the value added scale that the Chinese been talking about for years is now not even part of the plan. It feels like we’re looking at a broad scale societal and economic and political breakdown, and we are.

The shock, though, is that this is all happening at once. And after years, if not decades, of the story of rising China and hearing that from Beijing and oftentimes from political parties in the United States and around the world, for it to all of a sudden go completely inverted due seems like quite a shock. But here’s the thing.

It hasn’t all been happening at once. It’s just that this is when we’re noticing it. If you look back on the last few years, things have been odd in all things China. So first, let’s deal with this from the outside point of view and then from the inside point of view. So outside think of what’s gone on the last few years.

We’ve got the Ukraine war. We’ve got the Iranians on the warpath. We had four years of the Trump administration and we had two years of a more internally focused situation. And the Biden administration, the Europeans were dealing with the tail end of their financial crisis. The Japanese have been preoccupied with the demilitarization program. Everyone has been dealing with their own stuff, and it’s only kind of now that the noise out of China has gotten so loud that we’re even noticing that it’s not good news anymore.

As for the Chinese. Two big things. Number one, COVID killed the COVID. COVID cozied for three years. It was nothing but COVID in any sort of statistical release or news out of China was always viewed through the eyes of COVID and even if there was bad news, you could always lay that at the altar of growth. IT consumption was down a quarter.

That’s COVID problems with supply chains. That’s clearly with COVID problems with linked in their industrial production to news in the wider world. That was because we adjusted our consumption because of COVID. And so we’re only now kind of getting our first good look after years of COVID and then also within the Chinese system, that had a significant shift.

But when Chairman Xi, he started a series of purges under the guise of the like corruption campaign. And in his first five years, he removed every regional power center so he could never rise to national prominence. And then he went through and gutted the two factions of the previous presidents, Hu Jintao and Jiang Zemin, that put them in power to make sure that they could never come back.

And then he spent the last couple of years gutting the bureaucrats and the private sector of anyone who might be able to rise to national prominence. As part of that, he’s removed certain sorts of data collection to make sure that they can’t assist anyone from rising. So, for example, college dissertation, the information is not published anymore. It’s probably not even collected anymore.

So no one can take the economic route to prominence. And political biographies are no longer put together by the state. So any sort of local politician or younger politician has no way to rise in the situation that might down the road and generate a potential rival. So we’ve seen this ever tightening information vacuum across the Chinese space. All of these things have been going on for five and six years.

And during that five and six year period, we had an inflection point that was absolutely the high point of the Chinese system, and that’s largely demographic. We still don’t have what I would consider to be truly accurate information. But the most recent full data to be released by the Chinese in the last two three months tell us that the birth rate has dropped in China by nearly 70% since 2017.

That’s the fastest drop in the historical record of China, of humanity throughout all of recorded history. And in that timeframe, if the Shanghai Academy of Sciences is right, they’ve all recounted their population made over 100 million people, all of whom would have been working age people under age 40, meaning that in the last five or six years they’ve had that just peak workforce and the last year peak workforce probably in the earlier part of that process.

And they just don’t have enough millennials to do consumption at all. And we’ve seen the cost of the workforce increase by a factor of 14 or 15 in the last 22 years. So in the last five or six years in China, if you could somehow have a crystal ball and have access to all the data, especially the supplement collecting anymore, we would see that they’ve already fallen off the cliff and it’s only in the last few months that it’s become so obvious that it’s cut through the clutter and the noise and the preoccupations we all have with everything else in our lives.

And now it’s obvious that this system is breaking down. The demographic collapse is not correctable. There are not enough people under age 40 for them to even try, even if they had the macroeconomy, the structures that allowed or encouraged people to have families of the role. And we’re seeing an ever increasing rate of decline in terms of their industrial competitiveness.

On top of that, we have the issues with the Ukraine, where with China’s starting to come into the crosshairs of sanctions. We have China being more and more exposed to energy and food insecurity because the Europeans have taken everything else that is proximate to them. So they don’t have to use Russia and the infrastructure between Russia and China is so thin that stuff has to go out west past Europe through the Suez War around Africa and around India and around Vietnam before getting there, making it the most exposed supply lines in the world.

So we’re going to see more disruptions moving forward based on what’s going on in China with demographics and political situation. And we’re all certainly going to see disruptions in their ability to access the wider world for trade, merchandise exports. And that before you consider that the Biden administration is the most protectionist administration the United States has had, at least in a century, far more so than Donald Trump.

So the Chinese are getting hit from every single angle and Chairman Xi is so purged the system that it’s an open question whether he can even become aware in a reasonable amount of time that something needs to be done, much less have the capability to come up with a coherent policy to deal with whatever the issue is as it arises.

So demographically speaking, we know that this is China’s final decade as a coherent economic power, but now we see exposure and political failure that absolutely can bring that date forward. And that assumes that no one in Washington or London or Japan or the rest put their fingers on the scale and push this forward. This has been coming for a long time, but because of all the noise, we missed a lot of the signals in the last five years of just how quickly it was coming and now it’s here.

The biggest risk in all of this is whether or not we have enough time to adapt. If things like construction spending for industrial projects in the United States have risen to a level we didn’t even see in World War Two, the pace of the industrial expansion and the reshoring trend really is huge. Should have hopefully started five years earlier by better late a mother.

The biggest concern I have now is that the information vacuum out of China is so complete and the decision making capacity in China has so collapsed and the pace of decline is now so steep. And the fact that we’re coming so late to the understanding of all of these things means that we might not all realize the China really is broken until the product simply stops arriving.

There’s a lot of industrial demand for product in this country for things like transmission towers and transformers and other industrial equipment that is necessary to build out the industrial plant here that’s still made in China that we’re still depending upon. And some of these things already have waitlists that are more than 36 months. But we might now be in a situation where it’s not obvious that this stuff is never coming until the shipments simply don’t arrive.

