Hey, everybody. Hello from Lewis Creek. Today we’re going to talk about demographics, specifically old people. The stereotypical case is Japan, where today 10% of the population is over 80 and fully one quarter of the population is either retired or qualifies for retirement. They are by far the oldest country in the world. However, they saw this coming back in the 1980s after having a birth rate that had been really low for nearly a century. 

And so they started extending working lives, better health care to make people keep their minds rather than fall into dementia, better child care. So the people who do want to have kids can try, and above all, ways to keep older folks at least engage part time within the workforce. All of that has allowed them to extend the useful working life of your average citizen, while also increasing the birth rate to a degree that they are no longer the fastest aging society in the world. 

There are now, like 20 other countries that are aging faster, including Thailand, Korea, China, Italy, Germany, Spain, Poland. It’s not that these countries are past the point of no return, but it’s time for them to start thinking about what happens next. Because while they may have seen this coming decades ago. They haven’t done squat about it. A couple of countries to keep your eyes on. 

Number one Italy. Here is a large country with an ancient population that’s getting older by the second. The oldest in Europe, and they’re in a monetary union with the rest of the Europeans. At some point, the additional outlays that are required to maintain an elderly population are going to crack the European system apart. Germany is just a couple of years behind Italy. 

So we’re going to see the Germans go from a minute payer of Europe to a net pay. That changes everything about what makes Europe work. Another country to watch is China. Every time they update their data, it gets worse and they may well now have a demographic structure that’s not too far behind Italy. And this is a country that doesn’t have a social security or pension system worth knowing, or a decent health care system. 

So when this goes, you basically had the Chinese lose their entire workforce in a very short period of time. I would expect that to be a civilization crashing event. And then finally there’s Korea, which is also aging very, very quickly. Maybe even just a touch faster than Italy. The reason I would say Watch Korea is if any country can figure out how to adapt to this, it’s the Koreans. 

This is the country that when they decided to get into the supertanker business, didn’t bother building a supertanker drydock. First they built the supertanker in two halves, in two different drydock and then welded together. The Koreans have a habit of defying physics to make things happen. And if anyone can find a path out of this, it’s them.

Hey, all. Peter Zeihan here coming to you from the car. The snow is gone. So that means it’s hiking season. 

The first stop is, Utah. Anyway, we’ll be doing some more pieces as the trip continues. But right now, we need to get back to China. So we have seen a number of policy shifts out of the Trump administration in its first few months in office. 

And by far the most significant one is, of course, in trade. And we’ve spent the last couple of weeks going through the impacts of that on the US economy, and now we’re going to shift to the second largest economy in the world, which is the People’s Republic. The situation here is not minor. I mean, in the United States, we have been on the edge about industrial production and import self-sufficiency and all those good things that are worth having conversations about. 

But for China, the situation is far more existential. You see, the Chinese economic system is based on political stability. The, bribing the population. Basically, anyone who has cash, whether it’s a central bank or a mom and pop operation, that cash is forced into certain investment vehicles so that there can be cheep, cheep, cheep, cheep, subsidized cheap capital available for any entity that is capable of employing anyone. 

The theory is pretty straightforward. China has a history of being part of the region’s coming, their way of rebellions, and since the system has never had a way to transfer power from one generation to another, that has really worked. The best way to make sure that everything holds is to make sure that everyone is gainfully employed and it doesn’t have to be a real job. 

It just has to be something that keeps people doing something for most of the week so that they don’t get together in large groups and go on long walks together. Something the Chinese government is very familiar with because that’s exactly how they got their jobs anyway. So the capital structure is deliberately tilted towards this sort of robust, artificially cheap capital system. 

It means that the rate of returns on capital are very low, which means the entire system is kind of creaking along everyone’s style. But it means everybody’s got a job. The thing is, is if you invest a bottomless supply of someone else’s money into an industrial plant, it’s not going to be particularly efficient. And B is going to produce a lot of stuff that is not geared towards the local economy. 

And C, the local economy doesn’t have the capital that it would be needed to purchase it anyway. And that’s before you consider China’s demographic problems. Now, that they have more people over age 53 than under 53. Simply having consumption at all is kind of hilarious and so no shock. 

We’ve actually seen consumption go down in the last six years. One of the fun things about Covid is it kind of put everything on hiatus for a few years in China, because of the lockdowns, and none of the statistics really matched up with what we had before. And it’s only in the last 18 months that that’s far enough in the rearview mirror that we have some idea of what the numbers actually look like in China, and they’re all really bad. 

