The Revolution in Military Affairs: Weapons Sales

An F16 Fighter jet

Our series on the revolution in military affairs continues with the geopolitics of weapons sales. Why does Europe buy US weapons? And will they continue to do so?

Let’s start with the US weapons. They are designed for fighting like an American, aka fighting wars far from home against greater numbers and tough conditions. But that’s not quite what the Europeans need. The Europeans are facing off with a much closer adversary in Russia, who churns out cheap, mass-produced, short-range weapons like nobody’s business. And those Europeans should probably be taking a page out of the Russians playbook here.

So why is it that Europe continues to buy US weapons systems? Well, there’s that sweet little thing called an implicit security guarantee. You know, if you scratch my back, I’ll scratch yours. And sure, having weapons that are consistent across NATO doesn’t hurt either. Oh, and those billions of dollars that have already been committed aren’t helping. But, that oh-so-important “implicit security guarantee” might be crumbling.

If Trump continues down his current path, the Europeans can’t be sure that Uncle Sam will step in if (and when) they need him. So, it’s looking like it might be time for a sourcing trip somewhere else…

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Transcript

Hey, all. Peter Zeihan here coming to you from Colorado. Today we’re going to talk about the geopolitics of weapon sales, particularly American weapon sales or what the US builds, the sort of weapon systems that fields. And so therefore what it sells are largely driven by America’s own geographic options and constraints. The whole goal going back to the time of reconstruction 150 years ago, has been to make sure that if the United States is going to be involved in a war, that it happens over there and not over here. 

So we have a forward deployed military, wherever possible, that tries to keep potential violence as far away from American shores as we can, preferably away from the entirety of the Western Hemisphere. And over the decades, weapons systems that we use, have evolved to mirror that prerogative. So we started with the Monroe Doctrine and blocked sea access to the United States. 

Then we projected out on our sea lanes, and then eventually with World War One and World War Two, were actually fighting in the Eastern hemisphere in major conflicts. And the weapon systems that have evolved since then reflect the fact that the bulk of the fight happens over there. So if you look at every weapon systems that the United States has, it’s built on two basic cons or three basic concepts. 

Number one, we will always, always be outnumbered no matter where we are. And so the weapon systems have to punch much harder than everybody else is to make up for it. Second, we’re going to be fighting at the very end of a very long logistical chain, which means that the US has to excel at logistics and have allies that can help with logistics. 

And then the weapons systems themselves have to be much longer range than anything they’re fighting against, both because basing can be limited. And we have to make sure that the fight is happening as far away from our bases as they possibly can. And then the third system is these systems have to be durable. So whether it’s the F-16 or the Abrams or the now the F-35, it has to be able to fight in a contested environment that will always be contested by a greater number of things. 

And it has to be able to take as many hits as possible before it goes down. So yes, the US Abrams is the most badass tank on the planet, can take several direct hits and probably just shrug them off. Things like the F-16 can actually take anything shy of a missile hit and keep flying. And of course, the F-35. 

It’s a stealth issue. These aren’t by accident. This isn’t something that the United States just stumbled across. It’s something that we discovered with blood and with money over the decades for what was necessary for us to project power. And it affects everything from the hardware to the alliance structure. The Russians have a very different system. The Russians knew that all fights are always going to happen on their immediate periphery. 

And so they don’t need a long range system. 

They don’t need an excellent logistical tale. They don’t even need durable stuff. They want numbers. They want to be able to mass the other side with more jets than anyone else can field. They can be short range. That’s fine. They’re fighting from their own territory. They don’t need to worry about the logistical tail. They don’t have to be particular lethal. Sure. 

Maybe the opponent vessel can take eight hits. Hit him with 100. And so you go for cheap, short range and disposable. You fight with numbers, which makes the American Alliance with Europe somewhat odd. Why the U.S. wants to fight in Europe is obvious. 

Keep the fight over there and why the U.S. wants American basing rights in Europe is obvious. You want that logistical tale in place with competent people. But why? The Europeans would purchase American weapons? That’s a bit of a mystery, because ultimately the Europeans know that their fights are going to be in their near abroad. The Russians are right there. 

And if Ukraine falls over there, right, right. Right there. So you would expect the Europeans to develop systems that are much shorter range, that are much less durable, that are much cheaper, that can be fielded larger and larger numbers. And when you look at the weapons systems that the Europeans have fielded themselves, most of them crowd into that category. 

And yet they still buy weapons from the Americans. In fact, half of their military procurement is from the United States. But their weapons systems that are broadly inappropriate for their needs. They do this for two reasons. Number one is the NATO alliance. If there ever is a fight, the United States assumes immediate control of all European militaries, and interoperability of military forces is critical, especially to the United States, considering its robust logistical needs. 

The second reason is a little bit more tutti frutti. The Europeans would like the Americans to offer the Europeans as many security guarantees as possible. And while NATO is there from a legal structure, using American systems implies a degree of involvement in European militaries, because the manufacturing is in the United States, the services comes from the United States, the technicians from the United States. 

All the equipment comes through the United States, and the weaponry comes from the United States. And so maintaining that commercial relationship maintains an implicit security guarantee that is every bit as important as the article five guarantee of NATO. Or at least that’s where we were a few weeks ago. The last few weeks, the United States has proven the Trump administration has proven to the Europeans that none of this means anything. 

United States is clearly moving away from supporting article five on any issue that matters to the Europeans, most notably Ukraine and Russia. The United States is publicly debating whether it should withdraw from military command of NATO, which is the basically the same thing is withdrawing from NATO itself, since it’s illegal in the United States for any other country to command U.S. forces. 

That would mean an end to the NATO alliance. and that is the explicit security guarantee. And the Americans have already withdrawn weapons support and intelligence support for Ukraine, which is, you know, the fight of the age from the NATO point of view, especially from the European point of view. And the Europeans seen that the Trump administration is directly militarily threatening NATO allies now in places like Denmark and Greenland. 

