A Failure of Leadership, Part II: How To Lose Friends and Mobilize People Against You

Read Part 1 and Part 3

The propaganda out of China of late has been…notable. Beijing has accused the French of using their nursing homes as death camps, has blamed Italy for being the source of the coronavirus (at the very peak of Italian deaths), has charged the US Army with bringing the virus to China in the first place, has thrown a “fact sheet” of truly disbelievable disinformation at the fact-oriented Germans, and turned the country’s ambassadorial core into cut-rate tabloid distributors – all while leaning on anyone and everyone from the United Nations to the World Health Organization to the European Union to regional legislative bodies to alternatively suppress and delete any information or analysis that does anything but laud China, as well as push them to take public stances that slobberingly praise China.

In doing so the Chinese have seemingly deliberately wrecked their relations with the Americans, French, Italians, Germans, Czechs, South Africans, Kazakhs and Nigerians, just to name a few. (The Swedes had all but ended their diplomatic relationship with China – having come to the public conclusion that the Chinese government was a pack of genocidal, power-mad, information-suppressing, exploitive, ultranationalists – before COVID.)

Nor are these disturbing shifts limited to the realm of foreign disinformation. Propaganda at home is boiling in a new direction as well. Overt, blatant racism is the core of the new program, with the government expressly blaming foreigners of all stripes for coronavirus in specific and China’s ills in general. Everything from restaurants to buses to gyms are banning foreigners. As a rule the government edicts are color-blind, but there are plenty of stories out there of this or that municipality or establishment singling out this or that nationality or skin color for…special consideration.

And the invective will get more offensive and self-destructive and seemingly stupid. China’s propaganda offensive April was done by the professionals – the folks at the head of the Ministry of Truth-, er, Foreign Affairs. All the lies and everything that demeaned and insulted countries in the grips of the coronavirus was expressly deliberate and sanctioned from the top, with the ambassadorial core directed to follow suit. (For those of you who like names, watch spokesman Zhao Lijian, a man who enjoys Chairman Xi’s personal sponsorship).

But we aren’t in April any longer, and China’s propaganda effort has become more diffuse, adopting more of a mob mentality. Now the entire governing apparatus has been unleashed, including agencies and bureaus down to the local level who normally have nothing to do with public relations, much less official propaganda. There is no longer a cohesive storytelling effort a la the Soviet style of propaganda. It is as if the Chinese equivalent of the MAGA crowd and the Bernie Bros are suddenly part of the propaganda effort, working alongside – or at least in parallel to – the Voice of America and the State Department.

The April propaganda was sophomoric and moronic, particularly at influencing foreign audiences or achieving some sort of strategic goal. In May it has already degraded into the realm of the infantile. My personal favorite was when an apparatchik made a lovely post stating “We condemn the fatso to death” with the “fatso” in question being US Secretary of State Mike Pompeo. Considering the ultrafine mesh the Chinese internal censorship dragnet has been using of late, that particular post’s ongoing longevity is a testament to just how holistic the CCP’s effort has become.

In the past few weeks the Chinese have deliberately destroyed three decades of efforts to build up soft power. I have never seen this sort of influence collapse, much less on a global scale. Even the Soviet fall saw Moscow retain influence throughout Latin America, Africa and the Middle East…and then the Soviet Union collapsed. The Trump administration just lost their Olympic gold in Gravitas Destruction to the Xi administration, and not by a small margin.

So…what the hell?

The Party may be descending into narcissistic ideology, and the Han Chinese may have always had a superiority complex based on a superiority complex, and we all may be a bit aghast at both the new tone and substance of Beijing’s foreign policy, and CCP is too paranoid, controlling, arrogant and bunkered to pretend to lead anything on a regional – much less global – scale, but I think we can all accept that the Party is not run by a bunch of morons.
 
The explanation is unfortunately very simple: the Chinese leadership is well aware that soft power isn’t what is going to solve the problem they see. There’s some guidance as to the CCP’s thinking in how the propaganda effort is being explained within China, and it doesn’t bode well for the future.
 
Semi-officially, the CCP called the April (official) effort Wolf Warrior diplomacy, in reference to a recent (and wildly popular) Chinese movie series about ethically pure Chinese soldiers who purge the world of evil American mercenaries. The closest equivalent I can think of would be like calling an American propaganda effort Starship Troopers diplomacy. (Yeah, it is as stupid as it sounds.)
 
The (more disperse) May effort, in contrast, is being referred to as a Yihetuan Movement mindset. It is a reference to a particularly chaotic period at the turn of the 19th to the 20th centuries when a particularly violent strain of ultranationalism erupted in response to foreign actions within China. Most non-Chinese readers probably don’t recognize the Yihetuan Movement reference, but they probably do recall how it was labelled in the West: the Boxer Rebellion. More on that in a minute.
 
This new propaganda program isn’t about Xi attempting to convince the wider world of China’s greatness or rightness. This isn’t about the United States or Europe or Africa, and certainly not about global domination. Instead it is about intentionally saying things so far beyond the pale that there’s a global anti-Chinese backlash. The backlash itself isn’t the goal, but instead a means to an end. Xi is attempting to use a global anti-Chinese backlash to enflame anti-foreigner nationalist activity within China. Put simply, Xi is trying to get the world pissed off at China so that China becomes pissed off at the world.
 
Xi feel he needs to hyperstimulate and mobilize a large enough proportion of the population so that they can assist the state security services in containing, demoralizing, cowing – and if necessary, beating, killing and disappearing – those who do not buy in.
 
Think this seems a bit…extreme? Brush up on your 20th century Chinese history, particularly in the context of how the CCP is explaining its propaganda effort to the Chinese citizenry.
 
Google the Great Leap Forward to review just how deliberately brutal the Chinese government can be to their own people, and just how good the Chinese government can be at motivating its own citizens to persecute one another.
 
Check out the Cultural Revolution to see how mobilizing portions of the population to repress the rest of the population makes the East German Stasi look like New Zealand socialists.
 
Review the Tiananmen Square massacre to remind yourself of how far the CCP will go even in “modern” times when it faces a threat to its power.
 
Look up the Boxer Rebellion to see how such processes result in the state-sponsored lynching and murder of Christians and foreigners. (Btw, if you are a manufacturer or investor and you still have personnel in China, now would be a glorious time to get them the fuck out).
 
The only part of this that is new for China is that this time they have industrial and digital technologies to help manage the population so that the sharp end of state power can be brought to bear more quickly.
 
This leaves only one question: Why…WHY would Chairman Xi feel this sort of extreme action is necessary?
 
Put simply, Xi fears the end of China is nigh.
 
And that, again, requires a completely new newsletter.
 
Stay tuned for Part III…

With the world under COVID-related lockdowns, I’m pretty much as home-bound as everyone else. That’s nudged me to launch video conferences for interested parties on topics ranging from food safety to energy markets to the nature of the epidemic in the developing world. While most of these events are for a set fee, my next video conference will be free of charge. Space, however, will be limited.
 
Join me May 19 for a once around the world of where we stand in the current crisis. Which countries are suffering most critically? Which are pulling ahead? What the shape of the pandemic will be in the weeks and months to come? What will the world look like once coronavirus is in our collective rear-view mirror? As with all the video conferences, attendees will have the opportunity to submit questions during the event.
 