And at that point, we will be in a bit of a pickle because we will not build out our industrial plant fast enough in order to get by without the Chinese in the mid-term. That’s our biggest risk. Now, luckily, from an industrial growth point of view and an employment point of view, this is a good problem. But it does mean that the Chinese collapse is likely to cause a lot of follow on damage here because of shortage.

And the only way around that is to build more and make sure that we don’t need those products in the first place. Unfortunately, we need a lot of those products in the first place in order to get built or no real body around that except for to start yesterday.

Why Huawei’s 7nm Chip Isn’t a Big Chinese Breakthrough

The Chinese telecom firm Huawei (the same firm that was caught modifying equipment on behalf of the Chinese government) has released a new phone with a seven-nanometer chip.

After some digging, it appears that this breakthrough is not as significant as I initially thought – and it comes down to what the Chinese have access to. They are using a process called deep ultraviolet (DUV) lithography, and while it gets the job done, its days are numbered in the cutting-edge field. Further, the unofficially reported yield rate Huawei achieved is nowhere near the industry standard.

The other process of creating these chips – extreme ultraviolet (EUV) lithography – is still only accessible to the Chinese via subsidies, poaching, and theft. So, I won’t be classifying the release of this phone as a “significant” breakthrough.

If the Chinese head down this path, it’s quite illuminating as to how far they’re willing to go for the sake of saving face. Should China keep this up, it’s just one more way they risk harming their position on the global stage.

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Support medshare's ukraine fund
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Transcript

Hey everybody. Peter Zeihan here coming to you from Phoenix, where it’s 180 bajillion degrees outside. So we’re into this one from inside. A lot of you have written in and honestly, I was pretty curious myself about something that’s going on in China with the telecommunications firm Huawei. Now, that is a firm that has stands accused or guilty early of trying to modify wireless equipment and cellular equipment for the wider world so that the Chinese government can have a cheap and easy inside.

And everyone’s communications. They got discovered by the Australians, the Australians basically, or everybody else. And now we’re dealing with widespread sanctions by led by the Americans, by participating by every major country in the world that does the production of cellular equipment. And it’s kind of course, their business model. Now, in the last month, they have released a new phone, which is the first in a while because it took them a while to do anything without the ability to import equipment from anywhere else.

And it has a seven nanometer chip in it. And for those of you who’ve been watching me for a while, I’ve said that there’s not a lot that the Chinese can do that’s better than 90 nanometers. That’s what they can do themselves without external help. And 28 nanometers because of sanctions is about the best they can hope for.

So seven obviously potentially a very big deal. So we took a little bit of time. We dug into the details. And the short version is I’m not as worried as I was when this first came out. And it has to do with what the Chinese have access to. There are two types of chipmaking styles. The first uses something called deep ultraviolet, and that’s what was used for this chip.

Now, this is an older technology that has a number of drawbacks. You basically have to customize your equipment and modify your equipment for each individual chip design. So every time you have a new design, you have to kind of overhaul your factory in your lithography system from the ground up. And the way that the Chinese have done this is basically pirating design details from TSMC and Taiwan and then hire you just a huge number of people to do some technology transfer.

And they basically, especially when sanctions kicked in, you just basically were told they have a bottomless budget to go out and build a SUB10 nanometer chip. And they did. And it cost them five times as much as it should have. And the chip that they end up making wasn’t that great because they couldn’t do the design, that information, those people, they weren’t able to hire away.

So it’s basically a crypto mining chip made with a little bit smaller etching, which means that for a phone it’s really not a great option. More importantly, you’ve probably, from the Dutch point of view, the Dutch are the ones who make this equipment is that this theft started well before the sanctions run, but sanctions have only been in place for two, maybe three years now.

This started five years ago. So it is the ultimate expression of what the Chinese can do with a bottomless supply of money and absolutely no business ethics and the ability to hire anyone they want, all of which is, you know, an under threat in the sanctions regime now. So, you know, kudos for being able to get something sub seven, but it’s only about as good as your average smart phone from maybe 2017 which which is not nothing, but it’s certainly not the breakthrough that some people seem to think it is.

The second sort of technology is called extreme ultraviolet, and that is what you do to do all the good chips and the leading edge chips. Now, especially the three in the five nanometers that most smartphone folks are wanting to put in their machines. This system is much more modular and you don’t have to redesign everything from the ground up.

So when it finally did come online, which which is just like four or maybe about four years ago, everyone was really excited because all of a sudden the time to target for bringing the design to production could be shrunk. Still talking months to years. But you don’t have to re fabricate everything within your facility every time you have a new chip design.

And so far it seems to be performing to snuff and it’s this sort of equipment that the Chinese can’t get at all, in fact, don’t have any of at all in the country. So the U.V., they were able to use the stuff that they had and buy stuff that was no longer restricted or that wasn’t restricted yet, combined with a huge amount of subsidies, combined with a lot of poaching.

And they were able to cobble together a phone that does use something that is technically sub10 millimeter, even though it doesn’t perform anywhere like that for a phone. The EUV is simply off the market for them and everyone else is moving forward. So from my point of view, this is really instructive. Think of it this way. Think of it like I had said, that the Chinese couldn’t build a television.

And I’m thinking of like those OLEDs that you hang on the wall that way, like £20 have a slight curve and the deep black and blah, blah, blah, blah. And the Chinese are like, Oh, we can totally built a TV. And they came out with like a 48 inch tube TV. It’s technically a TV. Technically, I was wrong, but under the terms of the technology, this is not something that really takes them forward.

If anything, this is a one off because they can’t use the stuff to advance because they don’t know how to make the better chips. And the reason that do you’ve was ultimately abandoned is by the time we get to about 15 nanometers, it was really skirting the edge of what you can do with physics because the wavelength for the light is wider than what you need to etch on the chip.

And they basically had to tweak the laws of physics to get down to seven, but that’s the upper threshold. But even doing something a little bit dumber than that, it’s not clear that the Chinese have the ability because they no longer have access to the expertize of the Dutch. So this is really, really illuminating to me for how far the Chinese are willing to go in order to say that they broke the sanctions, but they really did it.

