What Does The Militarization of China Mean?

By Rich Kozlovich 

Normally I don't pay attention to videos because unlike articles I can't scan them to see if there are any pearls worth harvesting, and far too often I find videos end up wasting my time.   But there are exceptions.  Peter Zeihan's videos have proven to be worth my time more times than not.  Below are two of them I think are worth your time, along with my comments.

Over the years I've written a lot about China. Their economy, their corruption, their military, and most importantly, their intentions, and

I've also commented on the fact they now have aircraft carriers, but they're based on very old Russian technology. Peter Zeihan outlines this, and compares China's aircraft carriers to air craft carriers around the world, and to American aircraft carriers.   

However, what I see is China's aircraft carriers are largely obsolete and nonfunctional.  Any new carriers based on this technology will be obsolete while still on the drawing board.  Drones and laser technology are going to be the future of warfare, and overcoming all that will require massively new and effective technology.  They don't have it, and even if they steal it, which is what they, just like the Soviet Union have always done, will still find that to be massively expensive, and technologically challenging for a culture that based on central planning.   A planning system where Lysenkoism thrives. 

I've also written about the idea China will invade Taiwan.  They won't.  And this analysis of China's aircraft carriers I think further confirms that view.   

 

Now, having said all that, no matter how flawed their ships may be, we have to recognize this is nothing short of provocation to those nations butting up against China, and China's bully boy efforts to create an economic hegemony via military intimidation. And guess what? These nations are prepared to do something about it, including Japan. 

 

 

The question is can China keep up with all this militarization of their culture economically?  The Soviets couldn't do it and collapsed.  So, in my opinion the answer is..No!  

 

China's economy is based on central planning, corruption, and full employment, not profitability.  Xi is a mini Mao, who was an economic illiterate who was happily destroying China until Richard Nixon bailed him out by opening up international trade with China.  All of which has financed all this militarization.  Thank you Richard Nixon.   

 

So, what does all this militarization of China mean?  Hopefully, with Xi at the helm, it means they'll follow the Soviet Union and collapse.  

 

Peter Zeihan: Japan's Navy Gets Teeth

By Rich Kozlovich 

China has been playing the bully boy big kid on the block in South East Asia, demanding the world buckle under to their claim they own the South China Sea, and just about everything else within their "nine dash line".  Well, all this economic bully boy stuff has generated a backlash, and that includes Japan, and realizing they needed to alter their concept of national defense.

,

 

I read recently that China's military expenditures have now reached the level of the United States, and there's a lot of sack cloth and ashes over that.  I also believe that's being used to get more DOD dollars out of the Congress.  But I also like the fact they're spending all that money because it's money they don't have, and just like competing militarily with the United States bankrupted the Soviet Union, China's on the way down the economic drain. 

 

Hypersonic Hype

by Peter Zeihan on April 18, 2024 

Today, we're talking about the "unstoppable" hypersonic missiles that the Russians have been hyping up over the past few years. Spoiler alert: this is just the handy work of the hyperbolic-Russian-propaganda-machine. The hypersonics in question are the Kinzhal and Zircon, which are indeed some advanced missiles. However, we've already seen instances of these being intercepted with existing defense systems, such as the US Patriot. 

There are also several other factors that help deconstruct this Russian lie including flight path limitations, reduced accuracy and warhead size due to high speeds, and vulnerabilities at lower altitudes. Sure, these are advanced weapons that should be taken seriously, but these are nowhere near the game-changing level that the Russians have made them out to be.

The End of the Last, Best Chance

Visit the archives to re-read and share By Peter Zeihan 

Last week the American ambassador to China, Terry Branstad, attempted to publish an op-ed with his assessment of American-Chinese relations. The Chinese Communist Part summarily squashed it, banning the op-ed in all Chinese publications. This Monday, September 14, Branstad submitted his resignation from his post. (He will continue to serve in a caretaker capacity until his as-yet-unnamed replacement can step in in October.)

I hardly have the ambassador's ear on this topic, but it is fairly clear from the op-ed that Branstad sees no hope for an improvement in the bilateral relationship and that the fault lies with Beijing. The op-ed neither has the tone of someone who is mourning what could have been, or someone ready for a fight. Instead it sounds like someone who after years–decades–of engagement is admitting the obvious: relations are not working and have not been working for some time.

You can read Branstad's op-ed here, both in English and Mandarin:

Chinese-American relations have always been complicated, but they've been substantially less sunshiny and rosy in recent years. Differences over trade and finance and bank policy and human rights and navigation and a dozen other things all, independently, would have been enough to inject severe challenge into any relationship. But the simple overriding fact is the two countries have been strategically diverging for some time.

It comes down to demographics, security, trade, and America's role in the world:

Between rapid urbanization and the One Child Policy, birth rates in China plunged below replacement rates decades ago. The only thing preventing broad-scale population collapse is improved health care among China's older cohorts which has extended the average Chinese citizen's lifespan. Demographically speaking, that's a bit of a starvation diet. Within the decade that demographic dividend will be spent, and China's population will begin a harsh decline. The most reasonable estimates project a China with half its population in 2100 compared to 2020.

That's hardly the worst of it–or the part that will be felt first. The 2100 projection ignores the economic effects of today's young (already numerically gutted) generation. Without sufficient young people, nothing about today's China is sustainable. The young generation are the people who do work, buy goods, staff the army, and care for the old.

 

With the younger generation numerically incapable of forming a broad-based consumption-led economy, China has no choice but to lean on exports to power their system. China faces two issues here.

First, like all export-led systems, China relies upon others to consume, and China is hardly the only country suffering from a rapidly aging population. Within the next decade, enough countries–ranging from the United Kingdom to Brazil to Poland to Chile–will age out of the "consuming" cohort to make the very concept of an export-led economy impossible.

Second, China's dependence upon imported raw materials and exported finished goods requires physical access. Historically speaking, countries have only been able to enjoy such access if they can militarily secure it themselves. China's navy may have a lot of vessels, but only a tenth of them have the capacity to sail more than 1000 miles from port. Even that assumes they face no challenge. China's primary energy supplies are five times that distance. China's merchandise customers are even further away. Strategically, China is in a box. The Chinese have only been a global trading power when the countries of the First Island Chain – Japan, Taiwan, the Philippines, Indonesia and Singapore – have been forced by a greater power to be on the same side as China. That has only occurred once. Today. Under the American-led global Order. If the American goal is truly to destroy China, all the Americans have to do is go home.

Second, China's dependence upon imported raw materials and exported finished goods requires physical access. Historically speaking, countries have only been able to enjoy such access if they can militarily secure it themselves. China's navy may have a lot of vessels, but only a tenth of them have the capacity to sail more than 1000 miles from port. Even that assumes they face no challenge. China's primary energy supplies are five times that distance. China's merchandise customers are even further away.

Strategically, China is in a box. The Chinese have only been a global trading power when the countries of the First Island Chain – Japan, Taiwan, the Philippines, Indonesia and Singapore – have been forced by a greater power to be on the same side as China. That has only occurred once. Today. Under the American-led global Order. If the American goal is truly to destroy China, all the Americans have to do is go home.

 

Without the Americans negating China's problematic regional geography and so empowering it on the global stage, China simply lacks the military heft to impose its will on Australia, much less India or Saudi Arabia or Brazil or Germany or the United States–all countries China needs access to if it is to maintain its position.

Which leads us to the most galling, inconvenient truth for the Chinese nation. Everything about its modern history – the defeat of the Japanese, national unification and consolidation under Mao, the turning of the tide against the Soviet Union, its bursting onto the global scene as a major economic player–none of it would have happened without American strategic sponsorship. None of it is sustainable without ongoing American involvement. And the Americans are simply done. With China. With the world. With all of it.

And so, China begins its rage against the dying of the light.

Which brings us back to Branstad. Managing relations between an administration as egocentric as Trump's and a country as egocentric as China would have been a tough job regardless, but doing so during a period when America is disengaging and China is grappling with the consequences of that disengagement was probably always going to be a thankless task. Yet if anyone was going to eke out any crumbs of success, it was going to be Branstad.

Branstad was no neophyte. First elected governor of Iowa at the tender age of 36, he went on to serve six terms, making him the longest-serving governor in American history. Unlike senators and real estate marketing magnates, governors actually have to deal with people, manage things and establish compromises. In a word, governors…govern.

Branstad, is particularly well-known among the non-Twitter side of American politics for his educational reforms which have consistently put Iowan students at or near the top of most measures. (Full disclosure: I'm from Iowa, was a student there during Branstad's first, second and third terms, and worked for the Iowa legislature during his fourth.)

