EPISODES / WEEKLY COMMENTARY

Disunited Nations – Who Wins Or Loses When Global Order Breaks Down?

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Mar 31 2020
Disunited Nations – Who Wins Or Loses When Global Order Breaks Down?
David McAlvany Posted on March 31, 2020
Play

About This Week’s Guest:

Peter Zeihan is a geopolitical strategist who combines an expert understanding of demography, economics, energy, politics, technology, and security to help clients best prepare for an uncertain future.

Over the course of his career, Peter has worked for the US State Department in Australia, the DC think tank community, and helped develop the analytical models for Stratfor, one of the world’s premier private intelligence companies. Peter founded his own firm — Zeihan on Geopolitics — in 2012 in order to provide a select group of clients with direct, custom analytical products. Today those clients represent a vast array of sectors including energy majors, financial institutions, business associations, agricultural interests, universities and the U.S. military.

Peter is a critically acclaimed author whose books — The Accidental Superpower and The Absent Superpower — have been recommended by Mitt Romney, Fareed Zakaria and Ian Bremmer. Peter is also a highly sought after public speaker. With a keen eye toward what will drive tomorrow’s headlines, his irreverent approach transforms topics that are normally dense and heavy into accessible, relevant takeaways for audiences of all types.

Peter’s third book, Disunited Nations, will be available in March 2020. You can purchase a copy here

 

 

 

 

[thrive_leads id=’26614′]

 

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Disunited Nations – Who Wins Or Loses When Global Order Breaks Down?
April 1, 2020

“We had the opportunity in the previous three administrations to kind of pick and choose our allies, to kind of come up with a new goal, right-size the structure, if you will. And now hope is just collapsing. So we’ve gone from having over 100 allies back in 1992 to at the end of the Trump administration we’re probably only going to have four. Now the U.S. can thrive with that, but it does mean the degree of international dislocation, chaos and destruction that is coming is going to be a lot more than it necessarily needed to be.”

– Peter Ziehan

Kevin: Dave, as we watch the news and we see the response of the general public and the mainstream media, it is so different than the people who I have been talking to and you have been talking to over the last couple of weeks who are listeners to the show, they may be clients of ours. They have spent their lives educating themselves on things, maybe not pandemic, but educating themselves on what a debt bubble looks like when it blows up, and what do you do when you need to be more self-reliant. I’m just really proud of the listeners that we have. It is amazing the degree of intelligence that they bring, and calm during a period of time when many people are panicking.

David: I was listening to Public Radio and there was this tone which was really mournful and desperate, and I thought to myself, “This is just not the kind of interaction we have with our clients. Our clients don’t minimize what is happening today, but they are very clear in their thinking about what they need to do, what makes the most sense, what an action plan looks like. So I agree, I have been very impressed, and there are sort of two worlds. I think the general public is really faced with consternation and stress because maybe they have not considered anything but the status quo up to this point, and now faced with something other than the status quo, they are really not sure what to do.

We have talked with Robert Higgs, the author of Crisis and Leviathan, about how often this happens, and how government steps in, becomes the major player in the world. And then as the crisis recedes, you don’t see the footprint of government recede. Many of our listeners will be able to reflect back on the guests that we have had on the program that were there to bring context – context for what is going on and to help us understand the larger thematics which are really the backdrop issues, more important than the small details. And we tend to fixate as people. We tend to try to make a big deal out of one thing so that we can better understand the whole thing. And I think it is actually better to sort of take the third person perspective, step away, and see a broader picture.

Kevin: One of the things I’ve always enjoyed, knowing you, Dave, is how you take such a long horizon kind of view. We obviously have to deal with the events of the days and the weeks ahead – maybe months, maybe years – but we also have to, from a bird’s-eye view, step out and say, “Okay, this is not the end of the world. So what does the world look like in five years, 10 years, 25 years, 50 years?”

So it is important to take a shorter-term view and compartmentalize, whether you are taking what I call the short loop, mentally. I’ll say, “Okay, what is my short loop today? What do I need to do today?” But I purposely take time to look at the long loop and say, “Okay, what do I need to do for 10 years from now, or 20 years from now?” It is legacy thinking, and today, rather than being just centralized on the next few weeks like most media is today, what we would like to do is look forward with the guest that we have.

David: What I think will become clear in our conversation with Peter Zeihan today is that we are at the end of an era, but this is not the end of the world. I think for anyone who has read The Revenge of Geography by Robert Kaplan, you will appreciate one of the key assumptions of Peter’s latest work. His book is Disunited Nations, and this is it – geography matters.

If you look at a map and you’re familiar with topography, that provides insight into the past, as well as insight into the limitations for future growth and development for particular countries. So as we look at what is impacting the world today, there are some very basic things even down to topography, which have a lot to do with, and have a huge bearing on, who develops, and how, from this point forward.

Kevin: Here in the office, Dave, we have people who look at charts, and so they are continually looking at what we call the technical, sort of the inside of the market. But we also balance that with fundamentals, the outside of the market, the larger picture, and when bringing Zeihan in, what we are looking at is more that external – what do the fundamentals look like over the next decade, two decades, five decades?

David: That’s right. When we look at the financial markets, we toggle back and forth between the endo and the exo – the endogenous issues, the exogenous issues, internal market conditions, as it were – that can cause growth or decline, external conditions which can factor into growth or decline of asset values. If you look at the history of our commentary over the last 12 years, it has been to explore a variety of fields, connecting them to the markets and the pricing dynamics that are unfolding in the present.

Kevin: You know, there is a saying, “If everyone is thinking the same thing, no one is thinking.” What I love, too, Dave, if I were to look at the books that you read, and I have marginalia books, too, they are marked up, there are discussions – you actually have a conversation with the author. It is not always agreeing. Sometimes you agree, sometimes you disagree, but you are prompting thoughts that you may not have had on your own.

