The Breakdown - ‘Nancy Pelosi is going to Taiwan so she can buy the dip she's about to create.’

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDes. What's going on, guys? It is Tuesday, August 2nd, and today we are talking about Nancy Pelosi's trip to Taiwan. Before we get into that, however, if you are enjoying the breakdown, please go see. subscribe to it, leave it a rating or a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also, a disclosure as always, in addition to them being a sponsor of the show,

Starting point is 00:00:48 I also work with FTX. Listen, we had such a nice thing going on. A little rally to end the month, the chance that if it continued, maybe we could actually peel our eyes away from the computers for five minutes. But no, the year of geopolitical surprises continues. I'd call this a black swan, except for the fact that black swans are things you can't predict, not chosen events that increase global volatility. A caveat before we get too deep into this conversation, I am obviously not an expert on the region or U.S.-China politics, and so for that reason I'm going to mostly keep my own opinion out of this and try to just synthesize the takes of others who are much better informed. But let's start with the basics. Nancy Pelosi has chosen to go to Taiwan, risking and flaming the U.S.-China

Starting point is 00:01:36 relationship, which is already at a low point. The trip was originally planned for April, but Pelosi caught COVID and canceled that trip. Taiwan is a flashpoint for China, and many consider it the most risky geopolitical issue period when it comes to the potential for war. It's important to China because China sees it as part of China. It's important to the U.S. because of our commitment to democratic sovereignty and or the fact that it manufactures around 92% of all advanced computer chips needed for the manufacturer of smartphones, computers, and military hardware. Trips like this, despite what Pelosi's office has tried to spin, are not common. Pelosi is third in the presidential succession line behind only the vice president. Her trip marks the highest level official to visit Taiwan since House

Starting point is 00:02:19 Speaker Newt Gingrich did in 1997. The White House has been softly discouraging the visit, with one of their concerns being that the Chinese see it as an official White House visit, not a member of Congress, albeit a high-ranking one, making her own decision. The discourse leading up to this has been increasingly bellicose. On last week's call with Biden, President Xi said that he was, quote, resolutely safeguarding China's national sovereignty and territorial integrity is the firm will of the more than 1.4 billion Chinese people. Those who play with fire will perish by it.

Starting point is 00:02:51 Let's talk about the U.S. side of this first. I think the big, loud, clear question that seemingly no one has a good answer to is what the hell the U.S.'s actual strategy with regard to China is. Now, what's clear is that both parties find it to be good politics to act tough on China, whatever that means, and they're not wrong. According to a Pew Research poll in 2021, 89% of U.S. adults see China as a competitor or enemy rather than as a partner. What's more, China has been growing as a concern.

Starting point is 00:03:20 In 2018, 32% of respondents said limiting China's power and influence should be a top foreign policy priority. By 2021, that number was up to 48%. In 2018, 46% of Americans had a cold feeling towards China on a feeling thermometer, and in 2021, that number was up to 67%. On nearly every specific issue, Americans are more concerned about China than they were before. They're more concerned about cyber attacks, more concerned about its policies on human rights, more concerned about the loss of U.S. jobs, more concerned about its growing military power, more concerned about its growing technological power, and so on and so forth.

Starting point is 00:03:58 But being concerned about something and acting tough are not the same as having a coherent policy and actually seeing it through. This was much the point of an editorial from Hal Brands last week, called Biden's Taiwan strategy is flawed whether Pelosi goes or not. Brands points to an intensifying of this tension. Quote, China is determined to squeeze the international space available to the Taipei government, perhaps as a prelude to forcing unification. The U.S. and other democracies are expanding military, economic, and diplomatic ties with the island to shore up its international legitimacy and war in China against pushing harder. He finds, however, that the action from the White House and from

Starting point is 00:04:34 Congress has not really matched the rhetoric. Quote, the problem is that Washington's China rhetoric has overtaken its China policy, and the U.S. is badly positioned for a prospective crisis in Taiwan. For a half decade, American leaders from both parties have labeled China the supreme challenge of our era, but across many issues, the response has been uninspiring. American trade policy towards Asia was absent under Trump and continues to disappoint under Biden. Congress is finally poised to pay for major investments in semiconductor production and scientific research, but only after the measure had languished for a year. Despite some constructive steps by the Trump and Biden administrations,

