Can China Save Itself From the Mounting Debt Crisis?

Photo of woman holding Chinese Yuan

Beijing has announced a hefty plan to help local Chinese governments refinance their debt. But is this enough to ward off the mounting debt crisis?

Local Chinese governments don’t have many revenue sources, so they’re SOL when there’s no more land to sell. Many have issued local government financing vehicles (LGFVs), but they’re essentially hiding the debt…which is over $8 trillion now….about half of China’s GDP. So, the issuance by the national government will help (maybe for 2 years), but it’s not going to solve the problem long-term.

Once the rest of the world understands what China’s debt load actually looks like, I would expect foreign investors to run for the hills. And with all the other issues China is facing, this will be another notch along the journey towards economic decline.

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Undocumented Immigrants’ Impact on US Labor and Economy

Photo of an immigrant in a strawberry field

As of late, the topic of illegal immigration is getting as much airtime as Brittney Spears did in the early 2000s. And I hate to burst your bubble, but all those undocumented immigrants are probably doing more good than harm.

Without the influx of ~2 million undocumented immigrants in 2023, labor shortages would have likely caused higher inflation. As the baby boomers retire and the US needs to re-industrialize, labor needs are skyrocketing; this will be putting a heavy strain on industries like healthcare, construction and agriculture, areas where these undocumented workers are heavily employed. Simply put, without these workers, the US economy would be hurting.

Policymakers have obstructed and neglected meaningful immigration reform since the 80s. However, if we could modernize this system (which would take some political creativity currently lacking in DC), we could realize the full benefits of these immigrants minus the constant political bickering.

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Transcript

Hey, everybody. Peter Zeihan here. Coming to you from Austin, Texas. And today we’re going to talk about everyone’s favorite topic this election season: illegal migration. I’ve no doubt on record saying that if the United States hadn’t had the wave of illegal migration that it had in calendar year 2023—about 2 million people—we’d probably be dealing with inflation north of 8% by now.

So I figured that’s worth a bit of an explanation. In most labor markets, you’ve got a degree of liquidity where workers can move from one subsector to another based on the economic moves and remuneration of the day. But for that to work, you can’t be headed states. You see, here in the United States, the baby boomers are in the process of retiring.

Two-thirds of them have already gone. So we have a labor shortage. In addition, the United States is in the midst of a massive re-industrialization wave as we prepare for the end of the Chinese system. Basically, if we want manufactured products, we have to build it ourselves. So demand has never been higher, and supply has been curtailed. We no longer have that pool of labor that can shift from one thing to the other or be tapped and tracked in terms of building booms.

And so anyone who is removed from the system immediately generates a pulse that goes through the entire network, driving prices higher. So yes, there are 2 million people who crossed illegally last year. Most of them are in the workforce, most here in Texas. As for the folks that are residing here illegally, which, based on whose numbers you’re using, are somewhere between 7 and 14 million.

That’s another huge chunk of the labor force that actually outnumbers the number of folks the United States has who might theoretically be looking for jobs. Unemployment in the United States is below 4%; we’re at historic lows right now. So if you were to remove some of the people who are working, we’d feel it immediately. Now, not all jobs are equal.

These illegal migrants do tend to cluster in three general categories. The first one is health care, particularly when you’re talking about something that’s on the edge of a janitorial job, you know, moving people, clearing bedpans, that sort of thing. The second is in construction, especially industrial construction, because, remember, the United States needs to double the industrial plant.

That doesn’t happen without building a lot of stuff. And third, and finally, agriculture, particularly in fresh foods, whether it’s vegetables or tree fruit. These last two are jobs that Americans just don’t want to do, won’t do, or can’t do. They’re hot. They’re heavy, outdoorsy work—certainly not the sort of stuff that today’s youth, especially Gen Z, is really interested in.

And so that just leaves us with the illegal labor pool. If you were to remove that labor pool, we wouldn’t be able to harvest any of our fruits and vegetables. So say goodbye to most of the produce in grocery stores. We certainly wouldn’t be able to build new homes or new industrial plants, so say hello to dependence on China until China is gone—and then you just don’t have stuff.

And if you don’t want to clean your own bedpan when you go into the hospital or retire, well, then, by all means, be against migration. The question, of course, is whether we can amend our legal structure so that we actually have an updated immigration system to process these people in a way that we find a.

At the moment, we haven’t had meaningful immigration reform in this country since the 1980s, and folks on both sides of the political aisle have taken steps at multiple points to prevent that from happening. So if

you were to wave a magic wand to make this all work better, you’d find a way to induce the would-be illegal migrants to actually collaborate with the system.

And that’s a very different sort of legal structure and enforcement and would require a degree of policy creativity we just have not seen in the White House or in Congress for quite some time

China Faces Deflation as Economy Stutters

Photo of woman holding Chinese Yuan

China is facing an economic downturn reminiscent of Japan’s struggles in the 90s. Actually, I take that back…China’s outlook is much worse.

The core of China’s problem is declining demographics. This crushes demand and leaves industrial production as the only path forward. Issuing debt and spending more on real estate, bailing out local governments and boosting industrial capacity isn’t going to do much, in fact, it will lead to deflation…a particularly nasty economic phenomenon which occurs when oversupply drives prices down into a reinforcing spiral of dysfunction involving recession, industrial busts, mass unemployment and general mehness.

