The Revolution in Military Affairs: Series Intro

Photo of a solider throwing a drone into the air

Today, we’re launching into our new series on the future of military affairs. Before we get into what is coming, let’s first discuss what past revolutions in warfare have looked like.

The industrial era brought about the first major shift, with the rise of mass-produced weapons, railroads, and field hospitals. The second shift was seen in the late 20th century as digitization led to the introduction of precision-guided weapons and satellite systems. Now, we’re entering a third revolution.

With breakthroughs in digitization, energy transfer, and materials science, we’re seeing things like drones change the way wars are fought. Without adaptation and changes to traditional infantry and armor, these forces will soon be obsolete.

Some are better positioned for this coming revolution; take the US for example, they have money, industrial infrastructure, and they’re not in a major conflict. Other countries, like Ukraine, will be the guinea pigs for this coming technological shift. However, this new era of warfare will sneak up on everyone eventually…

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Transcript

Hey, all. Peter Zeihan here. Coming to you from Nashville, Tennessee, right outside the Country Music Hall of Fame. Today we’re launching a fresh series on the future of military technology and specifically how it’s going to change strategic efforts by various countries, and the policy that goes along with it. And before we can go forward, we need to take a big step back and understand the last couple of major revolutions in military affairs. 

The first one really begins with the dawn of the industrial era, and how the advancement of things like gunpowder and steel and electricity started to interface with the way we ran the military and the conflicts in question, or the Crimean War of the 1850s and the American Civil War of the 1860s. 

Both of these conflicts, we saw technologies that had been percolating for decades suddenly come into their own very real way, where they could be mass produced as opposed to individually crafted. 

And it changed the nature of war ever since. These include things like rifling muskets to give them better range and faster reloads and lower breech chance. This includes the, early efforts with the telegraph for mass communication and sending information to and for very quickly, the railroads for the rapid distribution of troops, field hospitals to prevent casualties from turning into fatalities. 

And of course, things like the ironclad, which gave rise to modern navies and all of these cases, if you were using a pre-industrial military force, if you came up against these forces, you were pretty much wiped out. The ratios were absolutely horrific and the more militarized of the countries did better. So this is not just having a little technological edge. 

This is operating in a fundamentally different technological era, Stone age versus Bronze Age versus Iron Age versus sedentary agriculture versus industrialization. It was one of those kind of seminal jumps that redefined what was possible. The Crimean War, I think, is particularly instructive because you saw the early industrial powers, most notably the Brits and the French, going against a completely, industrialized power, primarily Russia. 

And they laid a few miles of rail track and set up a couple of field hospitals. And that alone was enough to absolutely gut the Russians. The Russians simply could not maneuver fast enough to keep up with what the Brits could do. Via rail on the Crimean peninsula. That’s phase one. The phase two of the revolution. And military affairs happened much more recently, in the 1980s and then into the early 1990s, which digitization, basically taking the computer and applying it to military technology, started out in the Gulf War in a very big way with things that we call Jams now, joint direct attack munitions, where you take a relatively dumb bomb, put a fin kit on it, and a GPS locator can hit within about ten meters of its target. We’ve obviously gotten better since then. That against the Iraqi army. The Iraqis had no chance. And then you throw in things like not just satellite reconnaissance, but satellite communications, and you get cruise missiles and all the fun things that come from that direction. 

And that is now kind of the leading edge of what is possible with the US military today. And again, when we hit this point at the end of the Cold War, there was no competitor. And so every country that the United States came across was two, maybe even three generations of weapons behind. And there really hasn’t been a fair fight since. 

Unless the United States is in a situation where its advantages are denied it, like, say, in a long term occupation in a place like Iraq or Afghanistan, we are now at the verge of something new. In the last five years, we’ve had ever mounting breakthroughs in a number of sectors that are not related to military technology, most notably digitization, energy transfer and materials science. 

And those three building revolutions are combining to generate an entirely new form of warfare, of which drones are only the very leading edge. We don’t know where this is going to go. We don’t know what the military technologies are going to look like in ten, 20, 40 years. But we do know from previous periods that when the old technology comes up against the new technology, things get really exciting really quickly because either the new stuff crashes and burns because it’s inappropriate, not ready, or the old stuff is destroyed and everyone has to rip up the playbook. 

It appears at this moment that it’s going to be some version of the latter in the Ukraine war. To this point, about two thirds of the fatalities that the Russians have suffered have been because of first person drones, which is not even a particularly sophisticated technology that combines digitization, material science and energy transfer. It hasn’t gone into the second generation of technology yet. 