Signups for the teleconference are first-come, first-served with attendance capped at 1000. After the event, we will make the video available, so watch this space.

REGISTER HERE

Newsletters from Zeihan on Geopolitics have always been and always will be free of charge. However, if you enjoy them or find them useful, please consider showing your appreciation via a donation to Feeding America. One of the biggest problems the United States faces at present is food dislocation: pre-COVID, nearly 40% of all foods were not consumed at home. Instead they were destined for places like restaurants and college dorms. Shifting the supply chain to grocery stores takes time and money, but people need food now. Some 23 million students used to be on school lunches, for example. That servicing has evaporated. Feeding America helps bridge the gap between America’s food supply (which remains robust) and its demand (which coronavirus has shifted faster than the supply chains can keep up).
 
A little goes a very long way. For a single dollar, FA can feed one person for three days.

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A Failure of Leadership, Part I: A Look Around the World

Read Part 2 and Part 3

The past few weeks have been…eventful. I make my living anticipating and explaining and projecting change, with an unfortunate emphasis on destabilizing and disintegrative change. Pre-coronavirus the world was already hurtling through its most rapid breakdown in living memory; Coronavirus has accelerated…everything.
 
Times of extreme change are often painful, but for many they provide opportunity. Leaders often shine during times of extreme change. History tends to remember people who help their people and institutions navigate periods of disruption. Reagan’s speech at the Berlin Wall ended the Cold War. Yeltsin standing on a tank, defying the military put a bullet in the Soviet brain. Meir launching a worldwide assassination program made tiny Israel a global power. Churchill pledging to never surrender set the stage for the Nazi defeat. Ataturk defying Europe’s post-WWI carve-up plans ensured that, eventually, the Turks would return as a major power. In moments like these, a few countries pull away from the pack and reinvent themselves.
 
I haven’t seen any of that so far in the coronavirus crisis. Anywhere. Honestly, it is a little disappointing that no world leaders are rising to the challenge. While some leaders have dealt with the crisis competently, I haven’t seen any effort by any leader to harness the crisis to put their country on a more solid footing or to prepare for the post-COVID future. The lack of global leadership effort is simply mindboggling.
 
Let’s run through the list:
 
Emmanuel Macron has hitched his star to the idea that EU countries with solid budgets (that is, the countries less spendthrift than France) should shell out more money to help the poorer countries (that is, countries like France) get by. That certainly generates him some gravitas in Rome and Lisbon, but personifying the concept of asking for a hand-out isn’t what leadership looks like.
 
Germany’s Angela Merkel was supposed to be retired by now. Her chosen successor stepped back in early February, just before we all became obsessed with coronavirus. With her retirement plan in tatters, the Indispensable European is now once more unto the breach, dealing with intractable issues in her quiet, competent way. Unfortunately, she is constrained by her country’s savings-obsessed culture. No one in Germany wants to bail out Europe’s weaker members, particularly since Germany’s forward-looking, keep-your-powder-dry medical and financial approach has (so far) proven successful while Southern Europe’s spend-it-even-if-you-haven’t-got-it mindset has not. Honestly, Merkel looks like she’s just tired of it all. I feel exhausted just reading about her. (And frankly, she should be tired. She’s been shoveling Europe’s shit for over a decade.)
 
Even if everyone loved Brexit and how Prime Minister Boris Johnson has handled it, Johnson just now emerged from some quality time in a freaking COVID ward (just in time to bring his new baby home). The UK in general – and Johnson in particular – is in no shape to lead much of anything.

The orders to tamp down any discussion of coronavirus in Japan in order to maximize the chance of the 2020 Summer Olympics being derailed undoubtedly came from the top, making Prime Minister Shinzo Abe directly culpable in a spreading epidemic in the world’s oldest national demographic. Needless to say, few are looking to Tokyo for a how-to guide.
 
Canada’s Justin Trudeau has the look of a man who has been completely overtaken by events…because he has been. That’s less a judgment of his leadership or his team’s management skills, and more the crystallizing realization in Canada that there is no future for Canada unless it does everything of substance hand-in-glove with the United States. That includes trade policy and energy policy and China policy and…anti-COVID efforts. Trudeau has been (repeatedly) blindsided by whatever fresh spasms of oddity have erupted from the White House, and he simply has no option but to make the best of it. Pragmatic? Yes. Necessary? Certainly. But the liberal flame has most certainly gutted out.
 
Russia’s Vladimir Putin proudly proclaimed Russia had COVID “under control” just ten days before the Moscow mayor launched a lock down. There’s been broad spectrum public criticism by health care workers of the Russian government’s (mis)management of the epidemic, that has progressed to several doctors committing suicide by jumping out of buildings (a favorite technique of the Russian security services for disposing of troublesome personalities). This would be bad enough at any time, but Russia’s educational system collapse in the 1990s means Russia doesn’t have a particularly deep bench of health care staffers. COVID combined with the government’s response to the bad PR coming out of the health care sector is gutting what’s left of an already woefully inadequate health care infrastructure. Needless to say, while many countries want to manage the message, no one else is liquidating their precious health care workers to do so. (And incidentally, the Russian bot farms are hard at work spreading bat-shit crazy COVID-related conspiracy theories so please quit getting your COVID news from Facebook.)
 
Not to be left out, most of the world’s secondary powers have slightly wacky nationalist leaders who are proving…wackier with every passing day.
 
India’s Modi is working diligently to disenfranchise a large portion of his own population, and seems genuinely surprised when there is (violent) push back.
Turkey’s Erdogan is gayly skipping his way down a neofascist path, setting the stage for (another) harsh, ethnic-based, wipe-out of a conflict with the Arabs to the south, the Europeans to the northwest, and the Russians to the northeast.
Brazil’s Bolsonaro seems committed to ensuring the epidemic hits his country as hard as possible, in part by personally leading press-the-flesh rallies against COVID-containment and mitigation efforts.
Mexico’s Andres Manuel Lopez Obrador is nearly as obtuse on the topic of the virus as Bolsonaro. Moreover, he has decided against providing much of any support to Mexican firms during the crisis, ensuring that Mexico’s recession will be longer and more difficult than it needed to be.
 
The number of leaders who have risen to the occasion is vanishingly small. Korea’s Moon Jae-in and Taiwan’s Tsai Ing-wen have done a phenomenal job of managing the COVID epidemic, but much of the credit must go to those countries’ intelligence and diplomatic corps who are arguably the most attuned to regional disruptions. After all, for them threat detection/assessment is a matter of day-to-day survival, and their hawklike watching of China is what provided their countries’ health services with the advance warning the situation necessitated.
 
Honestly, the only leader who has truly outperformed is Prime Minister Jacinda Ardern of New Zealand. But while Ms Ardern continues to impress, her country’s geographic isolation grants the Kiwis virus containment/limitation options denied the rest of humanity. There are a few lessons there for others, but only a few. Yet even with these three bright spots, no one outside of their respective countries is looking to Moon or Tsai or Ardern for leadership.
 
That holds true pretty much everywhere. With the possible exception of Angela Merkel, not many people have looked to any of these leaders to be authorities on regional issues, much less global ones…ever. Part and parcel of true global leadership is that there can really only be one. Since the Americans for the past 70 years have provided the security architecture and economic capacity for a global system to exist, it has fallen to the man in the White House to design the response, set the course, provide the resources and, to be blunt, lead. That’s triply true in the case of the meaningful international institutions which provide the sinew of global cooperation.

