Charter Cities Podcast Episode 6: Peter Zeihan on the Determinant Power of Geography and the Coming Disorder
Joining us on the show today is geopolitical strategist, speaker and author, Peter Zeihan! Our conversation spans a wide range of connected topics, centering on the immediate future facing the United States and the global economy, with particular attention given to the question of China.
Peter holds a somewhat less common position on China's supposed power, arguing that the country is a paper tiger, waiting to ignite. He does a clear job of explaining this perspective and how so many casual theorists seem to have got it completely wrong.
Drawing the argument back to the US, Peter then explains the stability, even in today's chaos, that the country has and by extending his scope to Europe and the Middle East, he shows the huge part that geography plays in the unfolding of political and economic power struggles. We discuss the examples of France and Germany, as well as outlying African countries and Peter underlines the central part that geography and access play in all of their destinies.
Bringing the conversation firmly into the present, we then consider the role of technology and particularly the latest tech innovations in possibly disrupting the established order that Peter is describing. According to our guest, even AI and the rest of the digital revolution is not yet enough to overhaul the legacy of the industrial revolution and it will still take many further developments for this to occur.
We get into the question of the global economy and the trajectories of the world's strongest currencies; again Peter demonstrates why America's positioning will allow it to be non-reliant on others, a definite strength moving into an uncertain age. Links mentioned on today's episode can be found below the transcript.
Transcript (edited for clarity):
Mark: Hello and welcome to the Charter Cities Podcast. I’m your host, Mark Lutter, the Founder and Executive Director of the Charter Cities Institute. On the Charter Cities Podcast, we illuminate the various aspects of building a charter city. From governance to urban planning, politics to finance, we hope listeners to the Charter Cities Podcast will come away with a deep understanding of charter cities, as well as the steps necessary to build them.
You can subscribe and learn more about charter cities at chartercitiesinstitute.org. Follow us on social media, @CCIdotCity on Twitter and Charter Cities Institute on Facebook. Thank you for listening.
My guest today is Peter Zeihan. He is an expert in geopolitics, the study of how place impacts financial, economic, cultural, political, and military development. He’s the author of The Accidental Superpower, The Absent Superpower and his most recent book, Disunited Nations.
Mark: Welcome to the show, Peter.
Peter: Good to be here.
Mark: To start, your most recent book is Disunited Nations, about what might be described as the coming global disorder. Can you describe what that means?
Peter: Sure. There’s two things that have shaped our world for the last 70 years, especially the last 40. The first is in the aftermath of World War II. The Americans found themselves facing down Stalin's Red Army. They're like, “Holy crap. This is not something we want to do. It's certainly not something that we can do alone and we certainly can't do it as an imperial occupying force.”
We had to come up with a plan that would allow us to motivate everyone else to stand up shoulder-to-shoulder, not with us, not behind us, but in front of us, because we were in a different hemisphere and we just couldn't deploy fast enough to counter the Soviet Union. We came up with the idea of the global order, which would allow anyone to participate in any international trade with any market, grab any resource, all without needing the military to guard it. We would do that.
In addition, we'd open our markets so that everybody else could export to the only consumer market of size that survived the war. We basically paid everybody to be on our side. That worked beautifully. Eventually, that alliance is what defeated the Soviet Union in the Cold War. Come 1992, the Soviet Union was gone and the strategic rationale for the alliance went away. The strategic rationale for the global order went away in Americans’ eyes. 30 years after that, here we are. We have now seen a procession of four presidents that have become ever more skeptical of the global system, ever more disinterested in the United States holding up the ceiling, and ever more willing to explore other alternatives.
Trump is not odd. Well, Trump is odd, but he's not odd in a strategic sense. He's just the next step down that road. Honestly, whoever's next, from the point of view of the rest of the world, is even going to be more disengaged and maybe even more hostile. That's piece one. Everything that's allowed the system to exist at this point is based on a military plan that is no longer applicable.
The second piece is demography. People in their 20s, 40s, and 60s act differently. People in their 20s do a lot of consuming, people in their 40s are very high value-added, and people in their 60s are moving into retirement. That has different implications for things like consumption, or investment capital, or government expenses. What we have seen is, starting in 1900, we had more 20-somethings than 40 somethings than 60 somethings. The “demographic pyramid” is the term.
