With the new debt downgrade by Moody’s, we felt it the perfect time to repost some of our old videos covering the US debt situation.
Moody’s Downgraded the Debt, So Let’s Recap
The Fire Hose of Chaos: The Fed
Jerome Powell has been on the receiving end of Trump’s threats and the markets have reacted negatively to the undermining of the Fed’s credibility. Here’s the full picture.
The Fed is raising rates to combat inflation driven by Trump’s tariffs. Higher rates = more expensive borrowing = slower economic activity. A necessary evil to prevent an inflation spiral. Trump wants rates lowered to encourage economic growth, counter to the Fed’s mandate. There’s no legal ground for Trump to fire Powell unless he wants to alter the Fed’s charter through Congress. Which, to be frank, is a feasible route given a weakened Republican party unlikely to resist.
Stagflation is just the tip of this iceberg. A deep recession is lying just beneath the surface, and Trump’s undermining of the Fed’s independence would only surface more problems.
Peter Zeihan here. Coming from Canada….Coming to you from Colorado. Sorry. It’s been a long week. One of the big things that happened in the week ending April 25th. On a number of occasions, Donald Trump indicated that he planned to fire the Federal Reserve chairman, Jerome Powell. Eventually he backed out and said it was just a joke.
And he never really considered it. But the damage has been done in the markets are kind of on fire in a bad way. So why does this matter? Well, the Federal Reserve is responsible for determining the monetary policy of the economy. And the tool that is generally gets the most publicity and is most directly relevant to most of us is interest rates.
When the fed raises interest rates, everyone else in the economy that is involved on the credit side of things raises the cost of everything. Whether it’s your mortgage rate, your car rate, or your credit card rate. And so higher rates means that it costs you more to do whatever it is you want to do, and your mortgage will go up.
Well, if you get a new mortgage, you’ll be more expensive. You get a new car, it’ll be more expensive if you do a purchase on layaway, it’ll get more expensive. And when you do that, you slow down economic activity. And that is the intent to slow down economic activity, because what they’re trying to do is suppress demand.
Because if you suppress demand, enough inflation goes down. And courtesy of the Trump tariffs, we have a significant inflation problem that is only going to get more intense in the weeks to come, as the product that used to come in from China is no longer arriving. So we have product shortages. And the fed is anticipating that the Trump tariffs on China, in addition to all the other Trump tariffs, are simply going to generate shortages in supply, and they want to reduce demand to match it.
So we don’t have an inflation spiral. Trump doesn’t like this. He wants economic activity to be robust. And so he’s pressuring Powell and the fed to drop interest rates in order to reduce those credit costs.
So the consumption remains stable or even better, goes higher and generates faster economic growth. But if you do that, you get higher inflation. So three things come from this.
First of all, the Federal Reserve is not going to bend the knee to Donald Trump because it legally cannot. The Federal Reserve Charter as established by Congress is very clear. The Federal Reserve is supposed to achieve a balance between inflation concerns and growth and employment concerns.
But when the two sides clash, it always should go with inflation, because getting inflation under control can be very difficult and in some cases can take years and trigger massive recessions. But boosting growth is easy. You just make the credit easier and it can come back roaring in weeks to months. So Donald Trump is not going to get his wish here.
So the threats against the Federal Reserve chair probably going to continue. Which brings us to the second thing the president can fire the Federal Reserve chair for cause. And for cause does not include doing your damn job. So if Donald Trump were to fire Jerome Powell, two things. I mean, number one, it would go through the courts over and over and over again.
And the federal charter is pretty clear or so. It’s pretty obvious to me that the Trump administration would lose that fight and would be very public and would be very humiliated. And I think Donald Trump knows that. In addition, power would still be on the Federal Reserve Board for another two years. So it’s not like it’s going to generate some sort of activity that is all of a sudden going to be in Donald Trump’s favor.
And I think he realizes that now. That’s one of the reasons why the threats have stopped a little bit. Which brings us to the third issue. If this is what Trump wants to do, if he really wants lower interest rates, if he really wants a looser monetary policy, he can get that without replacing the fed chair.
He just has to change the Federal Reserve Charter. And that just requires an act of Congress. In that, considering that he’s basically ripped the backbone out of the Republican Party that is normally in favor of fed independence, it would be a much easier route. So as the economy starts to slow, as inflation starts to tick up to levels that are incredibly uncomfortable, expect a Trump to slam his head in the fed a few more times, and then just go to Congress, and we will find out at that point whether or not there’s anything left in the Republican Party that can stand up to Trump when he makes a very, very, very bad economic decision, because we’re already in an environment where stagflation is our best case scenario. And if the tariffs continue in their current form, much less get expanded as Trump says they’re going to be. We are looking at a very deep, dark recession, just a few weeks from now.
And gutting the independence of the Federal Reserve will only make it deeper and darker.
The Fire Hose of Chaos: Recession Time
What do you get when you mix overly aggressive trade measures and a poor economic plan? Trump’s idea of a great start. Or, as I like to call it, a policy-induced recession. Here’s what’s happening.
Cargo shipments from China have collapsed and shortages will begin in a month or so. Trump’s eager to dump $1 trillion into new deficit spending, raising capital costs. Those DOGE cuts failed to offset spending and have backfired. Customer confidence is at its lowest since the ’08 crisis. We’ve already chatted about the construction issues. New tariffs are killing growth across numerous sectors. Policy confusion has stalled investment. And the global demographic picture isn’t getting any prettier.
The recession that the US is facing is no longer avoidable. Political choices have led us here, not economic fundamentals. Even if we flipped the switch today, recovery would be months away.