There’s nothing about this that is home grown. There’s nothing about this that is replicable. In fact, there’s a possibility that may kind of fall into that category of stupid things that they’ve been doing lately in that you’ve got a number of people in the American Congress who are not interested in doing a week of research to figure out the details or just like, oh, always breaking sanctions.

Well, we’ll show them. We’ll just put it in front of the president, a bill that says that all technological transfers and sales to Huawei are now illegal. So not just the top, but stuff, everything. It’s Congress. Who knows how that’s ultimately going to shake out. But the Chinese are finding more and more ways to sacrifice their position on the altar of ego.

And it looks like this might be one more. All right, everyone, take care.

Chinese Leadership Concerns: Xi Ditches the G20 Summit

The announcement that Xi Jinping won’t be attending the upcoming G20 Summit is the equivalent of friends coming together for your intervention, and you turn around as soon as you see their cars parked down the road. With China facing economic slowdown, trade wars, and a slew of other things, an intervention (aka the G20 Summit) is exactly what Xi needs right now.

While some speculate that Xi is moving away from G20 in favor of BRICS, he didn’t even show up to the opening ceremony of the BRICS business forum. So, this announcement doesn’t indicate any political angle; it’s just a reminder of Chinese leadership’s ongoing and accelerating failure.

Xi has purged the Chinese political system of anyone who can form thoughts and potentially challenge his power, leaving him as the judge, jury, executioner, and everything else of importance in China. Even if Xi happened to be the smartest person in the world (which I won’t even comment on), he is still human.

Xi can only do so much alone, and the lack of competence across the Chinese system means that policy stalls wherever Xi is not. While Xi will send a replacement to the summit, concerns over China’s leadership capabilities are mounting, and the question remains – what is next for the Chinese people?

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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Transcript

Hey everybody. Peter Zeihan here coming to you from Colorado. It’s Monday, the 4th of September. And the news out of China is that Chairman Xi Jinping will not be attending the upcoming G20 summit in India. There’s a lot going on in the world. I’m generally a big fan of the G20, but if you consider the Chinese economic slowdown, trade wars and all kinds of other things, it’s a good time for leaders to actually be meeting face to face, to do things.

Some people are saying that this is G spurning the G20 in favor of things like BRICS. But remember that he didn’t show up to the opening ceremony of the BRICS and the Business Forum, which is arguably the most important part of the BRICS forum as well. What we’re seeing here, instead of any political decision to favor or denigrate any particular forum or angle of policy, is instead the general ongoing and accelerating failure of the Chinese leadership system to cope with the situation they find themselves in over the course of the last 1213 years, Chairman G has basically progressively purged every part of the political system at his first five years.

He called it an anti-corruption push, and he went after all the regional power centers. And the next five years he went after the two factions that actually put him in power, that of his predecessors, Jiang Zemin and Hu Jintao. And the last couple of years, he’s going against anyone who has basically had an opinion or shown any competence who might be a theoretical successor.

And we’re now at a point where there’s no one left. So if something pops up that JI thinks needs to be dealt with, he is now the only one who can deal with it. So he sent his premier, Li Keqiang, who is got the personality and the competence of a block of wood to sit in for him, where he’ll basically just be reading policy papers and not acting to engaging in any sort of meaningful negotiation on anything while he does whatever it is he feels he needs to do.

And remember, he’s still a person, so this might not be policy related, it could be personal. But he is now found himself in a very similar situation to that of Donald Trump and Barack Obama, that he just doesn’t trust anyone to do anything. And so not a lot is going to get done that’s going to get done competently.

And even if he is the smartest person and the best manager on the planet, he can only be at one place at a time, doing one thing at a time. And as a result, Chinese policy in every other field at best stalls. Not a good sign. All right, that’s it.

Ukrainian Drones: A New Issue for Russia and China

The super moon (or blue moon or whatever it was) didn’t have just the animals stirring last night…and since I couldn’t sleep, I figured we should talk about Ukraine’s recent drone attack and its ramifications.

While Ukraine being able to strike deeper inside Russia’s border is a significant strategic win, I’m not just up late thinking about the damage they inflicted. As Russia continues to face more and more attacks like this, the ability to defend and uphold its national coherence is now threatened.

Russia is a multi-ethnic empire; it expands and absorbs territories until it reaches defensible natural geographic barriers. The Ukraine War is just another example of this in practice (and success would mean delaying Russia’s demographic collapse). However, as dissent bubbles up amongst these various ethnic groups, what happens if Russia can no longer monitor and put the lid on it immediately? How could it possibly project power outside its borders?

The Russians aren’t the only ones feeling the heat after this drone attack. When a country like Ukraine can practically walk into a Walmart and get what it needs to launch a large-scale assault, that’s one heck of a conversation starter for the Pentagon.

Once the US amasses a – flock – of drones, they’ll have another way to attack the Chinese navy should they need to. The irony is that most drone parts come straight out of China. So the Chinese could stop exporting this stuff and hurt their economy, OR they could continue handing over the very thing that might end them. I’d say that was worth waking up for…

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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Transcript

Hey Everyone. Peter Zeihan here coming to you from Colorado. It is early in the morning on August 31. It’s the supermoon and the woods are kind of crazy with the animals. And I couldn’t sleep. And whenever I can’t sleep, I just kind of let my mind wander and see where it goes. So I’ll let you to be the judge of whether this makes any sense or not.

Yesterday, my time on the 30th, the Ukrainians launched their largest ever drone assault on Russian positions across the length and breadth of western Russia. At least a half a dozen different locations, some of which were several hundred miles from the Ukrainian border, doing a moderate amount of damage to a few things and taking out some long range aircraft, specifically the aisle 76 long range transport aircraft that the Russians use to transport paratroopers.

They’ve been building in terms of their drone attacks, doing more and more, further and further. And a couple of weeks ago, they took out a couple of backfire bombers, which are long range bombers, which launch long range cruise missiles which were designed to shoot an American carrier, battle groups and military convoys in the North Atlantic. You know, all very long range aircraft, strategic aircraft.