Everyone’s wondering, why did we buy any of this stuff in the first place? If ultimately the Americans simply are going to stop supporting it. And so the Europeans, every country is basically in the midst of having a debate with itself over whether and how to stop buying American weapons systems and moving to something that is more appropriate for their needs, their geography, and especially the war that is on their horizon right now. 

A great example is the F-35 Joint Strike Fighter, a fighter bomber with stealth capabilities. It’s perfect for the United States. It’s got stealth capabilities, got okay range, really good hitting power, very tough plane, largely pointless for everyone in Europe. It’s got too much range for what they need. Cost too much. Over $100 million per platform. And so far, the Europeans have committed to purchasing enough to spend about 75 to $80 billion. 

And then over the lifecycle of the jet, that’s another 250 to 300 billion. That’s a lot of money to spend on a relatively small number of planes that are not designed for your theater or your needs. And so the Europeans are looking to back away from all of those purchases and spend it on something that’s more appropriate. 

Now, at break of European purchase of American weaponry means a lot of things to a lot of people in a lot of places, and will require a lot of words for me to explain all the connotations. And that’s going to have to be tomorrow’s video.

Watch This Number for Recession Indicators

Photo of the word recession with storm clouds overhead

Everyone, get your calendars out and draw a big red circle around July. Why? Because a recession could be coming.

The tariff war caused a huge drop in imports from China, with transpacific shipments falling to historic lows. Trump has since backed off the gas, but the supply gap could strain US inventories. If those stockpiles run out, a recession will follow in short order. And we can say thanks to the erratic policy for this recession, as consumer demand and investments have remained steady.

But the real point of this video is to give you a tool to monitor early signs of economic trouble: first-time unemployment claims. What we’re seeing right now is a rise in claims, when all other economic signs say that unemployment should be falling. There are some specifics and nuance to this, but it’s a good starting point.

Link to the tracker: https://fred.stlouisfed.org/series/ICNSA

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Transcript

Hey all, Peter Zeihan here come to you from Colorado today. We’re going to give you a benchmark that you can evaluate for the status of the United States economic expansion slash recession. Quick reminder, I’m of the belief that July is going to be the critical month. And the reason is an 

interruption in shipments, of product from the rest of the world, most notably China, when Trump started the tariff war back in early April, we quickly got into a shouting match with the Chinese that saw bilateral tariffs go over 150% and cargoes just stopped moving. 

Functionally, it wasn’t a tariff was an embargo. And we have had more transpacific shipments canceled, since then than what happened during the entirety of Covid times five. So the last of the pre tariff ships arrived in New York at the end of May. And we’re now in this complete drought and probably in July, we’re looking at the consumption rate of the American economy overwhelming what was stored in terms of inventories from companies that kind of pre surged imports into the country. 

The question is the problem is the reason I can’t be any more specific than that is that Trump then gave in on the tariffs in order to restart talks with the Chinese. He did that about a month ago now. So we’ve had roughly a two month period with almost no sailings and then they’ve restarted. No, those new sailings haven’t reached the United States yet. 

They’ve only now started to leave Chinese ports. So we’ve got this gap where product is going to be insufficient. And the question is whether the inventories that have been built up are enough, and there’s no way to know. We don’t have a good enough data on the inventories to know. But July is when the rubber is going to hit the road. 

And we’re going to find out this is a really weird recession because everything else, whether it’s capital formation, retail sales and investment levels, has actually been pretty robust, has been for a couple of years. We’re dealing with a policy recession caused by really, really crazy easy decision making. And Washington has a very Venezuelan, Zimbabwe and Greek feel to it. 

And one of the weird things about that is it means you can schedule when the, recession is going to happen because everything else is kind of holding steady. So July is when we’ll find out. Now, the reason I’m bringing this up today is because we’ve got a measure that I want to make sure that everybody understand. 

It’s called first time unemployment claims. There’s a lot of pieces of data that economists look at for various reasons. But the problem with most of this data is it’s only as good as the data collection. And usually there’s a huge lag. So for example, retail sales, great measure, but they can’t finish collating all the data right away. 

It takes 6 to 7 weeks before the data comes out. So if we have low retail sales in July because of, insufficient inventory, we’re not going to know that until September. And by then it’s too late. Same thing goes for the Department of Labor’s estimate on job creation. It’s an estimate that is based on a series of estimates that are based on a series of more estimates and surveys. 

And so I don’t want to call it a made up number. It’s one of the best things we’ve got. But it’s not a real data point. But first time unemployment claims are because when people go to file for unemployment assistance, they do it right when they lose their job. And it’s a real number. Now, the data increase from today indicated that first time unemployment claims in the United States has risen to hit 248,000 people. Under normal circumstances, I would not even blink at this number. It’s actually a pretty good number because normally when you hit 300,000 or below, it means that not a lot of people are losing their jobs. The job market is strong. It’s when you hit 400,000 jobs or higher that you’re getting the danger territory, and 3 to 400 requires a little bit of loosey goosey analysis. 

So under 300 should be fine, but it shouldn’t be rising at all. Two things going on here. The first is industrial construction spending, another number that I figure has basically been flat ever since Trump came in. We’ve now had 140 tariff changes since the 20th of January. Trump has made it very clear that, especially for a major trading partners, in the next two weeks, there’s at least another 20 tariff policies coming in. 

They are still working on secondary sanctions for Venezuela. Congress is talking secondary sanctions for Russia. And we still have semiconductor and agricultural tariffs that are supposed to be just around the corner, although the US now has been just around the corner for two months. There’s more coming and as long as that is the case, no one knows what the rules of the game are and no one wants to break ground. 