We’re still and basically mass producing cheap things with a small explosives on. Once the kinks get worked out, it is difficult to see any military, most notably infantry and armor, surviving in the new environment unless they can develop their own countermeasures, which will mean an additional technological revolution. So we’re nearing the point now where we need to start having the conversation as a country, as a culture, as a military, as to what it is that we want, what we’re willing to pay to get it, and how big of a technological jump we’re willing to take to try. 

Now, in this, the United States has a couple of advantages. Number one, cache. Number two, a existing military industrial complex that can always be retooled. But third, and most importantly, at the moment, we are not in a hot conflict. And the countries that we are most likely to be facing down Russia, China, Iran are already in this technological shift. 

So we get to watch what they do and learn a few things in this. The Ukraine war is going to be most instructive, because the Ukrainians have been at the vanguard of this entire transition process and are coming up against a much larger conventional military being supplied by the Chinese who are providing the bulk. And yet they’re still there. 

And that should tell us a lot of what we need to know about the technological changes that are going to be sticking with us for the years to come. 

Bottom line. The human race is about to experience a higher form of war. That means, of course, new weapons. But from that comes new everything else.

Should the US Military Invade Mexico?

A military scout on overwatch

With rising violence in Mexico, is it time that the US military steps in? To quote Michael Scott, “No God please no!”

The spike in violence can be attributed to the rise of fentanyl, an easy to produce synthetic drug. This has led to the fragmentation of cartels into smaller and more violent actors. On top of that, the Sinaloa cartel has splintered due to US-led efforts in dismantling its leadership, causing further instability in the region. And the relatively new kid on the block, Jalisco New Generation, likes to lead with an iron fist. So, Mexico’s security landscape is in shambles.

But does that mean the US military needs to step in? There are a few ways to answer that question, but the bottom line is that the US needs to stop doing drugs!

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Transcript

Hey, all. Peter Zeihan here coming to you from above Telephone Canyon and Zion National Park. Today we’re taking a question from the Patreon crowd, specifically considering that over the last year, Mexico has just gotten more and more violent, is now the time to consider some sort of U.S. military action across the border? The short version is. Oh, God….Please. No. But it it’s a real question. I don’t mean to dismiss it. We do need to break this down. First things first. We need to understand why the violence has gotten so much worse. And it has really nothing to do with policy in Mexico. It has to do with the nature of the drug war itself. 

For the longest time, the drug war was about cocaine. So that was a mechanic that we understood. There was a supply chain that we knew was an agricultural product. It was produced in the Andean region of South America, and then it was shuttled by plane or boat, north to Central America or southern Mexico, where it then got into the hands of what we now know was cartels and moved its way north to the US border, where it was then distributed by the gangs. 

Over time, this structure has evolved. Central America is a relatively new addition to the trafficking route because we got better at interdicting things at seas. And we went from having one giant cartel to regional cartels and then ultimately, ultimately local cartels. There are more coalitions now than hierarchical organizations. 

Anyway, that’s how it was in the last few years, fentanyl has exploded upon the scene, and fentanyl is not an agricultural product. It is a synthetic. It is made in the lab. And it takes very few people with very little experience to cook up hundreds of thousands of doses in a very short period of time. So all you have to do is basically get some synthetic, components, cook them together in your garage, literally, and then cut them into powder and mix them tablets. 

So if you do a gram of cocaine and don’t do cocaine, it represents somewhere between 4 and 8 man hours of effort from the point of view of the plantain to the bailey and to the processing, to the shuttling, to the smuggling, where is if you take a hit of fentanyl and don’t do fentanyl either. 

It represents just a few man seconds of work because it’s so much easier to produce. Well, what this has done is change the cartel landscape. 

So two things have changed. First of all, the organization that is today, the Sinaloa Cartel, a large cartel, largest drug trafficking organization on the planet, under the Obama administration, we captured, El Chapo and basically beheaded the organization. And it’s been basically experiencing a slow motion, disintegration from an organizational point of view, ever since its fracturing. 

And those factions are becoming, violent with one another. That was accelerate in the last couple of years when the United States and Mexico, working together, managed to get a few other, senior lieutenants. In the meantime, the replacement cartel called Wholesale New Generation, is an order of magnitude more violent. And not nearly, as corporate, in terms of its activities, and they see intimidation as a much more potent tool for shaping local behaviors than bribes. 

So that’s part of the violence. The other part is the fentanyl side, because any mom and pop can basically cook up $1 million of the stuff in their garage over a couple of weeks. 