And it occurs to me as I was lying there in bed, that we may have had a turning point in the war, not on the Ukraine front, but on every other front that matters. Well, let me kind of dial that back and explain what I mean. Russia is not a normal country. It’s not a unitary republic like France or a federated country like the United States.

Instead, it’s a multiethnic empire. The Russians have never really had territory that is, from their point of view, secure. So what they do is they expand through the flats of Western Eurasia, absorbing ethnic group after ethnic group, until they reach a series of geographic barriers that you can’t push through easily, like the Carpathians. So this is one of the reasons why I’ve always thought that this war in Ukraine was inevitable, because the Russians are trying to rebuild that outer crust of defense that they had during the Cold War and with their own demographic decline.

If they don’t do this while they still are able to field a large army, they are looking at collapse over the course of the next 10 to 30 years. This is all about buying time for them. So from a strategic point of view, the war makes sense. A lot of sense. That logic works both ways. However, in order to maintain control of a multiethnic empire, you have to have a really deep intelligence system that monitors the population for any sign of dissent, and then you rapidly rush troops to any areas where there is a rebellion in order to quash them, which means that the Russians don’t simply need a long range power projection capability in

order to fight Naito or China or Japan or anyone else. They need it simply to hold their country together. And over the course of the last month, especially on the 30th, the Ukrainians have demonstrated that the strategic deployment assets, those IL 76 is those backfires that the Russians need simply to maintain their national coherence are now being threatened.

So everything that I’ve said about the Ukraine war to this point I think still stands. But we now need to consider that an aspect of the Ukraine war is that Ukraine is demonstrating that Russia proper might not be sustainable, even if they win the war in Ukraine. And that is something that has got to have a lot of people in a lot of capitals stroking their chins thoughtfully, because the Ukrainians didn’t do this with neater weaponry.

The United States, NATO’s, everyone else, the refusing to provide the Ukrainians with weapons that could be used for deep strike capability within Russia because they don’t want to risk any sort of nuclear exchange. This Ukraine did this by themselves and Ukraine did not start this war with a drone fleet, much less a long range one. This is stuff that they built with off the shelf commercial components, primarily from China.

 

You know, irony of ironies. And if you can do that by basically shopping at Wal-Mart, then the stability, the very existence of the Russian state is all of a sudden called into very serious question just from an internal coherence point of view. And there’s issues about this that carry over outside of the theater of the Ukraine war, Russia.

 

I mean, I’m talking here about China because over the course of the last couple of days, there’s been a lot of noise out of the American Pentagon, specifically from Admiral Hicks, about something called the Replicator initiative, which is to take off the shelf inexpensive commercial grade drone technology and make literally thousands, if not tens of thousands of attack drones that can be used to basically sink the entire Chinese navy.

They’ve seen in Ukraine how effective the strategy can be. Supposedly, they’ve already built the technical specs for what they want and they hope to have the entire fleet deployed in under two years. Now, a couple of things to remember about the Chinese side of things. Yes, the Chinese have a very large navy in terms of number of ships about twice the size of the American Navy.

Now, the American Navy still outclasses it. We have much larger ships with much larger ranges, and most of them are centered around the aircraft carrier battle groups. China has nothing like that. But the biggest restriction the Chinese face is the ability to operate far from shore. About 90% of the ships can’t operate more than a thousand miles. So you’re talking about most of them operating within the first island chain of Japan, Taiwan, the Philippines and so on.

That the East China Seas. The South China Seas. Well, if the United States has these long range legacy ships that can operate over a thousand miles from their adversaries and just poke at them first with fighter craft and with bombers and now apparently with drones. And you’ve basically turned the entire East Asian littoral into a graveyard for the entire Chinese navy.

The biggest problem is Admiral Hicks point out, is that the Chinese have mass a lot of ships, a lot of people. But if you throw a thousand drones out and all of a sudden that’s not so much of a problem. And the irony of ironies, the Americans are going to be using off the shelf, commercially available drone tech for this.

Most of that comes from China. So the U.S. military is going to be mass sourcing from China, the very systems that are necessary to end China. And the only way that China could stop that is by stopping exporting drone parts, which would mean, you know, destroying a section of their economy right now, which we would probably be fine with if that is the retaliation.

The United States gets a lot of crap sometimes for good reason for investing in weapons systems that maybe were designed to fight the previous war. But the Chinese have done that too, and they now have a very large fleet of vessels that is simply incapable of dealing with the American military as it is now, much less one that might have additional backbone because of something like the Replicator initiative.

Okay. I’m going to go try to sleep again now. I hope everybody has a great night. Take care.

The Problem with Central Bank Digital Currencies

With all the buzz around central banks starting digital currencies and one of these entities controlling all transactions, I think it’s about time I burst everyone’s bubble…

Fintech has blown up because it slims down the traditional money transfer process and removes some of the associated fees, meaning you can transfer money faster and cheaper. However, the Federal Reserve will wipe out most fintech startups within the next five years with their service – FedNow.

FedNow allows for the instantaneous clearing of funds when transferred using the Fed as the intermediary. Oh, and it’s functionally free. Put the hype for this or that financial product – whether crypto or otherwise – to the side for a minute and dwell on how said systems might compete with free, immediate, and from the source. Queue the gnashing of teeth.

What we’re seeing in China is different from this. They’ve married digital currency to social currency scores, making Orwell look alright. This could never happen in the US, but if China continues down this road, its entire financial space will be under the government’s thumb. Any dynamism left in the Chinese economy will be stamped out fairly quickly if this continues.

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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The BRICS Summit: Significant or Hoopla?

Have you ever seen a couple of 3-year-olds sitting on the playground talking gibberish and acting like they’re making life-changing decisions? Well, that’s what’s going on at the BRICS summit in South Africa this week.

BRICS comprises Brazil, Russia, India, China and South Africa, and if you’re struggling to find some overlap between those countries…you’re not alone. With limited economic ties and diverse interests, this group of countries struggles to connect on anything meaningful.