Those days are over.
 
Since his election, Donald Trump has functionally ended NATO, eliminating the single greatest security alliance in human history. Last year the Trump administration functionally destroyed the World Trade Organization, the only institution capable of empowering the multilateral trading system. Last month the Trump administration ended American funding for the World Health Organization. A flawed institution? Sure. But to abandon it during a pandemic was, in a word, questionable. The American alliance with South Korea – long one of America’s three most loyal allies – is likely to end this year at Trump’s behest. TeamTrump is even drawing up plans to pull intelligence assets out of the United Kingdom, America’s oldest, closest, and most capable ally, in protest over the Kingdom’s Huawei-linked telecoms policy.
 
It doesn’t really matter whether you think Trump’s actions are warranted or otherwise. The point is that the United States de facto controlled these institutions and alliances. By leaving or killing them while simultaneously failing to establish domestically-run alternatives, Trump has vastly reduced the ability of the United States to manipulate the world. That isn’t leadership. That is abdication.
 
Nor is it purely an international question. Domestically, Trump is a standout in that the longer he is in the White House, the less competent he appears to be at using the tools of domestic power.
 
I’m not talking here about Trump’s politics, policies, or even personality, but about his gob-smacking lack of managerial skills. Nearly three and a half years into his term, there are still hundreds of positions throughout the federal bureaucracy which remain unfilled, a disturbing number of which deal with issues of health. Headless bureaucracies are broadly useless except to carry out the last orders that they were given. It is with more than a touch of irony that I must note that despite all sound and fury to the contrary, Trump’s pathological unwillingness to engage with the federal bureaucracies has actually entrenched Obama’s regulatory disfunction rather than excised it.
 
Nor has much of what Trump has done trimmed those bureaucracies down to size. After all, reducing staff and mandates and budgetary outlays takes active leadership, and Trump is one singularly disinterested and disengaged leader. Since Trump hasn’t disbanded the agencies or programs, America has been landed with all the expenses of a sprawling bureaucracy, but few of the benefits.
 
Add in daily COVID briefings in which Trump seems pathologically committed to showcasing his furiously deliberate lack of knowledge, and Trump’s levels of respect at home and abroad are at the lowest of his presidency – and trending very firmly down. Imagine how weak he will look in a few months (weeks?) when the United States experiences its second coronavirus wave.
 
Absent from this list of not-necessarily-failed-but-certainly-not-successful leaders is, of course, China’s Chairman Xi Jinping. Understanding just how disastrously Xi has mismanaged the coronavirus crisis and just how much permanent, irrevocable damage his “leadership” is causing China requires an entirely independent newsletter.
 
Stay tuned for Part II…

With the world under COVID-related lockdowns, I’m pretty much as home-bound as everyone else. That’s nudged me to launch video conferences for interested parties on topics ranging from food safety to energy markets to the nature of the epidemic in the developing world. While most of these events are for a set fee, my next video conference will be free of charge. Space, however, will be limited.
 
Join me May 19 for a once around the world of where we stand in the current crisis. Which countries are suffering most critically? Which are pulling ahead? What the shape of the pandemic will be in the weeks and months to come? What will the world look like once coronavirus is in our collective rear-view mirror? As with all the video conferences, attendees will have the opportunity to submit questions during the event.

REGISTER HERE

Newsletters from Zeihan on Geopolitics have always been and always will be free of charge. However, if you enjoy them or find them useful, please consider showing your appreciation via a donation to Feeding America. One of the biggest problems the United States faces at present is food dislocation: pre-COVID, nearly 40% of all foods were not consumed at home. Instead they were destined for places like restaurants and college dorms. Shifting the supply chain to grocery stores takes time and money, but people need food now. Some 23 million students used to be on school lunches, for example. That servicing has evaporated. Feeding America helps bridge the gap between America’s food supply (which remains robust) and its demand (which coronavirus has shifted faster than the supply chains can keep up).
 
A little goes a very long way. For a single dollar, FA can feed one person for three days.

DONATE TO FEEDING AMERICA

The End of Cost

In the past five weeks the United States has thrown $3 trillion in new government spending at coronavirus-related bailouts, relief and economic stimulus. In total the US has already spent more on coronavirus-related actions than the rest of the world combined, tripled. Strangest of all, not one dime of it is backed up by new government revenue streams; every bit is deficit spending.

Nor is the United States likely to overly suffer from the expansion of its debt burden. Of that $3 trillion in new spending, the Federal Reserve’s total purchases of US debt is “only” $1.3 trillion. The rest of the debt bulk has been absorbed by other investors, mostly foreign investors. Such is the scare globally that many are eager to get a zero rate of return on an American government asset rather than risk their money at home.

Nor is the United States even remotely done. At least another $1.5 trillion is on deck for May, with another batch likely during the summer. None of this includes any of the monetary policy actions from the Federal Reserve, nor does it include likely inducements for American firms to relocate from China to literally anywhere else.

The feeling in the United States is that coronavirus is not only a crisis, but it is the type of crisis which necessitates heretofore unprecedented government action. And since government action isn’t free, everyone is willing to go along with big price tags. This feeling is strikingly bipartisan. In the first two week of the coronavirus crisis, Congress passed more legislation of substance than in the previous ten years. I’m not suggesting for a moment that American politics have entered a kumbaya moment, but instead that the very concept that price means anything has passed into myth. And if my broad forecasts for the future of Europe and China hold true, it will stay there for years to come.

There’s a political side to this willingness to throw a bottomless pot of money at the problem as well.

America’s political parties are in flux. Factions rise and fall in the hierarchies, and sometimes drop out of party structures or vanish altogether. Sometimes, leadership can move such transitions along much faster. In the case of America’s fiscal conservatives, Trump’s transformation of the Republican Party into his personal vehicle excised the fiscal conservatives (along with the business conservatives and national security conservatives) from the Republican coalition altogether. It is entirely reasonable to expect the fiscal conservatives to eventually find a new home, but for now the brake that they have institutionally imposed upon government spending is simply not present.
 
Which makes the next few years a time for big-ticket ideas. There are plenty of them bouncing around in the American political space. Many are near-and-dear to the Left, who at their core see the government as a change-agent which has the right and duty to uproot and remake society. Yet these days the Right is hardly aghast at big spending either. After all, America’s biggest (pre-COVID) budget deficits happened under the Trump administration. Let’s take a look at the most likely culprits:
 
Infrastructure spending:
 
This one is not only a perennial favorite, but its time has finally come. Typically, hang ups have included pork barrel politics, general ideological clashes over the nature and goals of this or that piece of infrastructure, state v federal decision-making authority and fund sourcing. But mostly it has been about cost. If you disagree with someone’s infrastructure plan on any non-cost point, you can always oppose it as being “wasteful”. That argument just vanished. And since everyone agrees in general that infrastructure spending is good (it’s just the other guys’ specific ideas that are kooky) expect a lot of it in the not-so-distant future.
 
Updating America’s interstate road, rail and water infrastructure would run a cool $3 trillion. A nationwide 5G effort would add another trillion. And that doesn’t even touch municipal infrastructure which could easily add another $2 trillion.
 