We now, instead of having three broad cartel alliances, have literally hundreds of small organizations that can basically print cash with fentanyl in a short period of time, and they don’t see the reason why they need to be part of the cartel structures. 

And so most of them have basically gone into business for themselves. Think of it as the digital economy where everyone has a gig, except for the gig is fentanyl. You put all that together and you now have, instead of some large cartels that kind of hold together like Sinaloa used to. 

You know, how hundreds of small, crime organizations out for themselves? These two things together have basically made Mexico a bit of a shit show from a security point of view. Now we can start talking about what the United States can do. Basically, there’s five options. Only one of them doesn’t suck. The first option, use drones, monitor the border, maybe even do some targeted strikes. 

We’re kind of halfway into this already. The Mexicans tried to talk us out of doing border monitoring. But Trump administration didn’t care. We haven’t started using the drones in an armed capacity to strike on the other side of the border. And honestly, this doesn’t do a whole lot. I mean, yes, you can see the border and go deeper, but consider the volumes involved. 

If you have 20 pounds of cocaine in a backpack, that’s a quarter of $1 million. If you have 20 pounds of fentanyl, pure fentanyl, and you want to bring it across the border and cut into pills, that could be up to $10 million. So you’re not going to pick that up with a drone, that can be smuggled in your glove compartment. 

It just it’s not an effective tool against that type of activity. It’s not that it does nothing. It just doesn’t do much. So that’s one number two, we’re at the point we’re starting to discuss this. Start sending special forces across the border, and going after the cartels themselves. Now, this is something we’ve actually already started, kind of doing. 

There is a task force based out of El Paso, as it’s been explained to me, that is Mexican citizens, but they use American equipment, American Intel, they have American distribution. They use they use American intelligence. They’re paid for by the United States. They’re just Mexican citizens, but they go every day south of the border and basically bust heads in the cartels. 

But because they’re Mexican citizens, it’s not considered an invasion. Now, this has been going on for well over a decade. And while I don’t want to say that it hasn’t achieved anything, it really hasn’t moved the needle very much. So if all of a sudden you’re gonna start throw some Rangers and Seals into this, all that does is ramp up the angst probably doesn’t change much because as we have seen with El Chapo and his sons, the torpedoes and other leaders of the cartels, when you take out the guys at the top, the rest of the organization doesn’t fall apart in the traditional sense. 

It just goes at its own throat as there’s a fight for succession and it breaks into smaller and smaller and smaller pieces that are more and more and more violent. So it feels good to get the guys, sure, but it doesn’t actually change the math on the ground except make it more violent and have more independent producers and trans transporters of the drugs. 

Option number three, which I have not seen seriously considered but has been floated out there, cross the border with the army and encircle and administer, take over, invade, take over, conquer all the border cities, places like Juarez, and Tijuana. 

20 pounds of cocaine is a quarter of $1 million. 20 pounds of fentanyl is $10 million. Even if you move the border, there’s still a way through, especially if you’re going to have a commercial relationship with a country like Mexico that is our largest trading partner in every economic sector manufacturing, agriculture and, energy. So putting Americans in charge of security south of the border, you know, to be perfectly blunt, we tried this for 20 years in Afghanistan, in Iraq, countries where we did not care and were not exposed to the local economies. 

In Mexico, we are. So if you were to do something that breaks down those corporate relationships, then you’re talking about having a recession in the United States, it is at a minimum four times as bad as what we went through back in 2007 to 2009. I would recommend against that. The final one is, even more dramatic, but might not be quite as bad economically. 

Draw a line in Mexico that roughly goes from Monterrey to Durango, and just take everything north of that line. Basically have a second Mexican-American War, where you, the United States, basically annexes the northern states that are most tightly integrated with the United States, establish a security line south of that, where you basically build a new wall that as much shorter and perhaps more effective than the stupid one that we’ve got on the northern border right now, because all that one did was build a bunch of construction lines and roads across the desert and made it easy to cross. 

Dumbest thing we’ve seen in a long time basically increase the economics of illegal migration. But if you do it further south would be shorter and keep all of the industrial plant that is integrated into the United States north of that line and basically just swallow annex parts of Mexico and make them part of the United States. The economic case for that is more robust. 

The security case for that is more robust. You’re simply invading, conquering, 30 to 35 million people and trying to make them Americans. Now again, we tried a version of this in Iraq and Afghanistan, just because I think it’s a less horrific option than just grabbing the border cities, does not mean it gets the zillion stamp of approval. 