So industrial construction spending hasn’t dropped. Everyone’s still finishing the projects they were on, but this should be a job creation story and it’s not so. First time unemployment claims should be going down and they’re going up. And even though they’re still well below the threshold, I normally worry about, I’m a little bit more worried. Second problem is the baby boomers are always the baby boomers. 

Over two thirds of them are retired, which means that the balance in the economy between number of workers and number of non workers is in the process of shifting by the greatest proportion since the baby boomers entered the markets back in the 60s, which means a lot of our benchmarks might need to be readjusted because that balance is shifted. 

And when you remove that many workers from the economy, workers who are retiring, not workers who are being fired, then maybe that 300 to 400,000 arc in first time unemployment claims should actually be revised down to maybe 250 to 350, because there’s fewer people to theoretically lose their jobs. We’ll have to find a new equilibrium on that as years go ahead, all of the baby boomers will be out of the market the next few years. 

But we live in the now. Anyway, so here’s a QR code for first time unemployment claims as garnered by the fed every single week. It is one of the measures I am watching most closely and now so can you.

Trump Calls in the Marines for California’s Protests

Photo of soldiers at the California 2025 ICE protests. Image by Wikimedia commons: https://upload.wikimedia.org/wikipedia/commons/f/f4/Los_Angeles_riots_-_June_2025_-_20250613.jpg

Anyone remember that 2011 movie called Battle Los Angeles? It’s beginning to look a lot like that again, just with a different kind of aliens this time.

Earlier this week, immigration enforcement began arresting suspected undocumented immigrants, which triggered protests. Trump deployed National Guard troops and Marines to LA, despite strong objections from the CA governor and LA’s mayor. Trump can legally enforce immigration laws and declare a state of emergency, so he stands on pretty firm legal ground.

The use of military forces like the Marines should be setting off alarm bells because this is not in their job description. Putting Marines that are trained for combat, into a situation where they will interact with civilians and act as law enforcement, is risky to say the least.

Perhaps the most interesting aspect of these protests is the scale. With CA’s size and political leaning, larger turnouts would be expected. Despite this, Trump clearly has no issues pushing California’s buttons, especially if it means political gain for him.

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Transcript

Hey, all. Peter Zeihan coming to you from a hotel room where I’m about to give a presentation. I figured that with everything going on in California, I’d better say hello and let you know my $0.02 on what’s going on. Short version is that we have protests and a little bit of rioting in the Los Angeles area specifically. 

What happened is, a few days ago, immigration enforcement went into communities and started rounding up people that they thought may or may not be illegal. There have been several hundred arrests, and that has triggered protests and action. That has prompted Donald Trump to send in about 4000 National Guard troops from local units, over the objection of the la mayor and the California governor. 

And as of a few hours ago, 700 Marines have, joined them as well. So few things here to unpack. Step one. Does Donald Trump have the legal right to do this? Of course he does. Enforcing immigration laws is why Ice exists. So of course, Donald Trump can send in, their forces in order to root out what they see is an illegal community. Were these folks doing anything particularly bad? Not really.  

One of the things that, the Trump administration has discovered is that if you want to treat immigration as a law enforcement issue, the step one is to investigate and figure out if someone’s actually breaking a law aside from being in the country illegally. That’s what Trump campaigned on. But that takes time. And, per agent, if you can get an arrest every few days, that’s actually pretty good. 

And Trump wants to uproot people and hundreds of thousands moving into the millions. And so that just doesn’t get the numbers that Trump is after. So he’s going into places where illegal immigrants are known to congregate. In the case of this California case, they started at the Home Depot and went after the day laborers and then eventually went into the communities and places that were known to employ illegals. 

And that’s how this all got started. Can Donald Trump declare a state of emergency and mobilize the national Guard over the objections of local authorities? That’s a bit more mixed, but probably yes. The federal government political leaders have the right to declare states of emergency and bypass some of the laws that we consider to be normal, especially if you’re dealing with someone who isn’t an American citizen. 

So Governor Newsom and the LA mayor have both sued, and the initial court case will be heard, today when you’re seeing this on Thursday. But I really doubt it’s going to go their way. The courts generally give a very wide latitude to any administration when it comes to issues. Federal law enforcement, if there’s going to be a check on the president’s power in this specific instance, that’s probably going to have to come from Congress, because they’re the ones who determine when states of emergency can and cannot be declared. 

And at the moment, there doesn’t seem to be any appetite in Congress to challenge the president on this or any other issue. So this is probably going to work out just fine for Trump from a legal point of view. That, of course, leaves the practicalities. Honestly, if I were the one writing this headline, I’d be like only 17,000 people in California protest. 

I mean, the protest movement in California has this high on self-righteousness and huge. And to consider that we are now in, I reemerge April, May in the fifth month of the Trump administration, and we haven’t seen widespread protests. That’s kind of surprising to me, especially in California. So the numbers of people involved here, the level of skullduggery or violence, if that’s what you’re after, is really very, very low by normal California standards, much less by the standards of what the Trump administration say triggered the first time around. So, this is very clearly, from my point of view, Trump trying to instigate an issue, California is on the opposite side of the political aisle from this administration. It is the most powerful economy in the country, and arguably the sixth or seventh most powerful one in the world. And Trump would love to take it down a notch. Now, will that work? Well, that’s really up to the rest of the country and Congress. 

But I think it is worth pointing out that this has the potential to get really, really ugly. The military is designed to kill people. We discovered in the war on terror that we do not like it when our military is responsible for civilian control and law enforcement. They are not trained for it, and it’s only in the last 24 hours that the Marines have started to get trained on non-lethal munitions and things like riot shields. 