So along comes Trump and puts up a series of tariffs that basically function as an embargo, 185% was the peak in that sort of environment. Trade between the United States and China basically arrests. And while that is a problem in the United States, from a consumer point of view, it will absolutely trigger a recession in China. It’s the kiss of death, because the United States is China’s number one consumer of Chinese exports. 

Exports that they can’t consume themselves, which means that China has to be export lead no matter what else, because it can’t consume the stuff itself. Now they will they have they will continue to try to dump that product on other markets to get the income. But the rest of the world combined simply doesn’t have enough spare consumption to absorb what once went to the United States. 

And that’s before you consider that a lot of these countries are becoming more protectionist anyway as the world globalized. So you dump the product, they start putting up their own tariffs. We saw that last year with the electric vehicle craze, where the United States was one of the first countries to put up barriers, but then the Europeans followed the Canadian style. 

Basically, anyone who has an auto industry at all, including the Brazilians and the Indonesians and the Russians, and we basically just saw China cut out of all of the markets, and they started chopping up the cars to get the battery packs to put into other things. We’re gonna look at something like that on a much larger scale this year, and we’re already hearing reports of companies closing, factories shutting down, warehouses already being full across the length and the breadth of the Chinese system. 

Not so much in electronics, because the Trump administration issued a waiver for that specific subcategory. But that’s only about a fifth to a quarter of the products that the Chinese used to produce. So there is no version of the deal that the Trump administration would accept that addresses the issue as Trump defines it. And that’s a trade deficit issue that would also allow the Chinese to solve their problems in the way that they define it, which is a mass employment and export problem. 

So we really do have the irresistible force meeting a unmovable object here, and there’s no clean way forward. And yet and yet and yet a couple of days ago, we got a deal. Well, let me explain what that deal was. The deal is to dial back most of the tariffs to roughly where they were the day before Trump announced Liberation Day. 

And that’s the entire. Oh, and this is exactly what we should expect from the American side, because the Trump administration still wants it hasn’t staffed up. And your typical real trade deal with a country that does not have an agricultural sector or anything particularly sensitive, which to say that China takes about 18 months and we’re only getting started on this process. 

What the Chinese are hoping for is they can do some version of a repeat of the phase one trade deal that was done by the Trump administration the first time around, and in that deal, there were product quotas. There were changes to intellectual property laws. There’s a long list of things that the Americans considered irritants in the relationship that the Chinese agreed to. 

And so they signed a deal and then ignored it completely because the Trump administration had no bandwidth to actually enforce the deal. And things just went on their way this time around, the Trump administration doesn’t have 5% of the senior staff that it had last time. One of the reasons it’s taking us so long, just to get to the point where they’ve agreed to talk, is that there’s no one on the US side to even answer the phone, and so real talks maybe will now begin. 

And if the real talks follow the pattern last time, it’ll be a year before we get the phase one trade deal that the Chinese will then proceed to ignore. The Chinese are betting that the Trump administration is bad with so slow out of the political environment at home is so toxic that the Trump administration will simply be tangled up in other things, and they can go back to some version of what they would consider normal, which is where they were on April 1st. 

Now, does this save the Chinese system? God, no. Everything about the Chinese system is terminal. The demographics alone suggest that this is a country with, at best, eight years to run. And we’ve already had a number of trade policies out of the Trump administration targeting China. We are now in our 128. Oh my God, a trade policy. All for all for this administration. 

So the rules are changing. Investment is stalled in the United States because nobody knows what to do. But as far as the Chinese are concerned, this does give them a little bit more bandwidth, allows them to stall and perhaps a little bit more. If the 145% tariffs would have stuck, we would’ve been looking at for maybe five years. 

Tops of the Chinese system could exist before the employment system simply imploded on them. They needed something, and the Trump administration has given them something. The question is, how long will it last until we have our next hiccup at the white House? 

Oh, and one more thing. This doesn’t deflect the, forecast that I have of a recession in the United States at all. Assuming that Trump means what he said with the return to some version of normal tariffs that we had a few weeks ago, and assuming that everyone in China gets right back to work immediately, and assuming that all of the ships that haven’t crossed the Pacific are still there waiting. 

And remember, we’ve had three times as many ship cancellations on the Trans-Pacific route so far as we did during all of Covid times. Three assuming everything goes back to normal. The first product that leaves China now isn’t going to actually hit shelves throughout the United States until the first week of October. So we have at least been where we have a problem with inflation, where we have a problem with lack of growth. 

And that’s before you consider all the other factors that are going on, because it’s just this is just one thing, that has changed a little bit and everything else is going full bore.