Hey, all, Peter Zeihan here. Coming to you from New York. There’s the World Trade Center, and I couldn’t think of a better place to discuss the recession that’s about to hit us. This is the latest in our series on the fire hose of chaos. How the Trump administration’s domestic and international policies are affecting the US economy.
If you were looking to avoid a recession, I’m afraid that that ship has sailed like it literally sailed out of China about three weeks ago. I’m recording this on the 29th of April and back on the first week, we had tariffs kicked into China that rapidly ratcheted up to 145%, and that basically turned into a trade embargo and ships just stopped sailing.
And at first it was just a few. And by now more ships have been canceled by a factor of two than what happened in the darkest days of Covid. The last of the three tariff vessels will dock in Los Angeles on or about May 5th. About two weeks later, the last will hit Houston about a week after that here in New York.
And at that point, the inventory that’s in the country is always got to work with, and we will see good shortages of almost every kind within a month. There’s also not much of a chance of changing policy to avoid this at this point, because even if the Trump administration were to climb down completely, and even if everyone in China were able to go back to work the next second, you still wouldn’t see loadings within a month, and then it’s another month for it to cross the ocean.
We’d already be talking about sometime in September or October. And that’s just one piece of the equation. We also have weakness everywhere else. The Trump administration says it wants to increase deficit spending by $1 trillion. That’s going to raise capital costs that won’t be compensated by the DOJ’s cuts. Doge has steadily revised down how much they think they’re going to cut out of the federal government, from 2 trillion to 1 trillion to 150 billion.
And the most recent data suggests that cutting that 150 billion actually cost 130 billion, because a lot of the jobs that were let go were people that were actually essential workers that Congress mandates. And so they’re being had to be rehired on a contract basis, which costs more. That’s before you consider what’s going on in the housing sector, where we’re seeing consumer confidence at its lowest since the financial crisis back in 2007.
That’s before you consider that industrial construction spending has dropped to zero, something that never even happened during Covid and that kind of blip doesn’t exist is going back as far as the data is. The issue is we’ve had roughly 100 different tariff policies in two months, and no one knows what the rules of the game are.
And we have had no effort by the Trump administration put in place an industrial policy. We actually encourage manufacturing construction. And so it’s just withered on the vine from lack of confidence. Also, we have significantly slower economic growth in places like Michigan and Indiana already from the car tariffs that are already in place. And if the Trump administration does what it says it’s planning on doing on May 2nd, those car tariffs expand to cover car parts, which will trigger a manufacturing recession in roughly 25 states. And that’s before you consider the consumer spending is going to hit by agricultural tariffs that are just around the corner. And that’s before you consider drug tariffs or semiconductor tariffs, which are being promised. Basically we’re looking at a secular slowdown in economic growth in almost every sector. At the same time, almost none of it has to do with economic fundamentals.
It all has to do with policy. And even if we got a complete policy change today, we’re going to have several months before we recover from this, just by unwinding things. And perhaps the darkest point of this is that some version of this was probably going to happen anyway. Birth rates have been dropping for decades, and it was always going to be the period between 2025 and 2035 when a number of countries including but not limited to Germany, Italy, Japan and China, basically aged out of being productive systems.
And when that happened, globalization was going to crash. But the tariffs are making it crash now harder. And in a way that is causing a lot of heartbreak for Americans. That wasn’t necessary. What is the other side of this look like? I don’t know, that has become a policy question.
The Fire Hose of Chaos: Government Debt
With everything that’s going on in the US, it makes sense that foreign investors decided to dump US T-Bills. But what does this mean for the government debt market and the future of the USD?
The selloff of $100 billion in T-Bills caused interest rates to spike and US Treasury yields to jump; however, the US remains the global financial baseline. Other countries simply can’t offer the volume, stability, or scale that the US Market can.
With no real alternatives, the US will remain in the number one spot. If things did heat up, the Fed can always monetize the debt (which is something they’ve never had to do at large scale). And the US has structural advantages and policy tools that will keep the US stable in the long run.
Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.
For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.
Hey, all, Peter Zeihan here with a home office video. We’re gonna take a question from the Patreon crowd, and that is, do I worry about what’s going on with the government debt market? Specifically, some of Trump’s economic policies have been so erratic that they have been causing foreign investors, most notably the Chinese, to dump a lot of us T-bills on the market.
We’ve had reports that as much as $100 billion has been dumped in a short period of time, and in doing so, the cost of financing that debt has gone up, with the US T-bills briefly hitting about 4.6% before falling back. Basically going up a half a percentage point in a day doesn’t sound like much, but typically if you go up more than like 5/100 of a percent in a day, it’s kind of a big deal from a financing point of view, because in the US, government has issued more debt to pay for the financing.
And since there’s $36 trillion in outstanding debt, you move that needle just a little bit and all of a sudden the US government can get into a lot of financial trouble. And some version of that is what destroyed the Premier ship of Elizabeth Truss in the United Kingdom a couple of years ago. She instituted a policy of tax cuts that were going to be funded by debt, thinking that the growth would then make up for the difference.
And the market absolutely destroyed the pound briefly. And she was out in only a few days. I don’t really worry about that from the American point of view. A few reasons for that. First and most importantly, the US T-bill market is the global standard. Whether or not it is the 80 list standard is not the point.
The point is it’s the baseline that everything else trades around. So you can have governments with tighter fiscal ships like say, the Netherlands or Australia or Germany, whose debt is generally considered higher quality than the US. And it doesn’t matter because with $36 trillion, we are the baseline for pretty much all financial instruments, and that provides a lot of cushion against big shocks.