David: That’s right. If you held my copy of Peter Ziehan’s book in your hand, in the margins there is an equal ratio of fist bumps to fresh points of disagreement. And you are right, marginalia is the domain for me for argumentation, for debate, for dialogue with an author, whether that author is dead or alive. And I’m grateful for the insights gleaned and the thoughts stirred. I am also grateful Peter is in the alive category because we get to have our conversation with him today. So we get to visit with him today and explore the currents of his thought going back a number of years and very briefly look at a couple of the other books that he has written, as well.

Kevin: It seems as we go through this period of time, Dave, that there is a real change. You have talked before about The Fourth Turning, Neil Howe’s book, and the changes that occur, not necessarily because of presidents, though. You and I have talked before. A lot of these changes that occur, like the rise of the empire of the United States and sort of the policing and the safety that the United States has brought to the entire world to allow free trade. It feels like that epoch is changing, and I know oftentimes people say it’s because of this president or that, whether it is Trump, or Obama, or Bush, or what have you. But in reality, the longer game really defies any presidential eight years here or there, doesn’t it?

David: That’s right. So the main focus in Peter’s latest book, Disunited Nations, is we have basically watched the closing of one era, we are entering into a very different one. That’s what he contends. And change may present the world and the United States with challenges, but in the end, we have a number of basic and very strategic advantages, and those we will see play out in the years ahead. What I have done is, for this show I have included some links to past interviews that we have done which are complementary to the themes in Peter’s book, whether it is Neil Howe and The Fourth Turning; Joseph Tainter who wrote his book many years ago back in the 1980s, The Collapse of Complex Societies; Harold James, The End of Globalization, written 20 years ago; Robert Higgs, Crisis and Leviathan; Carmen Reinhart, This Time is Different. Those, I think, are helpful additions, and as many of us are now sort of locked at home for a little while, perhaps a little binge listening through the archives will just give you the short track to some of our favorites that I think are good complements to what Peter has to say today.

Kevin: Dave, we have put those links on the site, so if you go to the web page for this particular podcast, if you just click on those various links and you want to listen to those shows, I can say that those are all shows that you and I have listened to multiple times. Just being involved with this show does not necessarily mean we hear it just once. We’ll go back, I know I do, and I’ll listen to Carmen Reinhart, or Higgs, or Tainter. In fact, last night when we were talking about this commentary, I went back and pulled off the shelf Joseph Tainter’s book on the collapse of complex societies because this is a discussion that has continued, like you said, for a dozen years. I am really looking forward to what Peter has to say.

*     *     *

David: Several years ago a friend of mine suggested The Accidental Superpower as a book I should pick up. And then a few years later the same friend said I had to read The Absent Superpower. And now, Peter, you have written Disunited Nations, and this caps your argument that the old order is passing away and a new era of far more volatile geopolitical relationships is emerging. Why don’t you start us with a quick contrast between your three books?

Peter: Sure. The first one was when people were still thinking that globalization was the norm. We thought we had had a bit of a correction – that may be an understatement – with the global financial crisis, but people saw the world getting back to normal, saw interconnection, saw national differences blending away, the European Union had survived. People were very up on where this could go, with the exception of the United States, where everyone was pretty sure that the United States was going to fade from history.

That was, in my opinion, a very inaccurate read of economic trends, and especially historical ones. The bottom line is that the period from 1945 until the present is the most abnormal time in history because it is the only time we have really had this sort of global structure where a single power provides security for everybody. The U.S. did that for very specific reasons, and those reasons ceased to matter at the end of the Cold War. So it wasn’t a question of would it end, it was a question of when it was going to end.

So Accidental Superpower explored all of the things that were leading to that environment and what it would likely look like on the other side for the United States. Absent Superpower picked up where accidental left off, and dove deep into the trend of the shale revolution, which had evolved faster than anyone could have possibly imagined. I was pretty bullish on shale when it started, but I was completely too conservative in my forecast. And if you fast-forward to the present day the United States is now not just energy independent, it is a significant exporter, it is the world’s largest exporter of refined product, and that has overturned global markets.

Of course, coronavirus has now overturned that again. And that changed the math strategically for the United States, and because the United States then accelerated its withdrawal from the world, it changed the strategic math for everybody else. So a big piece of the second book, of Absent, was to explore what the major powers would be forced to do in America’s absence. Disunited Nations doesn’t recreate the starting positions of the first two books. Instead of going into all the details of how we got to where we are, there is basically one chapter that traces 11,000 years of human history in about 20 pages to explain how we got to where we are, and then moves on to what happens the day after.

So we spend the entirety of the book looking at individual countries and how they are forced to change and cope, or fail to change and cope, with the circumstances moving forward. There are 11 countries that we cover in depth, all the major powers that we think of today, and all the major powers that will be the center of humanity moving forward.

David: Some implications are not surprising. Others are very surprising and we are going to work toward some of those country-specific surprises later on. You are really talking about U.S. disengagement from a post World War II global order, and the scramble for power, what that might look like in a less or ungoverned world, that being sort of the core of Disunited Nations.

We have, as you say, this really unique period, 1945 to the present, which is abnormal, the most recent period of radical growth you would say is nothing more than a moment in time made possible by strategic inertia, and I like the way you phrase that. There is this lingering moment that is held over from the old security strategy. There is also credit growth and some factors there, along with sort of this strategic inertia. But can you expand on that idea of strategic inertia? How far does that carry us?

Peter: That is the question. The whole concept of the global order is that we will create this global structure that allows anyone to trade anywhere, at any time, with anyone, without needing to protect their shipment. That was the key. There would be no more convoys, no more imperial militarization. So any country, big or small, successful or failed, can actually play now. So we went from having about a dozen significant empires back before World War II to having the 200 plus countries that we have today, most of which could not exist without this sort of environment. But the United States no longer needed to pay for its alliance network once the Cold War ended. And we have been drifting away from that ever since. Now, back in 1989-1992 the president at the time, George Herbert Walker Bush, tried, to his credit, to get Americans to have a conversation about what they wanted out of the world, how we take this order and kind of recast it for this new era. And we punished him for it, and we elected in the next seven straight elections the guy that celebrated his lack of expertise in foreign affairs. Americans just really don’t care unless something pops up like 9/11 that forces them to for a little bit.