Hey all. Peter Zeihan here come to you from Colorado. For the last couple of weeks, we’ve been doing a series. I’ve been calling the Fire Hose of Chaos about how the Donald Trump administration’s policies are changing the American economic outlook sector by sector. And, short version is, now, a lot of you on Patreon have written in and said, hey, hey, hey, we don’t want to talk about the United States anymore. 

Think about the rest of world. I’m just like, you know, patience, grasshopper. We start at the top with the future of the most powerful country and the most powerful economy. And then we’ll move on to number two. And that’s what we’re gonna do this week. We’re going to start talking about China. Now, for those of you who need the refresher before we go into all of the details of the day, China is in a really bad spot. 

There are many, many, many problems, but the dominant one is demographics. Birth rates have been so low for so long for a mix of reasons fast industrialization, fast urbanization, and the one child policy that China’s birth rates have now been below that of the United States since 1991. Their population probably slipped below India, sometimes between 10 and 15 years ago. 

China’s own statisticians think now that they’ve over counted by at least 100 million people, maybe as many as 300 million. And best guess is, at the moment there are more people over age 53 than under, and all kinds of things come from that. But for the purpose of the firehose series, I think the single biggest one is that the Chinese are longer economically competitive in any manufacturing subsector. 

Once you factor out the fact that they’ve actually built the industrial plant, which is $37 trillion, that’s not nothing. But their labor force has gotten older and smaller without getting enough better. And so now we have labor costs per unit of production in China that are two and three times what they are in Mexico. And the Mexican labor is more highly skilled. 

So anything that leaves China doesn’t come back and the tariffs are absolutely going to accelerate that process. And this carries on into everything else. And there are many other problems. Consider finance for example, the Chinese have increased the amount of credit in their system by a factor of 40,000, since 2000, which is like far more than Enron ever did. 

And that leads to a collapse sooner or later, probably sooner, now that we’ve got the trade tensions and that shapes everything else. So, for example, if you just continue to expand your money supply, like China has, to the point that it’s triple in absolute terms what the U.S. money supply is, and they’re not even a traded currency. 

You start turning capital into a political asset rather than an economic one. And when you spend an economic assets like it’s a political force, you don’t do it on anything that is really worthwhile. So the Chinese use it to ensure mass deployment so that their people are quiescent. That only work so long is that there’s something for them to do. 

It also creates the housing sector, which is a legion of ghost cities, and it makes every economic sector they have remarkably in efficient, with the worst one being agriculture on a capital rated basis. The Chinese agricultural sector is the least efficient agricultural sector in human history. And it’s completely dependent on foreign inputs. You put all this together, and there was no way that the People’s Republic of China was going to survive as a unified government. 

And there’s no way that China, as a state would survive as a unified country just like 8 to 10 years from now. And that is before Donald Trump arrived. Now they have a lot less time. We’ll go through some of the specifics starting tomorrow.

Hey all. Peter Zeihan here. Coming to you from Colorado at the Denver, Colorado airport. Today we’re talking about leadership. There are a few things going on. But I want to talk about three of my least favorite, leaders that are on the public stage right now. A lot of people. And all of a sudden. First, to establish my bona fides, I consider myself to be a political independent, which means that I think that I can look at politics in objective manner.

It’s even handed. What that really means is that everyone assumes that I’m partizan for the other side. You know, it’s just my personal cross to bear. But let’s start with somebody who is no longer in power, and that’s Barack Obama. Barack Obama is one of my least favorite leaders of the modern age, largely because of his lack of managerial skills.

Now, it’s not that he’s not intelligent. I would argue that he is the smartest president we’ve had since Jefferson. And he gave a lot of kind of exit interviews in his last year as president, where he demonstrated that he really did grasp how everything works, like why the Israeli-Palestinian conflict really had no meaningful conclusion that could ever be resolved.

Why green tech in its current form actually increases carbon output rather than decreases it? Whether it was economics, politics or strategy, he really did understand how everything fit together. But he really hated people. He hated being in the same room as people. He hated having conversations with people. It was a constitutional law professor. He wanted to lecture from the front.

He wanted that to be the end of it. So we actually thought when he was elected, that just because he was there, that we’d have bipartisan cooperation on everything and everything would be easy. And since he didn’t have meetings with anyone, that just didn’t work out. So of the presidents who served full terms going back to Foundation, no American president met with his cabinet or went to Congress fewer times than Barack Obama.

And so for eight years, we basically didn’t have a president. But that didn’t stop him from thinking that he was the smartest person in the room. So in his first meeting with the Joint Chiefs, he basically told everyone that he could do all of their jobs better than they could. You know, let’s let’s assume that that’s true for a moment.