The bigger problem is whether or not the United States is risking losing its position as the global currency, the global store of value in the currency of first and last resort. After April 2nd, when Trump put in the tariffs, it basically would have generated a global meltdown if they would have stuck around. The concern is that there is a flight to safety, and usually in a flight to safety, people go to gold because they interpret as it being inflation resistant, and they go to U.S. T-bills because they’re the global standard in the US economy.
If something happens to it, the rest of the world has already melted down. Well, since the cause of the problem was the US government, the T-bills didn’t seem to be a particularly viable option and money went elsewhere. But if you look at the other options, they kind of suck. They went to the European Euro, and the euro has risen since the US dollar in the last couple of weeks.
But at the end of the day, the countries in Europe are demographically dead, and they can’t provide this type of baseline activity that isn’t necessary to underwrite a new store of value or a new source of exchange. And the euro is bigger than all the other options put together. The British pound still hasn’t recovered from the Truss episode, and without the Empire behind them, they’re just a mid-sized country.
They could never provide the volume. Canada, Australia. They run a tight ship. But you’re talking about countries with under 40 million people. In the case of Canada, under 30 million people. In the case of Australia, they just can’t compare to 330 million that are in the United States. Not to mention, the United States is a larger economy per capita than any of the others.
And that just leaves Japan, which until recently had one of the most manipulated currencies in the world. People like to talk about the yuan, but the one is not internationally traded. It’s not even an option. There’s just nowhere else to go. But even in the worst case scenario where everyone, everyone decides they just have to go somewhere else.
Which, by the way, does indicate a complete financial meltdown of all countries. Even in that scenario, the United States has an ace up its sleeve that has been used as a matter of course, by pretty much every other central bank for the last 30 years. You see, as countries have been demographically declining, their debt has become less and less attractive.
And so the central banks have had to step in and monetize that debt bit by bit by bit, basically printing currency to buy up the government debt. It’s not that the US doesn’t do this, but the US has never done this on the scales. Everyone else has done it. And since the Covid crisis ended, the federal Reserve has basically been cleaning up its balance sheet month by month by month.
And so there’s a lot of wiggle room for the fed to do just that. Now, that would still have consequences. But we’re talking here about an end of the world scenario, which is kind of my specialty. And in that scenario, you basically would have the Federal Reserve monetize large portions of the debt and become the buyer of government debt, a first and last resort.
In that scenario, the existence of the US t-bill as the baseline for everyone else would be a little bit different, but it wouldn’t stop. So having that in your back pocket gives you a lot of options that nobody else has. Don’t feel great about it. We’ll be okay on this measure.
The Fire Hose of Chaos: Don’t Expect Many Trade Deals
The Trump administration can put out as much trade deal fluff as they want, but the reality is that the internal dysfunction and unpredictable nature of this admin will impede most deals from ever making it out of an email chain.
Trade negotiations are complex and take years to develop. Given the state of organizational paralysis, there’s just not enough people to handle most of these talks. All of that back and forth, up and down, and dragging through the mud has left a sour taste in most countries’ mouths. And with no real beta on how to successfully approach these trade deals, what’s the point in trying?
So, take those official claims that ‘progress is being made’ and ‘real trade talks are happening’ with a truckload of salt.
Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.
For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.
Hey all, Peter Zeihan here. The fire hose of chaos continues. And today we’re gonna talk about trade deals and why you really shouldn’t expect many. First of all, let’s talk about the organizational side of things. Usually it takes the United States about six months of consulting with industry and consulting with Congress just to build its general position on a trade talk.
And then you go into talks with the other side, the fastest trade deal the United States has ever negotiated with Singapore. It took about 18 months. Most of them take the better part of a decade because there are so many pieces in motion. Even the Treasury secretary says that meaningful talks aren’t going to begin for another five weeks, and the first results aren’t going to happen with six months.
Even that is just a grossly optimistic time frame. And what you normally do is the trade talks reach a point of stagnation down the road. Then you start throwing around the threat of tariffs. By doing it in the front end, everybody’s kind of on the wrong foot. And to be perfectly blunt, the United States isn’t ready to have these talks.
Part of that is also organizationally, when the Trump administration came in, he came in with a much smaller Cordray than most presidents do. It’s really just the cabinet and a few senior aides. The Trump administration then proceeded to gut all of the departments of everyone in the top, several echelons, and then never staffed those positions with anyone but loyalists.
And so there really aren’t a lot of people who even know how to negotiate in the first place, much less do a trade deal. So there’s really only four people in the US administration that are capable of holding the talks. You’ve got Jamison Greer, the US Trade Representative Office. You’ve got Howard Slotnick Commerce. You’ve got Scott percent at Treasury.
And then, of course, the president himself. That’s four. And all of them have other things to do. Normally you would have literally hundreds of people taking care of all the technical aspects of the talks. And so when another country reaches out to the United States to do exactly what Donald Trump says he wants them to do. Open conversations on all of the topics.
There are no people at the lower levels to carry on those conversations. It’s just the four at the top, and all of them are very, very busy doing everything they do with their normal day job. On top of several dozen trade negotiations. And so we’re hearing reports left, right and center from even larger trading partners that messages are going on responded.
And any offer that they make is just met with silence for their part. The Trade Representative’s office says that it’s sending the things on to the president that he thinks are worth the president’s time. But everything just snarled up because the president is doing other things. That’s kind of piece one. Piece two is much more visceral because of the way Donald Trump has approached these things.