So they’re being deployed with minimal training, but a lot of testosterone into an environment that is becoming deliberately volatile. That is not the sort of mix I feel great about now. Legally, unless it’s things get really out of hand, the military can’t be used for law enforcement, so they’re technically there to protect, say, federal sites. The Marines are not a protection force. 

The Marines are go in there and kick some ass force. And so putting the military in this sort of position is really awkward for everybody. Now, the last time the California authorities requested government assistance for things like law enforcement was the Rodney King riots that dated back to, you know, the early 1990s. Anyone who participated in that has been long since left the federal bureaucracy. 

And another thing to consider is that Donald Trump’s gutting of the federal bureaucracy goes up, and to include the military itself. So most of the people who would tell him that this is a horrendously bad idea have already been fired, and we’re all going to have to learn the hard way.

Musk Pulls the Carpet Out from Under DOGE

Musk swings the "Chainsaw for Bureaucracy" at CPAC 2025. From wikimedia commons: https://en.wikipedia.org/wiki/Department_of_Government_Efficiency#/media/File:Elon_Musk_(54349592271).jpg

The leader of DOGE (aka Elon Musk) has fallen from grace with President Trump and the rest of the agency is crumbling behind him. So, where does this leave the Department of Governmental Efficiency?

DOGE’s promise to cut $2 trillion from the federal budget has gone up in smoke. The estimated savings are likely closer to ~$30 billion. You know, hiring and firing and rehiring people can get a bit expensive. And Trump’s new bill codifies only $9.5 billion in cuts, which doesn’t even scratch the surface of what was originally promised by DOGE. To add insult to injury, the new budget working through Congress adds ~$2.5 trillion to the deficit over four years (and it could be higher than that).

To be fair, cutting the federal budget is extremely difficult, so this was kind of a suicide mission from the start. Unless we want to just take a massive chunk out of defense, Social Security, Medicare, and Medicaid…but I don’t see that happening.

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Transcript

Hey, all. Peter Zeihan here coming from Colorado. Now that Elon Musk is no longer part of the federal government, I think it’s worth doing a little postmortem on Doge. That’s the Department of Governmental Efficiency. Very short version is after the dramatic falling out between Musk and US President Donald Trump over the last several days, the Doge leadership has basically been gutted because most of these people were folks that were either already loyal to Musk or became a loyal to Musk, and he’s now taking them all out. 

So Dodge is in the process of a not so slow motion collapse. So the question then is what has been done to this point in terms of budget cutting? And the short answer is very, very little. According to the campaign pledges made by Mr. Musk last year, he would be able to cut $2 trillion out of the annual federal budget. 

By the time the election actually was over and we got an inauguration, he said that that number would actually be closer to 1 trillion. And if that number kept getting scaled down and down and down and down and down, and the official number, on the day that he lost was 180 billion, most people say it’s closer to 150 billion. 

And the original budget office says it’s closer to actually to 20 billion, because the Doge numbers neglected to include the things that the cabinet secretaries, in the Trump administration had to do. You see, a lot of the things that the federal government does, really almost everything that the federal government does is congressionally mandated unfunded. 

So when you fire the people who are responsible for programs or try to close up programs, you then come against this legislative wall that mandated that that money actually be spent on those things. And so to not go to prison, a lot of bureau heads and a lot of cabinet secretaries going right up into Donald Trump’s leadership court itself was forced to actually rehire people or part time contractors, in which some cases were the same people that had been fired. 

Bring him back in. Well, once you add that cost back in, that’s a total of $122 billion, which brings the entire savings to somewhere between 20 and $30 billion. Also, the Trump administration has finally submitted a bill to Congress to codify some of the cuts, and that slims it down to just 9.5 billion. So we have had a lot of drama and not much has changed. 

And if you just remember back a few days, the reason that at least Prox, the proximate reason that we had such a falling out between Trump and Musk was because of the mega bill that is working its way through Congress that will include the budget. If it passes in its current form, it will increase the federal deficit by roughly $2.5 trillion over the next four years. 

And that’s before you consider some changes that the Trump administration is considering making to things like Medicaid, Medicare and Social Security, which will increase spending. And so we’re looking in a conservative environment of additional deficit spending of around $800 billion a year at a starting point that assumes no new funds for things like border security, that assumes no changes to the military budget, that assumes nothing of all the various spending programs that Donald Trump says he wants to engage in conservatively. 

We’re really looking more realistically at $1 trillion deficit increase per year. Now, while that’s not great and obviously is a great example of the carpets not matching the drapes, I need to underline for everyone how hard it is to cut the federal budget, especially in the way that Doge and Trump have attempted. You see, if you were to fire every single non-defense employee of the federal government, you’d only actually reduce federal spending by about 5%. There is no version of deficit control in the United States that is not centered on four things defense, Social Security, Medicare, and Medicaid. That is well over three quarters of the total. 

And if you’re not willing to take a very, very deep gouge into those four programs, not one of them, all of them, we are not going to get anywhere near a balanced budget. So before you say X is stupid or Y is wrong, keep in mind the core math. If we don’t do this in a way that hurts a lot, it doesn’t mean anything anyway.

Trouble in MAGA Paradise

Photo of Trump and Musk inside the Oval Office taken from Wikimedia Commons: https://upload.wikimedia.org/wikipedia/commons/8/82/President_Trump_participates_in_a_press_conference_with_departing_DOGE_adviser_Elon_Musk_%28cropped%29.jpg

America’s “favorite” couple is breaking up…and doing so very publicly. I guess there just wasn’t enough room for two egotistical divas in the relationship.

The cat fight that has ensued makes for great TV. Musk has criticized the budget bill, threatened to start his own party, and is ready to fund Trump’s impeachment. Trump attacked Musk’s credibility and called for the contracts with his companies to be cancelled. And this might be the first domino to fall in Musk’s business empire.