To complicate matters further, BRICS is looking to add some new members to their ranks: Iran, Saudi Arabia, the UAE, Egypt, Ethiopia and Argentina. I urge you to try and come up with a worse list of mid-tier countries to bring on if you want to expand your geopolitical influence.

The varying interests of the current and new members will likely halt any meaningful conversation. The practical significance of this summit and BRICS as a whole is – limited – to say the least. And if you were hoping this would shake up the global landscape, I’m sorry to burst your bubble.

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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Transcript

Hey everyone, Peter Zeihan here. Today we’re going to talk about the BRICS summit. It was originally intended to be a two parter, one during the summit and one after. But because programing got shot down yesterday. We’re combining this into one. So it seems to a little bit disappointed. That is why. And here we go. Hey, everybody. Peterson coming to you from the shore of Lake, where I have been visited by a whole bunch of goats.

They were very curious anyway. Today we’re going to talk about something that is in progress. And that’s the BRICS summit in South Africa. They’re trying to come up with a series of plans of what to do. They’re trying to consider whether they should let in new members. And odds are that this is just going to be a really stupid summit that’s going to amount to nothing.

But it’s still worth talking about because it’ll give you an idea of the architecture of the international system. And you never know. They might be able to pull something out of the fire. So the reason I have primarily been dismissive of the BRICS since the beginning is because it was never an organization. It was never a grouping that was founded by its members.

It was some finance guy who’s like, Look, we’ve got all this capital because the baby boomers haven’t retired yet. We should put it into bonds. And we’re some big bond markets. Oh, yeah, Brazil, Russia, India and China. That’s it. That’s all it was. And then taken to later, they led in South Africa in a in a fit of pique.

Nothing’s going on here. There’s never been any meaningful deal. They have formed a development bank, but now over 90% of the capital comes from China. And there are reasons for the BRICS to talk with China. It is a significant trading partner, but there’s no reason for them to speak with one another. Brazil, aside from exports to China, doesn’t trade with the rest of them at all.

Same with South Africa, same with Russia. India is a special case, and if there’s one country that doesn’t like China, that would be India. And, you know, every once in a while you’ll hear them talking about forming a global currency or a new alternative currency to challenge the dollar. And then they start talking about details and all falls apart.

So right now, India, China, South Africa and the BRICS own bank are on record saying that they’re not interested in a global currency. The only two countries are left are Russia, who thinks that everyone should use the ruble, of course, and Brazil. How can I qualify? Describe Brazilian foreign policies these days, especially on economic issues, kind of. Lodhi DA.

Not a lot of substance beneath rhetoric anyway. So the purpose of this summit is to bring in dozens of leaders from other countries and see if they can kind find something that they can all agree on. A history suggests the answer will be no and everyone is coming with their own list of grievances and desires. The Russians want everyone to sign up with them and boycott the West until the West agrees to give them their way on Ukraine.

Of course, Russia’s not included in that. Russia is still allowed to talk. The first is still how to to trade with whoever they want. The Chinese are hoping to get enough countries on board that they can then walk into Washington and demand trade concessions. They don’t care about all the other countries. They just want them for themselves. The Indians are there because they are more of a classic nine nonaligned power.

But as the Chinese become more rambunctious, the Indians have become more and more edging towards being in the American camp. So the normal rhetoric that you would expect to see out of the Indians just isn’t there. The South Africans who are hosting are pretending to be neutral in all this and say they don’t have an opinion. The Brazilians are very logical and that’s it.

We’re going to turn around here anyway. Why might this one spark? Why might this still matter? Well, if you look back to the Cold War period when we had the nonaligned movement, that’s what a lot of these countries are from. Not Russia, not China, but a lot of the ones who are now showing out, they saw themselves as not east, not west, not first or Second World, but is something else.

And they try to come together for a common thing called the new international economic order. And the idea was that the West should restructure their trade practices in order to benefit some of their former colonies. It didn’t amount to much at the time. Eventually it became known as the ACP group Africa, Caribbean Pacific, a former colonies of the Europeans who have a degree of preferential trade access when it comes to European markets.

But it never got the restructuring that they really wanted. The reason I’m even less optimistic this time around is because the interests of the groups that are showing up are far more diverse than anything that we had in the early post-colonial era back in the sixties and seventies. So if they do decide, if BRICS does decide to do something, it will probably be about expanding their membership.

And that would be one of the most effective ways that I can think of to make sure that BRICS never achieves anything at all because they don’t agree on any much right now. So this is going to be an unofficial two parter. We’re going to wait to see what comes out of the summit. And then I will let you know what I think about the new roster.

All right. That’s it. Bye. Okay, here’s part two. So BRICS did decide they wanted to expand to involve six members in the six countries they involved. Indicate to me that BRICS has no plans of doing anything useful in the future. Those countries in no particular order are Iran, Saudi Arabia, the United Arab Emirates, Egypt, Ethiopia and Argentina. And I mean, honestly, folks, this is hilarious.

Okay, so let’s start with what the naysayers are going to say about how this does matter and explain why it doesn’t. They’re saying that because of the addition of the three countries in the Persian Gulf region plus Egypt, that this grouping, BRICS, now produces about half to 60% of global oil. And that means the downfall of the dollar, the formation of an alternate currency, the end of the petrodollar, divestment, the United States.

And it’s the end of an era. And, you know, the short version is absolute bullshit. Number one, Saudi Arabia does sell a few loads to China in yuan, and Russia does sell a few loads in yuan or rupees in order to get around sanctions. But the Russian system is kind of by itself. And as Russia follows no one, as with the Saudi Arabians and the Emiratis, that might be a little different.

Well, you got to look at why they’re considering doing anything in non-US dollars. They’re looking for a security guarantor. They’re afraid that the United States is going to leave the region. And if it does, they’re on their own. And since they don’t like to be outside of air conditioning, national defense is something they’re not very good at. So they’re basically open to all potential takers when it comes to not oil sales for sales sake, but as a way of getting into your security planning.

