The Fire Hose of Chaos: Finance

Money being burned

The US has known that a capital crunch was inbound for decades now. With the Baby Boomers retiring and Trump’s trade policies hitting at the same time, these financial woes might sting a bit more than we thought.

The retirement of the Boomers was always going to cause a capital supply crunch; it’s just what happens when people retire and begin shifting their investments to safer things. So, the cost of capital was already on the rise. Now mix in Trump’s rapid-fire tariffs and aggressive foreign policies…and you magically begin losing capital inflows into the US, exacerbating the US capital problem.

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Transcript

Hey all. Peter Zeihan here coming to you from Colorado. We are continuing our Firehose of Chaos series today about how various Trump administration policies are causing negative effects for the American economy. And today we are going to tackle finance. Now there’s a lot that’s going on in finance. On any given day, the bond market, the stock market, corporate bonds, municipals, blah, blah, blah, blah blah. 

But the bottom line is that it’s ultimately an issue about the supply of capital. The more supply you have, the cheaper that capital is, the faster the economic growth is. And we even before Donald Trump got into office, we’re already facing an adjustment period. And the issue is retirement. When you retire you liquidate your savings. You go from stocks and bonds into T-bills and cash, because if there’s a market crash or a currency adjustment, you have lost out, you haven’t locked in your savings and you no longer have an income to recover. 

So, for example, for those of us who are not retired, we’ve seen the markets drop by somewhere between 10 and 20% over the course of the last three weeks, and we are all feeling that, but we’re all young enough to continue to do contribute to our portfolio. So there’s hope that will emerge on the other side in a better position. 

If you’re over 65, there is no hope because there is no income. So if you had not liquidated, you would be looking at a permanent loss in your portfolio. Even as you continue to draw income out of your savings, which would put you in destitution a few years down line. So if you’re a baby boomer and you hadn’t liquidated your savings already, you’re in trouble and you did everything you weren’t supposed to do. 

Anyway, the issue for the economy writ large is the balance between the number of people who are turning 65 every year and the rest of us. So in the case of this current situation, the issue is the baby boomers, because the baby boomers, the largest generation we have ever had, are already two thirds moved into retirement and the remaining third are going to retire over the next 4 or 5 years. 

As a rule, 70% of total global private capital originates with people who are doing this saving for retirement, people who are over age 55 but have not yet turned 65. Well now the number of people who are over age 65 is rapidly expanding, while the number of people age 55 to 65 is rapidly shrinking. 

And that split has caused most of the movements in the credit market in the last few years. So I would argue that we’ve seen roughly a quadrupling of costs of credit writ large. I’m not talking about any specific credit product, but writ large over the last four years. And while there is a little bit of fed in there, there is a little bit of trump. 

There is a little bit of Biden. It’s mostly just the baby boomers doing what you do when you retire. We expected this. We’ve anticipated this coming for 30 years. And really, no one got ready for it. Certainly not in government financing. But now we’re here and we’re living through it and we’re having to deal with it. So that’s that’s piece one that has nothing to do with the change of administration at all. 

But the second piece does, we have now had 97 official tariff policies in the last 55 days, which is, you know, two orders of magnitude more than we normally get in that sort of time frame. And no one knows what the rules are. In addition, Donald Trump keeps changing his tune every day. It’s either we’re not going to be even going to have a memorandum of understanding with countries that we’re negotiating within six months, or we’re gonna have a finished trade deal in four weeks, both of which are kind of silly. 

We’re not going to get any new manufacturers out of the plants for the first two years. Or maybe it’s going to be ten years. We’re going to have new tariffs on agriculture. Or maybe we’re not. We’re on drugs, or maybe we’re not, or in shipping or yes, we did, but then we didn’t. But then we decided to do port fees. 

The point is that no one knows what the rules of the game are. So no one is doing anything to prepare for whatever the future is, because we don’t know what the future is going to look like in terms of industrial construction, to build the industrial plant that we’re going to need to live in a high tariff world that actually has gone to zero under Donald Trump, because no one knows what is going on. 

On top of that, Trump keeps threatening other countries and not just with tariffs. He’s threatened to invade Canada, make it the 51st state. He’s threatened to invade Greenland, which is a NATO ally. He’s threatened to pull everything back from Ukraine, which is encouraging the Ukrainians, the Romanians, the poles, the Swedes, the Finns and the Germans to all get nuclear arsenals. 

The bottom line is he’s shattering everything that worked and has yet to provide a vision or preparation for whatever might be next. And in that sort of environment, no one really trust the United States. Now the US dollar is the global currency. I don’t mean to suggest that that is in danger. And the US Federal Reserve stands ready to step in to save the government bond market, to prevent a run on the bonds, to prevent a financial catastrophe in this country, because that’s part of its job. 

I don’t worry about those kind of headline disasters, but there’s a lot on the margin that is measured in trillions of dollars. In any given year. We have about $2 trillion of capital flight from the rest of the world to the United States. Now, that comes for its own reasons. And Europe, it’s because the countries of the eurozone are aging out, and you just can’t get a good return in Europe. 