Universal basic income:
 
The concept of UBI is that government should provide every citizen with a monthly or weekly payment for “basic” expenses such as rent and food and power. As the argument goes, as automation erases more and more job categories, some sort of universal payout is the least disruptive and cheapest-to-administer method of wealth redistribution.
 
Many criticize the very concept because it would denigrate the work ethic. Others like the fact that it would introduce a sharp class distinction between earners who pay taxes and a loafing class that simply subsists (many of these folk in this second camp assume – probably correctly – that over time UBI would introduce different tiers of political rights, with those who do not pay into the system losing full voting rights).
 
One of the biggest reasons no one has really tried UBI is that it is expensive to attempt, and no one knows if it’ll work because no one has ever really tried it at scale. Well, as part of the coronavirus stimulus and bailout packages, most citizens received a $1200 check and anyone on unemployment gets another $600 per week on top of their standard benefits (meaning many on unemployment are now making more than they did while working). More cash payments are all but certain for the next couple of months, and an extension of unemployment benefits are pretty much baked in as well.
 
Functionally, the United States is trying UBI out right now. A few months from now we’ll finally have a real-world, at-scale example of how UBI works. And if it works well, expect a massive push to implement it on a permanent basis.
 
Defense expansion:
 
I’ve always found the process of deciding defense spending fascinating. Even in the days after the Sept 11 attacks, it was ridiculous to think that Islamic terror posed a more existential threat to the United States than the Soviet nuclear arsenal. And yet US defense spending today – with the Global War on Terror largely wound down – is higher than it ever was during the Cold War. Defense specialists are bracing for what they see as the inevitable spending drawdown. I simply don’t think it is going to happen.
 
Today the annual budget of the Defense Department is just shy of $750 billion, plus another $52 billion for Homeland Security and $63 billion for the intelligence agencies. If there is going to be a budget reduction, it will come from American forces being fully brought home. Although, honestly, closing America’s overseas bases means future deployments likely will cost more because the military will need to launch from the homeland rather from a foreign footprint closer to the action.
 
A partial solution to that imbroglio? Don’t cut funding at all. In fact, invest in more long-range deployment capacity.
 
Universal health care:
 
America’s health care system is the world’s most expensive, but from the quality of the care provided (not to mention the system more or less falling on its face during COVID) you wouldn’t guess it. The smart conversation would be how to institute real health care reform (as opposed to Obamacare which simply introduced health care payment reform), but that unfortunately isn’t the conversation that’s starting.
 
Instead, the passion from politicians such as Bernie Sanders is for free health care for all, based on the Medicare model, which is by far the least efficient, lowest quality, most expensive option possible. Leaving aside both the financial estimates of the Sanders crowd and their detractors, most independent estimates put the cost for Medicare for All at least $2 trillion. Per year. Normally, such proposals would founder on the rocks of cost. Not anymore.
 
Green New Deal:
 
Contrary to much rhetoric (which I guess is the case with all these ideas), the GND is less a well thought out plan and more an ideological grab bag of Green/socialist concepts. That has been enough of a deal killer to turn most moderate Democrats against it, as well as those within the Green movement who think that math needs to be part of the discussion (which would include me). Bottom line? There really isn’t a real plan yet, but with Americans shifting into a price-as-myth mindset, I bet there will be one soon.
 
Any meaningful GND would need to require the near-complete overhaul of nearly every economic sector ranging from automotive to construction to power to agriculture to raw materials. We haven’t even invented many of the technologies that would be required, which, at present, makes any brass-tacks budget proposal impossible. But suffice to say if it could be done for $10 trillion, that would be really, really cheap.
 
It doesn’t take much imagination to foresee a potential political alignment in Congress to dump a few supertankers of twenties on this or that Green-friendly policy. At a minimum, I expect much increased subsidies for this or that greentech, even if (especially if) they haven’t yet proven to be market ready.
 
Industry bailouts:
 
While I expect much of the country to be returned to work by mid-July, there is much about the coronavirus we do not yet know. For example, if it turns out that everyone who gets it can be re-infected a few weeks down the road, then the fundamental structure of the American economy will have to adapt to a fundamentally new reality. Such changes in circumstance will not impact all sectors or firms equally, generating scads of winners and losers. Without financial assistance, some sectors will shrivel and firms within those sectors will simply die.
 
But with a bottomless supply of funding available? Not so much.
 
Some of these are pretty obvious. Just off the top of my head, tourism, aerospace, child-care, education and restaurants look particularly endangered. The question is where to draw the line.
 
Consider air travel. Of course, we’ll bail out the airlines. What about airports? What about aircraft manufacturers like Boeing, or aircraft maintenance firms? Do we bail out all their hundreds of component manufacturers as well? What if key components are manufactured in other countries? Are those firms rescued? Normally, the fear of not knowing when to stop establishes a natural firebreak on bailouts. But that fear is rooted in the fear of cost. That fear no longer applies.
 
State and municipal bailouts:
 
Most American states have balanced budget amendments, and most gain their income from sales and income taxes which have pretty much gone to shit during the coronavirus crisis. Add in that many have wildly out-of-control pension funding issues and many states faced financial catastrophe before COVID. With COVID its more like financial Armageddon.

So far Congress has only extended the states and cities very limited assistance, with Senate Majority Leader Mitch McConnel (R-Ky) dead-set against any sort of broad-based bailout program. It isn’t simply about ideology. Some states are actually doing ok (all things considered), so rewarding states who have failed to reform their systems does bring up issues of fairness and moral hazard.
 
But the fact remains that the single biggest reason not to do some sort of federal bailout – cost – just doesn’t mean as much as it used to. (It is also worth mentioning that the sort of financial power and flexibility which enables the federal government to spend as much as it wants does not extend to the states and municipalities. They are not sovereign powers with their own currencies.) Some sort of federal fund designed to provide at least bridge funding is probably inevitable.
 
All these possible programs have multiple policy, strategic and cultural implications.

  • If the federal government bails out a firm, does the government take shares? If the bailouts are big enough and last long enough does that mean the US government becomes the majority owner? We have a word for that: nationalization. Can you nationalize a city? A state?
  • An America that doesn’t right-size its military for a new era, and expands its budget to make it very easy to reach out and slug someone, is a country that is perfectly willing to level any country anywhere for nearly any reason.
  • Massive infrastructure programs are not simply about building roads and bridges, they are designed to rewire economies for decades (my adopted home state of Colorado has a 100-year infrastructure plan). Decisions made now will guide the country’s development, literally for generations. There will be winners and losers.
  • An America on UBI is one that faces a wide array of utopian and dystopian futures. Consult Andrew Yang for the utopian, and the sci-fi series The Expanse for a good example of the other one.

There are those who would argue that none of these – let alone a few, much less all of these – would ever creak past the shrieks and performative rage of the Senate’s erstwhile fiscal hawks.
 
Ha! There are few things politicians of any political stripe care about more than getting reelected. And as the Trumplicans’ central rally cry – a booming national economy – crumbles, you can be sure that if not Senate Majority Leader Mitch McConnell, then President Trump’s survival instincts are going to go into overdrive.
 
Trump’s populist tendencies coupled with the very real economic pain being felt across broad swathes of the American electorate provides the current administration with an obvious path forward to electoral success: absolutely massive social spending.