There isn’t a lot of trust. So consider the situations of our top four trading partners outside of China. So first, Canada, Canada took a hard line position of resisting what the Trump administration did in its early days. And as a result, it got slapped with tariffs that haven’t come off. Mexico decided to bend and give the Trump administration everything it wanted. And as a result, it was slapped with tariffs. So with our top two trading partners, no one knows what the approach should be because the result is the same as for the Europeans. It’s a security issue. Trump administration came in, basically withdrew support for Ukraine. Ukraine is fighting Russia. Russia is the only reason that NATO alliance exists.
It was created by the United States to contain the Russians. And so the Europeans quite rightly see the United States as a security threat. And anything that happens on the trade front, as a subsidiary to that. And the Trump administration doesn’t want to talk about the security situation at all unless the Europeans buy lots and lots of weapons.
But still do everything the United States says. And so we’re getting a split in the security identity of the entire Western civilization. Because of this disconnect between the two, what the Trump administration says it wants, what it’s doing. And then throwing the tariff situation into the mix. And so the Europeans really don’t see a benefit to discussing anything with the Trump administration until such time that the NATO situation is untangled.
And then finally, you’ve got Japan. Japan has tried to take a relatively low profile in this, and it’s mostly one of, it’s kind of a combination of betrayal and disgust that they’re feeling.
During the first Trump administration, Shinzo Abe, the Japanese prime minister, specifically came to Washington, cut a humiliating deal specifically to get in with Donald Trump so that whatever the future of the United States would be, whatever the future of Japan would be, the hard work would be done, and they could proceed together.
So the deal was negotiated by Trump, was signed by Trump, was enforced by Trump. And in the last month, the Trump administration has basically abrogated the deal and told the Japanese to start over. And the Japanese position is, if you want, honor your own deals, why in the world should we bend over backwards to negotiate another one with you?
And so the official story is that everyone is reaching out to negotiate, and lots of good deals are being made. But the bottom line is, none of our trade partners really see the point in doing this, because everything is so erratic today is April 16th. Today, the Trump administration announced its 95th tariff policy in 45 days, raising the tariff rate on many Chinese products to 245%.
As long as everything is so erratic, there is no point in having a conversation with the United States. Even if you can get someone on the phone because the rest of the world just doesn’t know yet what this administration actually wants. The goalposts are changing on a daily basis, sometimes an hourly basis until that settles.
Trade talks. Real trade talks can’t even begin.
The Fire Hose of Chaos: Wait, The Recession Is Already Here?
What could have happened much, much further down the road (or even avoided given the right circumstances) is now in the headlines – the US is headed into a recession. And if you wanted to send a thank you card to someone, you could send it to 1600 Pennsylvania Ave and address it to the Trump administration.
Between the unpredictable tariffs and constantly evolving regulatory shifts, this recession seems like it was part of the “plan” all along. The four big contributors are government spending remaining high, industrial construction on hold since March, manufacturing getting hit hard by tariffs, and consumer spending slowing.
Even if Trump’s reshoring efforts worked perfectly, we’d still be looking at two years of inflation and recession. And nothing in this administration has been done perfectly so expect this recession to be much deeper and longer than necessary.
Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.
For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.
Hey all, Peter Zeihan here coming to you from Iowa. Happy Easter week. Happy Easter week? Happy Easter week. Any who, a lot of you have written in to ask, whether I think we’re going to be in a recession and why? Short answer is. Yeah, yeah. First, the caveat. When the United States was making its presidential transition back in January, pretty much all of the signals for consumption activity, for industrial activity, for government activity were all green.
I don’t mean to suggest there weren’t some complications in there are some things to kind of keep an eye on. But we were in the middle of an economic expansion. There was no reason for expect that to change. But the policies of Donald Trump have been so erratic, so consistently, ironically, that business confidence, has collapsed. And the United States is now in a situation where it is dealing with regulatory and geopolitical risk, which is something that business communities hate.
On top of that, you have the tariffs, where in the last six weeks we’ve had 92 tariff policies, which make it impossible for anyone, business or consumer or even state and local governments to plan. So we’ve seen everything freeze up. And this is definitely going to cause a recession and a rough one and one that is completely unnecessary.
So let’s just kind of go through the four categories of where the growth comes from. First, government. This is actually the one I’m least concerned about. Despite everything that Doge has done with firing people, it turns out that the president doesn’t have the authority to fire most federal workers. Neither does the Office of Management and Budget, and certainly Doge, which doesn’t even have a congressional mandate.
Instead, every department in the federal government does have a federal mandate. And as congressionally mandated activities. So you can’t fire these people without congressional activity. So everything that Doge has done is pretty much already been unwound. The total budget savings and the low double digits of billions and 90% of the workers have already been rehired, doesn’t mean that they won’t be fired.
Now, the Trump administration, in kind of round two is actually doing it the right way, going through the cabinet secretaries and getting legal structure from Congress for the reductions. And that will work. But that won’t manifest this quarter and probably not next quarter. So what that means is, even with the federal government being in chaos, the spending is still happening.
So we’re getting none of the functionality of government, but all of the cost of government. And from an economic point of view, that is a slight negative, but not a big one. So government’s kind of a non-factor right now. Next up is industrial spending, primarily on construction of new industrial plant. Now, in calendar year 2023 and 2024, we were setting records every single month, and it all came to a screeching halt on the 1st of March of this year because of all the changes in the regulatory structure programs, and because of all the chaos with the tariff policy, no one knows what the cost structure is any longer to build in the United States.