In China, it’s because you have an over financial situation system where capital is considered a political good and you can’t get a good return on it, and the government restricts where you can put your money. So people try to get their money out of these systems and into other systems. And while Canada looks great, it’s not enough. There is only one country that has the liquidity and the depth of capital markets to absorb this sort of capital flows, and that is only the United States. 

And so this is where most of that cash goes, $2 trillion a year, and as we move into circumstances that are more problematic, Europe getting closer to its demographic cliff, China facing a trade war with the United States. Those flows can often increase. So, for example, at the height of the subprime crisis, after an initial shock, we were probably seeing three, $3.5 trillion of capital flight into the United States. 

Now, this helps out the United States in any number of ways. It puts more strength into the real estate market. It keeps borrowing costs down for everybody, especially the federal government. But when you have the United States as the source of the geopolitical uncertainty, and when you have the white House is the single largest source of regulatory uncertainty in the United States, all of a sudden, putting things into US financial assets doesn’t look nearly as attractive. 

And so what we’re seeing is some of that money is no longer coming and some it’s being reversed. So let’s go around the world real quick and see what that looks like. First of all, the Middle East, the Middle East has been desperate to build some sort of alternative financial system that doesn’t work on interest based functionality like the Western system does. 

And that requires basically applying a degree of Sharia law to their financial sector and having their own financial systems to, at a minimum, serve as a bulwark and an intermediary between the Middle Eastern savers and the United States. They’ve been somewhat successful at that. And that has made places like Dubai to be pretty robust financial centers. But what we’re seeing now is the limits of that approach. 

People are realizing that if you put your money into a middle eastern financial center that doesn’t allow interest, you don’t earn interest, and it’s starting to lose some of its shine. And so people are looking for other alternatives. On top of that, most of the oil Emirates in the Middle East, up to and including Saudi Arabia, have vastly overspent their income and simply don’t have money to send abroad at all. 

So, for example, Donald Trump is trying to get Riyadh to invest a few hundred billion dollars in the U.S. and they don’t have the money to do it. They’ve wasted a lot of things on their own white elephant projects. They’re spending a lot more on social programs at home. There’s no money to send to the United States. So what used to be a relatively robust partner is going somewhere else or is shrinking in on itself.  

And, you know, that’s several hundred billion dollars a year. Second is East Asia. Japan has been a big source of capital for the US for decades. China more recently, largely because both of these systems treat capital as a political good. I actually don’t think that this is going to change because the Japanese, the Chinese have known for a very long time that if you keep the money at home, it just can’t do very much. 

The only reason we should expect countries like China and Japan to send less money to the United States is if they figure out that they can build industrial plant for their export industry somewhere else, and there aren’t a lot of good options. What? There are some options in Southeast Asia, but those are under U.S. tariffs as well. So we might see a little bit of weakening, but nothing compared to say what we’re going to have in the Middle East. 

The big movement though is out of Europe. The Europeans have basically started to treat the United States like a security threat, because that’s exactly what the US under Donald Trump has evolved into. They realize they’re going to have to take their militaries in a completely different direction. They realize they’re going to fight on their own. For many of them, that means they have to have nuclear weapons. 

And that means why, why, why, why would you ever send capital to the United States? So what? Until recently, and by recently, I mean January. It was about $1 trillion of capital flight from the eurozone to the United States. Every year has probably gone very close to zero, and in fact, is probably going in reverse as people liquidate their holdings. 

Yeah, that all up. And we’re looking at capital flight into the US financial markets probably dropping by a little bit more than half. And if you put that on top of what’s happening with the baby boomers, it means capital costs are going up as well. And that’s before you consider that the US currency has dropped by about 10 to 15% in the time since. 

All that adds up for significantly more expensive financing, regardless of who you are. If you’re the federal government and you’re issuing T-bills, you now have to pay more money. If you’re looking to buy a car, your car loan is now more expensive. If you want to refinance your mortgage, that goes up as well. 

And it all adds up to slow economic growth across the entire American economic space.

MedShare Donation + Russian Sanctions Are Making Global Finance Spicy

You’re about to watch a free video on a new round of sanctions hitting Russia, but before you do, learn how you can get access to the most recent videos and support a good cause in the process…

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The Russians are kind of like the Hydra from Greek mythology – that’s the creature that grows two heads every time you cut one off, for those who have been out of 5th grade for a bit – but the most recent round of sanctions might be the cauterizing torch needed to stop the Russians from bouncing back this time.

Sanctions are not a new strategy to fight the Russians; the US and the Europeans have used them to cut off access to dollar/euro liquidity since the dawn of the Ukraine War. While this shut the Russians down for a bit, the Chinese stepped in and provided yuan liquidity to help circumvent those Western sanctions.

On October 12, the exemption allowing Chinese yuan to help the Russians will expire. Any Chinese institutions that continue working with the Russians will risk losing access to dollar liquidity, which would be devastating for the Chinese economy. The removal of the yuan will limit Russian trade and global economic activity and I would expect most Russian industries to take a big hit, except for those producing military parts and equipment.