Tesla is on the fritz, SpaceX might be nationalized, and my internet (aka Starlink) could get much slower. For Trump, his big beautiful bill is backfiring; his coalition is fracturing (this fight is just one example of this), he’s burning through political capital, and his legislative agenda is collapsing.

Perhaps this episode would fit better in US Weekly or People Magazine.

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Transcript

Peter Zeihan here coming to you from Colorado. Apparently yesterday when I was presenting to a client and, on a plane, Elon Musk of Tesla and Donald Trump, president of the US, had a bit of a tiff and a falling out. Now, for anyone who wasn’t headless, we all saw this coming. We’ve got two divas who are not great people, and we always knew that sooner or later, there was only going to be enough room on stage for one of them. 

But kind of like how we all knew that when the US left Afghanistan, the place was going to fall apart. We didn’t necessarily think it was going to happen this fast or this bloody. Just to sum up, yesterday, Musk says that the budget bill that is going through Congress is an abomination and should be cut up and used as bait, and that anyone who is supporting it is a fool. 

He’s going to try to form a new party to challenge the Republicans at every step. And he is now personally putting his fortune behind impeaching Donald Trump. For his part, Donald Trump says that Musk was always a blowhard. Really never did any good work. Was the worst adviser ever. And the United States needs to reevaluate all of its contracts that it has with Musks family of companies and probably cancel most of them. 

And by the way, Musk should just go back to Africa. So, I don’t have an ear on the inside. It sounds real. It was very public. We had press reports out of the white House. Musk, of course, was going all day on Twitter, which is now his personal safety. Rather than talk about how it’s going to denigrate or recombine between the two of them or the political implications of that, I want to focus more on what we know for sure. 

This is the end of Tesla. Let’s start with that. Tesla, of course, is America’s initial electric car company, and they haven’t issued much of a new model in almost four years. Now, they’re no longer the industry leader in terms of technology, simply in terms of the number of units are actually out on the roads. But since Musk basically revealed himself to be a bit of a white supremacist of a really nasty type, environmentalists have found him far less, loving. 

And we’ve seen sales on a global basis of Tesla tank. Now, that would be bad enough as it is, but we now have an administration who isn’t, bleary eyed when it comes to doing environmental math in the same way that the last administration does. And if you’re willing to put aside your political leanings and actually look at the numbers, Teslas are some of the most environmentally damaging vehicles on the road. 

Making the lithium requires a huge amount of energy. Turn it into a battery chassis requires more. But what is left out of most of the math is the frame, which is a alloy of silicon and aluminum, which requires something like 40 times the energy that it takes to smelt steel. So in most jurists in the United States, a Tesla vehicle is not going to break even on a carbon count within a decade. 

All the math that Tesla puts out in its marketing is basically lies. They basically say that it’s produced with 100% Greentech energy, and it’s charged with 100% green tech energy. And if you believe that, then yes, a Tesla breaks even in carbon math in about a year. But it’s just utterly false. Anyway, that’s part one problem with Tesla. 

Part two is financing, because a lot of people, especially in Silicon Valley and Wall Street, saw Tesla as the brand of the future. People invested it in a huge way that was not reflective of what it would be for a manufacturing company or a manufacturing company. Its valuation is usually based on the amount of product that they have or that they sell, because there’s a production supply chain system that you have to cost in. 

Instead, Tesla was costed out as a software company where whatever your output is, you can then sell over and over and over and over and over and over. So the stock value is justified to be much higher. It’s valued as software company, but it produces and has income as a vehicle company. And the only way that you can justify that, disconnect is by saying that the federal government will basically subsidize everybody to buy electric cars. 

Well, that’s not going to happen now. The third problem is debt, because Musk basically ran this company with an enormously inflated stock valuation. He was able to borrow a lot of cash for all of his other projects. 

The next company that is doomed is SolarCity, which is a solar installer that he bought a few years ago. You guessed it, by issuing some Tesla stock and borrowing some money. Now, solar in the United States overall is kind of in a tight spot. And by a tight spot, I mean is probably going to take a decade off. 

And the problem is financing. When you have a conventional thermal plant, coal or natural gas, about three quarters of the cost of that plant over the lifecycle of the plant comes from purchasing the fuel. And only about 20% comes from the actual installation cost of building the facility in the first place. So you finance that 20%, and then the rest of it is kind of a subscription model. 

You sell power, you take money from your clients, use it to buy more fuel, you burn it, you make more power. You sell it to clients, you get some more money, and it’s cycles like that. That’s not how it works with green tech. Part of the attraction of green tech is there’s no fuel. That’s great, but there’s a much, much larger upfront cost, roughly two thirds of the cost of a full life cycle for a green tech plant is an installation, and that has to be financed. 

And because the baby boomers have basically exited the American economy and taken their savings and put them into relatively low velocity investments, we’ve seen the cost of capital go up by a factor of 4 or 5 in the last few years.  

It’s not because of policies from the Biden or the Trump administration’s. It’s not because of the fed. It’s not because of Covid. It’s not because the business cycle. It’s simply the boomers doing what you do when you retire. And since the largest generation we’ve ever had, that has generated a massive increase in capital costs. Well, most solar programs in the United States aren’t viable unless there’s some sort of concessionary financing. 

That’s how it was two years ago. Now, with finance being even more expensive now with the federal government under Trump getting out of that business, of subsidizing most of these projects don’t make sense at all. So if you’re in Southern California or Arizona or New Mexico or West Texas, you know there might still be a place for you because the numbers are really good in those zones for solar. 

And where I live, seeing Colorado in the Highlands, where there’s not a lot of moisture and we get a lot of sunny days, works here too. But the rest of the country, the rest of the world, not so much. So Solar City, which was already suffering from overcapacity, was already suffering from a lack of penetration options, was basically being subsidized by Tesla. 