And so no one is building in the United States. We have already had a longer stretch of zero industrial construction, at any point, in the United States, since World War two. Now that is only about 10% of the economy, but it’s at a huge drag right now. Next up is manufacturing. Primarily the problem here are tariffs on Canada and Mexico, which are coming in and out and changing on a regular basis, just like with everything else.
But it’s really hit things like auto spending, Your average automotive has 30,000 parts and on par, all of the parts basically go back and forth and back and forth and back and forth across borders to whichever one of the three NAFTA partners do the best. And on May 2nd, we don’t simply have tariffs on Finnish cars.
We have it on all of those auto parts. And so we’re looking at the average cost of a vehicle going up by 12 to $20,000. If it’s made in North America. And that is going to be crushing. So with the existing tariff that we have right now that was implemented on the first week of April, that was already enough to trigger manufacturing recession and the really heavily auto committed places like Tennessee, Kentucky, Michigan, Indiana, Ohio.
And what we’re going to see, in the 1st of May is that will spill out to the other 25 states that are big into transport technology, and that’s everybody from Washington to Texas to, South Carolina. So then we get a manufacturing, recession. That’s another 15 to 20% of GDP. And then finally there’s consumption, which is the big boy, three stories here.
First of all, Trump says we’re going to get agricultural tariffs very, very soon. In fact, by the time you see this video might have already happened, for the bottom quintile of the American population, one third of income is spent on food. So that immediately is enough to translate into a consumption recession for the poor and especially poorer parts of the United States, such as the Deep South or some parts of the Rocky Mountains.
Second, the wealthy, most of their consumption is tightly correlated to what’s going on with the stock market. And that’s been a shit show for the last couple of months. So all of a sudden, the people who have the highest amounts of capital are probably going to be drawing back. And third, the tariffs at the time of this recording, we have 145% tariff on, on China, which is where most of our electronics and consumer goods come from.
So you throw that on top of what everyone would normally purchase and, you get a consumption led recession across the entire system very, very quickly. Now, the end goal here, of course, of the Trump administration’s policies are to expand the industrial footprint in the United States and get back into manufacturing in a big way. But that takes a lot of things like steel and aluminum, copper.
And we now have tariffs on all of those things. So building out this industrial plant will be very, very expensive. And if everything goes the way that Donald Trump says it will, we won’t see the first output from these new factories within two years, which means that this transition period best case scenario, according to Trump’s words himself, is two years of inflation and recessionary activity.
That’s assuming that he’s made the plan perfectly. He hasn’t. And that assumes that he’s right about what he’s doing. He’s not. So yes, recession probably starting off formally, statistically in the second quarter, certainly in the third, and lasting a lot longer than it would have ever needed to.
I Hope You Didn’t Want to Buy a Home
Trump’s endless tariff policies will likely hit just about every corner of the American economy, but the US housing industry is poised to take a devastating blow.
Mortgage rates are higher, there’s a labor shortage, and material costs are on the rise, which all make the concept of homeownership less attainable. You would think that the aging population would help free up some of that real estate, but the boomers are aging in place, rather than downsizing or going to a retirement home.
So, if you already own a home…good for you! If you do not…I hear Van-life is all the rage right now!
Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.
For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.
Peter Zeihan here, coming to you from Florida, doing kind of an open ended series now on the effects of the tariffs on the US economic structure. And today we’re going to talk about housing. It is probably the sector that’s going to get hit hardest, with the exception of electronics imports. Both from the point of view of supply and from the point of view, of course.
So let me just run through it real quick. First of all, if you want to buy a house, you have to get a mortgage, unless you’re incredibly lucky and mortgage rates are going up for a couple of reasons. Number one, if the Trump administration does what it says it wants to do, it’s going to increase deficit spending by roughly 1 trillion US a year, which will put pressure on the debt market hugely.
And all those ten year Treasury bills the Treasury Department is going to have to issue, are going to add up and raise the cost of a mortgage because it’s based on the ten year Treasury. That’s number one. Number two, we were moving in this direction anyway. Most of the free capital in a system comes from a population of people aged 55 to 65, who haven’t yet retired but are preparing to.
Their incomes are very high, their expenses are low, and the difference between those two generally gets shoved away for the future because they know when they retire, they’re going to have to basically cash out of their high velocity investments. So stocks and bonds become T-bills and cash. Well, as of January of this year, two thirds of the American baby boomers, the largest generation we have ever had, have retired.
That liquidation has already happened. I’d argue that most of the reason we’ve seen a quadrupling in capital costs across the overall economy these last five years hasn’t been Covid. It hasn’t been Biden or Trump or the fed. It’s just been the boomers doing what you do when you retire. Well, that hits mortgage rates as well. And then we have Trump’s more specific policies, basically liquidating the migrant workforce.
Trump says he wants to send about half of at home, roughly 5 million people. Well, the industry that migrant workers are most likely to work in after agriculture is construction. In addition, we have tariffs on steel and aluminum, which are two of the four biggest components that go into home building, the other two being copper and wood, which are also under sanctions.
So all of the inputs that are necessary to build a house in the first place are seeing their prices go up even as finance goes up. And there’s one more angle to keep in mind if something happens to your car, if something happens to your housing, if you draw upon your insurance policy for rebuilding, you still need labor and steel and aluminum and copper and wood.
While you might not need wood for the car, but the rest of it. And so insurance premiums are probably going up 20 to 30% just this year, specifically because of new policies out of the federal government. Finally, the boomers themselves, unlike the generations that have come before, who move into smaller units when they retire, whether it’s an apartment or assisted living or something like that, boomers are far more likely to stay in their home and age in place.