We’re entering unprecedented territory here. No country of Russia’s scale has been cut off from global liquidity, so the outcome is up in the air. However, the next round of sanctions could very well decimate the Russian economy.

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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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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 the South Carolina coast. And since we’re on a beach, we have to talk about finance. Yeah. We’re about to get something really interesting happening in Russia with the sanctions. Now, first, the backstory: if you remember a few months back, the United States restricted dollar liquidity, and the Europeans restricted euro liquidity, which is a fancy way of saying that if you are a Russian entity, you can no longer access the currencies. Liquidity is basically the lubricating oil that allows everything to move, allowing any sort of financial institution to get temporary loans to smooth over operations.

The sanctions essentially shut down the Moscow Stock Exchange because, without currency to constantly churn through, any sort of international exchange becomes impossible. Keep in mind that, especially for the U.S. dollar, it’s the intermediary in all foreign trade. So when the United States said, “Nope, you’re out,” the Russians had to find other ways to do things. In the meantime, that shut down a lot of operations. So the exchange itself actually closed down for a while.

Anyway, what happened was the Chinese stepped into that role with yuan, essentially introducing an extra step and an extra cost, but allowing operations to begin again. The problem is that on October 12th, the exemption for the Chinese runs out. Basically, in order to ensure there was less of a shock to the global system, during the first phase of the sanctions, the Russians were denied access to liquidity. Now, in the second phase, anyone dealing with the Russians will be denied access to this liquidity as well.

For the last few months, the Chinese, who have dollar liquidity, have been providing yuan to the Russians. That will now be removed, or the Chinese companies and banks — all of which are state-owned — will lose access to dollar liquidity. Since the Chinese economy is roughly nine times the size of the Russian economy, every Chinese financial institution has far more exposure to the global system and the American economy than to the Russians. So, essentially, all this U.S. dollar liquidity is going to go away overnight. We’re going to see another seizing effect in the Russian system. Pretty much any company that uses parts or sells any commodity or product on the international system — which is, you know, 80% of them — is going to be out of luck.

There will be some exceptions. The Russian government has picked up a lot of yuan over the last couple of years because they’re trying to limit their exposure to everything else, so they have sufficient currency reserves to provide limited supply to limited companies. But almost all of that is going to the companies that have to import parts for weapons systems. So you’re looking at maybe 20 to 30% of the Russian companies that need this liquidity being able to get some of it in order to keep weapons manufacturers running. Because, as we’ve seen in this war, Russia’s technical skills have suffered greatly.

Probably half of their parts are coming from China, and about 10 to 20% are coming from the West. All of that requires currency liquidity. So the companies involved in those trades and in that manufacturing will still be able to get yuan from the central government and use that to access international systems. But everyone else is going to be high and dry.

Textbooks tell us that this shift to a more autarkic model is going to completely devastate any sort of economic flexibility. Everything from payroll to sourcing is going to be almost impossible. The problem with that confidence is that we’ve never had anyone of note get cut off to this degree before. In past times when the United States has done something like this, it’s been to a country like Iran, where, let’s just say, manufacturing and international trade are not something they’re really good at, at least not in this millennium.

And there wasn’t a secondary level, so rubles or yuan or euros or whatever could still be used to get in through the back door. This is much more airtight. On the 12th, we’re going to find out exactly what effect this has. Based on its effectiveness, we’ll know exactly what the next round of sanctions will be.

The US Credit Rating, Budget Deficits and Debt

We’ve all heard about the drop in the US credit rating, but what does it mean? Given the United States’ size and global standing, the resulting impact on financing costs is nominal. Think of this like your personal credit rating – sure, life’s easier with an 850 credit score, but a 700 isn’t the end of the world.

The bigger concern lies in the worsening fiscal conditions caused by growing budget deficits. With successive administrations exacerbating this issue and the Boomers transitioning from taxpayers to tax beneficiaries, the US has its hands full. And that’s before you mix in threats of the US not fulfilling its debt obligations…

The mounting uncertainty around this issue could impact credit costs and everyday financial transactions. So, unless there’s a massive shift in political responsibility and involvement, this budget deficit issue will remain hardwired into our system.

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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 Austin, Texas, at the 360 Bridge. A lot of you have written in with the same question. U.S. is credit rating has been dropped. What does it mean? Is this something we should be worried about? The very short version is ish. Whenever your credit rating gets dropped, it generally means that you get put into a different category in terms of reliability, of repayment, and that means you might have to pay a different amount to service your debt.

So imagine if you will, that you’re trying to buy a house and on your last house you just walked away and left the keys in the mailbox. That’s a hit to your credit rating. The next time you try to get a loan or that loan is going to cost you more. And since the United States government is issuing bonds, debt every single day, there’s an incremental increase in what we have to pay because of reliability.

Now, in the case of something like a country, the wobble, especially for a country the size of the United States, tends to be pretty minor. In addition, the United States is the global superpower. It is the sole global currency that is not going to change in my lifetime. And as long as that is the case, the United States kind of is the is the marker of 100% on what you can get.

And anyone who is above that kind of gets extra credit and even below that has to compare themselves to the United States. So we’re talking at most a couple tenths of a percent in the difference in what financing costs are now in a country the size the United States that comes out to something in the tens of billions of dollars a year.

