Posted on 09/07/2019 4:09:43 PM PDT by LS
This is the third installment of this rather dense book. In part I, Zehan reviewed the shale revolution, the end of the Bretton Woods structure in which the US provided worldwide protection for free trade, and the demographic collapse that in particular will drive Russia, China, and Japan into conflict in the next 20-30 years.
In Part III, Zeihan notes that the American retrenchment will remove the props that allow the international structure to exist; that after 20-30 years the US may again intervene in world affairs; but that when it does, the restructured, sharpened, trained US military will have no equal. In addition to lessons learned in the Middle East, and the widespread deployment of new tech including uber-drones, America will have the new Ford-class carriers coming out in 2021, that can carry more jets, deploy them more quickly, and maintain higher rates of operation for longer periods of time---all with a 15% smaller crew and having lower operational costs. The warfare that engulfs the other parts of the world will be a new sort of "warfare that the United States ALREADY excels at: intervening at any spot on the globe at any time, then fading away the next day."
Returning to demographics, Zeihan notes that of the world's 200(ish) countries, only 17 have the trifecta of wealth, security, and a large and growing cadre of young workers, and the American consumer market is bigger than all of them combined. For most of the countries on the list, the only way to generate export-led economic growth is to gain access to American consumers. With NAFTA, TPP, and all the rest of the giant treaties gone, each will have to come to Washington, hat in hand.
Bretton Woods made global transport cheap and easy. Each of the iPhone's 22 major components are produced in different facilities, and this doesn't touch the subcomponents made elsewhere. Now, "the first time a tanker or container ship is shot at in either Northern Europe or the Persian Gulf or East Asia, the cost of oceanic transport will skyrocket as much as the reliability of oceanic transport will plunge. Current manufacturing norms will come to an unceremonious end."
Companies and countries will have to co-locate manufacturing, production, and consumption. "Europe's rapidly aging and shrinking population will put an absolute ceiling on what the Continent can consume." He therefore predicts mass deflation---something I have argued has been going on since 1990 at a lower level, accounting for why current debt and deficits really seem to have no classical economic impact on American society.
Some manufacturing will move to SE Asia, but "a far larger chunk . . . will reshore to North America," where the US has the shale, Wall Street has the money, and the Western Hemisphere has the inputs.
This will result in multiple dislocations, including the breakdown of the eurozone that will force a re-nationalizaion of the European currency system (as we are seeing with Brexit). This heralds a continental depression as most debts in euros will be revalued or the Europeans will simply default.
Aggregate debt in China will explode. It is already growing at the fastest rate in the world int he last decade.
The US dollar will be the only internationally credible store of value and the US will be the destination of choice for all the rich people trying to get their money out of their collapsing home countries. Meanwhile the US controls the global ocean, global trade, and global energy, and therefore has no interest in global security. In short, the US has global power and global reach, but no longer will have global interests.
He then predicts in the Western Hemisphere a return to Dollar Diplomacy. In a fascinating section on Latin America, the geographer in Zeihan lays out a case for pretty much why Latin America will always be poor. It's the mountains and the jungles, stupid. There can be virtually NO cross SA trade routes, and certainly the Amazon, for all its miles of waterways (4,000) is just about useless. Meanwhile, the Andes not only separate east from west, but often separate key regions and towns WITHIN a country (like Chile). The continent is a series of separated and isolated "island states." Only Argentina really has the geographical wherewithal to develop. Brazil's major cities are backed up against mountains, blocking transportation to the interior, and Caracas---only 10 miles inland---has such horrible weather, mudslides, and bridge outages that a trip from the coast to the capital can take FOUR HOURS. And despite 1,300 miles of common border, Venezuela and Brazil do not have a main rod connecting their main population centers. Brazil now has 24-hour traffic jams in Sao Paolo,
All of South America has a very low skilled population due to these geographical factors, and when sudden inputs of manufacturing or oil come in, there is an explosion of inflation. Political "moderates" do not exist. Rather the leadership is either Peronista "jefes" or radical socialists. Nor is LA insulated from the global demographic decline. "Any infrastructure that isn't completed [by 2022] then will face great challenges attracting funding." Latin American products "tend to be below global norms in . . . quality and above global norms . . . in cost." And all this is before the great "Disorder" hits.
SA has a few advantages: it does not need to worry about war, and there have been no internal wars since 1870; second, the lower third, the Rio de la Plata is profoundly different form the rest of LA and countries formed there have been the most wealthy and successful. (Argentina was the world's 7th wealthiest country in 1920.); and finally the Monroe Doctrine has helped protect LA from foreign wars. On the flip side, the US faces no security threat (other than drugs) from LA.