If you enjoy our newsletters, please consider showing your appreciation through a donation to Feeding America if you are able to do so. One of the biggest problems the country faces at present is food dislocation: pre-COVID, nearly 40% of all foods were not consumed at home. Instead they were destined for places like restaurants and college dorms. Shifting the supply chain to grocery stores takes time and money, but people need food now. Some 23 million students used to be on school lunches, for example. That servicing has evaporated. Feeding America helps bridge the gap between America’s food supply (which remains robust) and its demand (which coronavirus has shifted faster than the supply chains can keep up).
 
A little goes a very long way. For a single dollar, FA can feed one person for three days.

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Global Grain Trade and its Discontents

Yesterday’s newsletter traced some of the issues that erupt when global transport gets wrecked. Today we’re going to cross that same initial problem into the world of agriculture.

It isn’t so much that plummeting oil demand globally hits agricultural production directly. If anything, cheaper oil translates not only into cheaper diesel fuel, but also key petrochemical outputs: things like pesticides and fertilizer are typically petroleum-derived. Instead, we’re going to have to hit this from another angle.

Take a look at this graph from Our World in Data:

Most of the world counts rice or wheat as their primary source of grain-based calories. So you’d think that either rice or wheat holds the top spot in international grain trade, right?

Wrong.

Corn is the winner of that particular contest by the proverbial country mile.

Most of you probably live in North America, and so probably don’t find this all that odd. Cornbread. Corn on the cob. Grits. Corn flakes. Tortillas. These are all part and parcel of our collective experience. In the rest of the world, however, once you get past polenta, corn isn’t used for much more than to line a bread pan. So why in the world is corn the top grain?
 
Check this out:

Most of the world’s corn isn’t eaten by people; but instead it is eaten by things people eat. Primarily cows, hogs and chickens.
 
One of the quirks of the American-led global Order that has dominated the world since World War II is that countries that normally couldn’t be physically secure or economically successful on their own suddenly could. For many that meant steadily increasing standards of living. That meant they wanted more and better food. Most people define more and better food as animal protein.
 
But while the Order radically changed the geostrategic environment, it didn’t touch the physical environment. If your climate and soil prevented you from growing a lot of of food before, you probably still couldn’t no matter what the Americans did or did not do. What you could do is build up an animal herd, and import the fodder to fatten it up. And so that’s what was done. Pretty much everywhere.
 
Enter coronavirus.

Global transport has crashed. The Americans used to use about half the corn they produced specifically to produce ethanol, a biofuel they mix into their gasoline. Since Americans are not driving, their need for ethanol has crashed right along with their need for gasoline. The United States is both the world’s largest producer and exporter of corn. American farmers are planting their crops right now, and so far they are planting just as much corn as before.

With US transport demand unlikely to recover this year, we’re looking at gross global corn oversupply with the expected downward pressure on corn prices. Globally, this is great. It implies little risk (at least on the supply side) to global meat production. Among major corn producers, in contrast, it suggests quite the glut. Corn farmers the world over – most notably in the United States, China, Argentina and Brazil – be warned.

Join Peter Zeihan and Melissa Taylor April 30th for an in-depth discussion and presentation on the impact of COVID-19 on global agricultural production and the stability of the world’s food supply.

REGISTER HERE

Future planned invents include:

  • Transport and Supply Chains
  • Manufacturing
  • Industrial Commodities

If you enjoy our newsletters, please consider showing your appreciation through a donation to Feeding America if you are able to do so. One of the biggest problems the country faces at present is food dislocation: pre-COVID, nearly 40% of all foods were not consumed at home. Instead they were destined for places like restaurants and college dorms. Shifting the supply chain to grocery stores takes time and money, but people need food now. Some 23 million students used to be on school lunches, for example. That servicing has evaporated. Feeding America helps bridge the gap between America’s food supply (which remains robust) and its demand (which coronavirus has shifted faster than the supply chains can keep up).
 
A little goes a very long way. For a single dollar, FA can feed one person for three days.

DONATE TO FEEDING AMERICA

The Next COVID Crisis: Income Falls, Famine Rises

The novel coronavirus has gutted humanity’s ability to engage in that most basic of social and economic activities: the ability to move. That simple fact has touched off a cascade of consequences, all of which touch off their own.
 
Stay-at-home orders mean less driving and flying. Transport is over half of global oil demand. The gutting of transport has crashed oil prices.

  • Less driving and flying means fewer people and firms are purchasing cars and jets. The gutting of transport has crashed global automotive and aerospace trade and manufacturing.
  • Less driving and flying means less tourism and shopping. The gutting of transport has shriveled global textiles and electronics trade and production.
  • Less driving and flying means more people at home doing their own cleaning and cooking and yard work. The gutting of transport means less income for migrant workers who normally handle those tasks. Remittances – a key source of foreign currency earnings in many countries – evaporate.

 
None of these sectors will return to strength until people feel it is safe enough to move about again and secure enough to spend again. In the case of textiles that could happen before the end of this year. In the case of tourism I’d be surprised if it happens before the end of next year.
 
It all adds up pretty quickly to something that is…not particularly encouraging. For American readers, think of how disruptive the coronavirus experience has been to this point. Now look at this graphic. For the United States, the sum total of all the sectors experiencing this sort of deep structural pain is a paltry 4.1% of US GDP. Compared to much of the rest of the world, that’s practically beer money. (For a point of comparison, China clocks in at just over 11%.)

Which brings us to a double pain-point for the global system. Not only are these countries now at risk of something far worse than a simple recession, many rely upon income from these threatened economic sectors to feed themselves. We’re not so much worried about a global food crisis caused by a lack of food production, but instead because of economic collapse among many consuming countries.

Join Peter Zeihan and Melissa Taylor April 30 as they break down global agriculture in the time of coronavirus. 

REGISTER HERE

Future planned invents include:

  • Transport and Supply Chains
  • Manufacturing
  • Industrial Commodities

If you enjoy our newsletters, please consider showing your appreciation through a donation to Feeding America if you are able to do so. One of the biggest problems the country faces at present is food dislocation: pre-COVID, nearly 40% of all foods were not consumed at home. Instead they were destined for places like restaurants and college dorms. Shifting the supply chain to grocery stores takes time and money, but people need food now. Some 23 million students used to be on school lunches, for example. That servicing has evaporated. Feeding America helps bridge the gap between America’s food supply (which remains robust) and its demand (which coronavirus has shifted faster than the supply chains can keep up).
 
A little goes a very long way. For a single dollar, FA can feed one person for three days.

DONATE TO FEEDING AMERICA

US COVID-19 Testing Data, April 27

Let’s start with the headline good news. Since our last update on April 19, it appears the COVID-19 epidemic may have plateaued in the United States with direct COVID-caused deaths peaking on April 21 at just under 2700 cases.
 
Of course, there are a boatload of caveats:

  1. While COVID-attributed deaths are falling, the number of confirmed cases is higher than ever. This could mean deaths are about to pick up again (which would be bad). Or, it could mean we are detecting more cases even though the actual number of cases has already peaked (which would be great). Or, this might simply be yet another trough-peak disconnect as we have seen before (which would be…frustrating). We really don’t know, and the only way to know is to do more testing. A lot more testing.
     