So it’s not insignificant. The bigger impact is what you’re going to be feeling if you happen to be downstream of that, where your debt is indexed to what the U.S. government does. And in that sort of environment, you’re talking about your mortgage, your credit card, everything is going to get a little bit more expensive again from a very low base, but still adds up to tens, if not hundreds of billions of dollars.

A year in additional credit costs. That’s not what I see is the big concern. So let me give you two one relatively minor one that’s really big. First, a minor one. This is only going to get worse. When George W Bush was president, he issued the most debt did the most deficit spending of any president in modern history.

And then Obama came in, was like, hold my beer. And he doubled it. And then Trump was like, well, I’m the best. I’m going to make the deficit huge. And he did so. And now Biden’s and he’s trying to top Trump. So this isn’t a Democrat thing. This isn’t a Republican thing. This is just a bad math thing.

All the fiscal people who have voted based on what the federal government will do with budgets have basically been purged from the political system on both sides. And so we should expect a budget deficit to get larger and larger and larger and larger, especially as the baby boomers go from being the largest tax payers in American history to the largest tax takers as they go from people earning income and paying taxes, to people who are drawing on social Security, Medicare and Medicaid and the like.

So this is going to get a lot worse before it might start to get better in, say, the late 2013, when the boomers are mostly all gone. So bad news, but we’ll live with it. The worse thing, the concern that most folks in the markets have today isn’t that the U.S. can’t pay. After all, the U.S. Federal Reserve has the ability to control the money supply with the click of a button and can basically print enough currency to buy all the government debt.

And that’s exactly what we’ve done in the last four presidents. However, the concern now is that the U.S. won’t pay. Donald Trump said we could renegotiate or abrogate some of the debt, which is the sort of thing you hear out of Greece or Argentina or Cuba. And in the current environment, we’ve had a number of people across the political spectrum heavier on the right, but not exclusively, who have tried to use the ability in Congress to shut things down.

Maybe it’s a program. Maybe it’s debt repayment. Maybe it’s the government itself. But basically saying that we abrogate responsibility for taking care of any of this anyway. And if the U.S. were to just walk away from any of its debt, whether it’s because we apply something like Monod, monetary theory or we just simply shut down the Treasury Department, then all of a sudden you’re talking about the biggest financial asset class on the planet being thrown into question.

And in that sort of environment, if just the fact that this is even a minor risk, just the point that this is a point of discussion, is sending up American credit costs of ECB, the rest of the world, and that very rapidly turns into $1,000,000,000,000 question. Now, if for an economy the size the United States military, the size of the United States, the reach of the United States, the U.S. dollars, complete domination of the financial space, $1,000,000,000,000 question is almost a rounding error.

But you will feel it each and every time you make your credit card payment. Get a mortgage, get a car loan. This is now hardwired into the system until such time that we have a twist in our political system that injects a little bit more responsibility. That’s not going to be this presidential cycle.

Why Rising Capital Costs Could Kill Greentech

The Greentech industry has reaped the benefits of cheap capital for years, but that’s all changing as demographics take a turn and investment patterns start to shift.

Financing Greentech projects requires a boatload of upfront capital, and if the cost of that capital rises, the viability of those projects has the inverse effect. This means the Greentech space will be in hot water even if economic growth holds steady.

Sure, Biden’s Inflation Reduction Act will help the US a bit, but there’s no replacing private investments. This isn’t an isolated issue either; if countries with solid Greentech potential want to see their industries thrive, we will need to see some major breakthroughs.

Prefer to read the transcript? Click here

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

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

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

Support medshare's ukraine fund
Support medshare's global efforts

Transcript

Hey everyone. Peter Zeihan here coming to you from Mexico City. And today we’re going to talk about some of the challenges that are facing the green tech space. If you’ve been following stock tickers in New York in general, you’ll know that there’s been a lot of pushback from the financial world about everything that has to do with wind and solar and interconnections, not just in the United States, but on a global basis with many communities getting sticker shock and changing some of their plans.

Now, this, of course, is going to be a story that’s going to look a little bit different everywhere. But there is a common theme, and that has to do with capital. One of the things that really sets green tech apart from any other power generation, whether it’s in transport or the generation itself, is that you have to pay for it all up front.

The the system is different. So like if you’re going to build a coal plant or a natural gas burning power plant, most of your cost over the life of the facility is going to be the fuel. Actually setting up something that, you know, burns it is not all that complicated from an expense point of view. But with solar and with wind, where the fuel is free, all of the expense is upfront, or at least two thirds of the total versus less than a fifth for most conventional systems.

And that means it has to be financed. Now, from 2000, literally from 1997 until very, very recently, that has not been a problem because we’ve been living in an environment of absolutely dirt cheap capital, and it’s been a demographic moment. The baby boomers were in their forties, fifties and early sixties, and in that time frame in your life, your expenses have gone down, but your incomes are high and they’ve been socking away all the money that they’ve got to prepare for retirement.