But unless you’re willing to consider something like that, there is no military option here that makes any sense. Which brings us to the fifth option. We could stop using fentanyl, cocaine.

Finally, Some Clarity on US-China Relations

Donald Trump and Xi Jinping at the G20 Summit

It’s a bird, it’s a plane, it’s…some long-awaited clarity on US-China relations. Here are the two major developments that we’re tracking and what they mean moving forward.

Defense Secretary Pete Hegseth just made the strongest official statement on US support for Taiwan in case of a Chinese invasion. Of course, he made this declaration without consulting any military leadership, but hey, at least something happened.

The other development is that Trump and Xi finally set up a phone call. There are clearly some big personalities (and egos) at play here, so it’s a big win to even get this on the calendar. With all the issues going on between China and the US, as well as a slew of internal problems for each country, a chat is long overdue. Especially when that little chat could impact one of the world’s largest trade relationships…

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Transcript

Hey, everybody. Foggy morning here in Colorado. Peter Zeihan here. Today we are going to talk about American Chinese relations because we’re finally about to get hopefully, hopefully, maybe, a little bit of clarity. Two big things are going on this week. Number one, and Defense Secretary Pete Hegseth has said that China is the threat if Taiwan is invaded, of course the United States will respond in kind. 

Military options are not just on the table. They would be our go to, It is the clearest repudiation of this concept of strategic ambiguity that we have been existing in East Asia for decades. That is the idea that Taiwan is not technically recognized. So the United States will not say, one way or another, whether or not we’re going to send them. 

The Biden administration, let me rephrase that. Joe Biden personally repeatedly repudiated that. But this is the clearest, most detailed, repudiation we’ve ever had from any American authority, ever. The question, of course, is whether or not that this is what the Defense Department is ready for. Hegseth apparently did not even discuss this issue with his own office, much less with the Joint Chiefs or the military chain of command at all. 

So I will never tell you that the military is not preparing for every eventuality. That’s why it exists. But it seems to be a disconnect between the political message that Hegseth is trying to send and what the U.S. military has actually been doing since January 20th. So that’s kind of piece. One piece to Donald Trump and Chairman G of China are having their first phone call this week. 

This is something that has been pushed off again and again and again and again. It’s been a very weird power play carried out by four year olds. She wanted Trump to make the call. Trump wanted to make the call, thinking that whoever came to the mountain would be the weaker party. I you know, if it makes sense to them, it makes sense to me. 

Whatever. This will be the first time that the two leaders have really had a conversation since the last time was Trump. President. And there are, of course, a number of big issues on the table. The most important one is the trade war. Trump put tariffs on China, which were 145% hundred and 85%, 510%. It’s hard to keep track. 

And then after a few weeks of basically seeing trade between the two countries go to zero, something that we’re going to start feeling soon because there are some holes in the inventory now that are starting to leak out. Trump abrogated his own tariff level, dropped it back down to low levels and said, you know, we have a deal. 

And all the deal was that this was that they agreed to talk. Well, now we’re talking. The problem we have on both sides of the Pacific is to be perfectly blunt. The leadership, Chairman Ji, spent the last 13 years purging the Chinese government of anyone who will tell him anything. Not just bad news, just anything. And that is in turn, gutted the bureaucracy of the Chinese system. 

So that is now the world’s least informed leader of the world in general of his own country. He has no idea what’s going on aside from the ideology. Trump is trying to catch up to him. Trump has executed his own purge of the government, is having his cabinet secretaries destroy the capacity of the United States to collect data long term. 

He’s sending back intelligence reports that don’t support his ideological views, no matter how far from reality they might be. And of the top 1600 positions in the US federal bureaucracy, a lot of them are still unfilled. When Trump came in, he didn’t just clear out the people at the top. He went as far down as he could, legally could go. 

And then even a little bit further. But those positions have not been filled. And even when he has nominated people and sent them to the US Senate for confirmation, a lot of those haven’t happened because he’s trying to achieve basically 17 bills worth of stuff in one with this giant super mega happy bill. And, you know, it’s taking every little piece of attention that Congress has. 

And so the Senate hasn’t been able to pick up the confirmation roster. So he is arguably today the second least informed world leader. The two of them manage what used to be the world’s largest economic trading relationship. Now it’s the third largest we are Mexico and Canada are now more important to us than China, but it’s obviously a massive strategic relationship that has to be handled carefully. 

So we’ve got two old guys driven by ideology who don’t think the rules apply to them, who have blinded themselves to information, and now they’re going to have a talk about what’s going to happen for the rest of us. It’s going to be consequential one way or another.

