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.
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.
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.
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.
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.
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.
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.
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.
The United States is likely to experience economic growth even as the Delta variant of the coronavirus continues its spread through unvaccinated populations. We should not overlook that qualifier; the vast majority of serious illness, hospitalizations and deaths from COVID-19 in the US are among unvaccinated populations.
Expect the US Federal response to continue to focus on encouraging Americans to get vaccinated, while local governments and businesses work through an awkward and hotly contested series of local mask mandates, vaccine requirements and political posturing as the majority of US students get ready to head back to school.
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The economic lockdowns in the wake of COVID-19 left many without jobs and additional tens of millions of people, including children, without reliable food. Feeding America works with food manufacturers and suppliers to provide meals for those in need and provides direct support to America’s food banks.
Food pantries are facing declining donations from grocery stores with stretched supply chains. At the same time, they are doing what they can to quickly scale their operations to meet demand. But they need donations – they need cash – to do so now.
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The world that we’re entering is fundamentally different than where we’ve been. The modern period we live in began with Columbus. It has been one of “more:”–near unending growth (population, capital, consumption)–all accelerated by post-Bretton Woods Order. Modern Monetary Theory is probably not the answer to address a future of shrinking populations, consumption, and growth but I am comforted by the fact that folks are looking into heterodox solutions to address an unprecedented future.
The Age of Constant Growth is over. What comes next?
If you enjoy our free newsletters, the team at Zeihan on Geopolitics asks you to consider donating to Feeding America.
The economic lockdowns in the wake of COVID-19 left many without jobs and additional tens of millions of people, including children, without reliable food. Feeding America works with food manufacturers and suppliers to provide meals for those in need and provides direct support to America’s food banks.
Food pantries are facing declining donations from grocery stores with stretched supply chains. At the same time, they are doing what they can to quickly scale their operations to meet demand. But they need donations – they need cash – to do so now.
Feeding America is a great way to help in difficult times.
The team at Zeihan on Geopolitics thanks you and hopes you continue to enjoy our work.
Before the coronavirus crisis, there were few underlying financial instabilities in the American economic system. There certainly were nothing like the massive bubbles in real estate markets in 2007. Nor was there the sort of broad industrial dislocations that triggered the 1979 and 1983 oil shocks.
Last week, U.S. President-elect Donald Trump shook the global diplomatic community to its bedrock by throwing the One China policy into doubt, specifically noting, “I don’t know why we have to be bound by a One China policy unless we make a deal with China having to do with other things, including trade.” He expressly linked One China to possible negotiations over the South China Sea and the North Korean nuclear program.
The One China concept is that meaningful, positive relations with the Chinese are predicated on public proclamations that mainland China and island Taiwan are one and the same country, and that Beijing oversees the whole thing. American acceptance of One China is not something that was agreed to lightly, but is instead part of a deeper strategy.
In the aftermath of the Normandy invasion of Nazi-occupied Europe, the Americans drew their Western allies and their major colonies together at Bretton Woods to prepare for the post-World War II (WWII) world. Pre-WWII global commerce was fiercely competitive with all countries using all levers of power to maximize their overall strategic position. Trade, finance, culture, employment, and war were all simultaneously tools and vulnerabilities. Successful states/empires would use all of them to maximize their gains in others. One result was the all-against-all nature of pre-1945 international affairs, ultimately leading to WWII.
Mount Washington Hotel in Bretton Woods, New Hampshire
At Bretton Woods the Americans changed the nature of the game. From now on the U.S. Navy would guard oceanic commerce for all participants, while the American economy would be opened to all participants. There was, of course, a catch — you had to join the Americans in their Cold War.
As the Cold War took shape new countries were admitted into the Bretton Woods system. Former Axis. Former neutrals. Developing countries. And finally, China. Unsurprisingly, Beijing insisted the Americans adhere to One China. Under Henry Kissinger’s guidance, the United States willingly and knowingly swallowed One China hook, line, and sinker. Bolstered by China, the Bretton Woods system now presented the Soviets with hostility in all directions. It was quite the strategic coup, and contributed heavily to Soviet overextension and eventually, collapse.
Yet the key factor to remember is that Bretton Woods firmly limited how the Americans could pursue trade. American market access was extended to allies for strategic reasons. Anyone could dump products on the American market, so long as they maintained their position in the anti-Soviet wall.