All that capital makes it into various different investment opportunities, whether it’s T-bills or the stock market. It makes it very easy for people, for corporations, for governments to borrow at scale. Well, as of the fourth quarter of 2022, the majority of the United States is baby boomers. The majority of the world’s baby boomers had moved into retirement, and they’ve liquidated their savings and they’re not generating any more.

And they’ve moved their savings into less prospective projects. So a lot more cash, a lot more government debt, a lot less things like stocks and bonds. And that means that the cost of capital has already gone up for everyone. And we’ve seen mortgage rates just in the United States double in the last 18 months. And for large projects like wind turbines and solar panels, we’ve seen it closer to a tripling now over, say, a ten year payback, which, you know, is just kind of a good benchmark.

That means that the interest costs have gone up to the point that the overall payback is going to be at least a quarter higher than it was just a year and a half ago. And if you have to finance your GreenTech project, all of a sudden you’re facing an expense that you weren’t having to deal with before. Now, this, to a degree, this sort of overbuild and retrenchment happens with any industry as people kind of grasp the realities of that.

Maybe solar and wind aren’t as great for our community as we thought they were going to be. But the capital that’s going to hit everyone everywhere, it’s going to slow economic growth on a global basis. And for projects that are very capital forward, like green tech, it’s absolutely going to retard the progress of everything. And the United States, we’ve got this little thing called the Inflation Reduction Act that the Biden administration was able to get through Congress, which is basically a green plan that is going to help a lot with making the finances of green tech a little bit better.

But it was never going to replace private capital. It’s just going to supplement. And now, since we need 25% more minimum, probably closer to half again more by the time we get to 2026, it’s going to be able to start seeing some of the edges off, but not fundamentally change the problem. But if you’re in other countries, I’m thinking here, places that have good green tech potential, places like Argentina or South Africa or Mongolia or Greece or Mexico.

That borrowing difference is everything. And unless we have a significant breakthrough in the economics and the physics of solar and wind in the next couple of years, it’s just not going to cut it. So my recommendation remains the same that it’s been for the last three years. We know the texts in their current form won’t get us to where we think we need to go, which means we need better technology.

And until we develop that, the rest of this is just kind of spinning in place.

“The Global Disorder Ahead” Metawealth Livestream

Money being burned

Metawealth Professional Training has contracted with Zeihan on Geopolitics for some geopolitical and demographic work. They have chosen to share this piece of that work with all takers. So thanks much to the folks at Metawealth, and enjoy the listen while you sharpen those pitchforks!

It’s been a scary year. The Fed seems determined to crash the economy. The reality for some is going to be far worse than a “mere” four banks collapsing. Not only have four banks collapsed, another 185 banks are hanging on by a thin thread. Plus, the war in Russia and geopolitical tensions are escalating with no end in sight, and we’re starting to witness vast economic and political consequences.

If you’re like most people, you’re worried about what it all means… and unsure about what to do to best protect yourself from what’s unfolding.

That’s why I’ll be speaking on a special livestream, where I’ll share what my latest research unveils about the future and a startling new set of predictions…

Join me on Wednesday, June 7th at 8pm EST

I believe the era of prosperity we’ve enjoyed since World War II is ending and Russia’s invasion of Ukraine has speeded up the process. The world is entering a new phase of “de-globalization.” The 2020s will see a collapse of consumption, production, investment, and trade…almost everywhere. Instead of a cheaper, better and faster world, it will be pricier, worse and slower.

There is a global disorder coming, in which countries will have to make their own goods, grow their own food, secure their own energy, and do it all with dwindling and aging populations.

In short, we will remember the last 75 years since the end of World War II as a golden age and no economic system can work in the future we’re about to face.

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.

CLICK HERE TO SUPPORT MEDSHARE’S UKRAINE FUND

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The Financial Crisis of 2023?

No, we’re not headed for another financial crisis…although, to those with more than 250k in one of the three failing banks, it may seem like we are. Silicon Valley Bank is the largest of the three, but it’s still only the 16th largest in the nation.

The problem for Silicon Valley Bank and the smaller Silvergate and Signature Bank is that they all took on a questionable amount of exposure to illiquid assets. For SVB, it was a variety of long-term bonds and securities with long durations. Then interest rates started to go up–way up. And SVB was not left with many tools to manage interest rate risk it had not hedged for. When its primary customers–the tech industry–found out, they sounded the alarm. Being the tech world, they’re all relatively well-connected and active on social media, triggering a stampede of customers wanting to pull their cash out more or less simultaneously, or what we’d call a good old-fashioned bank run.

The real thread connecting all of these banking mishaps, however, is one that’s not going to go away anytime soon. Rising capital costs. Many of these banks and their customers have been operating in a world where money has been as close to free as it has ever been in human history. Over the past year, we’ve seen interest rates rise–sharply–and there’s little reason to believe that we’re anywhere near done yet. The fundamental operating paradigm for banks and the financial paradigm of the past decade and a half is shifting, and we’re going to see which financial institutions are able to deal with the change and which ones won’t be able to keep up.

The Biden administration has now stated that the FDIC will make all depositors whole. That’s great for ending any potential bank runs, but those CFOs who thought it was a good idea to put all of their company’s capital into one bank won’t be learning their lesson this time around.