America’s Processing Crisis: Racing China’s Decline

Photo of workers in a manufacturing shop

One of the biggest challenges to US reindustrialization isn’t the raw materials, it’s the lack of processing infrastructure to convert those raw materials into intermediate products. Let’s break it down.

The US needs to (roughly) 20x its processing capacity to support the industrial buildout; however, the tariffs from the Trump administration have complicated things a bit. Importing already processed materials has become harder and the buildout of domestic processing capacity still needs years to ramp up.

Sure, we’ve been content getting all this stuff from China for decades since it was cheap and easy, but all that is changing as the Chinese system collapses. If the US doesn’t have the processing infrastructure ready, we’ll be in for a rude awakening.

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Transcript

Hey all. Peter Zeihan here, coming to you from Dead Horse Point State Park. Weird name. Looking over here at the Colorado Basin. That is a potash facility, which means it’s time to talk about processing. One of the biggest problems the United States faces in its re industrialization effort isn’t necessarily mining the minerals. It’s turning them into something useful, putting them into an intermediate form that can then be used in manufacturing. 

One of the things that Donald Trump administration has done by acting tariffs on everybody is make it more difficult for us to get the intermediate and finish materials that we need in order to do the industrialization process. What should have been done first, and this is not simply a criticism of the Trump administration, but also the Biden administration and the Trump administration before that, the Obama administration before that, and on and on, is that, North America is very rich in any number of raw materials, but we need things like this in order to separate the ore, in order to get at the minerals that we are after. 

And then you turn them into an intermediate product like, say, semi-finished aluminum or copper, whatever it happens to be. We basically need to increase processing on the continent by roughly a factor of 20. It’s different based on whatever mineral you’re talking about. But the problem we have is that the Chinese have basically massively subsidized their processing industry. 

So China is not nearly as rich in the raw materials as we are here in North America or the Western Hemisphere writ large. But they’ve expanded their money supply. They’ve funneled everybody’s private capital into whatever projects generate employment. And so if there’s something that technically that they can achieve, even if they’re not the low cost producer, they subsidize the crap out of it in order to corner the market in whatever it happens to be. 

And then because no one can compete with these subsidized prices, they basically drive other processors around the world out of business. And that’s before you consider that the environmental regulations in China are significantly less intense than they are in any third world country, much less first world country. So cheap capital. Turning a blind eye towards environmental damage, they’ve tended to corner the market. 

Well, we only now have a few years to undo and rebuild, some of our mistakes in order to have these materials locally. And unfortunately, it’s very difficult to consider being a manufacturing power, much less an industrial power, without having these things in place first. So we are now set up to have kind of the worst of all worlds. 

The Chinese system is breaking. It’s going away. We’re losing access to everything that they’ve been subsidizing for us these last 30 years, and we have yet to build enough of that capacity at home to begin a serious re industrialization program, much less provide enough manufactured goods for our own population. So expect to see a lot more things like this in the future all over the continent, because without them we don’t have anything to work from.

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…

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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.

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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.

Prefer to read the transcript? Click here

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.

The Question of Leadership…And Management

Donald Trump and Xi Jinping at the G20 Summit

Everyone gets mad at me for critiquing the leader that they like, but listen…I’m out here roasting everybody. Whether it’s Obama, Trump, Xi Jinping, or Grandma, nobody is safe. Okay fine, we’ll leave Gram Gram out of it for today.

Each of these three leaders has damaged long-term functionality of their respective governments. Obama was incredibly intelligent, but lacked the managerial skills to achieve bipartisan cooperation. Xi Jinping is paranoid and obsessed with preserving his power, which led him to purging the Chinese system and creating an overly centralized system that is disconnected from reality. Trump has adopted the worst qualities of both of these other leaders and brought them to his second term in office, results are obvious in daily news…

At least the US only has to deal with Trump for four years. The Chinese have no end in sight for their leadership crisis and are rapidly approaching demographic collapse. Hopefully the US can learn something from the chaos that will ensure in China, and avoid a similar fate.

Prefer to read the transcript? Click here

Transcript

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.

The Fire Hose of Chaos: The Green Transition Is Over

Photo of a plant growing in a lightbulb

The green transition in the US has made great progress in recent years, but the wheels are falling off. This is largely due to economic pressures, lack of financing, and the new tariffs instituted by Trump.