Starting point is 00:05:08 American money still flows into companies with ties to China's military and human rights abuses. Brands also notes that our defense spending has not kept pace with inflation. quote, the military is reportedly consumed again with disputes over what sort of navy the U.S. should have a generation from now, as China churns out vessels apace. And thanks to decisions made across several presidencies, the U.S. has a military equipped for only one war at a time, meaning that amid a protracted proxy war with Ukraine, Washington is bound to be on its back foot if mayhem erupts elsewhere. So basically, then, our China policy, according to brands, is largely about not looking weak on China. Peter Beinart, a former editor at the New Republic, wrote a piece

Starting point is 00:05:46 Would you go to war so Nancy Pelosi can visit Taiwan? He points out that Democrats are terrified of being labeled soft on China. He says that this is mostly about quote-unquote American credibility. Quote, had Pelosi not said she was going to Taiwan in the first place, no one would be suggesting she needed to go in order to bolster American credibility in Asia. The argument that she can't back down now resembles the argument that the U.S. couldn't leave Vietnam because the war had become a test of U.S. resolve. Hawks should emblazine this mantra on their think tank doors.

Starting point is 00:06:14 One's in a hole, keep digging. Zach Cooper wrote a piece for the American Enterprise Institute called the Strategic Case Against Pelosi's Trip to Taiwan. He writes, I have argued that the United States can and should use crises with China to its advantage. Crises may not be desirable, but if carefully managed, they can help build support both domestically and internationally. Unfortunately, Pelosi's trip violates this strategic logic in three ways.

Starting point is 00:06:38 Cooper says first that the timing is poor. He points to the upcoming party Congress in China. While some think that that would deter China from a major escalation, Cooper argues that it puts a floor on how little it can react. Chi, he believes, will have to demonstrate resolve now which increases the risk of accidental or inadvertent escalation. He also notes that this is not the same as if the trip had happened in April when it was first planned. Quote, the situation would have been somewhat different in April when Pelosi first planned to visit Taiwan. At that time, Beijing had less time to prepare its response options. The party Congress was four months further away.

Starting point is 00:07:12 Joe Biden had not yet muddied the waters by suggesting the United States had a commitment to defend Taiwan, and Mike Pompeo and Mark Esper had not yet traveled to Taipei and suggested doing away with the one-China policy. Cooper also argued that this could undermine deterrence, suggesting that Biden's wishy-washiness and being at odds with a member of his own party made the U.S. look less resolved. And finally, he said this could divide us from our allies. Quote, informal conversations with foreign officials and experts suggest that few are supportive of Pelosi's visit, and most would tend to blame the United States for precipitating a crisis. They see a pattern of recent U.S. actions by a variety of leaders as undermining the cross-rate status quo. In foreign policy, Mike Chinoi agrees. The timing does appear gratuitously provocative,

Starting point is 00:07:55 linked more to the August congressional recess than any strategic planning. Beijing is no right to tell U.S. politicians how to behave. But Pelosi's trip would come ahead of the Chinese Communist Party's National Congress this fall, where Chinese leader Xi Jinping will solidify his control over the party state by taking power for a third term, breaking with the precedent of his two predecessors. Chenoy also repeats some of the questions of just what the goals of this trip are. Quote, what precisely is Pelosi hoping to achieve? Her intention to demonstrate support for Taiwan is obvious, but her activities do not appear linked to any broader American strategy, such as drawing U.S. allies in the region into closer coordination to deal with the threat from China,

Starting point is 00:08:32 or encouraging Taiwan to improve its own defense capabilities by drawing on lessons from Russia's invasion of Ukraine. Given how little I know personally about this particular situation, I'm trying not to editorialize too much. However, this strikes me as fairly right on the mark. It's very hard for me having read a lot about this now to not view it as a trip for a trip's sake with ill-defined strategic intent and much more downside than upside. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security-first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on

Starting point is 00:09:20 custodial assets. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, chain analysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at Chainalysis.com slash CoinDesk.

Starting point is 00:10:03 The breakdown is sponsored by FTXUS. FDXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTCX app today and use Referral Code Breakdown to support the show.