So when you are talking strategic inertia, groups like the U.S. military or the U.S. intelligence apparatus haven’t received a meaningful update to what they are supposed to be working on, what their strategic goals are, what the world is supposed to look like, since 1992. And so they are doing the best they can with the equipment they have, and they are doing the best they can with the orders they have. But until someone at the top changes the goal, turns the page, opens a new book, however you want to phrase it, we are stuck with a strategic policy designed for another era.

Now, under Trump, the general disdain of this administration for all structures international, is definitely pushing the United States in the direction of strategic retrenchment, isolationism, distancing, whatever term you want to use. It doesn’t have to go specifically this way, but some brand of American broad-scale disengagement from the system is a given. And you are absolutely right, the question of a timeframe.

Now, with today’s events with the coronavirus, we may have just moved everything into fast forward because we are seeing the splintering of financial markets as everybody moves to fiat dollar. We are seeing a breakdown of intercontinental trade as everyone tries to build what they need at home. We are seeing a collapse of international transport as the airlines shut down. These are all things that could have happened from disengagement, it’s just that it’s happening in a matter of weeks instead of a matter of years.

David: You point out that 1989 – 1992 may be a significant date in terms of the intelligence and military community not getting an update in terms of mandates, but you also point out that 1989 was a critical year for transitioning the global order. The U.S. was leading the world up to that point. It has since then. But the world was fairly well organized around that common threat of Russia, of communism. And so that global alliance system that you talk about was held together by a shared fear. Maybe it was some self-interest, maybe it was that we just wanted to survive that threat. But that went away in 1989, so build off that date to where we are today.

Peter: Mutual destruction tends to focus the mind, absolutely.

David: Absolutely. Today we have competing versus cooperating nations. Bring us from 1989 to the present with that idea of competing versus cooperating nations.

Peter: It has happened in bits and pieces. There is no one leader, there is no one country that is to blame. Throughout the 1990s the United States, in bits and pieces, attempted to find purpose for the order in the interventions in places like Somalia and Bosnia kind of followed that general category. We started getting big into human rights.

But 2001, I would say, was the sharpest break that just kind of firmly put us on this path to a breakdown of the global order. We had a spat with the Chinese over the EP3 spy plane incident, the Europeans launched their euro with a specific goal of displacing the United States as the financial superpower, and then we also had the 9/11 attacks which forced the United States to see security in a different light and try to mobilize its alliance to fight this threat. And in all three cases the United States found it, to put it simply, rude. China could have never unified without the order. The European Union could never have existed without the order. And then in the aftermath of 9/11 when the Americans tried to ask their allies for help, the result was, in a word, underwhelming.

Fast forward to the financial crisis and we had a bunch of middle powers, everybody ranging from Australia to Argentina, to Indonesia, to Canada try to kind of muscle their way in and force the United States to do financial policy their way, without really bringing much to the table in terms of contribution.

Now, after eight years of the Obama administration, we have an administration here that is just outright rejecting everything. So this has always been the path. The pace changes, the flavor changes, and what we are seeing under Trump and coronavirus now is that we are losing the ability to steer this anymore. We had the opportunity under the previous three administrations to kind of pick and choose our allies, to kind of come up with a new goal, right-size the structure, if you will.

And now the whole thing is just collapsing. So we have gone from having over 100 allies back in 1992 to, at the end of the Trump administration we are probably only going to have four. Now, the U.S. can survive that. The U.S. can thrive with that. But it does mean the degree of international dislocation, chaos and destruction that is coming is going to be a lot more than it necessarily needed to be.

David: Keying off the word you used, contribution, talk to us about the benefits that have accrued to the alliance members. And maybe comment on the present administration here in the U.S. basically calling out every nation to pay for those benefits or else the deal is different going forward.

Peter: It’s actually pretty straightforward. The whole idea with the order is we pay to be on our side. So we provide global security, we provide access to the American market. The trade deficit is not something we were suckered into, it is something we volunteered as in the aftermath of World War II no one could absorb our exports so we absorbed theirs in order to stabilize their economic and political system. So this is what allowed Europe and Japan to export their way back to affluence. This is what allowed them to remain first world countries. This is what enabled the second tier of countries, places like Taiwan and Thailand and South Korea, to ultimately join the family of civilized, advanced nations. And in the early post Cold War era this is what allowed central Europe to join the European Union and NATO. This is what allowed the oil markets, the Middle East, to be independent countries as opposed to colonial possessions. So everything about our world, from the spread of immunizations to financial access, to rising standards of living, is a direct product of a world without strategic competition because the United States blocked it, which means that if the United States really is going its own way, it has the opportunity to choose which countries it wants to bring with it. And what the Trump administration has done is basically settle upon five. The first is Korea, and they came to us because they realized that if the United States really is leading that their country has no chance of continuing to exist. So they came to ask for terms, they gave in on every point of negotiation in a trade deal. It’s done.

Mexico and Canada were next with the NAFTA renegotiation. The Mexicans came in with a very clear-eyed view. It was a real negotiation. The Canadians thought it was just going to be more of the same where they would kind of be able to slip under the radar and get some concessions, and they were proven woefully wrong. Bur regardless, that deal is done and ratified, and is being implemented.

Japan was next, and Japan was certain that because they were important, the second-most powerful navy, the primary block to China, that they would be able to extract some concessions in exchange for security concerns. It turns out they were woefully mistaken, and so it basically went the same direction as Korea.