If the Chinese want to avoid deflation, they’ll need to cut industrial capacity, but that’s not risk-free either. And to round out China’s list of issues, Chairman Xi’s chokehold on Chinese power adds another layer of complexity to successfully navigating this economic headwind.

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Transcript

Hey, everybody. Peter Zeihan here. Coming to you from New Orleans. It’s like 6 a.m., but this is the only time I have today to record, so here we are. The news in the last few days is that the Chinese are doing another, another, another stimulus program. It’s starting to feel a lot like what happened in Japan in the 1990s, where they throw more money into the situation, hoping to generate economic growth.

But it never did, because their problem at its core is demographic. Unless you can get people to spend more, to consume more, all that’s left is industrial development. In the case of Japan, they used that for real estate, and so the bottom fell out of the market, and it took 25 years to recover. You could argue it’s only in the last five years that Japan has gotten back to some version of normal.

In the case of China, the demographic decline is way more advanced than it ever was in Japan 20 years ago. In fact, you could argue that in terms of the collapse of numbers of people under age 50, it’s actually much worse today in China than it is in Japan, even now, even though Japan’s the world’s oldest society.

It’s that lopsided. Anyway, back to the topic. The Chinese indicate that they’re going to issue a lot of debt, which is something they’ve never really done before, with the numbers being floated somewhere in the low hundreds of billions to the mid hundreds of billions. So by any measure, even for an economy China’s size, this is potentially a huge amount of capital.

So the question, though, is what are you going to put it towards? Three things have been floated. Number one, buying up property that hasn’t been finished so it can be finished. Well, that will exacerbate the oversupply of condos, which is already more than enough to house over a million and a half people, so that does nothing except for maybe generate a little bit more public goodwill because that’s where 70% of private savings is.

So that’d be a political decision, not an economic one. The second one is to bail out the debt of local governments. Local governments can sell land and issue bonds, but they can’t raise taxes, so they have no way of really generating an income. And once they issue debt, they have really no way of paying it back.

So that’s like a $4 trillion asset class that’s completely bunked. And while, you know, we throw half a billion at it, that’s not nothing, but it really doesn’t move the needle in any appreciable way. And the third idea that the Chinese have floated is, shocker, building more industrial capacity. So we’re in this weird situation where the Chinese are kind of damned if they do and damned if they don’t.

I mean, if they do nothing and consumption continues to wither and tariffs against them for their overproduction continue, then their industrial case fails and the population basically falls into impoverishment. This new idea of throwing a lot more money against industrial output actually generates potentially a worse outcome called deflation. Now deflation sounds nice, but it is not. We’re all familiar with inflation, when prices rise, either because there’s an insufficient supply or too much demand.

Eventually, you get spiraling prices that hurt everybody and eventually eat away at the value of economic assets. Based on who you are, that’s different levels of disastrous. But deflation in many ways is significantly worse. Deflation comes from a similar imbalance between supply and demand, but it’s when there’s too much supply compared to demand. In those circumstances, prices start dropping because there’s too much stuff.

People can’t possibly consume it all. And eventually, people become used to the prices going down, so they put off their purchases, which increases the disparity between supply and demand even more. Eventually, it gets so bad, and the oversupply becomes so much relative to demand that the industrial base starts to collapse and people start to lose their jobs because nothing is profitable anymore.

And then all of a sudden you’re hitting it on the demand side as well. The demand is collapsing because people have lost their jobs. Some version of this, in a persistent but mild form, happened in Japan starting in the late 1990s and continued all through the 2000s and through most of the 2010s. We also had a version of this in the Great Depression.

The problem we have in dealing with deflation is, ultimately, you have to get supply and demand back into whack so that they’re actually aligned with one another again. The two ways to do that are to increase demand or decrease supply. In China, it’s difficult to imagine being able to increase demand because there are now more people over age 50 in China than there are under age 50 in China.

And generally, it’s people under age 40 that are doing most of the consumption, and that is the class that has been completely gutted by the one-child policy, in addition to the world’s fastest industrialization process. It’s only been a generation since Chinese folks were having, on average, five and six kids, to now having one. In fact, in the metros where the majority of Chinese now live, we’re now looking at the birth rate being one quarter or less of replacement levels.

We’re talking about 0.5 children per woman. There aren’t enough people to even think about a meaningful consumption rebound. Well, that leaves destroying supply. And in this, the Chinese face two problems. Number one, oversupply has been the state mantra for the last 40 years, and that is the Chinese development model. You look around the world, you figure out something that’s in demand.

You produce it. You use subsidies, you use cheap labor. You produce, produce, produce, produce, produce—not for your domestic market, for the foreign market. You export it. And over the last 40 years, this has moved from product to product to product, from steel to cement and now increasingly electronics products. Now they’re trying to get into electric vehicles.

And it’s just on and on and on and on. Well, in a world where those who are experiencing breakneck economic and demographic growth, there’s some strength to that model. And especially in the 1990s, in the 2000s, we had the developing world kind of getting in the act of industrialization and urbanization. But a couple things to keep in mind. Number one, you only urbanize once, and once you do that, your demand for those sorts of products drops.

