The Peter Zeihan Podcast Series - China, AI and Geopolitical Dynamics - Question Time with Peter Zeihan: Episode 4

Episode Date: March 15, 2024

In this episode, we'll be discussing a wide array of topics, including labor problems and AI's impact on labor markets, challenges associated with chip shortages, differences between developing and developed countries, China's future, and more. Full Newsletter: https://mailchi.mp/zeihan/question-time-with-peter-zeihan-episode-4

Hey, everyone. Welcome back to another installment of our Ask Peter series. We've got a handful of questions that Peter's going to answer. Kind of rapid fire. We'll see how well that goes. So without further ado, let's jump in. All right. What role will AI play in future labor problems? It's really hard to tell. I mean, anticipating what a technology is going to do before it's really been deployed is always a little dicey because you never know how it's going to go. I mean, is it going to be Betamax? It's going to be VHS. We don't know. A couple things to keep in mind. Let's assume that everything we hope about AI is true as applies to things like automation and manufacturing. Okay, okay, great. Increased productivity needs fewer workers. But that doesn't solve the consumption side of the equation. The primary problem we're having is not so much fewer workers, although that is part of the problem.

It's fewer consumers. And if without a consumption-led system, we don't even know what the economic model looks like. So at best, it only solves half the equation. Second problem is it's unclear that we're going to be able to get enough chips. 90% of these things come from a single town in Taiwan. And the supply chain that allows those facilities in Taiwan to function require thousands of companies around the world, most of which only produce one product for one customer and they have no competition. So our ability to make these chips at scale for the remainder of the decade is very, very much in doubt. What that means is we're going to have a much more constrained supply of the hardware that's necessary for AI software to function.

And that tells me that we're going to have a pretty sharp divergence in terms of who gets access to it. The disparities between the American-led system and whatever else is on the other side, I think is pretty formidable. There's also, that's kind of all piece one. Piece two, more directly to the question, is during the 1980s, we got computing in terms of servers and mainframes. And then once we got into the 90s and the 2000s, we got computers in terms of laptops and smartphones. And those were two very discrete periods of productivity improvements for service workers. We'll probably see a third level of that now with AI. The problem is we don't know how it's going to, how a large it's going to be versus the first two.

we should probably assume it's going to be in between, but that is still enough for worker to productivity to probably increase at a rate of about 3% a year for a decade. That's a lot of apples. Yes, it is. If we get enough chips. Right, right. All right. Based on market dynamics and historical data and, you know, your crystal ball, do you

predict more stable economic growth in peace or more instability in slow economic growth? I don't think somebody that's read most of my books. Yeah, we're looking at a significant divergence. Between de-globalization and rapid aging and depopulation, the economic models that we're all used to are going away. And whenever you change the rules of the game, you get different winners and losers, and some of them seek to take advantage of it, and some of them are desperate to prevent their fall. This is going to generate a lot more conflict in most parts of the world. but in places where the changes generate more economic opportunity, if they have sufficient strategic insulation and sufficient partners, you can get a huge amount of growth in the prosperity and stability that comes from this. So the answer is both. If you're in North America and to a lesser degree Southeast Asia or South America, you're going to be part of a network that is looking more and more robust by the day.

If you happen to be in Northeast Asia or Central Eurasia or say the Middle East, it's a very different picture. So we can have record growth in parts of the world and dozens of Brushfire Wars in the other part of the world all at the same time. All right. Continuing kind on the same line of questioning here. Can you explain the trade policy of a developing country versus a developed country? And when does a developing country graduate to a developed? country. There are as many answers to that question as there are countries that fall into those two categories as a rule, gross over simplification. In the post-World War II era, and especially in the

post-Cold War era, we've seen an increasing desire by most countries to specialize at what they do best. And so the United States, the United Kingdom, France, have gone into ever higher levels of a service-dominated economy, whereas you get your middle manufacturers in places like Mexico or Vietnam, you get your high tech in places like Korea, and you get your get on the bottom run of the ladder in places like India and Bangladesh in terms of low value ad manufacturing such as textiles. You work with what you have. If you've got a population structure that is well educated, then you're going to be able to jump up a little bit faster, assuming you can keep the lights on. If you have a lot of raw materials to work with, you're going to get into energy processing,

most likely in some way. And all of this can mix and match. It is relatively rare until recently that this has generated any sort of state industrial policy with a couple of exceptions with China by far being bigger than all the others combined. The Chinese have followed a very, very different model where they print currency like mad and they trap the savings of the population within the country so that they have the cash that's necessary to force feed capital into every economic sector that they can even think. theoretically producing, even if it's something that they're very, very, very bad at, because then it gives them a price advantage on the international market. And making the transition from something like that to a true value-added system has only rarely been done. Taiwan and South Korea and Japan probably really the only examples in the last 70 years