And there’s nothing wrong with that. But what it does mean is the single largest concentration of homes that owned by the boomers is not getting freed up as part of this demographic turnover. And so if you are a millennial and especially, a member of generation Z, the quantity of housing simply isn’t there. The older generation is staying in place.
The newer construction costs more. The home insurance that you have to get to get the mortgage costs more. And the mortgage mortgage itself costs more. You add it all up and housing is just expensive and only going to get more. So we cannot build it fast enough. And even if we could, the components that go into it are more expensive than they have ever been relative to the average income in American history.
So if you happened to own your house, of course, this is all great news because we’re entering a higher inflationary environment, which will eat down the cost of your loan relative to your income. So if you were in a position where you have already established yourself, this is great. If you’re trying to get going. This is awful. And that is one more problem that we’re going to have with inequality down the road.
Economic Troubles for New Zealand
New Zealand has been having some issues, with a 1% economic contraction and roughly 80,000 people leaving the country. What does this mean for one of my favorite countries?
New Zealand is a service-driven economy, but its two key industries – tourism and agriculture – are facing some challenges. The weak Kiwi dollar is great for tourists, but its straining local affordability. The dairy sector may be the most efficient in the world, but a collapsing China will cause major issues for exports.
While there are some hills to climb, it’s not all bad news bears. The Kiwis have stronger demographics than other developed countries and New Zealand could be a haven for skilled workers looking to escape collapsing or struggling countries.
Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.
For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.
Hey everyone. Peter Zeihan here coming to you from the Queen Charlotte Walkway. That’s the king of Peru sound behind me. And today we’re going to do something that all my Kiwi followers have been screaming for for the last few weeks, which is, you know, do one on New Zealand already. So here we go. New Zealand’s in a bit of a recession right now.
Contracted about 1% in the last quarter that we’ve got data for, which doesn’t sound like much, but that’s like half as bad as what happened during, say, the subprime crisis in the first year. So, you know, it’s if this was in America, we would all be freaking out. And, so let’s look at the economics, let’s look at the demographics, and then let’s talk about the context.
So first, the economics, the, the, Kiwi economy, much like everybody else in the first world, is largely services driven. But the two more dynamic sectors in here are agriculture and tourism. Tourism participant has been driving up prices because we’re in a situation right now where the Kiwi dollar is the lowest it’s been in quite some time, which is it for me, but it means lots of people come in and consume lots of things that the locals otherwise would, housing an especially short term in rental housing.
Sorry. Not sorry. Driving up the prices for everybody else. When you have a situation like that, people get a little antsy. And, because the currency is weak, they’re getting more business, but earning less for it. It’s a little stressful, and people tend to leave. And so 80,000 Kiwis left last year, which, again, doesn’t sound like a lot, but this is a country of only 5 million people.
So you’re talking about losing basically a quarter of the percent of your population in one year? The only California’s worse than that, of course.
Anyway, that’s a lot to lose in one year for a country, primarily young and skilled people. Their destinations tend to be Australia, the United States, the United Kingdom, in that order. You go to places where there are jobs.
It’s just that simple. Okay. Anyway, tourism, obviously something that it works very well here at the wine is good, the food is good, the land is good. It’s just a beautiful place with wonderful people. But if you’re doing more and earning less for it, you can see how that can be a problem. Second big sector agriculture.
Huge, new Zealand is a primarily volcanic soil, and many of the volcanoes are still active. I hiked on two of them earlier in this trip. And it’s, positioned where the local wind currents bring it. Lots and lots and lots of moisture. In addition, it is surrounded by relatively cool water oceans. You put that together and you never have a hot summer, and you never have a cold winter.
And fertile soil, plus lots of water. Anything can grow, and I mean, anything can grow. So the New Zealanders have some of the lowest cost of production per unit for agricultural products in the world, and only have 5 million people. So they can focus on quality, they can focus on value add. And the sector that has seen explosive growth over the last 4550 years is dairy.
Once the Kiwis left being part of the Imperial network that the Brits had built and went into business for themselves, they switched almost wholesale from things like sheep to dairy because they just have a huge competitive advantage. They never need enclosures. They never need shelters in the winter or the summer, and they can just rotate the cattle around, always giving them fresh food.
Only in the last few years have they started growing corn themselves to use a silage to increase their productivity even more. But even before they had done that, New Zealand dairy was generally considered the highest in the world in terms of quality and could be produced, at the lowest cost of any dairy in the world.
In fact, they have about a 30 to a 40% price advantage over the country. That’s in second place in terms of efficiency, and that’s the United States. And we only do that with massive enclosures and sheer numbers and lots and lots of, inputs, such as silage, in order to make the cows grow quickly and produce a lot, the Kiwis don’t have to do that.
They’re starting to. Which means there are additional efficiency gains to be gained. And you should expect both tourism and agriculture, especially dairy, to continue to grow in percentage terms that are just not possible anywhere else in the world. And yet, 80,000 people left, were experiencing here the tail end, the final days of the China boom. As the Chinese demographic situation completely implodes.
And there’s a combination of political incompetence at the top of the Chinese system and globalization and trade pressures from the wider world basically break the Chinese system and dissolve the country as a functional entity. Everyone who sells to China is enjoying these last few years were basically at the top of the bubble, and then that market just goes away.
And that’s going to hurt the new Zealanders as much as it’s going to hurt anyone who sells into that market. And we will have to have an adjustment in production capacity around the world. Now, countries like New Zealand, where the efficiency is through the roof, are the ones who will come out of that in the best place.