Starting point is 00:10:39 Nancy Pelosi elicits such violent negative rhetoric on Twitter that I'm not going to bother quoting much or any of that. But there is a broad perception that this is more about her than it is about the U.S. Zagar and Jetty writes, The biggest problem with the Pelosi trip is it's fueled by her narcissism and desire to be fetid in waning days of her speakership rather than any strategy. She is yass-queaning the U.S. into greater tensions with a nuclear-armed power, but doesn't have to deal with the consequences.

Starting point is 00:11:05 The people who actually do have to deal with the consequences, the duly elected president, leader of her own party, and the U.S. military don't want her to go. M. Taylor Frivel, who studies China's foreign insecurity policies at MIT, writes, A few things to bear in mind. First, since last fall after Biden's two gaffes in October, senior Chinese leaders have expressed elevated concern about changes in the U.S. one-china policy and U.S. policy towards Taiwan. Wang Yi in late October began describing the U.S. as pursuing a fake one-China policy.

Starting point is 00:11:35 Xi Jinping at least twice warned Biden in separate virtue. meetings not to play with fire over Taiwan. Thus, China will likely believe it needs to restore its credibility and bolster its red lines over Taiwan and deter further erosion of U.S. policy. Second, the People's Liberation Army is nearing the peak of its annual training cycle. Many units are active and in the field. They can be easily tasked to undertake additional operations. Third, the PRC Ministry of Defense stated on July 26th that, quote, the Chinese military will absolutely not sit idly by. So there are two things here that Frivel is talking about. military specifics, of course, but also this perception of a shifting U.S. stance.

Starting point is 00:12:12 The question is, is the Biden administration pivoting away from strategic ambiguity into active deterrence rhetoric? Frivel also wrote another threat about when we're likely to see a response. The response will almost certainly include a military component, most likely with a show of force in the first instance, live fire exercises, a much greater military presence within the Taiwan strait and especially across the median line, even missile tests. This response will also include economic and diplomatic actions, probably mostly targeting Taiwan. The response will likely unfold over days, if not weeks, but likely start after Pelosi departs Taiwan. China will do more than surge aircraft into Taiwan's ADIZ for a day or two. The goal will be to underscore resolve

Starting point is 00:12:51 without sparking escalation, but the likely prominence to the military component will include the potential for miscalculation. There are also significant U.S. naval assets in the region at the moment. Now, of course, the other side of this is a question of whether China is really going to go to war over a visit from Pelosi. Deogenes out Wall Street cynic writes, China playing a strong social media saber-rattling game. But what if Pelosi visits and they do nothing? Trying to understand their strategy here.

Starting point is 00:13:19 Are they really going to commit their military over a visit? Josh Rogan, a Washington Post columnist, writes, if China does something aggressive when the Pelosi delegation visits Taiwan, that's China starting a crisis, not the United States. The Chinese government should take a deep breath and relax. Let's talk then about the China side of this. Our rhetoric almost entirely views China as a rising power, and clearly that's true when you take a 20-year view. But there are concerning weaknesses that could make conflict more, not less likely.

Starting point is 00:13:46 How Brands again, wrote a book recently with Michael Beckley called Danger Zone, the Coming Conflict with China. In a Bloomberg op-ed a little over a week ago, he wrote, China's window of military opportunity is opening, as the People's Liberation Army reaps the fruits of a generation-long buildup focusing on defeating Taiwan and, if necessary, the U.S. But Beijing's political window is closing. as the population of Taiwan becomes evermore determined not to accept reunification on the mainland's terms. Impending demographic decline in a slowing economy are also threatening China's long-term trajectory, perhaps putting President Xi Jinping in a now-or-never position. Historically speaking,

Starting point is 00:14:21 this sort of situation has often tempted dissatisfied powers to use force to achieve objectives they cannot attain peacefully, with consequences that reverberate far and wide. Quoting that line, Stanford Professor Neil Ferguson added, it is not strong, confident powers that start wars, it is weakening powers that no time is not on their side. In his piece, Ferguson discusses this economic insecurity further. Today's Chinese economy has acute slowing pains. Growth was negative in the second quarter. The IMF expects growth this year overall to be just 3.3 percent, and that strikes me as optimistic. The demographic trends in debt dynamics are dire, presaging continued trouble in an over-leveraged real estate sector. On top of policies that have knocked the stuffing out of the

Starting point is 00:15:00 country's big technology companies and private education sector, she's doctrine of dynamic zero-COVID has crushed consumer confidence. The latest reading points to the worst collapse since surveys began back in those distant 90s. The latest data from China's National Bureau of Statistics put youth unemployment at a shocking 19.3% in June. Surely it is obvious to someone in Washington that such a severe economic crisis increases rather than reduces the incentive for conflict with the U.S. How ignorant of history do you have to be to not see Xi's urgent need for a new source of legitimacy for the CCP now that economic growth can no longer provide it? On this show, we've recently discussed the huge problems with Chinese banking.