Branstad was no hawk. He has known Chairman Xi in a personal capacity since their first meeting back in 1985 when Xi visited Iowa as part of an agricultural delegation. Branstad and Xi have both often commented on their friendship, a friendship grounded in their respective polities' interactions: Iowa is America's largest pork producing state, and China is the world's most enthusiastic pork consumer.

Branstad was no dove. He was one of Trump's first appointees (and, incidentally, one widely supported on both sides of the American political aisle). His connection to Xi gave Team Trump excellent access within Beijing when pushing on hard-knuckle issues related to trade or intellectual property or navigation rights or Hong Kong.

Branstad was not simply the very best ambassador America had to offer as envoy to Beijing, he may well have been the only person who could have salvaged the American-Chinese relationship these past few years, no matter who sat in the White House.

The question, of course, is what is next?

On the American side things will get harsher, no matter what occurs with national elections in November.

It is impossible to think someone as pragmatic and proper as Branstad would have released the op-ed without President Trump's personal knowledge and green lighting. After all, the letter has already been endorsed by US Secretary of State Mike Pompeo and posted on the State Department's website for all to read.

At its core, Branstad's op-ed lays bare something that wasn't exactly a well-hidden secret: that Chairman Xi has been–personally, directly, intentionally and repeatedly–lying to the Trump administration for years on issues both economic and strategic. It stretches the imagination to think that with the cat not so much out of the bag as prancing on the countertop that Trump will treat Xi as anything less than something who has tried to make him look the fool. Cue your imagination for possible retaliations.

Nor would a Biden-Harris administration treat China much better. For the past two years, Biden has been far more critical of China on issues economic, cultural, trade, military, and strategic than anything that's ever come out of Trump's Twitter account, going so far as to personally and explicitly label Xi a "thug". As a former attorney general (aka friend-of-cops), Kamala Harris' diction regarding Xi has been somewhat less…polite.

Branstad's op-ed is not a condemnation of a recent Chinese policy shift, but instead an admission that relations are simply impossible unless and until there is a Chinese policy shift.

Realizing that their future likely holds strategic, economic and national oblivion, the Chinese Communist Party–led and personified by Chairman Xi Jinping–has degenerated China into a sort of nationalist fascism that brooks no internal challenge whether racial or political or cultural. One that denies any external influence aside from foreign money that helps employ Chinese citizenry (which in turn bolsters the CCP's political legitimacy).

It has already become so intense as to border on the comical. China has already closed up to the point that domestic media coverage of Disney's new theatrical release of Mulan–meant to be a celebration of Chinese culture–is now banned in China because outsiders are lambasting Disney for kowtowing to Beijing.

It isn't that things that have been in the news ranging from Huawei to Hong Kong to Xinjiang don't matter–they do–but instead that all of them are symptoms of much deeper problems that the CCP simply lacks capacity to address. Summed up, the CCP and Chairman Xi are desperate. And if we really are approaching China's witching hour, then all the normal niceties of diplomacy and global trade simply aren't as important as they once were. Xi sees it as high time to lock down everything and hunker down for the long haul. Foreigners be damned.

And forewarned.

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If you enjoy our free newsletters, the team at Zeihan on Geopolitics asks you to consider donating to Feeding America.  The economic lockdowns in the wake of COVID-19 left many without jobs and additional tens of millions of people, including children, without reliable food. Feeding America works with food manufacturers and suppliers to provide meals for those in need and provides direct support to America’s food banks.

Food pantries are facing declining donations from grocery stores with stretched supply chains. At the same time, they are doing what they can to quickly scale their operations to meet demand. But they need donations – they need cash – to do so now.  Feeding America is a great way to help in difficult times.  

The team at Zeihan on Geopolitics thanks you and hopes you continue to enjoy our work.

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Waking Up to Reality in the Middle East

by Peter Zeihan  Visit the archives to re-read and share

Thursday, August 13 the Trump administration released a series of breathless communiques proclaiming the onset of formal peace and diplomatic recognition between Israel and the United Arab Emirates. Shortly thereafter the Israeli government of Prime Minister Benjamin Netanyahu echoed the American releases in both substance and theme. The Emirati leader, Sheikh Khalifa bin Zayed bin Sultan Al Nahyan, was far less…gushy in his own announcement, but critically contradicted nothing stated by Trump or Netanyahu.

Waitaminute! Don't the Arabs hate Israel? Why in the world would a rich Arab statelet on the far side of the Arabian Peninsula want to exchange ambassadors with the Zionists??

It isn't so much that the Emiratis don’t care about the Palestinians any longer (although they really, really don’t), and instead it is bound up with the rapidly simplifying American position in the Middle East. The Americans have nearly completed their pullout from the overall region, and the Emiratis are hoping to get ahead of their rapidly disintegrating geopolitical environment.

In the aftermath of World War II, the Americans crafted the global Order to bribe up an alliance to fight the Soviets. Part of that was funding rebuilding, financing the construction of industrial plant, and enabling the Europeans and East Asians to access the American consumer market. All that required oil, and that oil for the most part came from the Middle East. And so, the Americans went to the Middle East.

We are now thirty years after the Soviet collapse. Americans are done managing the world, and the Americans are especially done managing the Middle East. They're going home. Troop rotations have outnumbered permanent deployments in-region for years. The Iraqi deployment is quickly approaching zero. The Syrian deployment is no longer more than a rounding error. Only Afghanistan remains as a meaningful deployment, and it is a deployment few Americans want to continue. The naval base in Bahrain and CENTCOM's operations center in Qatar only continue existing to service the Afghan deployment. And that’s…all of it.

From the United Arab Emirates' point of view this is an unmitigated disaster. The UAE (and their fellow Gulf states of Kuwait, Saudi Arabia, Oman, Bahrain and Qatar) don't care what US troops do in the Middle East or how many locals they kill or how many US troops die at the locals' hands. They simply want the Americans present – both regionally and around the world. So long as the global superpower is active, the Gulfies don't have to worry about guarding the production, processing, and exporting infrastructure for their oil and natural gas. So long as the Americans are globally engaged and guaranteeing freedom of the seas for all, the Gulfies know their hydrocarbon exports will safely arrive at their customers' ports. National safety and national bank. For them, it's that simple.

Those heady days are over. America's withdrawal from the wider world has been a longer running development than its Middle Eastern wrap-ups. It, too, is now multiple presidential administrations underway. Total US force deployments globally are at the lowest level since before the Great Depression, and still trending down.

For the Emiratis in specific and the Gulfies in general, the Americans' past-the-point-of-no-return departure conjures up multiple, reinforcing disasters.

1: Iran

Unlike many who have a finger in the world of national security, I've never found Iran to be strategically threatening.

Iran's army is designed to oppress its own population, not march on its neighbors. Its air force hasn't been updated since the fall of the shah in 1979, and the Iranians are running out of jets to fall out of the sky. It's navy…well, it doesn't have a navy. It has a bunch of speedboats. Should Iran march on the Gulf states, it would face four challenges:

First, its army would have to march. It isn't motorized. Second, it would have to first march through its own region of Khuzestan – a region populated by restive minorities. Third, it would have to cross a pontoon bridge into Basra, Iraq's second-largest city. A high-school science experiment could take out the bridge, while needing to pacify Basra's two-million-strong population at the beginning of an invasion's supply line would about as much fun for the Iranians as it was for the Americans when they conquered/liberated Iraq in 2003. Finally, there's a blistering six hundred miles of completely empty desert between the Kuwaiti border and any meaningful infrastructure in Saudi Arabia. That's a loooooong walk.

Yet as unimpressed as I am by the Iranian military, it is the freakin' Roman Legion compared to the militaries of the Gulf states. The Gulfies are beyond military incompetent because they've never had to be competent. Sure, the Emiratis and Saudis are getting some good target practice for their air forces in Yemen, but their armies are largely paperweights and none of them have a navy that's more than a coast guard. Not only have all depended upon the Americans to do their fighting for them, most consider a functional domestic military a potential threat to the ruling dynasties.

2: Their own populations

All the Gulfies ship in vast swathes of workers, to the point that over 70% of the "populations" of Kuwait, Qatar and the UAE are imported labor. This isn't like Western Europe or the United States where the migrants do jobs the locals don't want. In the Gulf states, the migrants do everything. The migrants are not allowed to bring their families or own property, and as soon as the migrant men lose the ability to carry their own weight or the women lose their looks, they are rooted out and sent packing. They are regularly the target of every assault imaginable, including sexual assault.

In the United states, we have a word for that: slavery.

Treat this many people this badly, and only the existence of a wildly intrusive and brutal and unfettered internal security service can maintain domestic control for the ruling dynasties. As much of a threat as Iran is, the day-to-day internal pressures of the Gulf states are far more likely to end them.