The Saudis have gone with the U.S. dollar for the last several decades, not because it was the global currency, not because they’re part of a caucus group that is basically with the BRICS. And they’re not in any sort of meaningful organization in which the U.S. and Saudi Arabia members, they have a bilateral relationship that was based on security, and that was the reason why they use the U.S. dollar.

That’s the reason why they bought refineries on the U.S. Gulf Coast, because they saw the United States as the country that ultimately would bleed and die for them. And they’re looking for alternatives, not because they want an alternative, but because the U.S. is probably not interested in that role anymore. There are also right now trilateral negotiations going on among the Americans, the Saudis and the Israelis, in which the Saudis are seeking a Japan style security guarantee for themselves.

Now, they’re probably not going to get that. They’re probably going to get a lot of things that they’re after. But the bottom line is that for the Saudis, this has never been about the money. It’s never been about the currency. It’s about who’s going to take a bullet for them. And the Chinese simply lack the capacity to deploy at range in a way that the Saudis would be willing to accept and believe, especially since the primary foe that they’re worried about is none other than Iran, which is how it has been, added the BRICS as well.

That brings us kind of the second problem here. The the BRICS have realized that if you’re going to add a country like Iran, that is how should I say, has some firm opinions about security issues, for example, that it should be in charge of the Middle East. Well, then you have to add anyone else from that region at the same time.

Otherwise, you can never have any of them because the Iranians would do the vetoing. So that’s adding the UAE, Saudi and Iran at the same time. It guarantees that you can expand the organization in the future, but it also guarantees that on all significant issues, you now have members inside the organization that going to be in diametrically opposed positions forever.

So we already know that BRICS can’t have a meaningful energy policy because now you have a number of opposed powers Russia, Iran, Saudi Arabian, UAE, all in at the same time. What a shit show. Okay, next up, Argentina and Ethiopia. Ethiopia brings very little the table. It’s one of the ten poorest countries between per capita terms in the world.

It’s landlocked. It’s one of the handful of countries in the world that is not part of China’s one belt, one road, because even the Chinese like there’s no investment case there. So they added in in order to get a little bit of African flair into the organization. And that’s about it. Argentina is not poor. It has a entitlement complex in which it thinks that everyone should give it money and should never have to give any of the money back.

And the reason they applied for BRIC membership is they’re hoping to get Chinese money. It’s not that the Argentineans are anti-U.S. dollar in any meaningful way. It’s just they’re anti paying back their debts. And so they’re always looking for a new financial access point in order to leech off of it until it goes away as well. So honestly, you know, best of luck with those two because there definitely a drain on the organization and they really don’t bring much to the table.

Okay. Who am I looking to? Oh, yeah, Egypt. Egypt is basically a U.S. satellite state. The U.S. basically pays Egypt and Israel and Jordan, for that matter, to not go to war with one another. So thinking that there’s a security play here from bringing the Egyptians in. No. If anything, it’s a bit of a Trojan horse. It is a large developing country.

I would argue that the reason it got brought in is because of India, which still has a lingering love of the nonaligned movement in which Egypt was a reasonably potent player politically but economically. Strategically, I’m afraid not. All right. Is that everybody? Yeah, that’s everybody. When an organization expands, usually one of two things happens. Either one, you’ve got an overwhelmingly powerful single member that kind of decides how things go.

And that would be the United States and NATO’s, for example. Option number two is you expand it with each member, you bring in differing viewpoints, and eventually it paralyzes the organization from doing really much of anything. And the BRICS is definitely firmly in that category right now. This is really only going to amount to anything in the midterm now if one of two things happens.

Number one, the Chinese pay for everything, and that means subsidizing the existence of the Argentineans, as they believe they should be subsidized, which is a hefty price. And very, very poor countries like Ethiopia. The last time a major power tried to do this, it was the Soviet Union. It was the 1970s, and it broke the bank. So not very likely that the Chinese are going to pay for influence in places that they actually can’t control and don’t really bring them much if they did.

The second option is we could see this very, very rapidly expand to basically become the new nonaligned movement. Of course, it would be different this time because the Chinese very clearly have elements in mind and the Russians very clearly have some goals in mind. And it’s difficult to imagine a lot of the world’s middle and lesser powers following the lead of these two countries.

I mean, yes, a lot of the global south has not been interested in condemning the Russians for what’s going on in Ukraine. That doesn’t mean they want to follow them. And anyone who’s not blind realizes the Chinese has some very clear, very nationalist, very, almost hateful, domineering goals for the Chinese rise. And in that sort of environment, no one wants to be a pawn because all of a sudden the nonaligned movement is going to align with a global pull.

No. So where does that leave us? Well, I think if you look at what really went down at the summit, you get your answer. Chinese President Xi Jinping didn’t even show up to some of the opening ceremonies where he was expected to give a pole speeches. The Chinese don’t see this as a useful vehicle, except rhetorically, and that means you shouldn’t treat it as anything else.

All right. That’s it for me by.

Making Life Hard for Chinese Tech

The Biden administration has issued its first wave of investment bans on the Chinese tech space – things like AI or tech with military applications. However, money isn’t the problem for the Chinese; the real kicker is losing access to American know-how.

This is only the first wave of capital restrictions placed on the Chinese, but they won’t be hurting for cash. For the last 30 years, the Chinese have restricted capital from flowing abroad, ensuring a bottomless supply of money at home. That’s why China has seen explosive growth over the past few decades.

The one thing they do lack is ACCESS. Without the know-how and connections American investment gave them, all those doors will slam shut in their face. Innovation will be stifled, and economic growth will come to a halt.

This is only the first wave of capital restrictions placed on the Chinese, but the long-term effects will be devastating. And to kick Xi while he’s down, he’ll just have to sit back and watch the tech sectors of the countries around him surge to the top.

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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Why Should Northern China Worry About Flooding?

If you’re thinking, “There’s no way China’s situation could possibly get worse,” you may need to talk to mother nature about the rains and typhoons causing flooding in northern China.