That’s gone too, the third one that gets really interesting is, SpaceX. That’s, Elon Musk’s SpaceX launch facility, which has dropped the cost of space launches by roughly 90% per pound of cargo. And with some of the changes that they’re making with the new Starship that they are hoping to have flying for real and taking cargo soon, those numbers are going to drop even more. 

They’ve basically driven out of business all the other space, large industries, because they simply can’t compete. 

This is something where Musk actually did, in my opinion, something really good, a good solid for the U.S system. The old model of rockets was, you know, rocket science is hard. So let’s baby every individual piece of every individual rocket and run every conceivable test we can on it before and after each launch. 

So we have few losses. But the cost, the insurance cost for losing a rocket is huge. So we just don’t even want to pretend to take the risk. Musk had a very different approach. He’s like, is it ready to go? Oh, not really. Will launch it anyway. We’ll learn from the mistake and something would blow up. A lot of things blew up Tesla. 

I’m sorry SpaceX blew up a lot of rockets, but they learned so much more, so much faster because of it. And now have this cycle of launches that is so much more rapid than anything happened before. So at the moment, the Dragon capsule is the only way to get people to and from the space station. And so in the little tiff with Trump over the last couple of days, he basically says that they’re going to decommission that and the United States can just suck it. 

What this tells me is that Musk is deliberately making himself a national security threat for the United States. And so the, the nationalization of, SpaceX is probably not too far in the future. And since Donald Trump has already got NASA, in part in order to give a totally corrupt payback to Musk, there’s no longer an institution. 

It’s states that can really effectively run this thing. I mean, you could turn it over to Boeing, I guess. But Boeing hasn’t been able to keep up at all. Same with Lockheed. So we’re about to have state intervention in the space. Space? That is an unknown because there aren’t personalities involved that Trump will trust because they all work for Musk. 

Now, this hurts me personally because I live in a rural area on the top of a mountain, and I can’t get good Wi-Fi. So I have a Starlink system on my roof. But the only way Starlink works is if SpaceX keeps launching dozens of new satellites and repeaters every single month because they have a limited life span. 

Space is a tough environment. They’re falling out of the sky pretty constantly, and so you have to keep injecting more and more and more and more. That only works. That only works if SpaceX is flying. So. So that’s the, that’s the Elon side of things. Let’s talk about the U.S government side of things. One of the biggest mistakes that Donald Trump made is refusing to treat with Congress. 

So normally when the president wants something done, he looks to his allies in Congress or he looks to his own staff and he builds a bill either over there or in the white House or together sends it to Congress to go through the process and eventually become a law. But that requires having conversations with people who might not be as worshiping of Trump as he feels he deserves. 

And he doesn’t even have the staff in the white House to do so. He gutted the top ranks of the entire federal government, hasn’t replaced the staff. So there really is no one to write the laws, and there’s no one in the bureaus to advise them on how you might make this happen. So what he’s told his congressional allies is I want every thing that I want and done put into one bill so I can just sign at once and be done for the year. 

And that is just moronic. So the budget bill is in there. The reconciliation bill is in there, giving the president new legal powers so he can go head to head with the media or the universities that’s in there. Some of the legal troubles he’s got new indemnification are in there. Tariff authority that’s in there. Anyway, the point is, is this this massive thing. 

And even if it was just Musk’s concern about the budget deficit, which is also true, it’ll be like the third largest budget deficit that we’ve ever had. The point is, everyone in Congress has a reason to oppose this. And the only reason that, it hasn’t completely collapsed already is because the line is held within MAGA. Well, now the MAGA line has been broken wide open, and you only need a couple of votes to not go Trump’s way. 

Like a couple individual senators, and the whole thing falls apart. So from a legislative point of view, the Trump administration has found itself today in a position where Jimmy Carter was three years in, when he’s burned all of his political capital, he’s alienated almost all of his allies, and now he’s fighting a rearguard action just to appear like he’s in charge. 

And we’re not even six months in. If you go back to some of the pieces that I did back in January and February, I’ve never seen a political leader in any country burned through political power and political capital. At the rate that Donald Trump was into order to achieve very, very little. Everything that Trump has done to this point has been an executive action, which means that just like Biden and just like Trump won and just like Obama, it can be unwound in a matter of days by whoever happens to come in next. 

And there is no legislative path out of this any longer, because the coalition has already broken.

Coping Mechanisms 101: The “TACO” Trade

Newspaper photo of President Donald Trump

I won’t ramble on about Trump’s chaotic trade policy because you’re all aware of that. However, there are some interesting updates to share.

After most of America’s key trading partners have been subjected to the chaos, Wall Street has adopted a new strategy called the “TACO” trade – short for “Trump Always Chickens Out.” You know since most of his aggressive threats are walked back within weeks of announcing them.

We’ve also seen a court ruling state that Trump’s tariff actions may be unconstitutional. We’ll have to wait and see what the result is following the appeal, but convos regarding presidential trade authority have been sparked.

This all contributes to the stalling of industrial investment in the US, because if you don’t know the rules, how can you play? It would be nice to get some clarity here soon, but we may be in for four-year ride on this roller coaster.

Prefer to read the transcript? Click here

Transcript

Hey, all. Peter Zeihan here coming to you from Colorado. I am recording this over the weekend. You’re going to see it on Monday, June 2nd, which means we will undoubtedly have a few updates that are not being folded in. And because that’s just the nature of the beast these days. We’re talking about trade today, specifically, what is up with the Trump administration and the current status of the many trade wars the Trump administration has launched. 

If you remember, this is the most aggressive president we have ever had when it comes to issues of trade. We have already had a 132 documented trade policy changes by this administration, and things are getting a little out of control. Let’s start by talking about two of the United States is four biggest trading partners. So number one and two are Mexico and Canada. 