Many make light of the fact that the actual citizens of the Gulf states could be a risk as well. After all, they are used to cradle-to-grave support for everything from food to rent to hookah bars. The idea being, that should social spending falter, the locals might rise up against their rulers.

While I don't quite dismiss this concern out of hand, I'm not all that worried. The Gulf states in general – and the UAE in particular – have addressed this problem by helping their peoples consume as many saturated fats as possible to make them as unhealthy as possible. The idea being that overweight people laden with heart disease who can only get around on scooters aren't the type to leave their air-conditioned compounds to riot in the desert sun. Pampered corpulence as a national security strategy might sound odd, but it works for the most part. Therefore, I am – and the local governments are – more watchful of the larger, younger, healthier, angrier and institutionally abused slave class.

The only way this system is sustainable is if the money from hydrocarbon sales keeps flowing in and whoever guarantees Gulf state security turns a blind eye. The Americans are leaving, endangering both the income flows and the political cover.

3: Outside expeditionary powers

Key thing to keep in mind when considering the United States in the Middle East: the US was primarily interested in Middle East oil for its alliance network, not for itself. Historically, the United States has gotten nearly all its crude from its own territories or its North American neighbors, plus Venezuela. With America's shale revolution now mid-way through its second decade, technically, it is already independent. Its need for Middle Eastern oil has gone from minor to nearly nonexistent.

Not so for…pretty much anyone else. Despite all the Green rhetoric on wind, solar and the like, combined they still generate only about 2% of the world's total energy needs. Oil and natural gas clock in at more than half. And for most of the world, it must be imported. From the Persian Gulf.

Outside powers who have been dependent upon the Americans to maintain energy flows can do the math. Outside powers who have navies can do it faster. The first time there's a real energy crisis anywhere in the world after the Americans have left the Middle East, we're going to see some records broken for sailing times from the United Kingdom, France, India and Japan to the Persian Gulf.

Note: China can only play in the Persian Gulf if the United States makes the Pacific and Indian Oceans safe operating zones for the Chinese navy. The Chinese navy only has a handful of ships that can sail beyond the First Island Chain. The operative word is "sail". It is almost certain they cannot fight their way much past the Chain, much less operate five thousand miles beyond it in the Middle East. China simply is not an expeditionary power, and is a non-power in the Persian Gulf.

The Gulfies might not like the Americans very much, but the Americans have had a vested interest in the Gulf states remaining independent and making boatloads of money by selling their hydrocarbons. For the locals it was a sweet deal. Any post-American power that comes to the Gulf is unlikely to be nearly as…understanding.

So, what does this all have to do with a normalization of relations deal between the UAE and Israel. Simply put, the Emiratis (really, all the Gulfies) know the Americans are leaving and they are massively – hysterically – unable to look out for their own interests in the world that's coming. Between the threats of Iran, their own populations and extra-regional powers, none of them are long for this world.

Unless they can get some help. They need someone who can help them resist Iran. They need someone who can help them infiltrate and purge undesirable elements from their own populations. They need someone who can help them stand up to far outsiders.

Banding together is off the table. As much as the Gulf states dislike Iran, they like one another even less. These are not countries. They are dynasties. It is as if each of the Kardashian sisters ran her own kingdom. (The GCC – for those of you who follow the region enough to know what that is – is nothing more than the Saudi attempt to force everyone to do things their way.). The Gulfies trust – they all trust – Israel more than one another.

To call Thursday's agreement a peace deal is a rhetorical flourish. A bit of PR flim-flamery. The UAE and Israel were not at war. Israeli military planners didn’t lose much sleep thinking about Emirati-backed militant cells in Palestine or Syria or Lebanon targeting their populations, much less a conventional Emirati military attack. Thursday’s announcement was more about a public acknowledgement of cold, hard, geopolitical reality: the issue isn’t an Israel-Arab divide being healed, much less one of Jewish-Islamic ecumenical healing. The difference hasn’t been that broad is decades.

Rather, it is about an American security dependent heeding the writing on the wall. Of wanting to (of having to) protect their interests (their existence) without the promise (or hope) of American intervention. The Emiratis are worried about Tehran. About Tokyo. About Paris. About New Delhi. About London. (About Riyadh.)

They should be.

The real kicker? This diplomatic normalization is only the first step. In time the UAE – indeed, each of the Gulf states – will need to partner with an outside power if they are to survive the predations of the others. Kudos to the Emiratis for the first-mover advantage. They've not only gained themselves a diplomatic, political, intelligence and military partner, they've broken the ice and made it a bit easier to stomach partnering with a true infidel.

Time will tell if it is enough.

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If you enjoy our free newsletters, the team at Zeihan on Geopolitics asks you to consider donating to Feeding America. The economic lockdowns in the wake of COVID-19 left many without jobs and additional tens of millions of people, including children, without reliable food. Feeding America works with food manufacturers and suppliers to provide meals for those in need and provides direct support to America’s food banks.  Food pantries are facing declining donations from grocery stores with stretched supply chains. At the same time, they are doing what they can to quickly scale their operations to meet demand. But they need donations – they need cash – to do so now.  Feeding America is a great way to help in difficult times.

The team at Zeihan on Geopolitics thanks you and hopes you continue to enjoy our work.

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Mexico: Triumph Over Geography

By Peter Zeihan on June 15, 2020 @ Peter Zeihan on Geopolitics

Let’s rile everyone up with an uncomfortable statement: Mexico should be a failed state. The issue isn’t cultural, political, or policy-driven, but rather, geographical. Most powers of significance share two geographic features:

First, they’re in the temperate climate zones, therefore boasting reliable rainfall, warm seasons for growing crops, cold seasons for deterring pests, recharging the soil, and avoiding extreme heat and cold that wrecks health and infrastructure.

Second, they’re pretty flat. Flatness simplifies the construction and maintenance of infrastructure. It means their cities can spread out, and keep land prices low. It means agriculture and industry alike can establish mass scaled economies, keeping food, power, and manufactured goods’ prices within reach. This not only boosts national power, but it also provides a backstop to help keep economic inequality-related issues under control.

Mexico has none of that.

Its north is a barren desert. That means agriculture is only possible by diverting the region’s few rivers. Its south is a rugged jungle, which reduces the general population to subsistence living. Plus, multiple mountain chains crisscross the country, with the two largest (the Sierra Madres Occidental and Oriental) prominently jutting up from the coast, complicating interior access to the one feature Mexico has going for it: its extensive coastline. All those mountains shatter Mexico’s people into multiple, often competing, zones.

 

Any of these features would be severely problematic, all sufficient enough to keep Mexico out of the ranks as one of the major powers. But all of them? Together? Across a territory as big as Spain, France, Germany, and Poland combined? With all these points, Mexico, arguably, has the world’s worst geography from an economic-development point of view. Mexico shouldn't just be a failed state, it should exist in a degree of organizational chaos rivaling Afghanistan.

Yet not only is Mexico not a failed state, rather it's the world’s 15th richest country, and among the most industrialized states of the developing world. Does this mean geographical lessons don’t apply to Mexico and its people? Hardly. But it indicates we need to add more layers of information.

First, Mexicans can read maps and thermometers. They know their country is in the tropics. Rather than staying in the tropics, the majority moved up their omnipresent mountains until they, literally, rose above the oppressive heat and humidity. Over half the Mexican population resides in a series of highland valleys and plateaus in the country’s midsection, with most living above 7000 feet. In doing so, Mexicans, at least in part, addressed some of their issues with agriculture and economies of scale and health. Other Latin American countries have followed similar paths, but none of them have proven as successful as Mexico.

Which brings us to the second layer of information: Mexico shares a 2000-mile-long border with the United States. There are plenty of historical chapters the two countries share that are, shall we say, less than cooperative. The United States defeated Mexico on the battlefield, and in the aftermath, drew the border to their own liking. As such, the United States owns the demographic and especially economic heft of the borderland. Still, the normal economic rules apply:

By imposing American security levels on the northern borderland’s bulk, northern Mexico has found itself somewhat freed of multiple “normal” stresses that plague borderlands in general (mountainous terrains specifically). And since Mexican labor is less expensive than American labor, the propensity for trade and economic integration among the two lobes of the borderland is amongst the strongest globally.

The American cities of San Diego, Los Angeles, Phoenix, Tucson, Albuquerque, El Paso, San Antonio, Austin, Corpus Christi, and Houston all sit less than 300 miles from the border – a border they are linked to by excellent infrastructure. The cities on the southern side of the borderland – the Mexican metro regions of Tijuana, Juarez, Hermosillo, Chihuahua, and Monterrey – might be culturally Mexican, but economically, they function as satellite cities of the United States.