But the Cold War is over. Bretton Woods has outlived America’s strategic needs, and American trade policy is now evolving to serve America’s economic needs. Trump’s statement on One China is (probably) not an off-the-cuff comment, but instead a true pivot away from Bretton Woods and towards a fundamentally new strategic posture. If the American government no longer views trade as a means to an end, but instead an end in its own right, it can and will begin using issues such as trade access, maritime security, and political positions on issues such as One China to cut different deals. That changes the global strategic picture radically.
China is wildly unprepared for such a shift. Everything about the modern Chinese system was designed expressly for the Bretton Woods system. The economy is export-led. Efforts to drive domestic consumption have largely ended in ignoble failure. The economy is driven by an Enronesque flooding of the industrial sector with subsidized capital. Such growth comes at the cost of sustainability and a functional banking system. China’s strategic position is completely dependent upon the United States offering market access and guaranteeing freedom of the seas for China’s merchandise exports and raw material and energy imports. Remove the economic and strategic cover of Bretton Woods, and it all comes crashing down.
Hong Kong Special Administrative Region of the People’s Republic of China
Even mentally the Chinese are not prepared for change. Since the election, the only American that Beijing has reached out to is none other than Henry Kissinger himself, the only statesman the Chinese respect and trust. But while Kissinger remains strategically brilliant, his connections and advice are firmly rooted — critics might say mired in — the Bretton Woods age. Beijing is so in love with its China Rising mantra — again, made possible by Bretton Woods — that it just cannot come to grips with the fact that the Americans might now have other plans.
Or that the Americans hold most of the cards. No surprise that Chinese state media’s response to Trump’s offhand statement could best be described as a seizure.
The Chinese are not alone:
Like China, modern Germany was expressly designed to maximize exports to the Bretton Woods system to the point that nearly half of German GDP is export-driven. In fact, the entire EU project relies upon the United States market as well as U.S. military protection for commodity import supply lines. Other countries heavily dependent upon global trade include — but are far from limited to — South, Korea, Taiwan, Singapore, Thailand, Japan, the oil producers of the Persian Gulf, Egypt, Australia, New Zealand, Brazil, Uruguay, Paraguay, Algeria, South Africa, and Israel. If these countries — or any others dependent upon trade — are going to retain market access and maritime trade opportunities, they will need to offer the Americans something in return.
A whole host of countries are utterly dependent upon implicit or explicit U.S. security guarantees. A partial list includes Estonia, Latvia, Kuwait, Lithuania, Poland, Saudi Arabia, Georgia, Azerbaijan, Finland, South Korea, Germany, Romania, Qatar, the United Arab Emirates, Taiwan, Japan, Sweden, Singapore, Croatia, Denmark, the Netherlands, Turkey, and Israel. If these countries are going to retain that strategic cover, they must give the Americans something the Americans find useful.
Part and parcel of the Bretton Woods system is the guarding of energy flows, in particular those out of the Persian Gulf. Remove American guarantees and the countries of the Gulf have to resolve their security issues themselves. That endangers energy flows at the point of production, within the Gulf, at the Strait of Hormuz, and even globally as importers must take supply protection into their own hands.
Of course, there is still a lot of wiggle room in all of this. And regardless it won’t all change (or fall apart) overnight. Some relations (like U.S.-Japan) have more ballast. Others (like U.S.-Australia) are so rooted in cultural, strategic, economic, financial, and political fundaments that they’ll likely survive on their own merits. But for every relationship that looks solid, there are a half-dozen others that just don’t make much sense outside of the Cold War rubric.
A few specific calls on the countries that are not likely to make the cut:
South Korea is too exposed (and expensive to maintain) for the Americans to continue a deep relationship.
The United States has been fighting a war of zero strategic relevance in the Philippines for a half century (anyone remember Mindanao?); that’s pointless except as a hedge against China.
Egypt’s descent into impoverished, dysfunctional tyranny means that it no longer is a threat to anyone, much less nuclear-armed Israel.
Syria’s civil war eliminates Damascus as a concern, eliminating any rational for ongoing alignment with Jordan.
Relations with Kuwait, Saudi Arabia, Qatar, and the United Arab Emirates have long been dominated by the concern of oil availability. Because of the shale revolution, the Americans only need that oil to fuel their alliance — an alliance that now is largely strategically irrelevant.
Subsidizing German, Polish, Baltic, and Romanian economic and physical security only makes sense if the United States wants to risk a ground war with an increasingly insecure (and yet still nuclear-armed) Russia.
Pakistan is nothing more than a giant pain in the ass.
What’s coming can only be described as the opposite of a global order — a Disorder.
Want to know more about what that looks like? Our next book — The Absent Superpower: The Shale Revolution and a World Without America — went to the printer today. It should be available in about two weeks. : )