Second, when you urbanize, your birth rate collapses. And if you’re, say, Brazil, that means you had a demographic moment in the 90s and the 2000s, but now you’re actually aging faster than the European countries, and your demand has kind of hit a plateau. And you’re also looking at the Chinese, who are basically doing product dumping at scale. You’re like, you know what? I don’t want to play this game. And so it’s not just the United States and the European Union and Japan and Canada that have put all these tariffs on things like electric vehicles from China. It’s also Indonesia. It’s also Brazil. It’s also Turkey. Most recently, Russia. The Chinese have produced all this stuff with the intent of swamping markets to save their social model.

And in doing so, they basically encouraged everyone to block the markets of Chinese products. So if the Chinese were to add more industrial capacity now as part of a stimulus program, all that’s going to do is exacerbate the oversupply. And now there’s nowhere for it to go. So I would argue that a year ago, before this really got serious, the Chinese probably had about twice the industrial plant that they needed because so much of it was geared to service the foreign market.

Well, now a lot of that is being shut out of foreign markets, and the Chinese are having to deal with it at home. Any stimulus will be on top of that. So the only way that the Chinese can avoid deflation at this point is to basically gut half or more of their industrial plant, and then you’ve destroyed the employment program for the entire country.

And if there’s one thing the Chinese government is obsessed about, it’s making sure that people have jobs so they don’t get together in large groups and go on long walks together. So there are any number of reasons how the Chinese economy can ultimately collapse. Demographics are at the heart of most of it, but it could be a trade war.

It could be a deflationary spiral, or it could be any sort of resource restriction. That’s not a short list, but we’re now in a situation where they could theoretically make it all about internal miscalculations and trying to rationalize their economic model for a world that can no longer support it. So this has become very real, very fast, and the Chinese are struggling mightily.

The question is whether or not they can come up with enough policy creativity to try something new. And since Chairman Xi has basically gutted the entire system of all decision makers but himself, I don’t think the chances of that are very high. All right, you guys take care.

Longshoreman on Strike: US Ports Get Shut Down

A photo of shipping containers in a port yard

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Back to the picket lines we go…this time with the longshoreman. Ports across the East and Gulf Coasts of the US will impacted by the strike, disrupting nearly two-thirds of the imports and exports by water.

European manufacturers are going to take a hit on this one, along with the US agricultural industry. We’re not just talking a couple days sitting in limbo either, even if the strike ends today, we’re still looking at weeks to clear the backlogs.

The unions’ demands on this one are pretty hefty; we’re talking about a 70% pay increase and a ban on automation at ports. In an industry that’s already plagued by slow advancement and limited automation, this ban would set the US way back. On top of that, the Jones Act has exacerbated the inferences of shipping in the US. So, we’re not talking about a duct tape solution here, its going to be a complex one.

There’s always a way forward, so what does that look like? Manufacturers can brush up on their Spanish and become friends with our neighbors to the South and/or they can build some more warehouses and stop relying on just-in-time supply chains. But that’s costly and inefficient, so expect some economic hurdles along the way.

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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.

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Transcript

Hey everybody. Peter Zeihan here. Coming to you from Dallas. Oh, humid even in October. Anyway, today we’re going to talk about the longshoremen strike on the East and Gulf Coast of the United States. They’ve been in place for a couple of days already by the time you’ve seen this, and we’re looking at roughly half of America’s ability to import and export.

Close to two thirds by water has been shut down. Basically, every port from Maine to the Texas border with Mexico is in effect, and all the ports are closed. This is going to have an impact far more than the actual time of the strike, which is so far to be determined, because for every day that the strike has shut down the ports, it takes about four days for once they reopen to clear the backlog.

So, if you hear that the port has been cleared while you’re watching this video, it’s still going to be upwards of two weeks before they actually get back to normal. And so, if this lasts through the entire month of October, that will obviously impact the holidays and going into the new year. Now, who gets hurt most by this?

Europe is the short version of all this — Europe and agriculture. So, first Europe. The Asians obviously import and export via the West Coast of the United States, which has a different union structure. Talk about them later. But the European model is different from the Asian model when it comes to interfacing with the United States.

In Asia, they either import finished products. Well, no, that’s the bottom line. They import finished products for the most part. The Europeans bring in all kinds of parts and have them assembled within the United States as much as possible so that they then can get around tariff walls. That means that the parts have to have access.

So most of the automotive industry that is in the East or the West Coast regions that has a European component is doing things that way. And it’s not just automotive. It’s pretty much any sort of manufacturing that the Europeans are looking to source closer to the demographic strike that is the United States. And so without that constant flow of parts, the whole thing gets disrupted.

And that’s going to have a very big impact on employment and economic growth throughout the entire eastern seaboard for the foreseeable future. The second group that gets hit is the United States agricultural system because moving things by water is really the only way you can ship things to the wider world, with the exception of Mexico. And so, everything that comes off of rail, everything that goes down the Mississippi to New Orleans, has to get repackaged onto another vessel — oceangoing vessel — at the port and then sent out, and that has basically stopped.

Now, we are kind of in a lull of seasons, agriculturally speaking, so if this only lasts a couple of weeks, no big deal. But if it lasts a month and we’re talking about all of the grains that are coming out of the Midwest suddenly having very few places to go. All right. How is this able to happen?

Well, the United States has an incredibly stupid law called the Jones Act. And you’ve probably heard me talk about it before because it prevents any cargo being transported by any ship between any two American ports by being transported by anything but a system that is 100% American-owned, captain-crewed, and built. We don’t do this for any other modes of transport.