And because Mexican-American relations have been stable and fruitful these past thirty years, those Mexican cities have painstakingly developed and increased their local educational standards to the American norm. This isn’t simply a relationship that simply works, it works well. Mexico figured out its geography, and northern Mexico in particular decided to get in-bed with its northern neighbor.

The third layer to Mexican success is more institutional: In the 1980s, Mexico was transitioning from single-party rule to democratic norms, a touchy, fraught process for any country – triply so for a country with as riven geography as Mexico has. Under George HW Bush and Bill Clinton's leadership, both to expand the American economic footprints and provide Mexican democracy with a more stable footing, the United States negotiated a free trade deal with Mexico City (and invited the Canadians along for the ride). And so, NAFTA was born.

Access to American capital and consumer markets provided Mexico with the opportunity to shift away from a resource-export-driven system into something more value-added. The results are almost unprecedented. Most developing Latin American countries are relatively closed, with most export income coming from things like crude oil, coal, coffee, fish. In the early 1980s, Mexico was no different. But now, Mexico is the most trade intensive Latin American country by a factor of three, and over 80% of its exports are manufactured goods, with nearly all its products flowing north. Hiccups and exceptions abound, but Mexico has taken maximum advantage of the formation of North America’s trade space.

Fourth and finally, Mexico got lucky. This one takes a bit of exposition:

Normally, trucks are the dumbest way to move things from points A to B. Dragging stuff around via semi truck-towed container costs approximately twelve times more than floating them via container ship. Courtesy of the Mississippi, Missouri, Arkansas, Red, Tennessee, Ohio, Sacramento, Colombia, Alabama, Tombigbee, and Hudson Rivers (plus about five dozen of their smaller lesser-known brethren) the United States doesn’t just boast an internal, naturally navigable water-network larger than anyone else’s, but instead, a system larger than everyone else’s.

The United States’ rivers proved a key feature in empowering America’s breakneck growth to world power in the 19th century. Not to mention, the United States’ subsequent maritime acumen proved key to the Americans’ rapid and thorough defeat of the Mexicans in the Mexican-American War of 1846-1848. (Cliff-notes version: American forces baited the Mexican army into a multiweek march across Mexico’s northern deserts, while the Americans simply sailed the Marines to the Mexican port of Veracruz and marched directly onto Mexico City.)

Mexico lacks a single navigable river, and in moving the bulk of the Mexican population up mountain, most Mexican ports have become wildly underutilized relative to the size of the Mexican economy. In an industrialized and globalized world dominated by massed waterborne shipments, this is a kiss of death. All imports or exports must first deal with a mountain chain. Any goods part of an integrated multi-step manufacturing supply chain where goods come and go via Mexico’s ports would need to navigate such chains at least twice. One of the many reasons East Asia does so well in electronics manufacturing is because the bulk of East Asian cities are either on the Pacific Coast or, at worst, only separated from the coast by a relatively short stretch of (relatively) flat land. Mexico should not be able to play.

But it can, because the United States continues to do something monumentally stupid.

Back in 1920, the United States adopted the Jones Act (aka the Interstate Commerce Act) which among other things, forces any cargo being transported between any two American ports to use American built, owned, captained and crewed ships – a restriction the United States declined to place on any internal transport method. The result was a century of massive investment in rail and truck infrastructure that dramatically reduced the cost of internal overland shipments and an atrophying of the American waterway system.

(Editor's Note:  The Jones act was new to me and probably to everyone else also.  I posted this piece to help, The Jones Act: A Burden America Can No Longer Bear - or - What is the Jones Act? Separating Fact from Fiction. Choose for yourself.  RK)
 
The Americans deliberately muffled their sublime geography’s most glorious benefits.

Within a few years of Jones’ adoption, the Americans lost their coveted spot as having the world’s lowest internal transport costs. Today, instead of internal American shipments using waterways, Americans primarily use trucks to shuttle about over two-thirds of their internal commerce.

If the Americans utilized their waterways like other countries, Mexico simply couldn’t compete in the American market. But if the Americans insist on doing everything the hard way, and limiting themselves to trucks…well, on that field of competition, the Mexicans are in their element.

And it shows.

Mexico became America’s largest trade partner in 2019, a position they will not give up in our lifetimes. So to best understand what’s going on south of the border, as well as with American-Mexican economic and diplomatic relations, sign up for our videoconference on June 16 below.

A Peek Under the Hood: Manufactures Trade

 By Melissa Taylor and Peter Zeihan on June 2, 2020 @ Zeihan on Geopolitics

We all know the United States imports a huge volume of finished manufactured goods from the wider world, with China being the largest source. What is less understood is the far larger volume of goods the Americans manufacture at home. Of the roughly $1.6 trillion output of value-added American manufacturing, less than one-fifth of the intermediate components are sourced abroad, with roughly half of the total originating in America’s NAFTA partners.

Chinese components obviously play a role, but even here their contribution is via sales to the United States rather than third parties. In other words, the US takes those imports and builds the final product. You can see that in the data below: American use of Chinese parts is roughly triple that of their combined presence in Canadian and Mexican manufacturing.

 

Such centrality bodes well for the NAFTA system as companies look for ways to reshore manufacturing operations. While there are many manufacturing supply chains that will need to find alternate suppliers and workarounds, China’s limited presence in the intermediate goods trade suggests such alternates and workarounds will be manageable for the system as a whole. From the point of view of American capital, workers, firms and communities, this is a welcome piece of good news.

The real problem moving forward will be what can go wrong with the manufacture and supply of all those already finished products the United States imports. As China’s links to the world fracture, the entire East Asian manufacturing system will need to be broken up, reordered and relocated. It took five decades to build Asian manufacturing into its current form. Its unraveling will happen much more quickly.

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MORE HERE

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On June 3 Melissa Taylor and Peter Zeihan will be hosting a video-conference on Manufacturing in a New Era. We’ll address the future of automotive, automation, reshoring, COVID’s shattering of supply chains, consumption shifts, as well as get you an update on the deepening trade war.

For those of you who don’t want to pop for the fee, we’ve recently completed a video on our projected shape of the COVID epidemic to come. You can watch it for free here.

Our June 3 manufacturing video-conference is only the first of a series which will include events focusing on Mexico, China, Energy and Agriculture. Scheduling and sign up information can be found here.

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Newsletters from Zeihan on Geopolitics have always been and always will be free of charge. However, if you enjoy them or find them useful, please consider showing your appreciation via a donation to Feeding America.

One of the biggest problems the United States faces at present is food dislocation: pre-COVID, nearly 40% of all foods were not consumed at home. Instead they were destined for places like restaurants and college dorms. Shifting the supply chain to grocery stores takes time and money, but people need food now. Some 23 million students used to be on school lunches, for example. That servicing has evaporated. Feeding America helps bridge the gap between America’s food supply (which remains robust) and its demand (which coronavirus has shifted faster than the supply chains can keep up).

A little goes a very long way. For a single dollar, FA can feed one person for three days.

A Faint Flicker of Hope in Europe

By Peter Zeihan on June 1, 2020 @ Zeihan on Geopolitics

The past few several weeks have been busy for the Europeans, easily generating more events of consequence than at any time since at least the 2007 financial crisis. There is no specific trigger event here that makes much sense without absorbing the context first, so I’m just going to do what I do and start at the beginning.

Germans aren’t normal.

I don’t mean that as a condemnation of their weather or dourness or food or their linguistic tendency to link a dozen or more words together into typographical nightmares, but instead that Germany’s peculiar geography has made the Germans somewhat…peculiar.

Germany’s geography is the best and worst of all worlds. Best in that it boasts four major and a dozen minor rivers as well as ample stretches of flat land to both ease internal transport and make for cheap development. Worst in that Germany’s most rugged terrain is in the country’s interior while its flattest lands are on its borders, making it easier (historically speaking) for most Germans to integrate with their (non-German) neighbors rather than their own co-ethnics.

Historically, this has made German lands among the most bloodsoaked in Europe, with the whole area being preyed upon over and over and over. The first “Germany” was Charlemagne’s, and it only lasted so long as the great monarch was alive. The Holy Roman Empire was a primarily German entity (occasionally referred to as the First Reich), but it wasn’t even remotely united, comprised as it was by sometimes over 1000 (often mutually warring) statelets.

It was only with the onset of industrialization in the 1800s that Germans were able to use rail and electricity to overcome their internal geographic complexity and achieve unity. But unity doesn’t automatically translate into happy-fun-play-time. The second and third Reichs were Germany’s Imperial and Nazi incarnations. Those governments’ attempts to impose writs on the wider European neighborhood resulted in the most catastrophic wars humanity has ever experienced. For the following 45 years, Germany was the very definition of not united – split into two pieces to serve as mutually-opposing frontline states in the Cold War.