of the countries that have pulled it off with that sort of model. The problem is that the debt levels that the Chinese have generated in relative terms are an order of magnitude greater than the countries just mentioned that did it successfully. And the countries that did it successfully still had multiple deep recessions as they had to root out all the deadwood for things that they just weren't competitive and except for that subsidization. So for China to go through that transition and that jump, you're looking at least a 30-year depression to root this sort of stuff up and they don't have that kind of time. So getting out of that middle income trap where you get out of kind of a pseudo-planned into a more free market system, it's not that it's impossible, it's that it's difficult. And everyone has to follow their own path and do it with their own partners. I would surmise that the next country that is likely to do it successfully will be Mexico,

because the industrial plant expansion that we're going to see in Mexico as part of the Chinese collapse and as part of the NAFTA expansion is going to be absolutely massive. And the Mexico of 30 years from now is going to be a radically, different place from the Mexico of today. A moment ago, you mentioned that the Chinese don't have that much time. Poking into that a little bit, what are the odds that the numbers coming out of China are on the low side, the estimates, the stats, the numbers are just, you know, completely wrong? Well, the idea that the stats are wrong, that wouldn't be a surprise to anyone.

That's part of the problem. usually when state-run cult of personality incredibly aggressive and narcissistic powers lie, they lie to make themselves look better, not look worse. And all of the revisions that we have seen out of China in the last five years, and I think we're up to our seventh one now, have been substantially degraded as they've come out. But let's assume for the moment that that is correct, or that you're right, and that actually the demographic data is not as bad as it sounds.

Then we have to deal with the geographic area where the country is hedged in by the first island chain. Then we have to deal with the idea that it's still an export-led system and not a consumption-led system, and so it needs an amenable security environment and a trade environment from the Europeans and the Americans just to get the product out.

So the trade war issue is still there. And then we get to the import dependency issue on raw materials, on food, on energy, and the inputs to draw their own food. food system. So there are roughly a dozen major things going on that are targeting China, all of which are system killers. I've just identified demographics as the one that's completely non-negotiable, because you can't ask the Americans for more people. You can ask the Americans for trade access, and that's a very, very different challenge. So in the best case scenario where the demographics are

not terminal, this is still really bad. And China still only has a couple of decades instead of one. So with the thought of China going down, is it possible they go down without a military fight? Without a, you know. A billion dollar question. We don't know. One of the reasons why I anticipated the Ukraine war is because if the Russians are to survive more than another 10 or 15 years, they need a more secure outer perimeter that's easier to protect than what they had in the post-cold war. era. And so if they win in Ukraine and in the next line of countries beyond them, they've actually solved, or at least addressed, a lot of their security and demographic problems. That's one of the reasons why this war always had to happen. There's no equivalent for the Chinese. It's not like

if they get Taiwan, they've suddenly burst through the first island chain and solve their demographic issue. Even if they conquer, say, Japan, which would be many bridges too far, doesn't solve any other access issues. Their issues are mostly domestic, except their international exposures, which there's no country or combination of countries that you can go to to conquer in order to make it all work. The only way it would work is if the Chinese were to float a Navy that was an order of magnitude more powerful than the American Navy, and right now that's reversed. The U.S. Navy is an order of powerful, or a magnitude more powerful than the Chinese Navy, so that they could have a military presence everywhere in the world at the same time, physically occupy all of East Asia, all of North

America, all of Western Europe, and force all of the people in those locations to send their capital and their technology to China and then absorb the finished goods that the Chinese produce. That's the only way this works. And unless they've got some technological tricks up their sleeves that involves spaceships, transporters, and clones, I'm not seeing that as a possibility. So when you talk about the Chinese lashing out as they fail, it wouldn't achieve anything. All it would do is probably hasten the end because would trigger countries like Japan, the United States, and others to cut off a lot of supply lines that allows the Chinese economy to even exist. So if you're talking about a China that doesn't have imported natural gas or oil or raw materials or food inputs or food,

You're talking about a deindustrializing state that's suffering from famine that loses half of its population in just a few years. That's a very different place. Now, does that mean there can't be a war? Of course not. But it means that the calculations on the other side are very different than what we normally think of when we're thinking about this conversation. It's not an issue of a cornered-warned animal tends to be violent. It's like what form does the violence take and why? So in the Chinese case, I kind of see two scenarios, neither of which are good for China, because they know they would lose the war.

Number one, they go for Taiwan for nationalist reasons. They have that deindustrialization, famine-riddled collapse, but it allows the Chinese government, CCP specifically, to write the narrative and maybe survive this collapse of Chinese history and still be in charge at whatever is next, whatever emerges the next time. after the civilizational collapse. That's happened in Chinese history before. It's ugly. It's dark. It's long. It's brutal.

But it's happened. Option number two. Chairman Xi is in a dark room, making policy decisions by himself with no input and not all the facts. It could just be a massive miscalculation on his person. And there's no way to predict that because he's not talking to anyone. So either of those scenarios can't rule them out. but they would mean the end of a modern, unified, Han-dominated, industrialized nation-state. And whatever would emerge on the next phase would be decades from now and much, much, much, much weaker.