And if we did, we’d be in a significantly worse economic position than the United States is. But since this law was passed in 1920, we’ve seen the amount of cargo in terms of value per mile that has shipped on our waterways drop by over 99%. There’s also a couple of clauses in the Jones Act regarding port management, which basically makes them all local monopolies.

And unions have taken advantage of this by forming a network of unions. It takes in all of the ports so that when one of them strikes, they can all strike. If this was done in the corporate world, this would obviously be easily illegal. And what the unions are demanding is a 70% pay increase. But the real kicker is they want a guarantee in their contracts that no automation will ever be added.

They want to go with like 1970s, 1980s levels of automation. And already, America’s East Coast ports are among the world’s least functional. There are a number of ports on the African continent that actually are more advanced than ours now. Now, under normal circumstances, what we would do — we, the United States, whatever — is give them everything that they say they want.

And then behind the scenes, work, work, work, work, work to add automation so that this can never happen again. That’s more or less what happened with the Teamsters union on the West Coast. And now, the port of LA has gone from one of the worst in the world in just the last few years to one of, you know, let’s call it above average. Repeating that on the East Coast would be wonderful.

That’s probably not going to happen for political reasons. Not only is this an election year, we are going through our once-every-generation-or-two political realignment in the United States, and the factions that make up our parties are moving around. And one of those factions is organized labor. One of Donald Trump’s political successes was teasing them out of the Democratic coalition, but he has not yet succeeded in folding them into the Republican coalition.

So they’re kind of out there in the wind right now, free agents. And as the Chinese system fails and as the euro system falters, if Americans still want manufactured goods, we have to build them ourselves. Well, that means we need to double the size of the industrial plant. How many of those jobs do you think are going to be?

Blue-collar? Probably 80% or more of them. So we are at the dawn of the golden age of organized labor in the United States, and the Longshoremen’s Union is part of that process. So it’s difficult to see the Biden administration using its executive power — which it does have — to forcibly end the strike before the election. You can’t say it won’t happen, but it’s politically more complicated now than it would have been the last time this went down.

In the 1980s. And so we’ve got a very different situation here, and it’s going to be complicated because neither side really wants to piss off organized labor right now. Now, if you’re a manufacturer, you’ve got two possible solutions here. The first one is the easiest one, and the one that will probably be followed most aggressively: Mexico.

Mexico. Mexico. Mexico. Mexico. Mexico. Mexico. Over 90% of our trade with Mexico is done by truck and rail. It doesn’t touch the ports at all. One of the advantages of having a land border. And so, the Mexican integration with especially Texas, but the United States in general, isn’t being affected by this really much at all. And that’s certainly going to increase the argument that Mexico not only is our number one trade partner but is going to maintain that position for the rest of our lives.

And by “our,” I mean anyone who’s alive today. The second piece is a little uglier, and it’s not ideal. And that’s inventory. We’ve spent the last 40 years in manufacturing going to something called Just in Time. The idea that as you get better with logistics, you can partner with all of your suppliers so every piece arrives at the moment you need it in order to assemble a product.

And by doing it that way, you don’t have to buy rafts of warehouses to keep parts for emergencies. You can just focus on the supply chain. Well, if the supply chain is not reliable because of strikes at ports, you have to go back to something called just in case. And that means stockpiling parts — maybe not at your primary facilities, but along the supply chain route for everything.

And that means probably having four, maybe five times as many parts in circulation at a time. That is expensive. You need to buy the land, you need to maintain the inventory, you need to staff that. You need to have basically twice as much industrial plant dedicated simply to holding things in a box. It is wildly inefficient.

And in the world the United States is finding itself in, it’s very, very expensive because we need to expand our productive capacity, expand our storage capacity. And if just-in-case techniques need to be done, then we have less capital and less labor and less land and less industrial plant available for the things we actually need to build.

But until this is resolved, if you’re a European manufacturer, that’s really your only option.

If You Think Mexico’s New Government Is a Problem, Wait Until You See Its Solutions

Mexican President Claudia Sheinbaum raising hand behind a podium

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Mexico’s newly elected president, Claudia Sheinbaum, is settling into her new digs. Despite her qualifications and experience, will her leadership actually look all that different from former President Andrés Manuel López Obrador (AMLO)?

While AMLO may have been popular, his policies and ideological governance will mark him as one Mexico’s worst leaders. Since Sheinbaum and AMLO are closely aligned, I’m not so sure we should expect anything different from the new president.

To make matters worse, the judiciary system has been weakened thanks to AMLO’s reform merging the National Guard into the military. So, Mexico’s political system is – let’s call it – fluttering.

We also need to touch on the geographic and economic challenges facing Mexico. AMLO attempted to redistribute wealth to help benefit the poor, but the country’s situation hasn’t improved…especially with the rise of the violent cartels. Sheinbaum has her work cut out for her, but let’s wait and see if she decides to follow AMLO’s policies or lead a bit more pragmatically.

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 free and we 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 a very damp North Carolina. Today we’re going to talk about changes going on in Mexico. Claudia Shane Bond is the president elect. She took office on October 1st, which is Tuesday. Tuesday? Yeah. You’re seeing this Wednesday? She is of the people who have run for office in North America in recent years, probably the most qualified.