What about energy? Venezuela has greater reserves than all of Africa and more than Russia or Saudi Arabia, but even as its reserves tripled from 2006-2016, its output declined. (Welcome, socialism!) Even without Chavez or the current whackadoodle, Venezuela historically has not been a good place. And Chauvez not only killed political opponents, he killed or chased off all the petroleum companies and all their expertise. Oh, and did I mention Venezuela's oil is absolute CRAP, nearly sludge, and must be heavily refined even to pump it through pipes.
Zeihan predicts a painful realization by the Venezuelans that they must work with the YANQUI and this will only come if American companies can acquire Venezuelan crude at $70 and resell on the world market at more than twice that. But ONLY with the help of a major foreign power can Venezuela even hope to regain stability. U.S. Supermajor Oil Companies "may not actually own Venezuela but they will command every part of the production . . . that will provide Caracas with its energy income."
Brazil is a different matter. Zeihan argues that Brazil not only has the best engineers and oil people in LA, but some of the best in the world in Petrobras. Their oil is all offshore, too. After the "Car Wash" scandals, the government has going through some purging and reform, allowing foreigners to directly operate off-shore blocks. It will be interesting to see how Bolisario deals with his one major asset.
Argentine under the newest incarnation of Peronism nearly drove its economy into the ground from 2003-2015. It sits on some of the most geographically favorable shales int he world. Regulations are now being revamped, foreigners courted, debts settled, and Argentina again appears open for business. But while Argentina has the money and expertise to reformulate any of its economic sectors, it cannot reformulate ALL of them without a lot of American money.
In conclusion, Zeihan sees American strategic dominance of LA not just as possible, but as automatic---so automatic that it can occur without a single actual formal government policy or treaty on the matter.
But aside from SE Asia and LA, Zeihan predicts a global free-for-all coming with Russia vs. northern Europe/Germany/England; China vs. Japan (with or without allies); and Iran vs Saudi Arabia. The US will sit back, make sure as little as possible touches us, sell to the highest bidders, and wait to pick up the pieces.
I’m sick of being the world police.
Let’s get back into isolationism.
Already headed that way.
Thanks
Hard to see why the geographical factors create low skilled populations.
How is education (which takes very little resources) tied to the geography?
Another point is that while Chile, for example, does not have much in the way of inland waterways, it is a long narrow country with a long coast, and many ports along the coast. That may be better than inland waterways, in many respects.
Praise kek for Trump. Now we're getting back to how we should be: let the world do what it wants.
Article is a compilation of fantasy and magical thinking. Some rebuttal;
Energy will always be priced either globally or it will be in short supply. The US consumer/voter will not tolerate $150+ oil so the pols will intervene military to keep world supplies abundant or nationalize US industry.
Which is the next point.
The US is just one bad election from being a workers paradise.
In 20 years the US will not have rearmed and become lean mean fighting machine. It will take 20 years to stem the decline.
The US is headed for a fiscal crisis. Huge debt didn’t matter until the day it does.
China may be in decline but it doesn’t defang them.
Etc, etc,
Thank you. Very clear and accurate. Time to get the book.
I read Ten Trillion Dollar Prize (2012) and learned the American products are most desired by 1,500 million new middle class in China and India. Young people need to get with the program and work for American companies like Ford, Nabisco, Yum, Levi’s and Budweiser.
(1) US oil production from shale is relatively expensive, but shale also offers abundant natural gas that requires an extensive pipeline network to collect, process, and distribute. In the years to come, natural gas from shale will provide the US economy with a unique and timely bounty of cheap energy. That will help spur the return of even a slice of heavy industry to North America.
(2) The world has financed the chronic US fiscal deficit because the world is awash in dollars used as the world's trade and reserve currency. In turn, the US and its allies and institutions provide a broad range of economic and security assistance that help keep the dollarized world economy spinning along and ever-expanding. This helps to entrench the US as the global superpower -- while also drawing the US to ride to the rescue of friendly countries who use the dollar and invest in our Treasury debt.
(3) On the whole, I think the US will remain the world's superpower because we are stuck with the role and no one else is suitable as an alternative. Far from becoming an absent superpower, the US will remain the world's superpower. No replacement is available.
(4) Contrary to Trump repudiating the US superpower role, he is reinforcing it through investments in new weapons, with a special urgency toward deterring China's growing power. Trump though can read balance sheets and insists that enemies and allies have had a sweet ride for too long. Time for them to pay up.
Very interesting.
On a related note, something I read in the last few years on our economic situation argued that as messed up as we are, with deficit spending, debt, and such, everyone else is screwed up worse. This seems to say much the same, and then some.
Except there is no, and I mean not one, indicator that the “debt” is a problem. This goes against all classical economics predictions.
No high interest rates, no high energy prices, no high commodities prices, no hyperinflation anywhere.
Zeihan doesn’t say the US CONSUMER will be hit with $150 oil prices. He says this will be the export price. Prices in the US will be $25 or so.
Any nation is always just “one bad election” away from a Hitler or Stalin. That’s been a historical truism.