To understand the problem, we need to rewind about 2500 years. The Chinese crop of choice was and still is rice (although corn and wheat would have been quite productive given the Yellow River’s sediment makeup and the region’s arid climate). To produce rice, you must precisely control when and how much water is introduced throughout the growth cycle.

They needed extensive government oversight and the physical infrastructure to control the flows of a river as big as the Yellow. This meant that the Chinese needed to develop a dike system. Fast forward to the present day, and you’ll see a system of massive and unfinished dikes throughout northern China.

This dike system prevents the silt and sediment from the Yellow River from spreading and dispersing naturally, which means it has had over two millennia to build up. As the Yellow River takes on water from the extensive rains and seasonal typhoons, these dikes are being pushed to their limits.

I’m not saying they will break this year, but it’s only a matter of time before they do. When that happens, you can expect catastrophic flooding that will destroy critical infrastructure and many people. But hey, that still doesn’t top the list of things China should be worrying about.

Prefer to read the transcript of the video? Click here

 

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Support medshare's ukraine fund
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Transcript

Hey everybody. Peter Zeihan here coming to you from the Golden Banner trail above Cannes Coral, which is a suburb of the Denver Metroplex. Today, we’re going to talk about water or specifically all the water that northern China has gotten of late, that heavy spring and summer rains. And they just got hit by a typhoon. And so there’s significant flooding through Beijing.

It’s already killed a few dozen people.

The key thing to remember about China is a lot of its government structures are a direct outcome of its geography. So the North China plain, where the Han ethnicity basically has its core of power, is a big, wide open area that is both drought and flood prone. The drought is normal climatic stuff. This is a semi-arid region, maybe roughly akin to a cooler version of Central Texas or maybe central Nebraska.

But instead of having kind of braided rivers that flow through it, it’s got one single mighty river, the yellow that originates significantly upstream. A couple thousand miles away that drains an absolutely massive watershed in an area that is soil type called the West, which is wind driven soils, very fine particulates. And that means with when this dry zone, a lot of it’s actually desert does get rain, most of it runs off, it carries a lot of silt with it.

And that’s why the Yellow River has its name. The salt is yellow by the time you get downstream to where everyone lives in the North China plain, it’s a raging torrent, but it’s a raging torrent with lots and lots and lots of sediment. Now, if you can capture that sentiment and kind of like the flood drive that you had in, say, Egypt or the American Midwest, you get incredibly productive farmland.

But that requires you growing things like corn, wheat and the rest. China’s rice country. Water management is very important. Rice has to have very specific watering conditions at every stage of its production. Otherwise, the crop is lost. Now, northern China, they don’t grow rice anymore. But after 2500 years of growing rice, that has set certain things into motion.

Specifically, they have to be able to control the river, otherwise the water will come or be not there at the time of its choosing, rather than the Chinese people’s choosing. And that requires a lot more organization at the state level, which tends to generate a stronger hand in terms of government and a requirement that you have everybody under a single house politically.

Otherwise, various factions will just attack the water works and destroy whatever the hostile power happens to be. Fast forward that 2500 years, wrestling the river into shape means basically building ginormous dikes down the entirety of its length for the entirety of civilized northern China. That means the silt has nowhere to go. So in the Midwest, one of the problems that we’ve seen after just 150 years of trying to do this strategy on the Mississippi is you get silt on the bottom of the riverbed.

That raises the level of water so that when one of those dikes does break, it floods an entire area. So a big thing that the Army Corps of Engineers have been doing over the last decade is leveling some of those dikes and turning some of the land to wetlands just to absorb the flood flows. This is at least two orders of magnitude more significant, the case of China, because you’re talking about the most dense human population footprint in the country.

And we’re going to rotate a little since you like this, so much so that shot over there or there. That is Red Rocks, Ampitheater. So if you ever want to see a good show in Denver, go there. I got a great view of downtown, the sunsets. Anyway, what this means now is that in China, you’ve got two and a half millennia of sediment.

And so every time there’s a flood, it threatens the entire dike system. And if you have a break somewhere, it’s much more big of a problem than you have in Mississippi, because after two and a half millennia of heavy sediment, the floor of the river, in many cases now above the ground level, surprising of the surrounding lands, meaning those dikes are two, maybe even three stories above the city’s.

And if they break the entire course of the river, you know, river goes by the path of least resistance crashes down into the populated zones. Now, that hasn’t happened this year. I’m not saying it’s going to. I’m saying that the Chinese really didn’t finish their dike system to the current level of absurdity until just about ten, 15 years ago.

They used to have floods regularly. They would kill hundreds of thousands of people. And in today’s environment, where the Chinese were facing every possible problem under the sun with their finance, their economy and their demographics, this is just one more thing you have to factor in, because when this breaks and physics tells us in time it will, they’re going to lose significant portions of some of their most advanced infrastructure, not to mention lots and lots and lots of people.

So whenever you see it raining West of Beijing, pay attention because it matters a very great deal. All right. Take care.

The Chinese Slide Into Deflation

The current Chinese system has been staring down the barrel of a number of serious challenges for quite a while now, and this new economic data just took the safety off that gun.

Between the demographic bomb that went off a few years ago and the lack of a post-COVID recovery, it’s no surprise that China is facing an economic funk. However, years and years of compressed economic damage are on the brink of bursting out and wreaking havoc on the entire Chinese system.

That’s right; we’re talking about deflation. This is only one month of data, so I don’t want to blow this up quite yet…but consumption has plummeted, there are ongoing trade wars, an oversupply of goods and undersupply of demand in both domestic and foreign markets, and that’s not even the whole picture.

We saw deflation take over Japan in the 90s, and it took them nearly 25 years to pull themselves out of it. The Japanese situation was leaps and bounds better than China’s current situation, so if this data is even partially indicative of China’s economic future, we could be looking at the beginning of the end.