In the years since the Berlin Wall fell, the newly-united Germany – or Fourth Reich if you prefer – has been taking a wonderous vacation from history. It doesn’t need to fight to remain unified; America’s imposition of a global Order makes that unnecessary. It doesn’t need to protect its borders; American-dominated NATO takes care of security issues. It doesn’t need to fight for access to either raw materials or consumer markets. The Americans’ global structure has enabled the rise of the European Union within Europe, and has allowed German firms access to a world full of consumption. All Germany needs to do to be Germany today is…be. And so the Germany of today is united, free and at peace…without the Germans needing to do a damn thing.

For those of you who would like Germany to exercise more decision making power and take security matters into its own hands, I refer you to literally any book on European history between 1848 and 1945 to highlight why that might not be the fabulous idea you assume it to be.

Anywho, there are now three intersecting problems that all independently threaten Germany’s blissful existence.

First, the Americans are done holding up the collective civilizational ceiling of the world. The United States created the global Order to fight the Cold War, and that war ended when the Berlin Wall fell. The Americans have been edging away from, well, everything, ever since. The day of final abandonment was always going to come, it is now here, and everyone who used to shelter under the American security umbrella or benefit from a globalized economy must figure out a new way forward. That applies to Germany as much as everyone else.

Second, the German economic model of mass exports is running out of road. Mass exports requires a large, highly-skilled workforce heavy with people in their late-40s through early-60s. Germany has had that for the past 15 years, but those skilled workers collectively are crossing the retirement threshold this decade. With no replacement generation coming up through the ranks, Germany can neither consume what it produces today, nor maintain its current production for much longer. That eliminates both the basis of the German economy and the German tax base. Something new, something radical, something that utilizes resources beyond Germany, is required.

Third, the EU – the only meaningful piece of the Order the Americans do not directly control and so the only possible anchor the Germans have keeping them in a safe, peaceful, united Europe – is in mortal danger. In part it is because much of Europe faces the same security and export dependence upon the Americans as the Germans do. But there’s another problem.

 

Geography.

Northern Europe is flat and well-rivered and so countries there can achieve efficiencies and economies of scale. Southern Europe is rugged and lacks rivers and so cannot. Exceptions abound in a continent as varied as Europe, but the bottom line is that Southern Europe will never be able to compete with Northern Europe economically, just as Northern Europe cannot hope to compete with Southern Europe when it comes to sun, fun, food and flair. (France has a foot in both worlds which is part of what makes the French…well…French.) Anywho, the bottom line is that there is no European Union without both parts of Europe, so the question becomes how to keep it all stitched together without either the American-led Order or the ability to access markets from far beyond Europe?

There is no good answer. Even more problematic, what might prove a good answer for Ireland would be hilariously inappropriate for Croatia. What most everyone can agree on, however, is that Europe as a combined entity will be better able to get what it needs than the EU’s constituent members acting independently. And so Europe has been limping along since the 2007-2009 financial crisis, economically suppressed, strategically adrift, politically riven…but with no one (save the Brits) willing to pull the plug on the whole project.

In my new book, Disunited Nations, I’ve got a whole chapter on called “Superpower, Backfired” on the hows and whys Germany ended up in this situation and where it is likely to lead.

And then there’s the coronavirus.

Just as there are differences in European financial and economic structures on a country-by-country basis, so has the virus impacted EU members differently.

It comes down to vectors and weather. Most of the cases in Germany originated at a series of Alpine ski parties for 20-somethings. When the virus started to spread, it spread among the population most able to survive it. In addition, late-winter and early-spring in Germany isn’t exactly tourist season, so most elderly stayed locked up at home. Germany was able to address the virus outbreak relatively quickly and move on.

Not so in Italy. Patient zero went to a massive outdoor soccer game and became one of the first COVID superspreaders. Elderly Italians are also more likely to live in a multi-generational household than elderly Germans because…well… sun, fun, food and flair. It wasn’t long before the Italian health care system was overwhelmed.

Finances matter too of course. Germany has been whittling away at its national debt for twenty years, and so had plenty of dry powder to apply to the crisis without needing to ask anyone for help. Italy…hasn’t. When the crisis exploded upon the Italians they almost instantly ran out of cash and had to turn to the EU hat-in-hand for help.

The response was underwhelming. The Germans – backed up by the European Central Bank (ECB) chief – told the Italians that saving Italy wasn’t their job. As a point of comparison, across the Pond the Americans slapped together humanity’s largest-ever stimulus program in a matter of days.

It didn’t take long for German Chancellor Angela Merkel to realize that the situation was untenable. It wasn’t so much that Italy and others were facing fiscal collapse because of COVID (although they were), it was that Merkel knows full well that the road the EU is on means that Italy and others would inevitably face fiscal collapse. COVID just brought the end forward by a few years. The question Europe has been struggling with since 2007 – now that we are certain this is unsustainable, what do we do? – had moved from the hazy future to the here-and-now. And Merkel simply didn’t have an answer. If she had, she would have produced it. Years ago. And so the demurring and dithering continued.

Ironically, it took events within Germany itself to force the issue. On May 5 the German Constitutional Court ruled that methods the ECB were using to keep some of Europe’s weaker states on life support were unconstitutional. Specifically, the ECB can only purchase government debt if it does so proportionally to the size of all eurozone economies. Since the Germans have been paying their debt down, there wasn’t much German debt left to buy. And since the Italians were in a COVID pickle, the Italians needed to issue more debt. The ECB did the logical thing and put its resources where they were needed. The German court ruled that the ECB’s logic violated European law in general and the German constitution in specific, and that the German government must cease all cooperation on the issue within 90 days.

Running the European Central Bank without the participation of Europe’s largest economy would open up a hilariously huge barrel of worm-ridden monkeys, taking us down paths so convoluted and impractical as to be positively Venezuelan. But those monkeys and paths all take us to the same place: no European bond market, no European currency, and – very likely – no EU.

A world without America. A Europe without the EU. Germany left to look after its economic and security issues on its own, likely in competition with its current EU partners. That is nothing less than Merkel’s worst-case scenario, and so she did the only thing she felt she could:

On May 20 in a joint presser with French President Emmanuel Macron, Merkel proposed the EU’s first mutualized debt. For those of you not in finance, that’s a fancy way of saying that not only will Germany co-sign for some Italian borrowing, but that Berlin will agree up front to use the EU’s common budget to pay for some Italian spending. Simply put, Merkel committed Germany to paying for the ongoing existence of the EU in general and the EU’s weaker members in specific in the hopes of buying more time to find a better solution.

Many many details remain.

How big of a fund are we talking about? At present the combined floats of the Germans, French and the EU Commission total something around 1.5 trillion euro. (Right now that’s about $1.65 trillion US, so, you know, real money.) That’s roughly ten times the current total EU budget. That would probably cover the EU’s current needs this year, but only this year. And all the proposals to date are nothing more than one-offs designed to counter COVID impacts. This doesn’t actually help the EU survive in the long-run. For this to work and for the EU to function as a true superstate, the EU needs a full transfer union of at least these volumes annually.

Who would get the funds, and who would pay the funds back and how? At present the idea is to funnel everything through the European Commission, with funds being dispersed into (suddenly engorged) EU programs, while payback would come from the various member states who fund the Commission directly. Needless to say, that would be wildly inefficient and cumbersome, although it would wildly strengthen the EU’s administrative core and take Europe a few big steps down the road to full federalization on the American model.

Can this – institutionally – happen? It doesn’t look great. Big things like this normally require a treaty, and the EU has rarely managed negotiating and ratifying a treaty on anything less than a decade timescale. Moving forward without a treaty would still require unanimity, and several EU states have already voiced their vociferous opposite to the plan.

But, again, let me be clear here. Between the Americans’ withdrawal and Europe’s demographic implosion, the very existence of the European Union is at stake. This was always true. This was always inevitable. But COVID and the German court ruling makes the crisis imminent. In a Europe without either America or the EU, Germany must reorganize into a form that enables it to protect and further its own interests without outside support. This isn’t “simply” an existential crisis for the Germans. It is an existential crisis for all Europeans.

And historical annihilation tends to focus the mind.

So let’s take a brief look at the four hard-nos in this debate: Austria, the Netherlands, Denmark and Sweden.

The bulk of Austria’s population lives on the southern watershed of the Danube. The entirety of the Netherlands lies atop the delta of the Rhine. Those two rivers are core Germany population, industrial and transport zones. The Austrians and Dutch have zero geographic insulation from Germany.