They’ll push the higher cost producers like, say, the Brazilians and the Russians out of the market in places where they compete. And we’re going to see that in industry after industry after industry moving forward. Okay. Let’s talk about the people.
New Zealand has the highest birth rate in the rich world and the highest birth rate in the advanced developing world. Better than India, better than Mexico, better than Turkey, better than Indonesia. Is one of the very few countries in the world where the cost of living for young parents is sufficiently low, and the availability of suburban and rural land isn’t just there, it’s there, and it’s attractive to live in. That helps keep family formation robust, that helps people marry and have kids when they’re still in their 20s.
The old model that we think of the United States as having dissolved back in the 60s, in the 70s and in, say, Europe much before that, still holds here no matter where you go in New Zealand, there’s lots of families with young children, and yet 80,000 young people still left. Last year. So whenever you have a period of economic distress, people will go to places that allow them to deal with that economic distress.
New Zealand’s primary problem is that it’s small and so any of the trends that are hitting in the wider world when they do hit New Zealand, there’s not a lot of else in the system to absorb the disruption. And so people flow, Australia, because they’ve got a a deal called the Common economic policy, something like that.
Yep. I think that’s right. Anyway. And then, of course, they’re still part of the Commonwealth so they can get into Britain. And everybody, who is white is generally allowed into the United States for limited periods of time. Looking forward, you know, what we’re do to looking forward from a different viewpoint.
Okay. We’re going to finish this video from, Queen Charlotte Sound. So 80,000 Kiwis last year relocated to other countries, which is a record. And that sort of population movement in the face of economic dislocation is about what you would expect. People go to where they think their prospects will be better. Now, I may be very bullish on New Zealand long term, but it’s a small economy.
So if there is a disruption in the global system, in tourism, agriculture, they’re dependent on the global system. People will look elsewhere, at least temporarily. But we need to think about this on a much larger scale, because New Zealand country with 5 million people is, if anything, the canary in the coal mine of the disruption to come.
At the end of the day, I think the Kiwis will be fine. More than enough food for themselves, no security issues to speak of. And, because they’re so far from the East Asian landmass, they can access energy either from the Persian Gulf or from Southeast Asia, or from North America or from South America. So, you know, the lights aren’t going to go out here no matter really what happens.
Other countries are not nearly so lucky. The demographic situation in places like Germany and China is just atrocious. We’re talking about national oblivion here with, their economies ceasing to function in the way we define the term, within a decade, probably with the worst of it in China happening within five years. Germany might have a little bit more time, but only a little.
And that’s before you consider globalization. Germany and China are both export driven systems, and as the world ages, its ability to buy stuff is going to shrink. And that’s before you consider politics or trade disruptions due to changes in trade policy. So you’re going to have a lot of Chinese, a lot of Germans, a lot of people from other countries looking for greener pastures, in many cases literally.
And the people who have degrees that are useful in an industrializing environment, and, are mobile are the ones that are likely be able to take the most advantage of, especially if they’re under 50. Because just because the Germans are dying out doesn’t mean that there are no Germans under 50. And the German educational system still cranks out top talent.
It’s just that there’s not going to be much opportunity for them at home. And if you look back through history, there’s nothing about this that is unexpected. The Germans throughout history have had booms and busts triggered by changes in the geopolitical environment, the one that is most relevant to this conversation, the one that is most relevant to the United States, is what happened in the 1840s with the German civil wars at the onset of the industrial period.
There you had, over a million Germans leave Germany for American shores, increasing the country’s population, our country’s population by 7 or 8% in less than a decade, from just that one influx. And in doing so, we developed these two little things that today we call Illinois and Texas. So bringing in millions of people who know how things work and how to build things, can drastically change a culture and economy in a short period of time.
Now, the United States today has 330 million people. The sort of influx it would be necessary to jar the system. It would be pretty big. But there is going to be a very, very large supply of Germans, of Italians, of Koreans and Chinese, and the rest, to take if you can take advantage of that, you solve many of the Americans problems in terms of workforce, industry and demographics and a fairly short period of time and if we don’t, we have to figure out how to do everything without the skill sets, and that’s going to make everything more expensive.
So watch the Kiwis. In many ways, they are leading the way into something that might work in the future, and the problems that they have identified are ones that are going to be much bigger elsewhere.
And in a world of globalization and the population, the Kiwis are the ones to watch.
Educating the Workers of Tomorrow
If I was tasked with raising and educating the next generation of workers (aka what middle school teachers do daily), what would I teach my minions (okay fine, “students”) to best prepare them for the future?
In the School of Zeihan, there will be 2 major areas of focus: Spanish and skilled trades. That’s right, instead of pencil cases and books, I’ll be handing out tool belts and Rosetta Stones on the first day of class.
Spanish will be essential, as Mexico will be one of our most dominant trade partners for the next 50+ years. Extra credit for the kids that can pick up some technical Spanish to bridge the gap in bilingual technical expertise – you know, to manage the semiconductor, automotive and aerospace industries.
After their Spanish lessons, the kids will head over to shop class. We’ll be churning out electricians, construction workers, and just about every other blue-collar position to ensure we can cover the demand associated with doubling the industrial capacity in the US.
So, who wants to enroll their kids in the Colegio Zeihan?
Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.
For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.
Hey, all Peter Zeihan here coming to you from an incredibly chilly Colorado. And today we’re to take a question from the Patreon page. Is like I’m a middle school teacher. What should I be teaching my kids to prepare for the future? Oh, I like this question. It’s a happy question. Okay. Number one Spanish. It’s the number two language in the United States.