And then next up was the United Kingdom in the aftermath of Brexit. That will probably be just as unpleasant for the Brits as it was for the Koreans, the Japanese, and the Canadians. But that’s it. That’s the Trump administration’s entire trade negotiation strategy because those five countries – that’s already over half of the American trade portfolio. If those are implemented, under normal circumstances – granted, coronavirus is throwing everyone a curve ball – if those five are implemented, the U.S. might not even have a recession when the global system breaks down.

Now, in coronavirus, we’re in a completely different environment, and it is going to cause a massive recession, the deepest recession we have ever had. It probably won’t be a depression. The worst of it will probably be over within six months – probably. There are a lot of things we still don’t know. But in that process, the pace of industrial development and retooling in this country is going to be faster than anything we have ever seen. The past two years have already seen the greatest reindustrialization of the United States in our history, faster than what we did during World War II, because the shale revolution basically collapsed the cost of energy inputs into everything.

And so we are seeing industrial plants moving back in order to take advantage of what are now cheaper production costs in the United States as opposed to China. Throw in coronavirus, and all of a sudden we have to do this as an issue of health survival. It’s a health policy as much as a national security or economic policy now. So we are going to see huge chunks of global supply chains, specifically the ones that were designed to service the United States market, move back in 2020. And so when this coronavirus quarantine policy does lift, I don’t think we are going to see sky-rocketing growth, but the nature of the American economy is going to be very different. We are going to have a lot more manufacturing capacity here and in Mexico, and a lot of what we have seen with the trade deficit is going to melt away, which should make Donald Trump very happy. We just kind of did it by the most painful way possible.

David: You describe the path being the same, but the pace increasing. And I think there are a lot of pundits today that would lay blame for disunification and disorder at Trump’s feet. I recall Harold James’ book on the topic of deglobalization nearly 20 years ago, so this is not a new theme. And I love the way you describe that Bush did a good job of abusing our allies, Obama of ignoring our allies, and Trump seems to be the most proficient at insulting our allies. The deterioration of strategic relations is more than a matter of personality and it stretches past this administration.

But what you are also saying is that at the end of the day, it doesn’t matter in so far as the U.S. is not going to be thrown back to the stone age. This is not the end of the dollar, this is not the end of our economy. In fact, this might be the beginning of the beginning, if you’re talking about onshoring and reindustrialization.

Peter: You kind of have to look at it a little bit as in phases of history. In the aftermath of the revolution back in the 1780s, the United States was an agrarian coastal community, and then we just started bit by bit moving inland. We had the War of 1812 that kind of underlined that the future of the country had to be inland for security purposes, but we still didn’t build a military because we really couldn’t afford it. We rip ourselves apart, then, in the Civil War. We come back together during Reconstruction, and the end of Reconstruction is really the birth of the United States as a major power, because all of a sudden we had had kind of this 30-40 year vacation from the world, where we actually integrated the North, the South, the Midwest and the West, during a period when the rest of Europe was dealing with Napoleonic conflict and its aftermath. We were left alone to digest a continent, and at the same time the industrial revolution was going on so we did so with things like telegraphs and railways. So the country that entered the Civil War was agrarian and was riven regionally. And once it came out of Reconstruction all of a sudden it was all in one piece, the largest population, the most unified population, the greatest financial power, the greatest agricultural power, the greatest industrial power, and we just kind of exploded on the world all at once. We became the factor that settled World War I, we became the factor that settled World War II. And in the aftermath of World War II there was no one else left standing so the U.S. could basically write the rules of the world, and that was the global order, and that is where we have been ever since.

What is different now as opposed to 1946 is that we have had 70 years to fine-tune our system, particularly our military system, and so our navy today is about ten times as powerful as everyone else’s put together, and the last I checked, almost all global trade, about 90%, travels the ocean. So the United States is the determining factor in whether this works or not, but since we are not a trading nation – [unclear] if we were a trading nation – we can shut down the entire system at a moment’s notice without actually suffering much ourselves, and that is the status going into this new era.

No one else has the military capability. Because of demographic reasons, no one else has long-term consumption capacity. And the United States has the ability to intervene anywhere, at any time, for any reason, and really not suffer any consequences. So whether you celebrate the United States because it is a democracy, or because it is your home country, or whether you hate the United States because it is not your home country and you don’t like what it does in the world, the degree of American independence and exceptionalism – define that term however you want – is about to become an order of magnitude more important than it has been before, limitless ability to act, limitless immunity to the effects of those actions. That is where we are about to be.

David: You are making a case that there are countries who have benefitted significantly from the stability of the last 40-70 years, and that dependency and that stability is now shifting. It is not going to affect us as much as it does those who develop dependency.

Peter: There are two categories of countries that arguably benefitted the most, the former empires, particularly the smaller ones who couldn’t stand up to Great Britain, and then the colonies which became free and had a chance to actually develop into significant powers of their own, and that is everybody from Korea to Poland to Italy. None of that would have been able to function without the global order, which means you have to ask yourself whether these countries can continue to function without the global order, because that is absolutely where we are headed.

David: Now, there is a gentleman who loves to pick at the current economic system that we have – Thomas Piketty. He might take aim at your suggestion that the world has improved so dramatically in this period of time, and some today would argue that the benefits have only accrued to the connected and the already wealthy. Can you respond (laughs)?

Peter: Oh sure. That’s actually a relatively easy one. One, I will leave it to other economists to pick apart his thesis of inequality. There are some weaknesses in there, but that’s not my bailiwick. My bailiwick is that stability causes wealth. Have you ever read The Great Leveling?

David: Yes.

Peter: One of the crazy things about international affairs is that in periods of stability wealth rises, the economy differentiates, diversification becomes the norm, and we get more and more complex structures in the supply chain. In those environments, when you are seeking maximum efficiency in a period of relative peace and wealth, the people who can figure out how to do it the best, get this widget built better in this spot as opposed to that spot, those are the ones that accrue the most wealth.