Neither country may like the financial implications of where the debt-mutualization path leads, but both are deeply, painfully aware of precisely where European collapse leads: a Germany forced or induced to seek out German national interests to the detriment of its neighbors. Historically speaking, once the Germans get rolling, maintaining an independent Austria or Netherlands is pretty much impossible. The Austrians and the Dutch know this. Both can be armtwisted into accepting Merkel’s (costly) logic.

And that assumes Merkel doesn’t do her traditional thing. Unlike most leaders, Merkel tries to shun the spotlight and instead lead from behind. She allows her opponents to stake out bold positions, and then unobtrusively steps back from the shouting and quietly cobbles together a majority position that doesn’t include the troublemakers, leaving them with the option of joining the crowd or screaming into the void. She’s done this (repeatedly) to consolidate control of her political party in Germany. She’s done this (repeatedly) to defang troublesome governing coalition partners. She’s done this (repeatedly) to guide Europe through the financial crisis. It is highly likely that the Austrians and Dutch will be Merkel’s next void-screamers.

Denmark and Sweden are a different sort of challenge. Sweden doesn’t border Germany, while the bulk of the Danish population lives not in peninsular Denmark, but instead on the island of Zeeland. Culturally, economically, and above all strategically both only have one foot in Continental Europe. In particular, both have historically been closer to the United Kingdom (and dare I say, the United States) on defense issues than to Germany. As such neither are even members of the eurozone. That makes the pair less likely to be cajoled into participation, but it also means there is another potential path.

Rather than run the funds and the debt through the EU budget, the funds could be kept aside as a purely eurozone project which could exempt any EU state that didn’t also use the European currency. (In addition to Denmark and Sweden, this list also includes a variety of Central European states such as Poland, Hungary and Romania.) It’d be messy organizationally, and arguably unnecessarily so, but the EU does tend to excel at spawning unnecessarily messy organizational structures.

Anywho, lots of details to work out. What Merkel and Macron are attempting on the fly is the first real step towards federalizing the European Union. Europe has a common currency (which not everyone is a part of) and a common foreign policy (which requires unanimity) and a common market (regulated by national governments), but until it has a common budget it is most certainly not a superstate and it is most certainly not pooling its national resources into a more powerful, more cohesive whole.

That more powerful, more cohesive whole is the only thing that matters if the EU is to persist through contorting geopolitical and demographic circumstances. There is no guarantee the current plan will be adopted, much less work, much less expand into something that would make the EU a true, durable power. But the fact remains that for the first time in years I have a faint glimmer of hope that this thing we call the European Union might, just might, survive.

Global Grain Trade and its Discontents

By  Peter Zeihan on April 29, 2020 @ Peter Zeihan on Geopolitics

Yesterday’s newsletter traced some of the issues that erupt when global transport gets wrecked. Today we’re going to cross that same initial problem into the world of agriculture.

It isn’t so much that plummeting oil demand globally hits agricultural production directly. If anything, cheaper oil translates not only into cheaper diesel fuel, but also key petrochemical outputs: things like pesticides and fertilizer are typically petroleum-derived. Instead, we’re going to have to hit this from another angle.

Take a look at this graph from Our World in Data:

Most of the world counts rice or wheat as their primary source of grain-based calories. So you’d think that either rice or wheat holds the top spot in international grain trade, right?

particular contest by the proverbial country mile.

Most of you probably live in North America, and so probably don’t find this all that odd. Cornbread. Corn on the cob. Grits. Corn flakes. Tortillas. These are all part and parcel of our collective experience. In the rest of the world, however, once you get past polenta, corn isn’t used for much more than to line a bread pan. So why in the world is corn the top grain?

Check this out:

 

Most of the world’s corn isn’t eaten by people; but instead it is eaten by things people eat. Primarily cows, hogs and chickens.

One of the quirks of the American-led global Order that has dominated the world since World War II is that countries that normally couldn’t be physically secure or economically successful on their own suddenly could. For many that meant steadily increasing standards of living. That meant they wanted more and better food. Most people define more and better food as animal protein.

But while the Order radically changed the geostrategic environment, it didn’t touch the physical environment. If your climate and soil prevented you from growing a lot of of food before, you probably still couldn’t no matter what the Americans did or did not do. What you could do is build up an animal herd, and import the fodder to fatten it up. And so that’s what was done. Pretty much everywhere.

Enter coronavirus.

Global transport has crashed. The Americans used to use about half the corn they produced specifically to produce ethanol, a biofuel they mix into their gasoline. Since Americans are not driving, their need for ethanol has crashed right along with their need for gasoline. The United States is both the world's largest producer and exporter of corn. American farmers are planting their crops right now, and so far they are planting just as much corn as before.

With US transport demand unlikely to recover this year, we’re looking at gross global corn oversupply with the expected downward pressure on corn prices. Globally, this is great. It implies little risk (at least on the supply side) to global meat production. Among major corn producers, in contrast, it suggests quite the glut. Corn farmers the world over – most notably in the United States, China, Argentina and Brazil – be warned.

Coronavirus, the Europe Guide

By Peter Zeihan March 26, 2020 @ Zeihan on Geopolitics

In the age of coronavirus, Europe’s near-term future is bleak.

European headlines in coming weeks will be about coronavirus deaths. In large part the issue is demographic. Coronavirus is far more likely to kill those over aged 60. The average European is approximately a half-decade older than the average American. Only the Japanese are older.

Specifically, Italy hosts the world’s second-oldest population, while Germany ranks 5^th. Meanwhile, many of the “new” European countries in Central Europe are not all that much younger, while also lacking German- or Italian-quality health care. Others, Ireland, Greece and Spain come to mind, have had to deal with financial crisis by cutting services. Services like health care. The United Kingdom, courtesy of the dual forces of Brexit and coronavirus, are seeing many health care professionals who are not UK citizens but who were able to work in the UK during the Kingdom’s EU membership, fleeing back to their home countries at the worst possible time. 

 

(Editor's Note:  There's a chart here that I can't reproduce well enough to be read.  Follow this link, CLICK TO VIEW COUNTRIES BY AGE PDF.  RK)

 

The demographic issue will hurt Europeans on more than simply mortality figures.

People under 45 tend to be a society’s big spenders. They buy cars and homes. They go to university. Such consumption is what drives most modern economies. But not in Europe. Europe’s young cadre is thin and getting thinner by the year. Most European countries – Italy and Germany most notably – have already aged to the point that any sort of demographic rebound is now impossible. They simply don’t have enough people who could even theoretically have children. There certainly aren’t enough people of the right age demographic to drive a consumption-driven rebound.

Which makes mitigating the economic damage of coronavirus structurally impossible. The sort of consumer stimulus which is the backbone of consumer-focused, anti-recession efforts in the United States simply wouldn’t work in Europe. On the whole, the European Union has aged into being little more than an export union. And in a time of global travel restrictions and virus-forced collapses in income and consumption, there just isn’t anyone to export to. All Europe can do is shelter in place, pray their health systems hold, and wait for the world to restart. So long as the coronavirus is impinging activity anywhere, a sustained European economic recovery is impossible.

But even if Europe had a favorable population structure, it lacks the institutional structure to hold the line against the virus anyway. It comes down to money.

Having its own currency enables the United States to print however much money it wants to risk, using that money to fund its own deficit spending. Neither W Bush nor Obama nor Trump would ever be confused with fiscal conservatives, but even now at the very beginning of the process we are seeing spending bloat unprecedented in American history – even at the height of World War II. By the second week of April, the Americans will have pumped over $2 trillion in financial relief into their system, or roughly 10% of GDP, in addition to monetary stimulus of a volume that stuns the imagination. The current spending wave has already seen the Federal Reserve hoover up over $1 trillion in securities, while the federal government is putting up to $1200 into the hands of the vast supermajority of American adults, with a $500 kicker for each child. Nor will this be the last such infusion. Expect another one sometime in the summer.

Europe lacks that sort of power and flexibility.

Part of the network of treaties that underpin the common European currency mandates not only fairly strict deficit ceilings (although those ceilings were suspended over the weekend) but far more importantly the Maastricht Treaty on Monetary Union took monetary responsibility out of member governments’ hands. European states can’t print currency. If they want to deficit spend, they have to raise the funds themselves. That takes time. That takes investors willing to put their money into governments’ hands.

Now technically, the European Central Bank can expand the money supply, and it will, but there are two problems. First, Europe never truly recovered from the 2008 financial crisis. Eurozone interest rates have been negative for years. What about unconventional measures? Much ballyhoo has been made in the United States about how the Federal Reserves purchased scads of bonds to prop up markets, purchases which peaked at just shy of 25% of GDP at the height of the financial crisis. The ECB’s balance sheet as of January 1, 2020, after a decade of calm and before coronavirus erupted, was twice that in relative size. It isn’t clear the ECB has much ammo to use here, conventional or unconventional.