  2. Speaking of which, the US is still nowhere near where it needs to be for testing levels if the goal is to avoid secondary epidemics. We really need at least one million daily tests, with those tests generating results within an hour or two. Without such testing in place contact tracing is impossible, which means the only means of combatting additional epidemics would be additional shutdowns.
     
  3. There is nothing within the data at present that is what we could call “clean”. There is no single set of data gathering guidelines among the states, or even within individual states. This is pretty typical of the United States in general; most data is collected not at the national level, but by the states. And it is especially true during an emergency when the emphasis is on saving lives as opposed to making sure spreadsheets line up.
     
  4. Just because national death figures have stabilized and are falling doesn’t mean such is occurring everywhere. Different cities and states were exposed to COVID at different times, and different demographic patterns shape the epidemic in different ways. Densely populated New York may well be through the worst *fingers crossed*, but my far more rural home state of Iowa is clearly nowhere near its own peak.
     

Take the example of my hometown of Marshalltown. The local hospital (which lacks ICU capacity) fears it is about to be Italy-style overwhelmed. The hospital takes cases from throughout central Iowa – a region which includes the now-closed meatpacking plant in nearby Tama, as well as Marshalltown’s own (which remains open). In beef and pork meatpacking, social distancing at work is more or less impossible. Such facilities rank right up there with cruise ships and jails for COVID intensity. Cases linked to Marshalltown’s meatpacking facility are responsible for most of the fear at the hospital. I have yet to hear anyone use the word “triage” but I worry it is coming.
 
But even here the case data reflects not only differences in statistical management, but in the nature of anti-coronavirus policies at the state and local levels.
 
Compare Iowa’s experience to that of our arch-nemesis, Minnesota.
 
Minnesota has about half-again the population of Iowa, and as one might expect, total testing in Minnesota is about half-again the total testing level of Iowa. But that is where the similarity between the hardworking, morally upstanding people of Iowa and the turgid pile of frigid confusion that is Minnesota ends.
 
Despite its smaller population, Iowa has half-again more COVID-19 cases than Minnesota. I’ve little doubt that this is due to Iowa still having no stay-at-home orders from the governor as well as the fact that Iowa hosts the country’s densest cluster of meatpacking facilities.  
 
But despite Iowa’s much larger overall caseload, the state has also suffered fewer than half the deaths from COVID as Minnesota. Over ¾ of Iowa’s positive cases are in people aged 65 and younger, an age group that is highly likely to survive the virus. Minnesota’s cases are skewed into older age groups, making death more likely.
 
Bottom line? For a country of the size and diversity and complexity of the United States, there is no single road forward to reopening. Nor to secondary epidemics. Nor to aftereffects. We cannot project New York’s experience onto anyone. And we certainly don’t want to project Minnesota’s.

A Note From Peter

If you enjoy our newsletters, please consider showing your appreciation through a donation to Feeding America if you are able to do so. One of the biggest problems the country faces at present is food dislocation: pre-COVID, nearly 40% of all foods were not consumed at home. Instead they were destined for places like restaurants and college dorms. Shifting the supply chain to grocery stores takes time and money, but people need food now. Some 23 million students used to be on school lunches, for example. That servicing has evaporated. Feeding America helps bridge the gap between America’s food supply (which remains robust) and its demand (which coronavirus has shifted faster than the supply chains can keep up).
 
A little goes a very long way. For a single dollar, FA can feed one person for three days.

DONATE TO FEEDING AMERICA

Join Peter Zeihan and Melissa Taylor April 30th for an in-depth discussion and presentation on the impact of COVID-19 on global agricultural production and the stability of the world’s food supply.

REGISTER HERE

Future planned invents include:

  • Transport and Supply Chains
  • Manufacturing
  • Industrial Commodities

US Meatpacking Bends to Coronavirus Pressure

Let’s get the bad news out of the way first.
 
Meatpacking is a messy business almost custom-designed to generate coronavirus outbreaks among the staff. When a cow or hog is brought into the slaughter facility, it is slit, hung, bled-out and then has its skin and organs removed, all in 30 minutes. Since the typical cow weighs a half a ton, it is the ultimate team effort. No social distancing here.
 
Later on the carcass is broken down into pieces for restaurants, supermarkets with other parts sent on to processing into things like sausages and ground beef. Social distancing is at least possible at these stages, but establishing that all-important six foot bubble means fewer people on the line. That means lower throughput, which means less meat.
 
Best guess? Roughly 10-15% of the country’s beef processing and 25% of its pork processing is currently offline. We should expect that any plant shutdowns will last at least until the staff recovers. For most young, healthy folks, that’s about three weeks.
 
There’s also not a lot of spare capacity to ramp things up once these plants reopen. Most plants run two shifts, six days a week. And since most of the labor is migrant, expanding the staff isn’t something that can be done in a few days (or weeks) – especially if a substantial percentage of the staff is out with coronavirus. The issue is amplified in states that have no social distancing guidelines and, as you can see from the map, there is significant overlap.

Now the good(ish) news:
 
Purging a facility of COVID-19 is pretty straightforward. It just requires removing the vectors (i.e. the staff) from the facility and doing a scrubdown. Meatpacking plants regularly close every week or three for top-to-bottom cleaning and sterilization, so this is baked into normal operations.
 
Nor can you get coronavirus from meat that came through any of the impacted facilities. Most beef and pork is in a chiller for a few days (more than enough time to kill the virus). Multiple sterilization stages are used throughout the slaughter and packing processes (all of which would kill the virus). And then once the meat makes it to your house, you cook it (also, more than enough to kill the virus).
 
Finally, there will not be a shortage of animal inputs for the meatpackers. America’s ranchers had been steadily increasing their herds for years, both to serve Americans who had been enjoying a ten-year economic expansion, as well as to serve export markets recently opened up by the Trump administration. The ranchers’ problem is too many animals right now (too many to the point that some pork producers are euthanizing and burying hogs because they cannot get them to a slaughterhouse). The issue is not a shortage of animals; the issue is the bottleneck at the slaughter/meatpacking stage of the supply chain.

A Note From Peter

The last few weeks have been rough on all of us. As of March 1, the vast majority of our income here at Zeihan on Geopolitics came from us putting Peter on a jet and sending him to rub elbows with large groups of people. As I’m sure you’ve guessed, that business line has gone to zero.
 
Some of our subscribers have realized that, and so have suggested that ZoG provide a means of enabling readers to “tip” us in the manner similar to many other podcast and newsletter and bloggers. In essence if you like the newsletter, you can kick us whatever bit of cash you feel is appropriate.
 
Starting today we are implementing that program, but we don’t want the funds to come to ZoG. There are many, many people out there who are in a far worse position than the ZoG team who ultimately cuts its teeth on disruption and chaos. We’ll be fine. Others are not so fortunate. So we ask that should you wish to chip in, that you do so via Feeding America. FA is a charitable organization that seeks out foods from farmers, processors and retailers, and delivers it to people in need. Nationwide.
 
One of the biggest problems the country faces at present is food dislocation: pre-COVID, nearly 40% of all foods were not consumed at home. Instead they were destined for places like restaurants and college dorms. Shifting the supply chain to grocery stores takes time and money, but people need food now. Some 23 million students used to be on school lunches, for example. That servicing has evaporated. Feeding America helps bridge the gap between America’s food supply (which remains robust) and its demand (which coronavirus has shifted faster than the supply chains can keep up).
 
