California has been one of the most successful states in the US, primarily because of things outside its control. Large-scale inward international immigration has enabled California to continue its population growth. The millennial desire for an urban coastal experience has brought a constant influx of people in their 20s and 30s, which has helped with taxes and a steady labor force. Now combine all these people with a rich capital environment and boom…Silicon Valley.

Ideas flow from the tech startups in the valley to factories in China, Japan, Taiwan, etc., making California the gateway to East Asia.  And when those products get imported back to the States, their first stop is the Long Beach Port along CA’s coast. This is just another external element contributing to California’s solid economic model.

But now, all of the factors that have propped up California are flipping. Immigration is stalling. The capital situation is upside down. The cost of living is through the roof, so the labor force is moving to places like Texas. Rising tensions with Asia are causing reshoring and nearshoring. The only thing California can do now is reinvent itself.

Whether they can do it or not is a discussion for another video…

Prefer to read the transcript of the video? Click here

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Hey Everybody. Peter Zeihan here coming to you from my home in Colorado. I’m in the process of packing up for an extended backpacking trip, so I am going to be mostly out of pocket for the remainder of the summer. We’ve recorded a couple dozen videos already and I’ll still be recording things while I’m out, but I’m probably not going to be able to comment on events of the moment because I will be out of reach and able to access news indefinitely, unable to upload a video on a regular basis.

We still aim to man the newsletter to at least the tune of three or four per week, however, so plenty of content you may have noticed. The world’s a mess right now. Plenty of things to talk about, even if they’re not about events that have boiled up in the last 24 hours. And so I want to give you a kind of an idea of what some of those videos might look like.

And so this one is on California. Now, California has been one of the most successful economic cases in the United States for the last four decades, for a mix of reasons that are largely beyond the control of California. So the first one is immigration. Natural population growth, even among migrants in California has been negative for some time, and it has only been with large scale, inward international migration that Camilla, for you, has continued to grow in terms of population, want to the millennials.

One of the things that we saw when the millennials came of age in the 2000 and the 20 tens is they wanted an urban coastal experience. And California, L.A., San Francisco were some of the big beneficiaries of that. So you’ve got millennials going from the middle of the country to the coasts. And L.A. thrived in that sort of environment.

It was still not enough to overcome an internal population decline. But having this constant influx of people in their twenties and then later in their thirties really helped with tax rates, really helped with the labor force. You put these two things together and then you apply the third factor, which is capital availability, and you get a very different economic model.

One of the things to remember about capital availability is it’s determined by the number of mature workers you may have used to be the rest of the population. Basically, when you’re your twenties and your thirties, you’re borrowing a lot to fund consumption for college, for raising kids, for buying homes and whatnot. That capital comes from people who are in their late forties to early sixties where the kids have gone away and they’re at the height of their earning experience, but their expenses have gone down.

So that has been the baby boomers since roughly 1990. And it’s generated a capital environment that’s been wonderful. This has been great for economic development, for a lot of regions, a lot of states, a lot of countries. But in California, when it came together with those millennials that were influencing, we got the tech sector because what is technology except imagining things that don’t yet exist?

And in order to make the future happen, you need two things. Number one, you need a huge number of people in their twenties, in their thirties, to do the imagining and to do the design, to make the prototype, to figure out how to operationalize it. But that entire process from idea to operationalization, that generates no income. And so you have to have a lot of cheap capital to pay those people and to pay for the work.

Well, that has been the environment in California for the last 25 years. And so we get Silicon Valley. And then fourth and finally, California has been the gateway to the United States from East Asia in two ways. Number one, California, with the tech sector, with all of that imagining, has designed new processes that could be applied to new manufacturing in new, new locations, whether that’s Japan, Korea, China, Vietnam or the rest.

And so part and parcel of the American de-industrialisation process under globalization has been made possible by the ideas generated in Silicon Valley. And then California makes money on the other side of things because as these products are coming back into the United States, a lot of them go through the port of Long Beach. So California is the first landfall.

Well, folks, all four of these trends that have made California. California have now flipped. The American political system, both left and right, has turned anti-immigration. People forget that the most anti-immigrant group in the country is first and second generation Mexican-Americans who see themselves of having crossed the right way. And everyone else needs to stay on the other side of the border in California.

Populations of Hispanics coming in from the South has been the single largest sort that has now turned flat to negative. In fact, overall migration from the south across the border to the north has been flat to negative for 17 years. It’s just it’s only now hit California. Number two, the capital situation has changed dramatically. The baby boomers are no longer mature workers.

They’re majority retired. So capital costs have gone up by about a factor of five in the last six months. They’re probably going to go up by a similar amount in absolute terms over the course of the next year and a half, which means Silicon Valley in its current form has been totally screwed by the lost capital and now the lack of people.

The millennials are no longer in the age group where they’re seeking those formative experiences. They may be late to the party six years later than most generations to this point so far. But they are doing all of the normal things now getting married, having kids, buying homes, and none of them want to do it in California. And so they’re moving out of California, back to the states that they’re from or to places that have brighter economic horizons for example, Texas.

And that’s why we see Texas grabbing more seats in the Electoral College of California’s extent, because the millennials are no longer benefiting California on a net basis. They’re moving away. And then finally, there’s Asia. The Chinese system is arguably in terminal decline. There are demographics of beyond atrocious higher capital costs globally make it difficult for companies to justify fresh investment outside of their home.

Domiciles. Trade tensions are forcing near shoring and reshoring, and the Chinese themselves are now entered into kind of a narcissistic political system that is ossified and incapable of making long term decisions or plans. That is weakening the case for exports from the East Asian sphere to the United States. California is the loser for all four of these trends.

And just as all four of these trends owed nothing in the original development in the seventies, eighties and nineties to anything done in Sacramento. Same with end. So California is going to have to reinvent itself. It’s going to have to come up with a new economic model that doesn’t require cheap capital and ample labor and international connections and high IT development.

It’s going to have to do something new, whether it can. Well, that’s a question for a different video.

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