Prefer to read the transcript of the video? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:
 
First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

CLICK HERE TO SUPPORT MEDSHARE’S UKRAINE FUND

CLICK HERE TO SUPPORT MEDSHARE’S EFFORTS GLOBALLY

TRANSCIPT

Hey, everybody. Peter Zeihan here, coming to you from Bloomington, Illinois. Sorry, I forgot where I was there for a second. It is the 14th of March. Tuesday. And for those of you that have been following the news, you, of course, know that the United States is facing a little bit of a banking hiccup right now. Over the course of the last few days, three banks of note Silvergate Signature and Silicon Valley have either been closed by regulators or just simply collapsed. And this is something that honestly, I don’t think anyone should really overly worry about. The biggest of them, Silicon Valley, is like number 16 in the country. So this is nothing like the financial crisis of 2007 when all of our Big Ten banks were in trouble all at the same time. Now, normally when you have a financial crisis, it’s because of a problem with loans. Whenever the business cycle turns, the cost of capital goes up and loans that may have made sense in the past don’t anymore. So in the 2007, the issue was subprime. We had, based on how you measure the math, somewhere between a half trillion and two and a half trillion dollars of questionable loans in the real estate market. And that meant that touched almost every single bank within the entire system. So when the real estate market turned and we realized that a lot of these people were baristas who had no incomes and had qualified for 100% mortgages on million dollar homes, and those loans went bad. We had problems across the entire space. Nothing like that is going on this time. We’ve had a very strong expansion and certainly capital has probably been overly cheap and there is some rot in the system that does need to be worked out. And what basically what’s going on is the financial system is going through the process of taking out the trash right now. You would expect some banks to go down. That’s not necessarily a signal of a broader contagion, systemic risk sort of thing.

In addition, the United States has something called the FDIC, the Federal Deposit Insurance Corporation, which is a system by where all banks pay a monthly fee into the system in order to get insurance for their depositors. So as long as your deposit is under a quarter of $1,000,000, you are federally guaranteed to get your money back without the federal government having to do anything. That system has kicked in and depositors will be made whole. It makes sense that these three banks are the ones that went under first. They won’t be the last, probably. Although that doesn’t mean I’m concerned about something like eating through the entire system like a cancer. It’s just that they’re all related to tech and tech tends to be a capital intensive industry, and especially when you’re talking about newer firms and startup firms and research firms, which are what these banks cater to. You’re talking about institutions and companies that don’t make money today. They’re hoping to make money next year or the year after, the year after that, or invest in the next big thing. So they tend to be more perspective. They don’t have to have any income. And so when capital costs go up, they face problems. And so these banks are the ones that are facing the issues. So there’s nothing about this that is any more than a run of the mill bank failure, that matches most of our understandings about macroeconomic trends. I don’t want to say it’s nothing to worry about, but I’m really not concerned about an overall national bank contagion or broad bank run. And I think what the stock markets have done in discounting all things financial is a gross overreaction. So there’s that.

Now, there are three reasons why this time it is a little bit different. First of all, tech has been on a tear for the last several years and not just because capital has been cheap, but because of COVID. When we all found ourselves living and working at home, we needed better cameras, we needed ring lights, we needed computers. We need to update our phones. And so in the year 2020 and 2021, and to a lesser degree in 2022, we were all buying all kinds of tech related products, generating a bit of a boom. Well, once you buy the newest and greatest computer and phone, you probably are going to wait before you get the next one. And so we were always going to have a little bit of a tech bust independent of what was happening with the overall economy. So that’s one. Number two, this is a little atypical for a bank run or a bank crash because normally the problem is on the loan side. It really isn’t this time. It’s not that there hasn’t been a capital crunch, but in the tech start up space, these companies usually don’t go to like the Small Business Administration to get a business loan. They get their capital directly from a venture capitalist. And it’s the venture capitalists who are finding themselves with less capital to throw at situations. So they’re not as able as they have been to throw money at these small startups. And so the startups have been drawing down on their cash, which means the problem from the bank point of view hasn’t been with the money that they’ve lent out. They don’t lend out very much. It’s been with the money that they thought they had. So as deposits have been drawn down, they haven’t had enough operating capital to continue normal operations.

Now, this is mostly good news because it means the overall exposure to the financial sector, which is normally what happens when you sell loans among banks, just isn’t there. But it is a very big problem for the tech sector.

And then we get to our third problem, which is how the Biden administration has chosen to deal with it. Now, if you are dealing with a deposit that’s under a quarter of $1,000,000, the federal government doesn’t have to lift a finger because the FDIC will take care of it. But a lot of these small startups, they put all of their money into individual banks, most notably Silicon Valley Bank. So it was a lot more than a quarter of a million now more than a quarter million is not insured. So what the federal government has done under the Biden administration is step in and say that all depositors will be made whole by the FDIC.