We’ve dealt with those bear for I’m sure we’re gonna deal with them again. But in the last few days we’ve had a lot of movement on Europe and China who are number three and number four. 

Let’s start with Europe. Trump decided that the Europeans are not serious with their trade talks. The primary reason is that there’s no one on the US side to answer the phone when the Europeans call. 

The Trump administration still hasn’t staffed up for really anything. Most notably for trade talks, normally takes several dozen, if not several hundred people to handle the negotiations. For one major trade deal. And the United States is attempting to do 200 deals at the same time. So everything is just kind of slogged. Anyway, Trump laid the blame on the Europeans and said that come July 1st, tariffs will increase by a factor of 5 to 50%. 

He then had a call with the commission president, Ursula von der Leyen, and said that, no, that’s going to actually happen on July 9th. By the way, these are not trade policy adjustments. So they don’t go to that 132 number. These are just, things that he said on Truth Social. And with the Chinese, we had a recent deal in Geneva where the Trump administration agreed to peel back the tariffs from 145% to 10% while talks continue. 

So it was just an agreement to talk. Trump has now said again on Truth Social that the Chinese had violated the deal to talk. And so tariffs are probably going to be coming back in soon. I have no idea what’s going on behind the scenes in the Trump administration. There are so few people that you can tap to find out. 

But it appears, at least from the Chinese and the European point of view, as well as the Canadian, the Mexican and the Japanese and the Korean and blah, blah, blah. Is that the Trump administration is basically making policy off of a whim, the normal flows of information that would inform the white House of what’s going on in the world don’t exist anymore. 

The Trump administration has fired the top 1400 positions in the federal government. Very few of those have been replaced with anyone. And those that have been replaced have generally been replaced with party loyalists, rather than anyone who knows anything about in this instance, trade. So we’re just getting things going back and forth and back and forth, not based on data, not based on reality, not based on trade flows, not based on national security concerns, based on whatever it is that Trump feels the issue of the moment happens to be. 

And the result is just this erratic nature of policy. As a result, now that we’re a few months in, Wall Street has had to deal with this, and they’ve developed something called the taco trade. Taco stands for Trump Always Chickens out. And the logic behind the trade is that Trump says these big things implement these big policies. 

And then he immediately backs down immediately within a few weeks. I’m not sure that’s entirely fair. Trump obviously finds it a lot less amusing than a lot of other people do, but it gives you an idea of just how everyone feels. We don’t know, day to day what the policy is going to be. We don’t know, day to day what the goal is. 

And so we don’t know day to day how Trump is getting from A to B, assuming there is a B and what information I’ve been able to clean out of the white House is that there was never a goal in the first place. This is just how Trump likes to run the show, and this is what we can look forward to for four years. 

Which explains in vivid detail why industrial construction in the United States is basically seized up because nobody wants to invest in an industrial plant if they don’t know what the rules of the game are, especially if the person who’s making up the rules of the game keeps making up the rules of the game. On top of that, we have now had a court case by a trade court in the United States that says that the Trump administration does not have the legal authority to do most of these trade policies. 

Now, according to the Constitution, the Congress is the only body in the United States that has any trade authority on tariffs. But over the last several decades, most notably in the 70s, the Congress submitted some of that authority to the US executive for emergency circumstances. And almost every tariff that the Trump administration has put in place to this point has drawn upon that emergency authority. 

So Trump declares an emergency and then defines the tariff. The court disagrees with the logic of that, saying, not that Trump is interpreting the statute incorrectly, but that Congress cannot unilaterally cede, tariff authority to the president. Now, I’m not a legal scholar. I’m not going to parse out. I just found a case kind of interesting that they were going after Congress with the ruling rather than the presidency. 

It’s already been appealed, and there’s already been a stay on that tariff suspension. So those are two of the 132 tariff changes that we’ve had now. And the Trump administration, of course, is going to appeal this all the way up to the Supreme Court. And since we’re already at the upper federal district court level, it’s not going to probably take too long to get there to get some legal clarity. 

But the bottom line is clear. We’re in a bit of an institutional crisis over the ability of Trump to do what he is doing. And now Congress has been roped into that discussion as well. From my point of view, the fact that Congress actually is being called to the carpet on some of these issues is actually great, because it’s going to force a degree of clarification about what is possible, what is not without an act of Congress. 

But between now and then, you should expect nothing but more confusion as everyone is trying to figure out what’s going on while the floor keeps shifting under all of us.

Did Trump Just Wreck US-India Relations?

The Attari–Wagah border ceremony at the border crossing

With tensions rising in India and Pakistan, it was only a matter of time before Trump had to step in and put his foot in his mouth. Basically, what happened is the Trump administration announced a ceasefire and peace talks between India and Pakistan…seemingly without consulting either side.

The tit-for-tat military exchanges between India and Pakistan were bound to end in peace talks anyways, but having a third-party (i.e., the US) step in, goes against everything in the “how to engage with India” handbook. And given the extreme disparity between India and Pakistan’s demographic and economic situations, external mediation undermines the Indian position. So, feelings were hurt.

And when feelings get hurt, relations and policies will suffer. That means US-India relations are at their lowest point in decades, and all those years of developing a closer relationship with India went up in smoke.

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Transcript

Hello, Peter Zeihan here. Coming to you from Canyonlands National Park. And today we’re going to talk about India and Pakistan and how it intersects with what the Trump administration has recently done. Specifically, India and Pakistan recently had a near war exchange. Some Pakistani militants who may or may not have been loosely affiliated with the very weak Pakistani government, launched an attack inside Indian territory in Kashmir and killed a lot of people, and took their time about it. 

It showcase the general security incompetence of the Indian government. So the Indian government felt that it had to respond. And it hit some targets in Pakistan, some of which were military. And then we got tit for tat back and forth attacks that were just gradually escalating, hitting more and more sensitive issues. Until such time as we got peace talks, brokered by the Trump administration. 