Wind and solar projects require heavy upfront investment, which isn’t a great combo with capital costs skyrocketing and available capital draining from the system (blame the retiring Boomers). The government support for the green transition has also dried up; the Biden admin had the Inflation Reduction Act and other Greentech subsidies, but the Trump admin has pulled support and funding for these programs and projects. And you can’t forget the new tariffs hitting key components for the green transition, which have made solar prohibitively expensive and wind an uncertain gamble at best.

So, it looks like the green transition in the US will effectively be on pause until the US can build out its own manufacturing base. And that’s at least a decade-long process…

Prefer to read the transcript? Click here

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Transcript

Hey, all. Peter Zeihan here. Coming to you from my parents backyard in Iowa. I’m visiting because I’m a good boy. Anyway, today we’re going to talk about the end of the Green Revolution in its current form, at least in the United States. There are three things that have come together to basically completely destroy the economics of the green transition. 

And then a couple of things on the side that are making it more difficult anyway. The first has to do with the baby boomers. Two thirds of them have retired, which means that all of the money that they were saving for retirement has been liquidated. And it’s gone into less exciting financial instruments such as T-bills and cash. 

And that means there’s less capital available for everything. So we’ve roughly seen the cost of capital in the United States increased by a factor of four in the last five years, has nothing to do or very little to do with government policy. It’s just that there’s less money available in the system overall. So mortgage rates go up, car loan rates go up, anything it needs to be financed goes up. 

And that’s a real problem for green tech. When you’re looking at, say, a conventional thermal power plant, coal, natural gas, that sort of thing, you only have to pay for about one fifth of the cost of the life of the plant at the front end. That’s the upfront construction. And then about two thirds of the expense over the full life of that power plant is the fuel, the coal or natural gas. 

And you buy that as you go. That’s not how it works with wind and solar. With wind and solar, about two thirds of the cost has to be paid upfront. And that means it has to be financed. Well, you increase the cost of financing by a factor of four, and all of a sudden you’re talking about a financial commitment. 

That’s just huge compared to what it would have been just five years ago. And that is now happening across the entire space. So that alone would have probably ended 70% of the power plants that are in solar and wind. Just just off the top. The second problem, of course, is that you have to finance everything upfront in the first place. 

Anyone who wanted to do the green transition really needed a helping hand from government, typically at the federal level. And the Biden administration, through things like the IRA Inflation Reduction Act, was very big in providing that financing. Well, that’s basically gone to zero under the Trump administration. So your financing costs have gone up by a factor of four, and you don’t have any outside help. 

But the real killer, especially for solar, has now been the tariffs. Almost all of the photo voltaic cells that are used in solar systems are produced in China, oftentimes with slave labor. And while the green transition folks were willing to overlook the fact that, most of the stuff was ha, I still have a sticker on there. 

Well, most of the folks in the green transition were willing to overlook the slave labor thing, in order to get the panels that they needed. You can’t really overlook 145% tariff. So if the PV cells cost you two and a half times as much and your financing cost has quadrupled, that’s just not going to fly. 

Now, it’s not quite as bad for wind because there are some non-Chinese providers of wind turbines. Most notably in northern Europe. But those were where we have a tariff of at the moment, 10%. It was 20% a week ago, that just introduces a lot of uncertainty into the system. So both of those things are gone. 

Wind a little on the edges. Maybe. Solar’s absolutely out of the question for most people now. The only other remaining piece is batteries. When last year, the Biden administration slapped a lot of tariffs early in the year on Chinese electric vehicle bills to keep them out of the U.S. market. What happened is the Chinese repackaged all of the EV batteries into, container units to be sold as grid storage. 

And so in calendar year 2024, adding battery storage, which is actually the cheapest form of power that you could add to your system. So the Texans in particular, you know, just boned up on that hugely. Because if you can have a battery grid system, it’s actually better economics and say having a natural gas peaker plant because they normally speakers or is would only run a few days of the year. 

The batteries can take that load, but since you now have them. And since Texas is the number one green energy state, they would use their solar system to generate power during the day, store the extra in the batteries, and then use that during peak demand and evening hours when the sun’s going down. 

It worked really well. She was like 48% off of power costs, but now we have 145% tariff on all of those batteries as well. So I don’t want to say that that’s going to stop cold, but the pace of the application is going to slow considerably because the Chinese dominate that space. And we haven’t built the industrial plant here yet. 

That isn’t necessarily to fill the gap for ourselves. So for the moment, minimum two years, probably until we have a better battery chemistry, probably until we have better PVS, certainly until we have more diversified manufacturing base, which is a ten year process. We’re looking at the green transition taking a bit.