What will happen is banks will have to pay a little bit higher. All banks. Into the FDIC system in order to ultimately make up for this so that taxpayers don’t have to pay for the actual bailout. Now, this does put a hard stop on any risk of a bank run. So it’s definitely the right tool for the job there. But what it does is, is it encourages companies that have done stupid things like this to continue doing them, because now all of us have to pay through lower bank interest or more difficult loan conditions for a handful of startup companies who had CFOs who were just too dumb to realize that there is a limited limit to the deposit insurance system. And so this has injected a permanent level of stupidity into the financial system that was really not necessary. And by backing all depositors, the federal government, the Biden administration specifically has chosen to introduce what we call moral hazard into the system at the base level, which in my opinion, was really not a great idea, although it definitely does put a bit of a backstop on the financial maybe kind of sort of itty bitty crisis.

Okay. I’d like to give a little shout out here to Marci Rossell, who is an economist that I actually just saw on stage, who is fantastic. So if you ever have a chance to see her in person, she is definitely an entertaining show and will constantly give you new things to challenge your assumptions and think in new directions. Alright. That’s it for me. See you guys next time.

Why the Fed Is Shrinking the Balance Sheet

Before we jump into the newsletter, I wanted to remind you that tomorrow is the big day! Join the webinar and learn how the Ukraine War has affected global supply chains, agriculture and much more. Click the link below for more info, and I look forward to seeing you there!

Federal Reserve Chairman Jerome Powell wants to shrink the balance sheet to zero over the next few years. And while this may be good for the economy and the US overall, not everyone will like the outcome…especially our vest-wearing friends down on Wall Street.

So how did we get here? Well, the Fed is in the business of preventing economic crises, and one function of that is having the “tools” to do so. The typical “tools” we see are using interest rates and other money operations to manipulate the financial system, but what happens when that’s not enough?

Since the 2008 financial crisis, the US economy has seen all the unorthodox tools in the toolbox. One of those is purchasing bonds on the secondary markets…to the tune of $9 trillion. That’s not an easy pill to swallow for everyone, but it goes down a bit easier when the alternative is a depression.

Now that the economy has seen a few years of growth and unemployment is at an all-time low, the Fed is ready to pack up its unorthodox “toolbox” to be better prepared for a future economic downturn. So what does this all mean?

Lots of money is coming off the table very soon. With the Fed pulling back and the Baby Boomers aging into retirement, we’re about to see almost a third of all available capital leave the system. Hopefully, your financial advisor is really, really good.

Prefer to read the transcript of the video? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:
 
First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

CLICK HERE TO SUPPORT MEDSHARE’S UKRAINE FUND

CLICK HERE TO SUPPORT MEDSHARE’S EFFORTS GLOBALLY

TRANSCIPT

Good morning from still chilly Colorado. Peter Zeihan coming to you to talk about what’s going on in the world of finance. For those of you who have not been watching, the US Federal Reserve chairman Jerome Powell has indicated he plans to shrink the balance sheet down to zero over the course of the next couple of years. So, you know, real quick, what’s the balance sheet and why does it exist?

The Federal Reserve prefers to use interest rates and money operations in order to manipulate the financial system to regulate the flow of capital, the cost of capital, and in general, what happens in the wider world. But from time to time, that is not enough. You can only push interest rates so low. I mean, once you hit zero, there’s really no further to go. And you can only shove so much money into the banking system to encourage lending. If people aren’t borrowing, people are not borrowing.

So from time to time, certainly at the end of the or in the middle of the financial crisis and into COVID, the Federal Reserve dipped into a series of relatively unorthodox tools that use the balance sheet. And what they did is they would expand the money supply to print currency and then use that money to purchase bonds on the secondary market. And they could be car loans or college loans or credit card debt, mortgages, whatever happened to be. And from 2008 until the peak, which was about about two years ago now, they did $9 trillion that way. So, you know, the U.S. federal budget deficit is about a trillion. So you get an idea of just how stimulatory that was. And there are a lot of people who thought that this was irresponsible and that it was inflationary, and it was another unorthodox. You know, they have a point. But from the Federal Reserve’s point of view, the alternative was to fall into a deep recession or maybe even depression, and didn’t feel they had much of a choice.

What’s going on now is the economy is on sounder footing. We are at record low unemployment levels and growth has been moderate to strong for three years in a row. So the Federal Reserve feels it’s time to kind of get out of that business and get back to normal. And if from the point that they really started this process a year ago to two years being done. 3 year process, you know, that’s like three or four times as fast as they built the thing up. So really quick, actually, when you’re thinking about the size of this $9 trillion, that’s a lot.

Now, what will that mean? It should, under normal circumstances, typically mean slower economic growth, because when you reduce the cost of capital, less stuff gets funded and the stuff that does get funded tends to be more viable. So more industrial plant, more infrastructure, more education, less on things that are like emerging technologies that haven’t made it to the prototype stage yet. Less on technologies that don’t seem to be working out in terms of cost benefit analysis. Overall, from an economic efficiency point of view, this is a really good step because shaking out some of the dead weight that has evolved in this environment we’ve had for the last 15 years of nearly free capital. You know, we’ve seen a lot of crazy shit go down and we’re finally going to see a lot of that get shaken out. Interest rates are getting back to a more normal posture. The Fed is not done raising. He’s got at least another full percentage point to go. I would argue probably closer to three. And we’re finally seeing all this surplus liquidity go out of the system and return us to a more balanced system, which means when we get to the next financial crisis or the next recession, the Fed will have a lot more tools, a lot more wiggle room, and the overall economy will be a lot healthier. These are all good things, but what is good for the system as a whole is not necessarily good for each individual piece.