Stability, by definition, generates inequality, and we have had the longest period of stability in human history under the order. The greatest period of equality the world has ever seen is the end of World War II because we leveled everything. We broke down the economies of scale that existed, we destroyed the industrial base, and we were all poor together. So whether or not Piketty is right or wrong in terms of his overall thesis I will leave to other people, but I can guarantee you that stability means inequality and chaos means equality, but also poverty. So you can pick which one you want.

David: I guess you would also argue that out of stability comes an improvement in things like education, security, connectivity, democracy, human rights. There is a long list of things that come with stability, including that one thing that Piketty is picking at – inequality.

Peter: Which means we have seen some of the greatest advances in the human condition the last 70 years, and those are now under threat. And I think we have passed the point globally and passed the point in this country to even start the conversation about what it is we are trying to save. I think we have missed that opportunity completely.

David: There is this issue of losing a common foe, and terror was clearly not enough of a strategic foe to unite and align the interests of the global community. Is there anything else? Global climate change? What issues can you imagine that could sort of stand in for a unifying evil that must be fought that could somehow change your thesis of disuniting, and perhaps bring us together in a different way?

Peter: Let me first explain why those other options haven’t worked. The Cold War was great for mobilizing people because there was no aspect of global thermonuclear war where anyone comes out ahead. Everybody would just be wiped out. So it was very easy to focus minds, both in the United States on both sides of the political aisle, as well as across the entire alliance network. Of course we squabble. Not everybody agrees on everything. But that core thesis that we have to prevent this from happening – that everybody bought into. It didn’t work with terror because to be perfectly honest, terrorism isn’t new. It was just new to Americans.

And so everyone else in the world thought that we were having an outsized response. And with history being greater in hindsight, they have a reasonable point. The Europeans always had higher terror attacks. They were always more proximate to the Islamic world. And so, did they think it was a problem? Yes. Did they think we should take action? Yes. Did they think that action should be global in scope? Yes. But they were like, “Hold your horses, there is no point in making this worse than it needs to be.” And I would argue that political Islam, radical Islam, in the Middle East is far more powerful now as a result of our policies to fight terrorism than it had been when we started. We have created a bigger problem down the road.

Coronavirus isn’t going to be that thing because we’re seeing different rates in different countries based on different systems and different responses and different health care quality and different demographic structures. So it is easy, actually, to see certain countries, using air quotes here, “winning” the coronavirus crisis, and because of Americans’ ability to reindustrialize, source what it needs locally, have a skilled population, have a strong production base, the United States, despite what is probably going to be a hefty death rate, is one of those countries that will probably come out of this ahead.

But what you need is something that a broad array of nations, not just democratic ones, not just advanced ones, see as a threat. And I would argue the only even theoretical candidate for that is China. It is a nuclear power, it’s exploitive, it’s putting out some horrendously damaging, but stupid, propaganda on the virus right now, and it is already trying to position itself as a world leader, but to be perfectly blunt, nobody is buying it.

So that is a possibility, but I honestly don’t think that China has the duration or the staying power to make any of this work, or to make an alliance work. The Soviet Unions were cut off from the world. They were relatively resistant to global changes economically, and containment was a decades-long strategy. If some sort of neo-containment policy were to run against the Chinese they would crumble within a year. They are massive importers of every raw material you can imagine, most notably energy. Their social, political and economic system is completely based on the mass exploitation of their population, and then exporting the product for the wider world. The One Child policy means they are losing their consumption base. They cannot function in a vacuum. They have to be integrated. So if you snip those ties of integration, China falls apart.

You might be able to have a brief burst with a very, very good diplomatic president in order to generate a temporary alliance structure. But then as soon as China cracks, you would have to find something else. And we haven’t found something else in 30 years. I don’t think that any of the people who have expressed an interest in being the American president in the last couple of decades are the types of folks that could actually make that work. Let me rephrase that. I don’t think there is anybody in this presidential cycle who has expressed interest in being president, could make that work. If you go back ten years you get into a different crop.

David: Let me tease our listeners with a couple of chapters that you have. One that talks about the four carrots of the American order – physical security, maritime security, unfettered market access, and a floating global currency. Contrast that with the British model, which was sticks instead of carrots. And those orders are, according to your argument, going away, which leads us to a very critical discussion on how geography defines and becomes a more defining factor in terms of country, specific strengths and weaknesses. And then that plays into your list or bifurcation of the countries that you see as emerging great powers and the countries that are short-listed for struggle and decline.

I want to do a quick overview of each of those countries, the country report cards, on each of those. Maybe you could just, before we get into the report cards, tell us about the critical assets that contribute to national survival and power, the four things that you see as really key and sort of define these groups of winners and losers in terms of the countries that you analyze in your book.

Peter: Sure. The first one is you have to have a decent geography. You have to borders that are resistant to invasion. But you also need to have a core zone where transport is really easy so you can actually integrate your population, grow your own food, move things around your own system. It’s kind of a balanced transport issue. You want it to be easy on the inside, but difficult to penetrate the borders. That already eliminates 80% of the earth’s surface. Very few countries have that.

Second, you either need to be able to grow your own food or have easy access to a close, friendly market where you can get it. That eliminates half the earth’s surface right off the bat. Third, you need a demographic structure that is relatively favorable to long-term development. Young people are the ones who do most of the consuming and most of the work. Older individuals, people roughly 45-65, generate most of the capital and they have the value-added expertise. You have to have a balance between those two groups that doesn’t get overwhelmed by, say, a large retiree cadre.

And you have to make sure that your birthrate stays up long enough, and high enough, that you never run out of young, immature workers. What we have seen, between industrialization, urbanization, and the order, is that this balance has now collapsed in most of the world. Based on where you are, the birthrate collapsed in most parts of the world between 1960 and 1990, and we are now in this final cusp where countries have run out of children, run out of young workers. They have a lot of mature workers, but they are all becoming retirees. And this decade a lot of that flips. China is on that list.