The US is already more than the military equal of China, Russia, and a third power put together. Just don’t fight a land war in Asia or on the road to Moscow, and they are screwed.
Zeihan’s point exactly is that China can be dangerous, except not to us in the continental US, and the danger they present is to neighbors were are not exactly “defanged” either. Their big land army is meaningless against a ring of air power and a good Japanese navy.
There is no need for high skills in largely extraction/agricultural zones that deal in things like pineapples, bananas, coffee, etc. SA is relatively resistant to large-scale agribusiness because of the lack of usable land, the terrain, the mud, etc.
Chile’s coastal cities are often separated form each other by mountains . . . as are Brazil’s. If you have to use your shipping just to get from one of your own ports to the other, that’s a problem. We, on the other hand, truck/ship by RR, or ship by inland waterways TO ports to export. Big difference.
Exactly. And while he doesn’t say so, he does reinforce with everything he says that we have been in a de facto deflation for 30 years. I have argued this for some time. My view is that the computer revolution was NEVER accurately valued, and as we had soaring productivity (”goods”) even with QE 1 & 2, the money supply never kept pace (just as in the 1920s).
This is why we still do not have a single symptom of hyperinflation, despite massive debt and deficit-—because in reality our “goods’ still are outpacing our dollars.
I thought of another example: our own pre-Civil War South.
Skill levels there were quite low partly due to slavery but also due to the 3 main cash crops, tobacco, rice, and cotton. Each was resistant to any technology of the day to mass produce/pick/harvest. The South lagged badly in patents compared to the north.
The US will pay world prices for oil. The idea that the US will pay $25 and the rest of the world will pay $150 is ludicrous. . The only way it happens is with export controls and price controls and that only works for awhile.
One bad election may be a truism but in the US is was very unlikely. That’s is no longer true since we are likely to have a populist-socialist government. Once that happens the downside of debt will become real.
High debt is impacting the US it isn’t apparent due to the anemic growth rate of the US economy. 3% growth is pathetic if we hit 5 and street rates would skyrocket with current spending and debt levels.
The US a is not going to place a ring of air power around China and Japans navy has s for Japan.
When I was in Panama, a business man told a tale about someone building up a cattle business.
He did well, and passed some of the profits along to his employees.
They immediately demanded another day off, which, they claimed they needed in order to spend the extra money.
Probably an apocryphal tale...
Richard Feynman, as I recal, tells of a cab driver in South America, whose retirement plan consisted of buying lottery tickets.
The article was quite cogent and logical, your observation is an unsupported opinion; I'll go with the article, thanks.
The post was quite interesting to me and squares with what I know about the global situation. Smile if you like, but I've actually been around quite a bit; the article resonated with me. Thank you LS, for posting this.
Very nice rebuttal, I wish I could write as well.
Disagree on every point.
Thanks (again) for posting a review of this book.
On the whole, Zeihan has some very interesting points (and, of course, not just in Part III). That the US could become a superpower - THE superpower - in less than 2 centuries (I would date our superpower status to the very early 20th century), starting with only about 3 million people and what was essentially a wilderness with a few farms mixed in, is due to factors that will not go away quickly. IOW, because we became a superpower, we must remain one - unless...
...unless we totally screw it up ourselves. You see, one of the critical elements in our rise to power has been our social/economic/legal system - it isn’t all natural resources and geography, though those factors are also critical. We have face a growing internal hatred for our system and our very values since the early 20th century, in the form of “Progressivism.” This was initially, IMHO, a product of the guilt of a certain portion of the upper classes regarding their wealth as compared to the average factory worker, minor or farmer. However, in the late 1920s - 1930s it was significantly augmented by a purposeful plan on the part of Stalin’s NKVD to undermine the US and England over the long term. They co-opted a large part of the elites within academia, and began the “march through the institutions” that has led to the virtual Leftist monopoly over education at all levels, over the media and over the bureaucracy of government at all levels. In the event that we ever have a Democrat President, House and Senate (thankfully not seen since 2009-2011), we will see the social/economic/legal underpinnings of our superpower status even further undermined than under Obama, perhaps to a fatal degree. Yes, you are correct that this is ALWAYS a risk, but in the past (pre-Obama) the risk was only that the train would be slowed down, or put on a slower, parallel track. The plain goal of the Left in the US now is to permanently derail the train - stop fracking, eliminate all fossil fuels, impose crushing taxation on the successful and overly burdensome regulations on business. This time IS different - and while President Trump MAY (emphasis there) not be the ideal man for the office in a theoretical sense, he is most certainly the ideal person for these times and circumstances. [BTW, other than some of his tweeting, and some of his apparent backsliding on gun rights, I do think that he comes pretty close to being an ideal man for the job - smart, driven, uber-patriotic, motivated to put this country first and not beholden to statist interests].
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