Starting point is 00:15:38 There appear to be billions and billions of dollars of bad loans to Chinese real estate developers that are looking very problematic. I think the concerns that Ferguson and brands are bringing up are very worthy of consideration. Autocrats need a basis for their rule of power, and if they can't find one internally, they look externally. Now, what about market sentiment? Well, the TLDR leading into today was that it was a bit risk off. The total crypto market cap was down 3%. The dollar gained against everything but the yen, and S&P futures were down 0.3% overnight. Lisa Abramowitz from Bloomberg writes, yields on two-year treasuries are now the highest relative to 10-year rates of this economic cycle, with the gap between the two becoming the most negative since 2000.

Starting point is 00:16:17 Pelosi's Taiwan trip has accelerated a move into longer-term U.S. debt, with fears of a protracted U.S.-China conflict. Wu blockchain writes stocks in China and Hong Kong opened down 3%. Ethereum is down 6% in the last 24 hours. U.S. House of Representative Speaker Nancy Pelosi's visit to Taiwan in the next 24 hours could raise the risk of war between China and the U.S., causing turmoil in global capital markets. However, the J.P. Morgan desk said Pelosi's plane is scheduled to land about an hour after the U.S. opens. If there is no immediate reaction, you may see markets move higher.

Starting point is 00:16:47 So what then has happened since Pelosi touched down? Again from Bloomberg, China plans a military response, including missile tests off Taiwan's East Coast beginning as soon as this evening, and military drills in the waters and airspace encircling Taiwan, August 4th, the 7th, following her departure. The White House has not said if it's in contact with Pelosi, but warns Beijing not to make it a big thing. John F. Kirby, a National Security Council spokesman, says there is no reason for Beijing to turn a potential visit consistent with longstanding U.S. policy into some sort of crisis or conflict, or use it as a pretext to increase aggressive military activity in or around the Taiwan Strait. Our actions are not threatening and they break no new ground.

Starting point is 00:17:24 nothing about this potential visit, which, oh by the way, has precedent, would change the status quo. Biden yesterday reiterated that this was Pelosi's call, saying, The Speaker will make her own decisions about whether or not to visit Taiwan. Congress is an independent, co-equal branch of government. The decision is entirely the speakers. Markets today are in some combination of wait and sea, and the world didn't end immediately, so we'll go up a bit. Ultimately, I think Alex Kruger summed up a lot of people's feelings when he wrote, A charade by idiots, four idiots.

Starting point is 00:17:52 hopefully markets can now move on from Pelosi. Still, I think Doug Bonaparth wins the Best Tweet Award, which is also the name of this episode. Nancy Pelosi is going to Taiwan so she can buy the dip she's about to create. So what's next? Well, obviously this is going to continue to play out, and there is still time for it to escalate, so I'll be watching closely. Before I wrap, I did want to note something.

Starting point is 00:18:15 Dennis Porto wrote a piece on substack called Taiwan, common pitfalls in Western discourse. The key line is, quote, the biggest pitfall in Western Taiwan discourse is to completely neglect the perspective of the Taiwanese people. Commenters in the West will speak of Taiwan as a mere chess piece in the great power conflict between the United States and China, without any curiosity about what the Taiwanese themselves actually want with their country. Now, I admit that this show is guilty of that too. Obviously, my focus is big-picture power shifts, and this is ground zero for potentially one of the biggest of those, so that's my lens.

Starting point is 00:18:46 But that doesn't change the fact that there are about 24 million people with their entire lives to recollectual. in the center of this. Anyway, for now, I want to say thanks again to my sponsors, nexus.com. Chainalysis and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - ‘Nancy Pelosi is going to Taiwan so she can buy the dip she's about to create.’

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.