And then finally, you have to be able to keep the lights on. Energy is critical. And petroleum is, obviously, the form we are most familiar with. Green energy is what we are all excited about potentially going to, but neither of these technologies work everywhere. With oil, you either have it or you don’t, and if you don’t have it you have to ship it in, sometimes from a different continent. And green power sounds great. It’s easy to say that solar power is free, wind power is free, but it’s not. You actually have to pay to put that up and maintaining the grid is a lot more difficult, and you have to go and electrify everything.

So if you want to run everything off of electricity you are talking about quadrupling your power supply. Solar and wind are not that intense. We can’t store it, it is difficult to transmit, so you are really only talking about 5% of the earth’s surface where green tech really works and can make a big difference as the technology exists today. Those four things don’t exist in very many parts of the world, and having all four is a very, very vanishingly rare issue.

David: So those four inputs are important now that the countries that you see as emerging great powers in the decades ahead. Maybe it’s global, maybe it’s regional powers. The list that you have – France, Turkey, Japan and Argentina. Let’s do a quick report card on each of them. Where do you want to begin?

Peter: Well, let’s start with France because it’s probably the country most Americans are familiar with. We like to make fun of the French from time to time because they are really good at cutting their cheese into easy to weigh rectangles, all that good stuff. But really, the French have won more wars than anyone in history except for the Brits. The fact that they are right next to the Brits, of course, is the reason they have lost a lot of the ones that they have lost. But they are a very successful nation, stretching back 1500 years.

Their borders are pretty good. They have deep, thick forests, or mountains on most of them. They have good naval access. They are a great agricultural power. The river system they have is fantastic. It lends them to a natural integrative system. And despite the fact that they have a relatively rugged chunk in the center, the Massif Central, the rest of the country is so easy to move around that they have even kind of digested the ethnic groups that are up there. In a world without the United States, the only country they need to worry about in the short term is Germany, and German is going to be focused further east, as opposed to west.

So France is going to become what it has always wanted to become – the broker of all things in Western Europe. That doesn’t mean they won’t have challenges, but this is something that they have been born for and have been waiting for for decades, if not centuries.

Let’s do Turkey next. Turkey is the most powerful country within 1,000 miles in all directions. They have a reasonably potant navy. Their core zone, the Marmara, is one of the most fertile and easy to defend places on the planet. Istanbul, the former Constantinople, has only fallen three to four times throughout all of recorded history. And everybody in their broader neighborhood either, A) wants to be on the Turks’ good side, or B) is too weak to matter. So Turkey is going to be able to define its region however it wants. The biggest complication it faces is internal. They have kind of been on a vacation from history for the last century. And they are going to make a lot of mistakes along the way, but they have a lot of wiggle room to make those mistakes.

Argentina is kind of like a mini U.S. The Pampas region is kind of like the Midwest, very fertile, crisscrossed with navigable rivers. There is really only a handful of countries that are even bordering that and none of them are threats. Chile is on the other side of the Andes. Paraguay and Uruguay are basically satellite states between Brazil and Argentina. And Brazil is one of the countries that is probably going to see the greatest fall during the disorder, which means that Argentina is left to shine. Now, Argentina has had a series of governments that are literally textbook examples of how not to run a country. But despite 80 years of catastrophic government, it is still the richest country in Latin America. People who look down on Argentina have got to be able to square that, the natural richness of this country is phenomenal, and if the rest of the region, or the rest of the world, is having more problems and has issues with financial access and rule of law and transport, Argentina knows how to operate in that sort of environment. It has been for decades. They’ll be just fine.

And then the last one is Japan. At a glance, it is kind of hard to understand why Japan is one of those four. Its agricultural zones are weak. Its population is the oldest on the planet. But it is an archipelago. And that changes everything. Because for Japan to exist as a nation in the first place, it has to have a powerful navy. And it has used that powerful navy to go out and get the things that it needs. Japan, today, has the second most powerful navy in the world. It is a position that it will not give up in our lifetimes. And that means it can go out and integrate with choice bits of its neighborhood or the wider world, whether it is southeast Asia or the western hemisphere, and get the energy it doesn’t have, and get the food supplies it doesn’t have.

And one of the things that we have seen since the collapse back in the 1980s is that the Japanese have basically changed their economic structure. They are no longer export-based. In fact, they are one of the least involved economies in the world as a percent of GDP. They are almost as isolated as the United States. So if the global connections break down, they are going to do just fine.

David: So then once we get a snapshot of the countries that can do well in the times ahead, there are the countries that are left that arguably today seem like the rising stars, whether it is China, Germany perhaps not so much in recent years, but they have certainly claimed market share, so to say, within the European Union. Talk to us about Germany, China, and Russia and Saudi Arabia, Iran and Brazil, those who have vast natural resources, so you might argue that at least in the case of the latter four – Brazil, Iran, Saudi Arabia and Russia – maybe they have a future. Talk to us about those that have the resources, those that need the resources – Germany and China – and what some of the challenges are that they will face.

Peter: The first thing to keep in mind is that those six countries – Brazil, Germany, Russia, Iran, Saudi Arabia, China – the thing they all have in common is they are all wildly dependent on global exchange, and none of them have the capacity to guarantee that global exchange. So Brazil, Saudi Arabia and Iran are wildly dependent on the export of raw material. You can’t do that without global markets and without security, particularly in the eastern hemisphere.

China and Germany are wildly dependent upon the import of those raw materials and then the export of finished goods. They get a double dive. Not only are they going to have a problem getting raw materials in the first place, but if you are looking at a global economic breakdown and global demographic implosion, global demography will not be able to consume the products that are on offer, doubly so if the United States basically takes its markets and goes home because there are only a handful of countries that actually have positive demographics where their consumer market is stable. The U.S. is far and away the largest of those, bigger than everybody else put together, and it has taken its market and leaving.