A little goes a very long way. For a single dollar, FA can feed one person for three days.

DONATE TO FEEDING AMERICA


Join Peter Zeihan and Melissa Taylor April 30th for an in-depth discussion and presentation on the impact of COVID-19 on global agricultural production and the stability of the world’s food supply.

REGISTER HERE

Future planned invents include:

  • Transport and Supply Chains
  • Manufacturing
  • Industrial Commodities

American Agricultural Abundance

Yowzas! That’s a lot of food! The United States is by far the world’s largest agricultural producer and exporter. For America’s food supply system to truly break down in the age of coronavirus, a whoooooole lot of things would need to go wrong.

But that is not the same thing as saying there are not challenges.

Consider bacon.

Everyone loves bacon. Even (especially?) vegans secretly lust for it. But we don’t have it every day at home – or even every week. Yet when we eat out we are far more likely toss some down. Wrapped around a jalapeno, on top of a burger, sprinkled over a salad, and on and on. The products we consume are appropriate to our culture, and the American food industry excels at matching foods to settings. What coronavirus has taken from us is some of our settings.

Restaurant sales in most locations were down 70% the day before the stay-at-home orders snapped into place. So now America has a bacon surplus. But it could simultaneously have a pork chop shortage, because we are more likely to eat that particular cut of meat at home.

This sort of product mismatch is only one of a half dozen factors causing tightness in our food supplies. Also in play are labor structure, product gaps, trucking vulnerabilities, industrial packaging and meat processing. Join us April 20 for the fourth in our series of coronavirus-themed videoconferences to hear Peter Zeihan break down the threats to American food security.

REGISTER HERE

Future planned invents include:

  • Transport and Supply Chains
  • Manufacturing
  • Industrial Commodities

Coronavirus: The American Food Security Guide

My partner just got back from a grocery store stock-up. The trip-in has been part of our weekly ritual since this coronavirus thing got going. The post-shopping conversation has a similar ritualistic feel. Whoever stays home queries the other one with the same barrage. Here’s this week’s Q&A:
 
How busy was it? (Packed)
People wearing masks? (Maybe two-thirds?)
Bare shelves? (Nope)
Produce? (Loads) *thumbs up*
Plenty of flour? (Yup)
What about pasta? (Only if you’re gluten free) *mutual gag*
Meat products? (Everything but hotdogs and the cheap sausages)
Anything on our list not there? (No caramel-flavored coffee creamer)
 
We’ll come back to that creamer.
 
Much of my work involves me balancing on the knife’s edge between big-picture statements and projections on one side, and an endless litany of caveats and clarifications on the other. About half of what I speak and/or write about really really big stuff: the fate of nations over timeframes measured in decades.
 
I love doing the big stuff. Sussing out the big trends in technology and geography and demographics to play forward a global game of multidimensional chess with dozens, even thousands, of players.
 
But to do the big stuff you absolutely must sweat the details. Every snowflake is a potential avalanche trigger. It wasn’t so long ago that America’s shale revolution fell firmly into the “small stuff” category. Now it’s altered the global trajectory. I (heavily) rely upon Melissa Taylor and Michael Nayebi-Oskoui to alert me to just those sort of avalanche triggers.
 
Which makes discussing America’s food supply in the time of coronavirus somewhat…messy. As I am wont to do, let’s start with the big.
 
Despite all the disruption the coronavirus epidemic is causing the United States, the food supply system is working well. Disruptions are largely limited to changes in demand (such as hoarding), as opposed to challenges to supply. There is zero reason to expect the United States to need to bar food exports. No region of the country is going to starve, much less the country as a whole.
 
My high confidence in this projection comes down to simple economic geography. America’s agricultural capacity is absolutely unparalleled.
 
Vast tracts of flat, fertile, arable land in a wide variety of temperate climate subzones to support a wealth of crops. Winter weather to kill bugs and weeds. Wind currents from the Pacific and Gulf of Mexico to provide ample, reliable precipitation. And all of it overlaid with the world’s largest, interconnected, naturally navigable waterway system to ensure easy and cheap transport of the resulting product. Toss in the vast petroleum production of the American shale revolution—oil is the base material used to fabricate the core agricultural inputs of gasoline, diesel fuel, fertilizer, herbicide, pesticide and fungicide—and every part of the American seasonal agricultural supply chain is domestic, redundant, inexpensive and secure.
 
It shows in the output. The United States is either the largest or among the largest producers of corn and wheat and soy and oats and dairy and beef and pork and chicken and apples and you get the idea. All-in the American agricultural industry is so productive and outsized for its population it must export about one out of every four calories it produces. There are exceedingly few items the United States is not self-sufficient in, and even those items—such as, God-forbid, coffee—are nearly all easily-sourced at volume within the Western Hemisphere.
 
The nature of most agricultural production is also pretty damn near virus resistant. Most aspects of the farming/ranching process deal with few people over large chunks of territory. Whether it is sowing or fertilizer crops in a large piece of farm equipment, or zipping around a cattle herd on an ATV, there simply isn’t much opportunity for contamination. Even with more constrained facilities such as dairies or chicken farms, it’s the animals rather than the humans that cannot social distance. So, big picture, the issue simply isn’t going to be one of insufficient calories being produced.
 
Which is where Melissa and Michael both intervene and say, “not so fast”.
 
Much of the country’s agricultural labor force in the harvesting of fruits and vegetables, as well as in the processing of meats, is not highly spaced out and so is vulnerable to the virus. Each step of getting foodstuffs from production to processing to packaging to retail requires a different truck…with a different driver. More steps, more chances for disruption. And food producers in one part of the country might not even be aware of food demands in a different part of the country, leading them to plow under their fields or dump milk in ditches, even in times of stress.
 
As regards American food security at the moment, the detail-oriented minds of Melissa and Michael are somewhere between thoughtful concern and a slight edge of quiet panic. The big picture guy in me blithely waves a hand at the complexity while noting extreme redundancy, extreme resilience, extreme slack in the system, and extreme overproduction compared to national demand. Soooo many things would need to go wrong for the United States to face meaningful shortages. They note that many areas in Texas are already experiencing scarcities of flour and steaks and chicken and produce – and that in a state that produces all these things, in many cases through multiple seasons. I note that we’re in pretty good shape in Colorado, even though the concept of growing food at high altitude, in the winter no less, is simply laughable.
 
(Incidentally, our best guess for that last disconnect is that Texans are used to being scared more, and so are more experienced hoarders. A Texas hurricane can take basic infrastructure offline for weeks, prompting locals to panic shop for everything imaginable. The Houston area is still recovering from Hurricane Harvey. In contrast, Colorado snowstorms don’t require much more than grabbing a couple extra frozen pizzas. We got a foot of snow here Sunday and Monday, yet by Tuesday morning everything was already clear.)
 
The core of our dispute is information. The United States still hasn’t reached sustainable COVID testing capacity of 150,000 people a day. Until the country hits one million, complete economic lockdown is really the only mitigation method for any flareups. At the rate we are going we will not get there this year. That leaves all three of us guessing. Just how bad COVID-19 is going to be? Just how long will it last? Can we get reinfected? How soon until a reasonable treatment?
 