Unlike, Justin Trudeau. She wasn’t a kindergarten teacher. She actually was a mayor of Mexico City. No less. And unlike Trump, she wasn’t a marketer. She had a real boy job. And unlike, folks like Harris or Biden or Obama, she wasn’t a senator. She was actually responsible for people and getting the trains to run on time. So in terms of expertise and managerial skills, she’s clearly the top of the heap.

The question is whether or not she’s going to show any independence. The outgoing president’s, Andres Manuel Lopez Obrador is going to go down in history as one of the worst leaders in Mexico, despite the fact that he’s leaving on relatively a popular point. He was an ideologue who wanted to punish most of the other factions that are responsible for policymaking in Mexico.

And in doing so, he dismantled a lot of the country’s institutions. In fact, in his last couple months in office, he basically gutted the judiciary. So if you’re an American, imagine that your most popular hated presidential candidate wins, and then he or she goes through and changes the way the judges are appointed. So instead of going through Congress, it just goes through party caucuses like that person’s party caucuses.

Some version of that is basically what Mexico has now, which is going to make it very difficult for the country to recover and have any sort of judicial independence in any sort of multi-party system. The question now, of course, is whether Shane is going to be part of the problem or part of the solution. And considering that she considers herself Lopez Obrador’s protege, I can’t say that the prognosis is particularly good here.

We also have another reform that has just been pushed through, the lower house of Congress just approved the folding in of the National Guard into the military writ large. It’s already passed, the upper house or is it the upper house? Just passed it. Anyway, it’s already passed both houses of Congress and now goes to the states where they need 17 states to ratify it.

And considering that Lopez Obrador’s and Shane Bonds party controls 20 of the state legislatures, that should be a pretty straightforward process that then comes back to Mexico City and the president formally stamps, it becomes law. Now, why does that matter? Well, the National Guard was set up a few years ago because the military was so horrendously corrupt and Mexico City needed a new semi military operation that could fight the cartels.

Now it’s just getting folded back in in order to guarantee central control by the president. So we’re looking at the tools of violence of the state being consolidated under one party, and we’re looking at the judiciary being consolidated into one party and using elections. That one party has already dominated most of the political conversations of the country.

Now, this was done without a coup. This was done through the ballot box. One of the downsides of the Mexican economic model is it’s grossly in equal. And because the country’s so difficult to manage, because it’s so difficult to build, it’s a mountainous issue. Most of the country is mountainous in the north. It’s desert, mountainous in the south, it’s jungle mountainous, and in the middle it’s just mountainous.

And so you get a lot of oligarchs who basically take control of their local cities. And this is how it’s been since independence back in the 1800s. And so Lopez Obrador, to his credit, sees this to the degree as a problem. And he wants to wrest power away from these local oligarchs, or could be used, if you want to use the Spanish term and give power to the people.

And so instead of having the most economically unequal state in the world, which is how Mexico was when he came in, he’s been redistributing, resources from the states to the federal government. Then the federal government has been giving them primarily to the poor. And that has one of the reasons, primary reason why Lopez Obrador, despite, wrecking the country, is leaving on a high point, because you have a lot of people who’ve never read and would speak for them.

The challenge moving forward is we’re now looking at a situation where the security situation in Mexico is going to degrade massively. We’ve got a civil war going on among the Sinaloa cartel, which used to be the most powerful one in the country, and we have now. Security in the country is the responsibility of the military, which is corrupt.

And for the last five years, Lopez Obrador has refused to move against the drug cartels. So they’ve basically taken over many, many aspects of everyday life, including in the Mexico City Central region as well. So Shane Bond has her work cut out for her, and we will find out whether this relatively pragmatic governor is going to be able to ditch the ideology and rule like a normal person, or whether she’s going to make it even worse.

Immigration: Social Costs vs. Economic Benefits

Its easy to sit up in an ivory tower and say immigration is always good because of the economic benefits; however, turning a blind eye to the social implications of immigration would be irresponsible in a well-rounded discussion. Here’s what Canada and Germany have going on:

Canada jumped on the immigration train fairly early in order to counteract their demographic decline. This influx of young immigrants helped stabilize the population, boosted labor productivity, and brought in more taxes than it cost in benefits. Butttt Canada’s social fabric is rapidly changing due to this new (and growing) population of immigrants.

On the other end of the spectrum, we have Germany and they’re not exactly known for their history of immigration. Over the past few years, the Germans have brought in large numbers of refugees from places like Bosnia, Syria and Ukraine. That has created some hefty social challenges, which will only continue to grow as Germany must bring in millions of young immigrants annually to balance its demographics.

While there is a strong economic case for immigration, we must also consider the social and political costs that it comes with. No amount of money can make a round peg fit in a square hole…

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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 the top of the Grand Canyon of the 12. I’m in Yosemite, just below Glen Allen. This is where I’m going to be hiking for the next couple of days. Not bad!

Today, we are taking an entry from the Ask Peter Forum, and the question is: Could you go through the numbers on the pros and cons of mass immigration into countries, specifically like Canada and Germany?

People always talk about the economic upside and the tax benefits, but they rarely mention the downsides, like crime and social identity. It’s a reasonable question, especially as we see more and more countries aging. Since we have more nations basically aging out, immigration is often brought up as one of the few, if not the only, possible patches or even solutions.