So these economic models that have been built up, especially over the last 30 years, are going to come violently unwound. For countries like Brazil this is even worse because the products that they export, iron ore for example, there are other producers in areas that are likely to be relatively safe, Australia at the top of the list. So you will see a decline in demand for the product, but no change in the supply, and that price structure is just not enough in order to make a country like Brazil work.

Another thing that those six have in common is that their geographies are kind of awful. China’s is internally riven, and there are very few periods in China’s history where they have actually been able to integrate with themselves Either they are in some degree of civil war or breakdown or some sort of foreign power has come in and preyed upon them. It is only under the order that that trend has been disrupted. These 70-75 years of the order is the longest period of Chinese peace and prosperity ever.

The Germans – wide open frontiers, far more so than the French, and unfortunately for the Germans, one of those big, open frontiers leads directly to Moscow. Those two countries, just by definition, are at each other’s throats. Brazil is like a table that lost two legs, but the lowland is not on the coast, so if you want to develop Brazilian resources and enrich the population, you first have to basically run infrastructure up a cliff, which is as hard as it sounds. Saudi Arabia is a broad, open desert. They have literally nothing but oil.

Iran is the opposite. It is a series of mountains, the most expensive territory that you can possibly develop. Now, none of these countries is set up for success, but all of these countries have experienced the greatest expansion in wealth in their history under the order. And for countries like Iran and China and Russia who see themselves as strategic competitors with the United States, it has to be galling and disbelieving, in equal quantities, to think that the only thing that is allowing their systems to continue to work today is this lingering American strategic inertia, and when the Americans really do leave, it is the end for them.

David: It is fascinating to me, when you are writing about Iran how sort of wealthy and ahead in terms of the global structure they were to a point in history. And then when structural things change, if you’re not on board with those changes, you can be left behind, and it radically reshapes your future. In this case it was technology. They were not around for the industrial revolution, didn’t integrate with it, didn’t bring it in, and it left them behind. There are different kinds of being left behind, whether it is not participating in the development of naval wherewithal, or the Industrial Revolution, but there are countries that have, in the past, represented greatness and have not martialed the resources necessary to maintain that greatness and move it into the future generation.

We have talked about stability, defining the last unique period of time. So let’s imagine the U.S. in a state of global disorder, your disunited nations. The disruption in stability globally reinforced our position of strength, chaos being a tool and potentially a desired end of foreign policy.

Peter: One of the great lessons of the global order which the United States forced upon the system was that we told everybody that geography doesn’t matter anymore. We’re all going to enjoy a degree of security and interaction, interconnectedness, that we couldn’t before, and the United States will enforce it. For countries that had great geographies – Turkey, France, Argentina, Japan – this was kind of a bit of a disaster, because these are countries that could have looked after their own interests. They could have been regional powers. But the United States basically smashed that and forced everybody to be part of the global norm. If the global norm changes, and if the United States is no longer imposing its security, then countries that have great geographies will do well once again. Not just those four countries, but first and foremost the United States more or less has a continent to itself, security risks don’t really emanate in any meaningful form from Canada or Mexico. They are now partners, they are now family.

So the large American system in North America works great and it is laughable to think that there is an extra-hemispheric threat that can hit North America when the Americans control the high seas. And that allows the United States, should it choose, to expand. But we’re not into that as the United States right now. In the aftermath of the war on terror and certainly in the aftermath of coronavirus, the United States is going to want to take a pretty good breather from the world. And it is going to be several years before we start the conversation in this country about what we want to see out of the world. That might require another crisis, and that crisis can’t happen until there is another country out there that we find kind of threatening. Well, we’re talking 20-25 years in the future for that.

So in the meantime we have some lingering foreign policy issues that are still kind of driving out of a sense of inertia a little bit with the global war on terror. But for the most part we’re going to kind of sit it out. That doesn’t mean that Americans are going to be gone from the world, but it does mean America will be gone from the world. You will still see individual Americans taking advantage of the situation and going out to pick and choose their economic engagement.

There is no way that you can have a wealthy, well-fed, well energied, well supplied America that is rich and have no Americans who think that aren’t some advantages economically to be had in parts of the world that just can’t make it function, a kind of reprise of the dollar diplomacy foreign policy that we saw between the Spanish-American war and World War I. We made a lot of money during that time, we generated a lot of bad blood during that time. But that is probably the most coherent foreign policy that we are likely to see in this country for the next decade.

David: So back to that issue of chaos, is that potentially a tool? We have created power vacuums in the Middle East and it may be that we are creating, in terms of the disunited nations, even more of a power vacuum. Does that instability elsewhere play ultimately to our favor?

Peter: It absolutely does. We haven’t gotten to the point where it is a conscious, deliberate policy, but we’re going to get there. American foreign policy going back over a century has been to try to set up regional balances of power so that the United States does not have to do all the security lifting itself. For example, we backed Stalin against Hitler, we backed Mao against Stalin. We’re really good at getting into bed with people that under normal circumstances we wouldn’t.

Most countries in the world right now are dependent upon a degree of interconnectedness, and since the United States controls the environment that allows that interconnectedness to happen, it is easy to see the United States going in and breaking up trade routes or supply lines or sowing conflict in places that resources come from, specifically to hobble strategic competitors. If, on the outside chance – I don’t think this will happen, but on the outside chance the United States really came to think of China as a meaningful strategic competitor over the long run, all it would have to do it go into the Persian Gulf and stop oil from flowing to East Asia. It would be over in a month.

David: I want to come back to those four critical assets that contribute to national survival and power. It is something that we have today, all of those. You mentioned usable and defensible borders. You talked about reliable food supplies. You talked about a sustainable population structure, good demographics, and lastly, access to stable energy inputs. And this is something that has really reshaped the conversation. The math changed, the map changed, I think is what you said earlier, as it relates to shale energy.