Second, any ECB action raises the issue of whose bonds will the ECB buy? Will it be the country with the most likely chance of repayment (Germany), or the country facing the worst health crisis today (Italy), or the country likely to see the highest death rate (Spain), or the country in the worst financial position (Greece)?

Every time the Europeans face any sort of question that bridges the monetary and the budgetary, the eurozone finance and prime ministers have to meet to hash out their disagreements in marathon negotiating sessions that take days (if not months). In times of calm this is a questionable system which often borders on the comical. In times of crisis it is really really really really stupid.

It shows in the outcomes. During the 2008 financial crisis the Americans did more mitigation in three weeks than the Europeans did in nine years. This time around, the Americans did more in 48 hours than they did during the entire financial crisis.

The funding America’s Small Business Administration made available to provide bridge financing for America’s small businesses is a case in point. On day one $50 billion was unleashed, with another $350 billion to be available by April 1. The EU has no such established facility. Individual European governments are scrambling to raise the necessary cash for their own small businesses. Weaker EU states are unlikely to be able to raise the requisite funds without raiding their already rickety banks. With quarantines in place, entire countries shut down. Add in Europe’s far less flexible labor market and a workforce which remains wedded to old-style set-location facilities means European firms have more need for bridge financing than American ones, yet even Europe’s capacity to provide that financing is far lower.

Europe today is just getting going with its Rube-Goldberg-like-decisionmaking machine, and this time around coronavirus quarantines prevent the European leadership from even meeting in person to hash out a plan. The only European leader with gravitas, German Chancellor Angela Merkel, is in isolation due to potential coronavirus exposure.

Which means “Europe” cannot be part of the mitigation process.

That leads us six places, none of which are good. First, European investors know all this and they aren’t flooding their money into European assets. Instead, it’s a massive flight to US dollar assets. Expect the USD to continue to rise throughout the crisis.

Second, an exception to that rule will only increase the light between the various European governments. Germany, unlike most of Europe, has steadily whittled away at its debt levels to the point that pre-crisis there was a shortage of high-quality, low-risk government debt on European financial markets. With Germany loosening the purse strings, investors will purchase German debt. It is the bulk of the rest of Europe that’s likely to be shunned. Deep, visceral splits between how the Germans and the bulk of the Union viewed finance existed before coronavirus.

Debates on the topic are already taking on the stench of desperation. On March 25 the leaders of France, Italy, Spain, Portugal, Ireland, Luxembourg, Slovenia, Belgium and Greece (aka countries who consistently find balancing their checkbooks difficult) called upon the EU to issue a joint debt instrument to deal with coronavirus. Germans are likely to have a different opinion.

Third, when the scale of the capital flight and budgeting shortfalls becomes apparent, when European governments realize the money they need to try to save their systems is leaving, they will take action. Expect strict European capital controls at all levels. (China of course already has capital controls. Expect them to intensify.)

Fourth, the controls won’t be nearly enough. Even if the Europeans could prevent capital from leaving, raising capital to fund emergency spending the old-fashioned way isn’t as quick or effective as the American method of simply flipping the switch on the printing press. Firms would fold in the thousands, and the damage will not be limited to the small players. To stave off the subsequent economic and cultural carnage, expect mass nationalizations throughout European economies. Unsurprisingly, the French are already discussing the mechanics of how to manage this. Peugeot, Renault and Airbus have already indicated they will fight the process (although they’d still love help with recapitalization and operating costs).

Fifth, this is likely the end of “European” manufacturing. The European manufacturing system, especially the German manufacturing system, is based on the free movement of goods, people and capital across borders. That simply isn’t possible in an environment of national quarantine, capital flight, capital controls and nationalizations. Post-crisis things will still be made in Germany and Bulgaria and Sweden and so on, but not all that much is likely to be the result of a multi-national European supply chain.

This is doubly problematic in the short term as most European countries lack even small pieces of the medical supply chain. While the US can retool and China can get back to work, many European states simply don’t have anything within their borders they can use.

The dream of Europe was that open borders would enable Europe to have economies of scale of the Chinese or American type. But these are still separate countries, and the utter inability of the EU to ride to the rescue leaves individual states more or less on their own at the worst possible time. Germany, for one, is a major exporter of medical equipment, and it has already barred exports of many coronavirus-related materials. Even to its EU partners. Many Europeans already resent Germans’ unwillingness to share their wealth. Imagine how refusal to share medical equipment will go over once the death toll gets seriously scary.

Sixth, this is the end of the European economic and social model, and it risks being the end of “Europe” as an entity.

• Europe’s demographics make consumption-led growth impossible, even as coronavirus blocks export-led growth.
• The Americans were backing away from the global security rubric that makes Europe’s export-led growth model possible before coronavirus, and the virus is only accelerating America’s turning-inward.
• Europe lacks the institutional capacity to manage crisis response.
• Europe lacks the financial capacity to cope with the crisis, much less apply the sort of financial fire-hose the Americans did almost reflexively.
• Dealing with the virus’ spread has already forced the Europeans to abandon the free movement of people.
• Dealing with their financial shortfalls will force them to abandon the free movement of capital.
• Dealing with mass nationalizations and the loss of export markets will force them to abandon the free movement of goods.

That’s three of the four freedoms upon which modern Europe relies. The fourth freedom – movement of services – was largely something that only the UK cared about, and the Brits are gone.

There is one possible “solution” to these problems: drop the euro.

If the Maastricht Treaty were abrogated (or at least suspended) and national control over monetary policy reintroduced, individual European countries could then engage in unlimited quantitative easing, both to mitigate the current crisis and to help manage the subsequent damage and recovery. This would (obviously) hold (many) downsides, but if the goal is to have the necessary capital required to address the current crisis, this is the only path I see that still results in salvaging Europe’s current economic and social structure.

In theory, once coronavirus was in the rear-view mirror, Europe could go through the process of re-merging their currencies (perhaps this time without basket cases like Greece). Yes, I realize this would be monumentally messy, but we’re already in a world where economic and financial norms are in abeyance. Most of contemporary Europe’s “messes” require extensive multi-national negotiations. This “plan” has the advantage of countries doing things themselves.

Regardless of the path forward (or down) coronavirus is just the beginning of Europe’s problems. Demographics, economics, financials, supply chains, none of it works under coronavirus – and coronavirus is going to be with us until we either get a vaccine, herd immunity or mass serological testing, none of which is particularly likely to happen in 2020. Even then, it is far from clear that Europe as we know it can reconstitute in the world after coronavirus. And never forget that all Europe is not created equal. Germany is not France is not Italy is not Poland is not Sweden is not Portugal is not Romania.

An end to the concept of “European” being singular represents more than simply the return to the norm of European history, it removes one of the central pillars of the world we know. That cascading failure and the reordering to come will be a subject in subsequent installments in our Coronavirus Guides series.

And now the pitch: the Coronavirus Guides are our primer documents, intended not to finish the discussions of this or that topic, but to launch them. Contact us at Zeihan.com/consulting to inquire about rates and scheduling options for teleconferences, videoconferences and in-depth consulting calls.

The End of Cost

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By Peter Zeihan on May 4, 2020

In the past five weeks the United States has thrown $3 trillion in new government spending at coronavirus-related bailouts, relief and economic stimulus. In total the US has already spent more on coronavirus-related actions than the rest of the world combined, tripled. Strangest of all, not one dime of it is backed up by new government revenue streams; every bit is deficit spending.

Nor is the United States likely to overly suffer from the expansion of its debt burden. Of that $3 trillion in new spending, the Federal Reserve’s total purchases of US debt is “only” $1.3 trillion. The rest of the debt bulk has been absorbed by other investors, mostly foreign investors. Such is the scare globally that many are eager to get a zero rate of return on an American government asset rather than risk their money at home.

Nor is the United States even remotely done. At least another $1.5 trillion is on deck for May, with another batch likely during the summer. None of this includes any of the monetary policy actions from the Federal Reserve, nor does it include likely inducements for American firms to relocate from China to literally anywhere else.

The feeling in the United States is that coronavirus is not only a crisis, but it is the type of crisis which necessitates heretofore unprecedented government action. And since government action isn’t free, everyone is willing to go along with big price tags. This feeling is strikingly bipartisan. In the first two week of the coronavirus crisis, Congress passed more legislation of substance than in the previous ten years. I’m not suggesting for a moment that American politics have entered a kumbaya moment, but instead that the very concept that price means anything has passed into myth. And if my broad forecasts for the future of Europe and China hold true, it will stay there for years to come.

There’s a political side to this willingness to throw a bottomless pot of money at the problem as well.