Let’s start by saying Canada is a special case. Canada knew 30 years ago that they were headed for a German-style demographic implosion. Under the Harper government and later under the Trudeau government, they made the decision to open the floodgates and become an immigrant country. You’ve probably had, I mean, they didn’t count the statistics the same way we do in the United States, but roughly 3 to 4 million immigrants have come in and become Canadians during that period.

Most of these immigrants were in their 20s and 30s, as Canada specifically targeted younger people, unlike the migrants they had received in earlier years. This managed to stabilize the numbers, but only so long as they keep those inflows coming, because native Canadians, to use a church term, still have a very, very low birth rate. There’s no replacement coming from within the population, so a new social fabric is developing.

The numbers, which I don’t have top of mind, I apologize, are unequivocal: the new migrants, especially those under age 40, generate far more in tax payments than they take out over their lifetime. It’s a definite net fiscal benefit. In terms of jobs, as a rule, the people who migrate tend to be the more aggressive, skilled, and educated of their countrymen. This gives you a boost in labor productivity. Not everyone is an Elon Musk, but you get the idea.

Third is crime. Unequivocal data shows that in every country that tracks these statistics, crime committed by immigrants is significantly lower—typically at least a third lower—than crime committed by the native-born population.

Fourth, there’s something people usually don’t think about: education. In the United States, it costs over $150,000 to graduate a kid from high school. That’s just the government cost for education, not the societal cost of raising the child from birth to age 18, including healthcare. One of the benefits of migrants is that, you know, another country has already paid those costs, and now you’re benefiting from their labor. Economically, it’s a very easy case to make.

Two things to keep in mind. Number one: not all migrants are the same. Take the United Kingdom, for example. Indian migrants and family reunification—basically, the UK would bring in one person from India who meets all of these criteria we’ve discussed. But then they bring in their extended family, and all of a sudden you’ve got 60 Indian Brits, half of whom are over 60. It’s a different story if you’re bringing in new retirees; the cost to society can be very, very high.

Also, in the German case, the migrants from Syria—about a million of them—were 80–90% male. So, you’re not getting much of a demographic boost there because there weren’t enough women to have more children.

The second complicating factor is social cohesion. If immigration has been a part of your social fabric for decades or even centuries, absorbing people from different places is relatively easy. Countries like the United States, Australia, New Zealand, and Canada have done this in phases for a long time, so if someone says their parents are from a different country, most Americans won’t even blink. People in the U.S. assimilate very quickly.

But if your country doesn’t have that culture, like Germany, and you suddenly open the floodgates, things start to look very different. The first real wave of migration into Germany happened during the Bosnian wars in the 1990s. Germany did the right thing for the right reason by taking in refugees, but it changed the social character of the country. They did it again in the 2000s with Syrians, and now they’re doing it with Ukrainians. If you wait too long, until there are more people in their 40s than in their 30s, 20s, 10s, or even newborns, you’ll end up with a very different place.

This is the situation that Canada will face—not right now, but in 20 or 30 years. They waited until late in the day to start bringing in millions of people. If it happens over a long enough period, society can adapt. But in Germany’s case, this has all happened relatively quickly. To maintain their demographic standing, Germany may have to bring in 2 to 2.5 million people under age 30 every year for the next 20 years, just to stay where they are. By then, those people will form the majority of the country, which will make it a very different place.

If you look at immigration purely as a numbers game, a fiscal issue, or an economic growth issue, it’s a slam-dunk case. But we don’t live in that world. And you know what we call the gap between the ideal and reality? Politics.

The Federal Reserve and Its Inflation Target

For all the hungover Americans out there, I heard the best cure after a long day of drinking is to talk about inflation. Well, maybe it will just make your head hurt more, but you still have the weekend ahead of you to relax…

The Federal Reserve has been juggling lots of different things over the past few years, and attempting to keep our system balanced is no easy feat; however, the Fed’s job is just getting started. With the need for a massive industrial buildout coming down the pipe, raising rates could hinder this expansion and cause a huge swatch of problems. Then the Fed will have to factor in the decline in population growth which is creating a low-demand environment, necessitating an entirely new economic model.

So yeah, the Federal Reserve has their work cut out for them, but don’t worry too much. The Fed’s actions should remain effective and US economic growth should remain strong…if anything (like inflation) does run awry, we might see some “legislative intervention”.

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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 the lost wilderness in Colorado. This is Lost Canyon, which I found myself in and turned out to be a little bit more than I bargained for. Anyway, we’re taking questions from the Ask Peter Forum today. One question is about my prediction of facing several years of inflation at 10% or higher and whether the Federal Reserve should revise its policy on interest rates.

For those of you who are not financial aficionados, the prime rate is what the Fed sets. The idea is to keep it low enough to generate economic activity by making credit cheaper, but high enough that demand doesn’t get out of control and generate runaway inflation. If we’re looking at a 10% inflation rate, that’s a bit of a problem because the Federal Reserve targets a 2% inflation rate.

So, big difference. And, a little bit of rain. We’ll continue this in a minute.

During the financial crisis into Covid, we were basically at a 0% prime rate. We’ve been ticking up ever since. The Fed recently met and it’s around, let’s call it 5.5%, 6%, somewhere in there.

Anyway, the question is whether they should go higher.