So think of all the things that we have seen bubble up over the last 15 years because of cheap capital. In part, this is the Green Revolution, the technologies that on a cost benefit basis, once you include things like intermittency and geography, you know, are not really ready for prime time. EVs which are very materials intensive and tap supply chains that are not secure that we want to produce at scale, even though their carbon footprint in a lot of the country is heavier than ICEs internal combustion engines for at least several years. And then you’ve got your more traditional crap, your subprime, your Beanie Babies, your Bitcoin things that probably should have never existed in the first place. All of that is going to be in a much more difficult capital environment, and we should expect that to adjust appropriately. But perhaps where we’re going to see the most pain is in finance.

When the amount of money to be managed shrinks, the number of money managers that you need goes down. And it’s not like the Federal Reserve is the only player here. There are other things going on in the overall economic system that are also pushing us in the direction of less capital. I’d say the single biggest one, maybe even more significant than the Federal Reserve in the long term, is what’s happening with the baby boomers.

As you get older, you get better at your job, you earn more money, and after age 50 to 55, your kids have moved out of your house has been paid down. So from 55 to 65, that’s the most money you will ever have in your life. And then you retire. And when you retire, you take your money out of more prospective investments with higher velocity of capital, things like stocks and bonds. And you put them into T-bills and cash because the next time there’s a market crash, if you haven’t done that, you lose your shirt and you’re no longer working and you can’t buy a new one.

So the baby boomers, for the last 15 years have kind of been in that magical era between 55 and 65, where they’ve been saving money and investing it. And that has happened at the same time that the Federal Reserve has maintained an ultra loose monetary policy. Well, on average, the baby boomers retired last year, which means that their money is rapidly draining away from the system. At the same time that the Federal Reserve is tightening policy. So over the course of the next 2 to 3 years, we’re looking at a global reduction in available capital of at least a third and we will probably see the number of people employed in the financial sector in the United States drop by a similar number.

Good luck, folks. It’s going to be all about quality moving forward. Alright. Until next time.

Global Currency: The Dollar Ain’t Going Nowhere

A photo of US one dollar bill

If I had a nickel for every time I heard someone say the U.S. Dollar was going to collapse…I could probably draw Thomas Jefferson’s face from memory.

For a global currency to exist, there are a few “gotta-haves”. That country must be able to back up its currency (in the muscle type of way, not the gold bars kinda way), run a trade deficit, and have a s**t-ton of it (I believe that is the technical term).

So consider those factors, and voila – your list of potential global currencies comes to a whopping 1 – USD.

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.

CLICK HERE TO SUPPORT MEDSHARE’S UKRAINE FUND

CLICK HERE TO SUPPORT MEDSHARE’S EFFORTS GLOBALLY

Russia’s Debt Default

US bond rating service Moody’s announced that Russia was in default of its foreign debt payments yesterday, a first for Moscow since 1918. Unlike most countries who go into default, Russia has the money to pay its debts. But the sanctions put in place following the invasion of Ukraine, Moscow does not have a reliable mechanism to deliver payment to its debt holders. While the Russian central bank is trying to argue that this does not constitute a technical default, the episode does highlight some of the particularities of the approach the US and its allies are taking in sanctioning Moscow and the rest of the world is taking note.

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.

CLICK HERE TO SUPPORT MEDSHARE’S UKRAINE FUND

CLICK HERE TO SUPPORT MEDSHARE’S EFFORTS GLOBALLY

Some Economic Questions…and Some News!

The nature of the economic system so many governments are attempting to grapple with right now is unprecedented in modern history. For much of the span of human history since industrialization, governments could reasonably promise their subjects some kind of more. The promise of more held that the economy–no matter the political system in charge of it–could be expected to grow, largely through population growth and rising demand.

Enter the End of More. A central theme of my equally cheery-titled new book, The End of the World is Just the Beginning, the pie for many countries is as big as its going to get. This is especially true for countries staring down terminal demographies: Germany, Italy, China, Japan. With population growth firmly in the rear view mirror, these countries can’t rely on a baby boom to spur consumption-led growth.

Which brings us to our current problem with inflation. Central banks’ primary tool in battling inflation is through raising interest rates. Making borrowing more expensive usually dampens demand, thereby pressuring prices to fall. The trick is not dampening demand too much, and risking recession. For the world’s oldest populations, this is going to be an near-impossible balancing act. 

And now for a bit of good news–The End of the World is now officially a New York Times best seller! On behalf of myself and my entire team: thank you, thank you, thank you.

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.

CLICK HERE TO SUPPORT MEDSHARE’S UKRAINE FUND

CLICK HERE TO SUPPORT MEDSHARE’S EFFORTS GLOBALLY