Prefer to read the transcript of the video? Click here

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TRANSCIPT

Hey everybody. Peter Zeihan here coming to you from Colorado. And the new news out of China is they’re facing a kind of a triple economic funk. For those of you who’ve been following China for a while, you know that they’ve never really recovered from COVID, whereas nearly every other country in the world, once the opening finally happened and the end of the epidemic was declared, we saw an explosion in consumption as people tried to get back to some version of their life, which generated a lot of inflation.

We’ve not seen that in China. Growth is actually lower now than it was over the course of the last two years when they were supposedly under complete lockdown. Consumption is down. Imports and exports both dropped in July compared to a year earlier by double digits. A percentage is normally the sort of stuff you only see out of a country like, say, Ukraine or Russia.

When a war starts and this is happening, when the Chinese are supposedly getting back to normal. Now, a lot has gone down since the opening chapters of COVID in China, which date back to the fourth quarter of 2019. But something to remember is that we saw a demographic bomb go off in China before COVID going back to as early as 2017.

The demographics really turned negative from 2017 to 2021. The birth rate dropped by about 40%. And even in the months before COVID, we saw new car sales, which are kind of a quintessential indication that your population is kind of up and coming and feels confident about its future and spent a lot of money going negative. And they’ve never really recovered.

So now after COVID, we’ve had all of these trends with four or five, six years behind them. And as they’re manifesting in a more normal environment, the numbers are really, really, really bad. Now, for folks who are not familiar with demographics, this is probably a little bit of news. For those of you who are familiar, not too much of a surprise, but the very, very short version is that most of the consumption of the modern system happens when you’re in your twenties or your thirties, when you’re buying cars and raising kids and building homes.

Well, because the one child policy Chinese don’t have much of a generation in that block at all. And since the one child policy is now over 40 years old, we’ve now had a full generation of people to not have kids. And that is manifesting in the data as well. Anyway, that’s kind of problem. One problem to her boy, deflation.

Now in the United States, in Europe, in most of the developing world where there’s India, Brazil, Indonesia, the rest, the opening of COVID was accompanied by a huge burst of inflation. People were trying to consume again to get back to some version of their normal lives. And over the last 2 to 3 years, their consumption patterns had changed.

Instead of buying cars or homes, they were buying computers and phones in order to adapt to the new reality. Well, now they’re shifting back and supply chains take about 18 months to catch up. Now, in the United States, it has been 18 months now since the last state to reopen California did so. And so we’re seeing inflation incrementally drop, as it has been for the last year.

This is broadly what you should expect. In China, things are going the opposite direction. The consumption boom never happened. So supply chains never had to adjust. What has happened is people are less confident in their futures. So the consuming less. And we’re seeing mounting trade wars out of Europe, Japan, the United States and increasingly secondary states like the Koreans are joining in.

And that means the Chinese have fewer places to send stuff to. So what’s happening is product that was normally produced for export from China is now being locked up within the Chinese system at the same time that the population is purchasing less. You have an oversupply of good of goods and under demand, both at home and abroad. With all those extra goods, prices go down and you get deflation.

Now, short bursts of deflation are no big deal. So I don’t want to overstate what’s happening here. It’s only one month of data at present, but this is what you would expect when you’re at the beginning of a deflationary spiral that’s caused by a fundamental mismatch between supply and demand, which is where we are going with globalization and the Chinese demographic trends, which are now well past the point of no return.

The last country to face a major deflation burst was Japan started in the late 1990s, lasted for 2025 years. You could argue that it might be over now because of their COVID reassertion of demand. That might be overoptimistic, but the issue is once those prices start to drop because of that mismatch between supply and demand, it’s devilishly hard to adjust because normally you would do one of two things.

Number one, you could reduce supply, but that means closing productive capacity, which means people lose their jobs, which means they spend less, which means that mismatch persists. Or you can increase demand, usually with government stimulus. This might not work in China and not just because of the huge demographic bomb that’s going off. The Chinese economic system isn’t really based on exports or consumption.

It’s based on invest mint. The idea that the state fosters mass borrowing in order to build industrial plant infrastructure in the rest that based on whose numbers you’re using, are somewhere between 40 and 70% of the entirety of the Chinese economy, and it’s generated the vast majority of economic growth going back 40 years. Well, you can only do that for so long.

Eventually. You don’t need any more bridges or any more factories. And I would argue the Chinese reached that point before COVID. And so, again, there’s been this three, four year lag between reality and the data. Finally manifesting. The point is, more spending probably isn’t going to help the marginal outcome. The amount of growth they get for every yuan spent has been dropping steadily for 40 years, and now it’s in far less than 1 to 1.

So it really doesn’t matter how much more fuel and how much cheap capital the Chinese pump into the system. It’s never going to generate more economic activity than what it cost to put it in the first place. This is what happened in Japan in the late 1990s. In the early 2000s, they had reached the point where their economic model couldn’t run any longer.

They were getting basically negative income on their investments and they had then 20 to 25 years of deflation. The advantage that the Japanese had going into this is they already had a global supply chain, they already had global allies. They had an option for offshoring some of their manufacturing incrementally. They had strong demand out of the United States.

They had a good political relationship with the United States. And most of all, they were already rich. The average Chinese citizen today in inflation index terms, compared to the average Japanese citizen in the year 2000, has an income that something like a quarter or a fifth what it is in China. They’re getting old and they’re getting into a permanent recession and a deflationary spiral long before they got rich.

And this can end in any number of horrible ways. So, again, one month of data, I do not want to overplay this, but I’ve been watching for something like this for several years now. And in the post-COVID environment, we’re seeing the data belatedly match up with where demographics and geopolitical trends suggest that it should have been years ago.

If this proves to be the actual story, as opposed to a blip in the data, you’re going to see this get significantly worse in a relatively short period of time because we have years of compressed damage that is now bursting out all at once. And because the political system in China is basically down to one man cult of personality, the capacity of the Chinese state to come up with a creative solution is almost zero.

And even in Japan, where they were willing to talk about this publicly, it still took a generation to pull out of this. And alliances and the Chinese don’t have either. All right. That’s it for me. Take care.