Yes and no. First and foremost, the Fed is going to be wrestling with things that I can’t even imagine. So I’m not the kind of guy who says the Fed should do this or that. I would just say that the Fed has a lot of tools. As we saw during Covid and the decade before, they can use them in ever more creative ways. However, the key thing to keep in mind is that the reason we’re going to be having these high inflation rates is not necessarily because of growth per se, although that will be part of it, but also because we’re going to be doing a historically unprecedented industrial buildout. We basically need to double the size of the industrial plant and probably increase the amount of processing capacity we have for raw materials by a factor of ten. That’s going to use a lot of electricity, a fair amount of labor, and a huge amount of land. Normally, if the Federal Reserve was looking to get inflation under control, they would raise interest rates to make borrowing more expensive.

But if you do that now, you’re going to choke off that industrial expansion. We’re not engaging in this industrial expansion because we think it’s just a peachy keen idea. This is not normal economic activity. No, no, no. We’re anticipating the collapse of the Chinese and, to a lesser degree, the European industrial systems. So if we still want manufactured goods, we have to build the manufacturing plant.

If you were to raise rates in that environment, you would choke it off, and we would be left with higher costs of living because of a lack of goods rather than because of inflation. So basically, we get the worst of all worlds. There’s another reason why I’m not going to be needling the Federal Reserve to do anything specific.

That’s because the rules, as we understand them, are changing. Going back to the dawn of the first era of globalization that Columbus kicked off in 1500, economic activity on this earth has been based on more interaction, larger populations, more interconnections, greater financial penetration, more markets, and more technology. The core of all of that is more people. Well, that’s not happening anymore.

Countries as diverse as Japan, Korea, China, Taiwan, Thailand, Germany, Spain, Poland, and Russia—they’ve all aged out. It’s not that they’re going to die in the next year, although some of them are getting close, but they will never have larger populations again unless something really weird happens with migration. So if you remove that component—larger and larger populations—that has undergirded economic activity for the last 500 years, we need a new model. Because if it’s not based on population expansion and the market expansion that comes from that, what is it based on? Well, we don’t know. Any guide that we have is literally futile—500 years ago or more. So we’re going to have to figure out something new. We’re going to figure it out as we go.

Now, the advantage that the Federal Reserve has in this is that the United States is the first world country that does not face the same degree of demographic degradation as everyone else. Yes, the American birthrate has recently dropped by quite a bit. Millennials have more kids. But if we keep dropping at our current rate, we’re not going to be in the same situation as China, Germany, Korea, or Italy for another probably 40 to 60 years.

So we will get to see what everyone else does with monetary policy in an environment where there’s no demand to regulate. Because, let’s be honest here, interest rates going up and down—all that is designed to do is to regulate the amount of demand in the economy. And if your populations are declining, there’s no demand left.

So the Federal Reserve has more tools, its tools work better, and it’s a growth story. So regardless of what happens with policy, this is still a pretty positive outcome. The only way that I can see that the Federal Reserve might be forced to do something different is if inflation gets to the point that it becomes a political problem. Then the executive and legislative branches of the US government might work together to pass a law to tell the Federal Reserve what its goals are and how to achieve them.

We’re nowhere near that yet, but I would argue that’s the thing to look for—not this year, not next year, but thereafter. Alright, let’s see if I can get out of this canyon. Take care.

NGLs: Ohio’s Plastics Industry’s Juicy Secret

Since I’m here in Ohio, why not talk about what makes this region so unique. Today, we’ll be discussing how shale in Ohio has propelled economic growth in an unfamiliar way.

For most of America, the shale sector looks fairly similar – traditional oil production produces natural gas as a byproduct, which is flared off until infrastructure is put in place to harness it. However, the Marcellus and Utica fields in Ohio primarily produce natural gas that is used for fuel across the central and eastern US. This is a bigger deal than it seems. If the tri-state area of Ohio, West Virginia and Pennsylvania were a country, it would produce more natural gas than any countries save Russia and the United States itself.

But what truly sets the region apart isn’t simply the abundance of natural gas, but of natural gas liquids such as ethane, propane and butane. The local prevalence of these materials has enabled Ohio to become a world leader in high-end plastics manufacturing. Thanks to this, Ohio has seen boosts in industrial activity and the establishment of chemical facilities throughout the state.

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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 just outside historic Harbor Village, just across the river from Marietta, Ohio. And that is the Ohio River behind me. Today, we’re going to be talking about something that is an exception from the exception. So the big exception is the American shale sector, because it has a different economic structure and uses different technologies for most oil production in the rest of the world and as a result has very low production costs and produces a lot of natural gas as a byproduct of oil production. 

So when you’re in Texas, most notably, say, the Permian people are after the crude oil and then natural gas comes up as a byproduct and they have to flare that natural gas until the infrastructure can be built out to absorb it and bring it into, say, the chemical sector here in Ohio and moving into Pittsburgh, big area in Pennsylvania, you’ve got a different problem. 

The natural gas field is the Marcellus and the Utica, and they are dry gas fields where people are after the natural gas rather than the liquids, because they’re using it for fuel in every place from Chicago to Boston to Washington, D.C. And so they need it for electricity. But there are still liquids here, especially in the western parts of the play, which move into, say, Ohio. 