So, you know, my understanding is the presidency is not a part time gig. So even if you were the best person for every job, you can’t do them all at the same time and do your own. And so he never delegated or sealed himself in the white House, basically built an information wall around him and just sat there for eight years, and he’ll go down in history as one of the worst managers in the worst presidents we’ve ever had.

Next up is chairman Xi of China, who, like all world leaders, is a bit narcissistic, but his issue is power preservation. Whereas Barack Obama always insisted that he was the smartest person in the room and was so confident in his arrogance that he basically just could be in a room alone. He is always concerned about what the next threat happens to be from internal services, because if you look back on the long stretch of Chinese history, lots of coups, lots of assassinations, and he knows that in a ossified political system like the Chinese Communist Party, it’s only a matter of time before somebody else decides to kick him off.

So his policy was to preemptively stop that. So he purged. He started with the local regional governments. He worked with the federal bureaucracy. More recently, he’s taken on academia and the business community in the military. And really, the last time he had a meaningful advisor who would tell him the truth has been 6 or 7 years ago now.

And so he’s been making policy in a box all that time. And federal policy out of China has become more and more erratic and less and less connected to reality. You know, part of this is in the geography of China, it’s a big place with a lot of variety. And the saying is that the emperor is far away.

And so you get China spinning between these two extremes of over centralization, which is definitely what we have now, or when the emperor or the chairman loses control, all of the regions take out power and basically become five terms of not nations to themselves. There’s really no good middle ground. At least there hasn’t been since, Chairman Deng back in the late 70s. Throughout the 80s. into the 90s. Well, sorry. Ding. Lived a long time. Anyway, what this means is that leadership in China is completely broken, completely isolated from the wider world. And the federal bureaucracy in China has seen so many of their messengers shot, in some cases, literally, that they’ve basically not just started to self-censor, but to self guide.

So if you look at the statistics the Chinese system collects, it’s not as robust as you would expect for a country of China’s level of size or sophistication, because if they present a data point to the Chinese premier that he doesn’t like, the Chinese simply stop collecting that statistic. So there’s no longer any information on things like local political biographies, because that would allow people to start climbing the ladder and getting into the system.

Same for college dissertations. Same for death rates. Same for the bond market. It might generate bad information. It’s not that they collect it and sit on it. It’s it. They don’t even collect it anymore. So they can never have that awkward moment with the boss. And then finally you’ve got Donald Trump. Now, normally when a leader loses an election and spend some time out of power, they try to hire some new people who fill in the gaps of their knowledge base, have skill sets that they don’t have, especially built around things that they want to achieve.

They build up a cadre of legislation so that when they get back into power, they can hit the ground running, modify the laws and Congress, and make sure that the vision this time outlasts the president for at least his current term.

That’s not what Donald Trump did. Instead, Donald Trump purged his inner circle of anyone who knew anything about anyone, including his outer circle, including the leadership of a Republican Party. So it’s just a yes man crowd, and a very thin one at that. You see, when he became president the first time around, he really didn’t expect to win.

And so he tapped the Republican Party apparatus quite strongly, as well as the military for his circle. And when they would inform him of things that he didn’t like to hear, he would fire them. That’s why he went through more cabinet secretaries than any American president in history. By a significant margin this time around, he’s made sure that that can’t happen.

He hasn’t brought in anyone who knows anything. So we have a vengeful, incompetent running the FBI. We have a TV host running the Defense Department and so on. What this means is that Trump has achieved in just a few months, what is taking Chairman XI of China almost 13 years to achieve?

And so what he’s done is basically seal himself in the white House. Obama’s style built a hermetic seal around, and more information can’t penetrate Obama’s style. But then he’s also gutted all of the sources of information that leadership would normally rely upon Xi style. In many ways, we’ve gotten the worst of all worlds. About the only thing I can offer as hope here is that really, most of the purging is at the top of the federal bureaucracy and all of the people down below, you know, the 3 million people in the military, in the bureaucracy that do the day to day.

There’s still there. There’s still a cadre that over time can regenerate the leadership. But that’s going to be a 5 to 15 year process. So take this for what it is. We’ve got three world leaders. Two of them are active that are actively destroying the ability of their states to function, not just during their administrations, but long term.

Now, in the case of the United States, there’s a use by day here. Trump will be gone one way or another within four years. Who knows what’s going to happen next. But in China, who even before the trade war, their demographic situation was so atrocious, they probably only had about eight years left. And now they have to do it without a functional government.

So Xi will be the last Chinese leader, and he will ride this system into the ground, and he will destroy the People’s Republic of China. And hopefully here in the United States on the other side of the Pacific. We’ll look at how that goes down and learn a few things about what to do and what not to do with your government.