Now, Trump being Trump, he made peace talks all about him. And he announced that there was now a ceasefire without really consulting either the Pakistanis or the Indians. I made it very clear in the situation to come that all three parties would be involved in the talks, blah, blah, blah, blah, blah. Nothing that sounds too incendiary unless you know anything about India. 

The Indians have had the firm position for over a half a century now that any negotiations between Pakistan and India should be that negotiations between Pakistan and India, with no third party involved at all. And so the very involvement of the Americans was something that New Delhi saw as an insult. And the reason is pretty straightforward. 

India has a population that’s roughly nine times the size of Pakistan, an economy that’s closer to 12 times the size of Pakistan. And that’s probably being overly favorable to the Pakistanis. So in any real negotiations on anything, the Indians feel that they should hold all the cards because they do hold almost all of the cards. And if you bring in a third party, they’re going to tilt towards some degree of equality between India and Pakistan, which India rejects on principle. 

And that’s exactly what has gone down. And so we now have arguably the worst relationship between India and the United States that we have seen in the last 30 years. Now, that might seem grossly overexaggerated, but think back to what we’ve been doing for the last 30 years. In the aftermath of the September 11th, 2001 attacks, the United States found itself needing to be involved in a ground war in a landlocked country. 

And the United States is a naval power. So we found ourselves doing things that we don’t like to do in places we don’t like to do them, and we had to rely on countries for transit. And Pakistan was the most important of those. During the Cold War, it was okay to side with Pakistan against India because India was relatively pro-Soviet. 

But in the post-Cold War environment, we found ourselves dealing with a jihadist government that was fighting a jihadist insurgency in order to transport gear through jihadist territory, to get to other jihadist territory to fight different jihadis. It was a pain in the ass, and we had to do it for 20 years. And at every step of the way, we found ourselves at odds with the government in Islamabad as Pakistani militants were attacking every aspect of the American operation, oftentimes in league or at least informed by the Pakistani government. 

We hated every single second of it. And so, as the United States has gradually removed itself from Afghanistan over the last 15 years now, we’ve been bit by bit by bit, edging towards a better relationship with the country that we would rather have the relationship with. Not Islamist Pakistan, not weak Pakistan, not militant Pakistan, but a democracy in India that has a lot more shoreline and is a much more logical partner for us long term, and holding off China and protecting sea routes and making a partner with the country of the future that has a much bigger market. 

Or that’s how it was until this week. Basically all of that work has now been unwound, because we took the one thing that the Indians cared about and basically took a big steaming dump on it. So this is something that the Trump administration would have known if they had talked to people in the CIA or the NSC or, the State Department. 

But all of those people have been fired. And so we basically now have a new foreign policy that has partnered with the wrong side and the partner that we have been trying to get away from since 2002. Blehhh.

Aging Populations and Which Countries Look the Worst

Note: This video was recorded during Peter’s last hiking trip

Many countries are on the brink of crisis. No, I’m not talking about political issues or potential wars. Instead, I’m looking at the aging population crisis facing a number of countries around the globe. Let’s start with Japan.

Japan is the oldest country globally, with 10% of its population over 80, yet they’ve managed to mitigate the impact this has had. The Japanese have adopted policies that extend working lives, improve health care, and encourage younger generations to have children…and there are plenty of other countries who could take some lessons out of Japan’s playbook.

Italy and Germany are aging more rapidly and could put some strain on the European monetary union. China could very well face a civilization crashing event due to its inability to handle its older population with poor social security and weak health care system. Korea is also aging quickly, but I’m optimistic about their ability to innovate their way out of this pickle.

While there’s not a lot of positive in this one, those countries that are bit behind in the aging process will at least have some guinea pigs. And If anyone is looking for a career with solid job security, I suggest pursuing something in hospice or elderly care…

Prefer to read the transcript? Click here

Transcript

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.

The Fire Hose of Chaos: The “Deal” With the Chinese

Trade tensions are taking their toll on an already fragile Chinese system. The US is dealing with self-sufficiency problems, but for China, it is an existential question. Will this new deal change that?

The Chinese economy relies on cheap capital to keep people employed and distracted; the idea is that social stability will keep people busy enough to avoid unrest. Surprise, surprise, that system is unsustainable. Throw in all the other issues plaguing China and you get a sticky situation. Now, enter Trump.

Round after round of extreme tariffs might be hurting American consumers, but that’s nothing compared to the death blow it is dealing to China. The entire Chinese model depends on exports, especially to the US, and the rest of the world can’t make up for that. But this new deal that’s emerged has walked back tariffs a bit (even if it’s largely symbolic).

This temporary relief from the tariffs will buy China a little time, but the fundamental issues haven’t changed. Oh, and the US is still going to get hit with a recession. Sorry to burst your bubbles.

Prefer to read the transcript? Click here

Transcript

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.

The Fire Hose of Chaos: Chinese Edition Intro

Chinese flag over a building

Today, we’re launching into the next phase of our “Fire Hose of Chaos” series, shifting our focus from the US and onto China. Trust me, there will be no shortage of chaos in this series either.

The Chinese have built themselves up to be one of the most powerful countries in the world, but there are cracks in the foundation. The demographic issue is the largest crack, thanks to rapid industrialization, urbanization, and the one-child policy. And then the other issues start to pile on.

An aging and shrinking workforce has left Chinese manufacturing uncompetitive. Decades of financial mismanagement has created a fragile and unsustainable economy. Chinese agriculture is massively inefficient. And don’t get me started on the Yuan and the capital situation.

Get ready for a whole lot of dysfunction and chaos, because China was heading towards this scary collapse long before Trump came into the picture.

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Transcript

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.