Which brings us to two conclusions.

First, it is time to start gaming out weaknesses in the system. Trucking, meat packing, food processing, migrant labor dependency, grocery store workers. All these and more are potential failure points. For them to impact—I mean really impact—food supplies at the local level they would need to fail badly. But low risk is not the same as no risk, and coronavirus continues to…surprise.
 
Second, we will have product mismatches. It is less an issue of raw demand or supply, and instead an issue of preparation and packaging.
 
Consider toilet paper. Are people hording it? Yes (damn them), but there is more going on here. Since as many people as possible are working from home, most…use of the “facilities” is also occurring at home. Ergo, most everyone needs more toilet paper at home. The two-ply rolls of fluffy TP you buy for your bathroom are not the same as those giant wheels of ultra-thin near-newsprint you typically suffer through at work. While technically they are substitutes for one another, the two products use different wood fiber, they are made in different production runs, and they are packaged and distributed differently. The country’s overall supply of TP hasn’t changed. Neither has its demand. But the product mix has shifted.
 
The same thing will occur—is occurring—with food. Something like one-third of the meals Americans used to eat were eaten out. The sort of food processing and packaging for IHOP is significantly different from the sorts of products you purchase at the grocery store. The food processing industry is shifting onto a new footing more appropriate for Quarantine World, but it doesn’t happen overnight. In the meantime, it isn’t that there is less food available, it is our new stay-at-home lifestyles have concentrated demand into specific product categories.
 
There’s also more than a bit of second-guessing. Grocery stores are bracing for disruption in the food supply chain. While that may never actually occur, they feel obligated to provide for everyone’s basic needs regardless of everyone’s less-than-basic preferences—doubly so while the food processing industry is shifting gears. So, for weeks they have been making changes to what they order and warehouse, not based on customer preference, but instead with an eye towards nutrition and redundancy. More big bottles of canola oil from North Dakota, fewer small bottles of committed-suicide-in-the-wild collected-by-singing-cherubim imported hazelnut oil. More half-and-half, less…luxuriously velvety delectable caramel coffee creamer.
 
That’s what product mismatches means. Not that we’re out of food, but that there’s a hole in grocery shelves where you wish there was a very specific kind of food. Unless COVID disrupts the system far more than it has to date, the big-picture guy in me can confidently proclaim that this isn’t about shortages, but instead about insurance.

Or at least it isn’t about shortages yet. As Melissa and Michael relentlessly pointed out to me as I was assembling this piece, at the moment due to coronavirus-triggered facility shutdowns, some 10% of America’s beef and pork processing is offline. I’ll admit that one made me a little nervous.
 
Next week it is my turn to make the grocery run. If there is no bacon I will very suddenly shift from the big-picture guy to someone far more focused on the details.
 
But I won’t starve while doing it.

If you have more questions about the resiliency of the US Agricultural supply system in the face of pressures due to COVID-19, join Zeihan on Geopolitics’ Peter Zeihan for an in-depth seminar on April 20, 2020. 

REGISTER HERE

Future planned invents include:

  • Transport and Supply Chains
  • Manufacturing
  • Industrial Commodities

OPEC Production Deal, or Price War 2.0?

After the better part of five days of marathon negotiations spearheaded by Saudi Arabia with the goal of eliminating coronavirus-induced overhang in oil supply, global oil producers hammered out April 12 an agreement to reduce oil output by a record 8.5 million barrels a day.
 
The short version is the deal is a joke. I could spam readers with a full newsletter on just how much a joke it is – it relies upon cuts from countries who have never cut before, not all OPEC states are participating, it expects the Russians to cut as much in exports as Kuwait exports in total, the plan is to not begin the cut until May and then start rolling it back only two months later – but really it comes down to something far more basic:
 
Oil traders, the folks who probably have the best feel for just how much demand has dropped, estimate the global oversupply is now between 30mbpd and 35mbpd. Simply the reduction in demand for jet fuel is probably about 5mbpd. The OPEC cut is only for 5.6mbpd with another 2.9mbpd coming from non-OPEC members. Even if everyone plays along, this just isn’t enough to make a difference.
 
Which pushes the discussion to other directions. The world is running out of storage capacity. We’re really not quite sure how much spare storage exists in the world since everyone measures it a bit differently, while countries like Saudi Arabia and China are notoriously squirrely about just how much they have stashed around the world. Industry guesses as of the end of March ranged from 1 billion to 2 barrels, so I’m just going to split the difference and call it 1.5 billion.
 
If everyone sticks to the OPEC plan and if that 1.5 billion figure is correct and if the oil traders know what they are talking about, then all global storage is filled to the brim by early June at the latest. Should the OPEC deal collapse and everyone just keep pumping, zero-hour moves forward to roughly mid-May.

Or maybe sooner.
 
The quick and dirty of the backstory is that in addition to the coronavirus-induced demand collapse, the Saudis are engaged in a price war with the Russians. In every agreement the Saudis have hammered out with the Russians since the Soviet collapse, the Russians have never actually cut and simply made the Saudis eat the difference. Similar attitudes have prevailed in Venezuela, Iran, Nigeria and Iraq – the first two of whom are not even included in the cuts agreement.
 
Ok, on with the show.
 
On April 13 the Saudis announced sales prices for their crude shipments. They added $5 a barrel to their asking prices for American deliveries, but cut their asking prices for Asian deliveries.
 
US President Donald Trump has been aggressively lobbying the Saudis for a significant production cut in order to help US shale producers. While the April 12 OPEC agreement will likely keep Trump off the Saudis’ back for the time being, the change in contract prices is far more significant. They suggest the Saudis are going to stop dumping crude oil on the US market, so that the shale producers don’t drown quite so quickly. Add in that roughly half of all remaining (known) oil storage is in the United States, and most American shale producers won’t be facing chock-full infrastructure until at least late-summer. Any sort of output reductions in the American shale patches, whether caused by rapid well-decline rates or deliberate shut-ins, will extend that deadline out further.
 
But simultaneously, any Saudi crude that is not being shipped to the Gulf of Mexico will instead be steaming towards Asia, intensifying Saudi Arabia’s price war in countries where Russian and Iranian and Nigerian and Iraqi crudes feature. So the price war lives on, just in a more constrained economic geography. We could see a complete overload of Eurasian storage capacity in a matter of a few weeks.
 
All in all it’s a pretty shrewd play by Riyadh. Lead an agreement you know the Russians will violate in order to provide political cover. Reduce flows to the United States to get Donald Trump off your back. But redirect those flows to places that will really hurt your Eastern Hemispheric competition.

While things look rough for oil futures, it’s not all bad news! One area where the US supply chain is particularly resilient is regarding its agriculture. US farmers, food processors and grocer/retailers are in the strongest position in the world to continue delivering food supplies to American consumers. While consumption patterns and panic-induced hoarding will continue to empty shelves at local stores, all elements of the US supply chain have been able to continuously restock — and will continue to do so. 
 
If you have more questions about the resiliency of the US Agricultural supply system in the face of pressures due to COVID-19, join Zeihan on Geopolitics’ Peter Zeihan for an in-depth seminar on April 20, 2020. 

REGISTER HERE

Future planned invents include:

  • Transport and Supply Chains
  • Manufacturing
  • Industrial Commodities