It’s the number one language. And our top trading partner and the demographics of Mexico, which are significantly younger than the United States, suggests that Mexico is going to be our top trading partner and pretty much every economic sector for at least the next 50 years. Any good beyond that and technology might change, but at least for the next 50 years, integration with Mexico is the story, especially as the Chinese fail.
Second, if you want to take the next logical step in that not just Spanish, but technical Spanish, the issue is that there are lots and lots of Americans who speak Spanish, and there are lots and lots of Mexicans who speak English, but there are not a lot of people on both sides who speak the technical aspects of specific parts of the language.
So, for example, 80% of the world’s low quality semiconductors, that’s 90 nanometers and dumber. Think of the Internet of Things, your smart refrigerator, that sort of thing. 90, 80% of those come out of mainland China. And when the Chinese system breaks, we’re going to have to do one of two things. We’re going to have to basically get by without the quality of chips.
And they’re in everything. So we basically digitize large sections of the economy, or we take this legacy technology, which in many cases is 20, even 30 years old, and we rebuild it somewhere else. And in the case of the United States, it’s probably not very cost effective. We’re probably going to be focusing on the middle and the higher end components that go into things like automotive and aerospace and power management, not to mention AI and satellites and cell phones and computers.
But Mexico is rapidly, especially in northern Mexico, is rapidly moving up the value added scale in every type of manufacturing they do. And they could probably, with a little bit of help, move into low end semiconductors with just a couple of years of effort. The problem is going to be the transition period between now and then. And for that, you’re going to need a lot of people in a technical capacity in these Mexican semiconductor fabrication facilities who can basically handle the language of the technical side of the manufacturing process, and that requires some very specific language skills that just don’t exist in the bilateral relationship right now.
And you can do the same thing as Mexico. It’s more sophisticated IT and aerospace and automotive and, wiring harnesses and basically everything that puts together a modern industry. Remember that as the Chinese system goes, that’s the workshop of the World Breaks. There’s going to be a lot of stuff that has to be relocated very, very quickly. And the sooner we can start on that, the better.
And this is probably, I would argue, more of a restriction on our ability to bring Mexico up to snuff quickly than anything having to do with capital or labor, which is saying something because those are huge problems. And then the third item is much more straightforward here in the United States, in Canada and Mexico, we basically need to double the size of the industrial plant, to replace what currently comes in from China.
Well, that’s a lot of construction workers. That’s a lot of bricklayers. That’s a lot of electricians. We need skilled blue collar labor with probably electricity manipulation, being the single largest gap in the workforce. So the two biggest things that you can do, if your goal is to earn a six figure salary right out of school, technical Spanish to become an electrician, language skills and shop class are looking really good right now.
And on top of that, the politics of this are pretty good too. We’re going to double the size of the industrial plant. Pretty much all of those jobs are going to be blue collar. So we do stand at the dawn of the golden age of organized labor. And if you can be the skilled labor within the organized labor who you can punch your own ticket however you want.
All right, that’s it.
Can Tariffs Replace Income Taxes?
Imagine never paying income tax again. Sounds damn nice to me too. That’s until reality kicks in and you start looking at the math on how large the tariffs would need to be to replace those taxes…
Tariffs on imported goods would need to be roughly 50-65% and you could imagine the fallout that would have. Trade with key partners would collapse, prices would surge, supply chains would be disrupted, and energy supplies would take a hit. Tariffs once worked as a revenue source for the US, but with all the current programs and expenses, they barely scratch the surface.
In theory, there could be a way to make this work; like implementing entitlement programs, so a lower tariff would suffice. However, that would require some massive political changes that the US just isn’t ready for.
Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.
For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.
Hey, all, Peter Zeihan here. Coming to you from a windy Colorado. We’re taking a couple of questions from the Patreon page today, specifically. A lot of talk in Washington these days is about replacing all income taxes with import tariffs. Is this possible? What do you think about what it would look like? Great question. The proposal dates back to something that predates the income tax, which was really adopted only about a century ago.
But you have to keep in mind the volumes in question. Today, the United States imports about 1.14. trillion dollars of goods and services, about, three quarters of that as goods. And the tax generates about 2.6 to $2.7 trillion of income. So if your goal is to zero out the income tax, you need a tariff on everything, not just from China, everything that is in the range of 50 to 65%.
I guarantee you, if you increase the price of things by half, it’s going to change how we live. For example, we bring in a lot of Canadian crude, heavy stuff that is then refined into, distillates such as gasoline and diesel, which are the primary fuel source for most of, say, the Midwestern part of the United States. That would go to zero almost overnight with a 50% increase. So we’d have lots of reshuffling. We’d have to basically shut down trade relations with all of our major countries that participate. Link supply chains with us. And, anything that is electronic come to Asia would get very expensive.
So you’d have some big impacts. The reason why you’d have this, such as mismatches. We don’t have the same economy that we had back during the times in the 1800s, when tariffs were our primary source of income. So we have built out the social welfare state with Medicare, Medicaid, Social Security and defense now being our four biggest line items in the government.
So if you were to zero out Social Security, Medicare and Medicaid, then you could perhaps talk about doing an equalization with a tariff that’s only around 20 or 30%. But I would argue that that would require a lot of political evolutions in the United States that we are not quite ready to cope with at the moment. So it’s an interesting idea, but as a, as an income tax eliminator, we’re nowhere near to tariffs, being the solution to that particular problem.