And there is this question, really, a concern in my mind when you look at the usefulness of cheap credit to drive the shale oil boom, and look at how difficult it is to continue that game if you don’t continue to have access to cheap capital. What risk do we have to stable energy input? We consider it stable today. What if instead of 12-13 million barrels a day we move back to 8, and all of a sudden needed to care more about Saudi Arabia? Today we can divorce ourselves from their trajectory, but in a world of less energy production domestically, does that have us re-engaging with some of the order’s allies?

Peter: Let’s talk scope first. We’re not at 12, we’re about at 18. Twelve is just what is coming out of the shale fields, themselves, that we consider traditionally crude oil. Once you throw in things like natural gas, liquids, that are in many ways better then crude oil based on what you are after, we are definitely up to 18. We were in the midst of a correction in the shale industry in 2019, as credit costs, as you noted, were going up. And there was a lot of stress and a lot of the smaller players were falling out of the market. But we still had record growth and output.

We are not going to have growth this year. It’s not because of the credit issue at all. It’s because oil prices have tanked. We have already gone below 30. We’re certainly going to go below 10 if something significant doesn’t change. That has nothing to do with the credit situation in the United States. It is because all of these quarantine lockdowns basically have people traveling less and that has a catastrophic impact on demand. So we’re probably looking at global demand being down about 15 million barrels a day right now, which means by the time we get to the end of April or near the end of May, everybody’s storage everywhere will be filled up and then we will really see the catastrophic drop in prices. We haven’t experienced that yet. That is going to hit shale right upside of the face just like every other energy producer.

This won’t last forever. Oil production will fall off the market and demand will come back. But a couple of things to keep in mind, U.S. Shale is no longer the marginal producer, is no longer the high cost producer. Full cycle production in the Permian basin is certainly below $40 a barrel, and in the rest of the shale fields, overall, it is very rare for it to be above $50. That is already below the global average for oil prices. So in terms of price, shale is actually in the best bucket for coming back once this is all over.

Then there is the issue of time. You want to bring on a complex well in interior Kazakhstan or if you want to bring online a deep water well off of Alaska, you’re talking about a multi-billion dollar ten-year project. But you can bring a shale well online in Texas for just a few million dollars in less than six weeks. So whenever there is a recovery anywhere in the system, U.S. Shale will probably take up the majority of the market share. So in the next few months, couple of years, if you are shale operator, it’s going to suck. There is no way around that. You might go bust. Consolidation is the order of the day. But now that Chevron and Exxon are the big players in the shale fields for the first time, they have the capacity, and they have the organizational structure, and there are enough pipelines in place that it will just come roaring back very, very quickly.

In addition, while only about 5% of the earth’s surface is good for solar and wind, almost half of that good territory is in the United States. We are the first world country that is closest to the equator. The entire southwest is a great solar zone, and the Great Plains in the Midwest are great for wind. So we have replacements, we have different diversification options, and most importantly, the nature of the technology of shale itself means that it will be coming back very, very quickly as soon as the circumstances get back to something a little bit more standard.

David: As we cap our conversation today, there have been efforts to unify around something different than a U.S. created order, to work around the IMF, to work around the World Bank, to work around U.S. dollar hegemony. Are these efforts unlikely to go anywhere, in your view?

Peter: In my opinion, any system that tries to build a global work-around has to rely on the security environment that the United States provides, so in the end it is a waste of time. Now, as we Americans step back, and as the global system breaks down, these systems that try to go global can’t, but that doesn’t mean they can go regional. The United States is not the only hard currency, and as we have less and less international connections and less international trade, that will affect finance as well, and so you will need regional lending projects. But these are very unlikely to be the result of transnational cooperation.

If you remove the Americans from the equation – let’s just look at Europe for a second – the German demography is awful and they have to export. But the demography in the rest of Europe isn’t all that great, and it is not that everybody wants to import. You are looking at a fraction of what makes Europe Europe. So the countries that are left standing are the ones that might be able to build some of these alternative financial houses. That is probably not going to be Germany because it is too dependent on external connections. But it could very well be France.

In East Asia, you are going to see exactly the same thing. Japan is the country that is going to have to come up with some sort of alternative system, and Japan and France, just take specifically those two, are likely to be the two countries that are going to seek connections to the United States in an attempt to maintain good relations, maintain some sort of shadow of the security order. France because the United States and France really don’t have a lot of overlapping interests, so it could be a very professional, friendly relationship, Japan because it realizes instinctively what happens if you get on the wrong side of the United States. There is opportunity for collaboration out there, but it is regional, and it will be very clear who is in charge of the region.

David: Well, here we are finishing our conversation on Disunited Nations: A Scramble for Power in an Ungoverned World. Peter, where should people find your book – Amazon, or do you have a preferred source for them to go and purchase it?

Peter: You can find the book anywhere you want since most of the world’s bookstores are closed right now. I’m a big fan of IndieBound. If you just go there, you type in your zip code, you can find your local bookstore and most locally owned bookstores, while they are storefronts open for business right now, are still doing deliveries for prices the same as Amazon. So support your local bookseller.

David: IndieBound, to support your local bookseller at a price comparable to Amazon. It sounds almost too good to be true.

Peter: Well, also Amazon is running overtime just stocking food and medical supplies, so the book division is in the process of, not shutting down, but they are not taking new inventory, so local booksellers, definitely the way to go.

David: Thank you for bringing your insights and taking the time to write not only The Accidental Superpower, but The Absent Superpower, and now Disunited Nations. We appreciate your contribution.

Peter: My pleasure.

Stay Ahead of the Market
Receive posts right to your in box.
SUBSCRIBE NOW
Categories
RECENT POSTS
Greg Weldon: Silver Looks Good Here
An Interview With Charles Goodhart
The Economic “Sweet Spot” Reversal
Gold Will Play A Role In The New Monetary Regime
Apple Mentions A.I. & Gets Free Pass On Falling Earnings
Global Discord: Paul Tucker Interview
Currencies are Tattletales
What if China Ruled the World?
Double your ounces without investing another dollar!