All right. It sounds like Ukraine winning is the most important item on the U.S. docket right now. Why don't the Americans understand that and why won't Congress do something about it? We're in a post-fact world right now. Until we find a better way of managing social media, there's no penalty for people making up whatever they want. And that means there's just a huge amount of misinformation out there. What used to be delusionary conspiracy theories of the far left had now penetrated most of the right as well. And the people who used to be thought of as the adults in the room who made the big decisions about guns are almost as useless as everybody else.

That's problem one. Problem two is a little bit more basic. the Biden administration, like the Trump administration, like the Obama administration, are horrible communicators. They have a hard time connecting with the general public on anything that matters. And if you think back on what's now been the last 15 years, we have not had a press secretary or a president who's really functional when it comes to communicating messages. There's almost nothing that ever happens outside of the state of the union address, and the state of a union address is a choreographed affair that's not really focused on message communication.

So until we get a government or a change in personnel within a government, that it is better at talking to the American population, at where the American populace is, we're all relying on things like social media and God forbid Peter Zion. And, you know, that's, I don't have that big of a lever, but I'm trying. I think we all appreciate you trying at the very least. What's your range in timeline for the BRICS system and how long is it going to last? There isn't a BRIC system. I'm sorry. I mean, it's a talk shop. All of the BRICS countries trade a lot with China and have reasons to caucus with China. But none of them have a relationship with one another. I think the best example I can give you is in the early days of the Ukraine war, and the Russians were trying to work out non-US dollar and non-Euro and non-Yuro and non-Yos.

ways of getting their exports out. They were having a conversation with the Indians who were happy to take the crude. And the Indians were trying to pay with rupees. And the Russians wanted them to pay with rubles. And it got heated and it got heated. And it got heated. And eventually the Russian delegate, the finance minister, was like, I don't want your fucking rupees. To which the Indian responded, I don't want your fucking rubles. And that was the end of the conversation. So the Brick's name was created by an American bond trader back in the 2000s. He's like, hey, you know, here's some large bond markets in the developing world. Let's trade them as a block.

That's all it ever was. And then they get together every once in a while to have a summit and decide that they have nothing to agree on. And so they talk about bringing in new members like Argentina and Iran, which, you know, you want to talk about adding to members, which bring a lot of clarity and stability to a conversation. There are the two. So we obsess way too much about the bricks. With the exception of the Russians, the bricks certainly don't. Sounds like one big happy family over there.

All right. Peter, what is your opinion on the national debt level? We've heard a lot of conflicting ones, but we want yours. Sure. So let's start by saying I'm a fiscal conservative, and I really don't like saying this, but it really doesn't matter. Let's start with the math and then go into kind of the extended strategic issue. So the math, if we expand the national debt by roughly $800 to $850 billion a year, that's about 3% of GDP.

And 3% of GDP growth is our average growth rate for most of the last half century. So from a numerical point of view, an increase of that volume every year doesn't increase the relative debt load. That's the free debt increase. Second, as long as the U.S. currency is the unassailable and unchallenged global store value and method of exchange, it really gives the United States a huge amount of flexibility in everything else. And because the Europeans confiscated and ensured bank deposits to pay for their own bailouts, that means no one, even in Europe, wants the euro for international exchange.

It's a regional currency. It's successful at that, and that's fine. but it's not a global currency. The Japanese tried to internationalize back in the 1980s, and it failed horribly. They will never try again. The Brits still haven't figured out Brexit, and nobody wants the Brits to be in charge of anything again. So the pound is out. The next largest hard currency down is the Canadian dollar, and no offense to our Canadian neighbors,

but a country of 35 million people does not make a global currency. And then the bricks are a non-issue at all, and the yuan in China is not even internationally convertible at all. And everything that people say that the U.S. Fed does wrong with printing currency, the Chinese do as a matter of course by a factor of four to five larger than us and have been every single day for the last 20 years. There's no one. Now, that doesn't mean there's not an opportunity cost. If we had stuck with that bastion of conservatism, Bill Clinton's plan, we would have already paid down the entirety of the national debt to zero and the baby boomer retirement would have already been prepaid. So, you know, our economy would be at least another $15 trillion larger from the efficiency gains. So there is a cost to it, but it's not a national security issue, at least not at the moment. The question is how far can we push this before we feel really deleterious effects?

And then Japan provides probably the best example there. Japan's debt today, if you include pension arrears, is about 500% of GDP, so over four times ours. And they're still there, and they're not the global cost. currency. So if we quadruple our debt from today's supposedly unsustainable levels, we would still not be facing any sort of dissolution issues. That's a lot of wiggle room. Doesn't mean it's my first choice. All right. We're on to the last and arguably the most important question. What is your favorite place to hike at? I like Yosemite. I get on the continental divide where there's no trails and I

I just go. Usually when I'm up there, I'm up there for four or five days at a time. And I think in the five times I've been up there, I've seen two people. Wow. Yeah, sounds amazing. All right, that wraps up our installment here. Make sure to submit your questions via the Ask Peter Forum. We'll include it in the description of this video.

And we will see you all next time. Thanks, Peter. Take care.