They’re you’re getting a fair percentage of something called natural gas liquids, which in layman’s terms means things like propane and butane. That means that in this part of the country, it’s not just that the natural gas is cheap because the production costs in the Marcellus are very low. But so many end girls come out of places like the Utica play that Ohio has become a world leader in things like high end plastics, because for them, it’s not the oil that’s the waste product, it’s the propane and such. 

That is a primary feedstock into chemicals specifically for things like plastics. And so we’re seeing dozens of chemical facilities that do secondary processing popping up in the more populated parts of Ohio, taking advantage of what is basically below global cost inputs of things like ethylene, propane, butane and the rest. So here we are in the middle of the continent and we’re suddenly seeing an explosion in industrial activity for something that we normally associate with the Chinese coast, the Persian Gulf or the Texas coast. 

Very different situation, very different geology, very different outcomes. 

Japan: Zero No More

The Japanese have just announced an interest rate increase to a whopping 0.1% after seventeen years of zero to negative interest rates. So, is this a sign of a return to normality for Japan or is something else going on?

After years of demographic and economic challenges, Japan has struggled to stimulate consumption and combat deflation. Unfortunately, this recent interest rate adjustment isn’t a light at the end of the tunnel, instead it’s just supply chain inflation trickling down.

Japan has faced challenge after challenge and while there might not be a glimmer of hope for them, countries like Korea, Taiwan, and Germany might have a crystal ball moment by looking at the Japanese tribulations.

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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 snowy Colorado. The news last week in the financial world is that for the first time in 17 years, Japan raised its interest rates above zero. They’re now point 1%. Very exciting stuff. Let me give you the backdrop. So I talk a lot about demographics. Japan is the original demographic basket case.

They started industrializing around the turn of the last century and were the first significant country after Germany to be majority urbanized. And like Germany, where you have suburbs, you basically just have inner city, followed by more inner city with everyone living in condos. So they’ve had the world’s lowest birthrate for quite some time until recently. And they’re definitely the world’s until recently, the world’s fastest aging society and or still the world’s oldest society.

They found a way to mitigate some of that, but it’s really just slowed the decline. Definitely not reversed it. Any who once people age are past roughly 50. It’s different for every culture, but roughly they’re they start consuming less and saving more. And in the case of Japan back in the 1980s, which was one of the most productive economies in the world, you’ve got this super saturation of the local market with high tech goods, and then everything had to be sold abroad.

It was a combination social management, political and economic plan, all in one. That meant that Japan became the boogieman of the day for the Americans because they could sell high tech stuff for cheaper than the Americans could make it at home. But it also meant that back in Japan, the super saturation pushed prices down. And if you think prices are going to go down, you tend to defer your purchases for a little bit because they’ll go down more.

And that happened across every economic sector in Japan for decades. And they eventually got to the point that between trade tensions, which triggered problems with the United States, that forced Japan to offload some of their manufacturing to other countries, most notably the United States, in order to keep relations. Okay. You also had people aging and aging and aging and aging, eventually hitting mass retirement.

So the bulge in the population pyramid in Japan is past the age of retirement already, and people who are retired don’t consume much at all. So after 30 years of consumption being flat to negative, you’re now not simply dealing with a different population structure that can’t consume. You also have a smaller industrial base in Japan because so much of it has been offloaded, moved to other places for a mix of strategic, political and economic reasons.

Well, that means deflation has never really gone away, and that means that the Japanese have been really having problems stimulating consumption. Normally, normally interest rates are, to be perfectly blunt, a method of regulating demand. The idea is you make them lower so it’s easier to borrow when you want people to buy more. You raise them when you may a slowdown and fight inflation so that they’ll buy less.

That’s how it works. But once you get into deflation and you eventually drop your interest rates to zero, you can’t go any further. Well, I me guess the Japanese did. You went negative. So you actually get paid when you borrow money. But it wasn’t enough to change the fundamental mechanics of it. Now, in recent years, especially with the recovery from COVID, we’ve been seeing inflation throughout the manufacturing supply chain system.

Japan is no exception to that. And so prices have risen in Japan, triggering monetary policy changes like raising interest rates to a record high in recent years of Point one. But this is not a sign of a return to something that’s more normal. This has only occurred because of increase in prices for the inputs of raw materials and the outputs of intermediate and finished products.

This is a supply chain reason for inflation going up, not a demand reason. So while it’s a little bit more normal today in Japan, and banks can work a little bit more normally, which is, you know, a good, good thing. There hasn’t actually been a fundamental change in the core problem that plagues the country, and that’s that demand has been steadily dropping now for an entire generation and is unlikely to recover.

Why does this matter? Well, Japan used to be the world’s second largest country, and it has basically stalled for 35 years now. Second, in the meantime, a lot of other countries have caught up or even passed Japan in terms of the speed of aging. If you remember earlier, I said that Japan’s birth rate had risen a little bit.

And it’s aging. It’s slowed a little bit. Not not recovered, not reversed, but slowed. A lot other countries have screamed right by it. Countries that are now aging faster include Korea, Taiwan, Thailand, China, Germany, Italy, Spain and Poland. And now it’s kind of a race to see who gets to the bottom first, which means this sort of problem.

It’s not so much that it’s Japan’s old normal and still new normal. It’s about to become the new normal for a whole swath of countries that we have long associated with robust economic growth and high levels of industrial production. So Japan’s past is the future for a lot of these countries. And Japan’s present doesn’t look all that hot either.