America’s political parties are in flux. Factions rise and fall in the hierarchies, and sometimes drop out of party structures or vanish altogether. Sometimes, leadership can move such transitions along much faster. In the case of America’s fiscal conservatives, Trump’s transformation of the Republican Party into his personal vehicle excised the fiscal conservatives (along with the business conservatives and national security conservatives) from the Republican coalition altogether. It is entirely reasonable to expect the fiscal conservatives to eventually find a new home, but for now the brake that they have institutionally imposed upon government spending is simply not present.

Which makes the next few years a time for big-ticket ideas. There are plenty of them bouncing around in the American political space. Many are near-and-dear to the Left, who at their core see the government as a change-agent which has the right and duty to uproot and remake society. Yet these days the Right is hardly aghast at big spending either. After all, America’s biggest (pre-COVID) budget deficits happened under the Trump administration. Let’s take a look at the most likely culprits:

Infrastructure spending:

This one is not only a perennial favorite, but its time has finally come. Typically, hang ups have included pork barrel politics, general ideological clashes over the nature and goals of this or that piece of infrastructure, state v federal decision-making authority and fund sourcing. But mostly it has been about cost. If you disagree with someone’s infrastructure plan on any non-cost point, you can always oppose it as being “wasteful”. That argument just vanished. And since everyone agrees in general that infrastructure spending is good (it’s just the other guys’ specific ideas that are kooky) expect a lot of it in the not-so-distant future.

Updating America’s interstate road, rail and water infrastructure would run a cool $3 trillion. A nationwide 5G effort would add another trillion. And that doesn’t even touch municipal infrastructure which could easily add another $2 trillion.

Universal basic income:

The concept of UBI is that government should provide every citizen with a monthly or weekly payment for “basic” expenses such as rent and food and power. As the argument goes, as automation erases more and more job categories, some sort of universal payout is the least disruptive and cheapest-to-administer method of wealth redistribution.

Many criticize the very concept because it would denigrate the work ethic. Others like the fact that it would introduce a sharp class distinction between earners who pay taxes and a loafing class that simply subsists (many of these folk in this second camp assume – probably correctly – that over time UBI would introduce different tiers of political rights, with those who do not pay into the system losing full voting rights).

One of the biggest reasons no one has really tried UBI is that it is expensive to attempt, and no one knows if it’ll work because no one has ever really tried it at scale. Well, as part of the coronavirus stimulus and bailout packages, most citizens received a $1200 check and anyone on unemployment gets another $600 per week on top of their standard benefits (meaning many on unemployment are now making more than they did while working). More cash payments are all but certain for the next couple of months, and an extension of unemployment benefits are pretty much baked in as well.

Functionally, the United States is trying UBI out right now. A few months from now we’ll finally have a real-world, at-scale example of how UBI works. And if it works well, expect a massive push to implement it on a permanent basis.

Defense expansion:

I’ve always found the process of deciding defense spending fascinating. Even in the days after the Sept 11 attacks, it was ridiculous to think that Islamic terror posed a more existential threat to the United States than the Soviet nuclear arsenal. And yet US defense spending today – with the Global War on Terror largely wound down – is higher than it ever was during the Cold War. Defense specialists are bracing for what they see as the inevitable spending drawdown. I simply don’t think it is going to happen.

Today the annual budget of the Defense Department is just shy of $750 billion, plus another $52 billion for Homeland Security and $63 billion for the intelligence agencies. If there is going to be a budget reduction, it will come from American forces being fully brought home. Although, honestly, closing America’s overseas bases means future deployments likely will cost more because the military will need to launch from the homeland rather from a foreign footprint closer to the action.

A partial solution to that imbroglio? Don’t cut funding at all. In fact, invest in more long-range deployment capacity.

Universal health care:

America’s health care system is the world’s most expensive, but from the quality of the care provided (not to mention the system more or less falling on its face during COVID) you wouldn’t guess it. The smart conversation would be how to institute real health care reform (as opposed to Obamacare which simply introduced health care payment reform), but that unfortunately isn’t the conversation that’s starting.

Instead, the passion from politicians such as Bernie Sanders is for free health care for all, based on the Medicare model, which is by far the least efficient, lowest quality, most expensive option possible. Leaving aside both the financial estimates of the Sanders crowd and their detractors, most independent estimates put the cost for Medicare for All at least $2 trillion. Per year. Normally, such proposals would founder on the rocks of cost. Not anymore.

Green New Deal:

Contrary to much rhetoric (which I guess is the case with all these ideas), the GND is less a well thought out plan and more an ideological grab bag of Green/socialist concepts. That has been enough of a deal killer to turn most moderate Democrats against it, as well as those within the Green movement who think that math needs to be part of the discussion (which would include me). Bottom line? There really isn’t a real plan yet, but with Americans shifting into a price-as-myth mindset, I bet there will be one soon.

Any meaningful GND would need to require the near-complete overhaul of nearly every economic sector ranging from automotive to construction to power to agriculture to raw materials. We haven’t even invented many of the technologies that would be required, which, at present, makes any brass-tacks budget proposal impossible. But suffice to say if it could be done for $10 trillion, that would be really, really cheap.

It doesn’t take much imagination to foresee a potential political alignment in Congress to dump a few supertankers of twenties on this or that Green-friendly policy. At a minimum, I expect much increased subsidies for this or that greentech, even if (especially if) they haven’t yet proven to be market ready.

Industry bailouts:

While I expect much of the country to be returned to work by mid-July, there is much about the coronavirus we do not yet know. For example, if it turns out that everyone who gets it can be re-infected a few weeks down the road, then the fundamental structure of the American economy will have to adapt to a fundamentally new reality. Such changes in circumstance will not impact all sectors or firms equally, generating scads of winners and losers. Without financial assistance, some sectors will shrivel and firms within those sectors will simply die.

But with a bottomless supply of funding available? Not so much.

Some of these are pretty obvious. Just off the top of my head, tourism, aerospace, child-care, education and restaurants look particularly endangered. The question is where to draw the line.

Consider air travel. Of course, we’ll bail out the airlines. What about airports? What about aircraft manufacturers like Boeing, or aircraft maintenance firms? Do we bail out all their hundreds of component manufacturers as well? What if key components are manufactured in other countries? Are those firms rescued? Normally, the fear of not knowing when to stop establishes a natural firebreak on bailouts. But that fear is rooted in the fear of cost. That fear no longer applies.

State and municipal bailouts:

Most American states have balanced budget amendments, and most gain their income from sales and income taxes which have pretty much gone to shit during the coronavirus crisis. Add in that many have wildly out-of-control pension funding issues and many states faced financial catastrophe before COVID. With COVID its more like financial Armageddon.

So far Congress has only extended the states and cities very limited assistance, with Senate Majority Leader Mitch McConnel (R-Ky) dead-set against any sort of broad-based bailout program. It isn’t simply about ideology. Some states are actually doing ok (all things considered), so rewarding states who have failed to reform their systems does bring up issues of fairness and moral hazard.

But the fact remains that the single biggest reason not to do some sort of federal bailout – cost – just doesn’t mean as much as it used to. (It is also worth mentioning that the sort of financial power and flexibility which enables the federal government to spend as much as it wants does not extend to the states and municipalities. They are not sovereign powers with their own currencies.) Some sort of federal fund designed to provide at least bridge funding is probably inevitable.

All these possible programs have multiple policy, strategic and cultural implications.

• If the federal government bails out a firm, does the government take shares? If the bailouts are big enough and last long enough does that mean the US government becomes the majority owner? We have a word for that: nationalization. Can you nationalize a city? A state?
• An America that doesn’t right-size its military for a new era, and expands its budget to make it very easy to reach out and slug someone, is a country that is perfectly willing to level any country anywhere for nearly any reason.
• Massive infrastructure programs are not simply about building roads and bridges, they are designed to rewire economies for decades (my adopted home state of Colorado has a 100-year infrastructure plan). Decisions made now will guide the country’s development, literally for generations. There will be winners and losers.
• An America on UBI is one that faces a wide array of utopian and dystopian futures. Consult Andrew Yang for the utopian, and the sci-fi series The Expanse for a good example of the other one.

There are those who would argue that none of these – let alone a few, much less all of these – would ever creak past the shrieks and performative rage of the Senate’s erstwhile fiscal hawks.

Ha! There are few things politicians of any political stripe care about more than getting reelected. And as the Trumplicans’ central rally cry – a booming national economy – crumbles, you can be sure that if not Senate Majority Leader Mitch McConnell, then President Trump’s survival instincts are going to go into overdrive.

Trump’s populist tendencies coupled with the very real economic pain being felt across broad swathes of the American electorate provides the current administration with an obvious path forward to electoral success: absolutely massive soci al spending.

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