That's what you would expect. As industrialization kicked in, as urbanization kicked in, and as the global order increased wealth levels and kicked all these other things at the high gear, we started having fewer kids, we started living in more dense urban cores. After 20, 40, 60 years of that, we now have more 60-year-olds than 40-year-olds than 20-year-olds in most of the world.
The 2020s was always the decade when the bulk of the advanced world was going to move into mass retirement. The bulk of the developing world was going to run out of people in their 20s. Consumption-led growth is about to become technically impossible. Investment-led growth is about to become technically impossible. That means for the rest of the world, the economic model is that of a retirement community. If global trade from a strategic and security point of view was going to collapse, and if global trade from a consumption and investment point of view was going to collapse, we were on the verge of something new anyway.
The real kicker is that just because the US isn't upholding the global order, doesn't mean that the United States lacks the military capacity to look out for its own interest. It certainly does. It’s maybe 10 times as powerful as everybody else is put together. On the consumption side, the United States is the advanced country that is aging most slowly. We have the Millennials and the Millennials get a lot of crap, but they exist and they're consumers and they're having kids. This is not a demographic twilight in the United States, like it is in Canada, or Korea, or Germany.
We are aging, but we're aging most slowly. The global system is going away, but we don't use it. Most countries can't look out for their own strategic interests. We can. We are going through a transition in this country. It will not be comfortable, but it's an order of magnitude less than what everybody else has to deal with. We get to see how they deal with, or fail to deal with, these changes and we can adapt appropriately.
Mark: Thanks. One of the key parts of your thesis is interesting, because to my knowledge, you’re the only person presenting it, and that is the rationale for the global system as a defense compact, instead of what might be called a mutually beneficial free trade compact. I’m an economist. I'm trained as an economist. Most economists love Adam Smith and think free trade is great, comparative advantage is good, this allows for both sides to benefit. What’s increasingly being called into question is China, which we can get to later, in terms of geopolitical tension. Ignoring that aspect, there is the implicit part of your thesis that the global order was constructed as an anti-Russian implement, the explicit as a part of your thesis. But an implicit part of your thesis is that this free trade is perhaps not as beneficial as some economists might assume or argue that it is.
Peter: I don't think those two theories exist in isolation. The United States is certainly capable of trading if it chooses to, it's just that it has a continental sized economy and a developing world economy of size that it broadly trusts, Mexico, hard on our borders. We can have a regional trade system that matches all of our needs and have comparative advantages, without needing to have a global system.
Let me fuse two things together you're discussing there, the idea that it might not be quite as beneficial as the theory suggests and then the China situation. Whenever you've got a structure where somebody basically pays you to be on your side, there will always be a question and an ebb and flow of benefits versus costs. When the Soviet Union was there and the threat of nuclear Armageddon was very real, there were certain things the United States was willing to put up with.
When the politics changed and all of a sudden, the Soviet threat is not perceived as aggressive as it used to be, then the needle moves. United States was willing to put up with Europe, basically product dumping on us through the 60s and 70s and early 80s, because that was the price of having an alliance of several hundred million people to face down the Soviet Union with us, or honestly, for us.
It was worth the cost. The Sino-Soviet split, when Nixon went to China and brought China into the family of trading nations, brought them into the order, that was totally worth it, even though the Chinese just dumped, dumped, dumped, dumped, dumped, because it put a break in the Communist world and really set the stage for the collapse of the Soviet system. That doesn't mean it's always been that way.
In the mid-80s when Gorbachev had come to power and things look like they were pretty calm, we forced the Europeans and the Japanese into the Plaza Accords, which basically forced them to revalue the currencies, driving the currencies up by about 50% versus the US dollar in six months. I mean, that was neo-imperial. What's going on with the Chinese right now, we're no longer getting what we perceived as a strategic benefit, and so we're willing to play hardball with the Chinese.
I would love to think that at some point in the next year or two, there's going to be a Plaza Accords moment, where the Chinese see the writing on the wall and realize that their economy can't function without American involvement. I think we've already passed that point. I don't think the Americans are sufficiently interested in maintaining the order any longer. I think to be perfectly blunt, the Chinese have abused the situation and a split is inevitable.
This isn't decoupling. Decoupling implies that there could be two parallel systems that just don't deal with each other. The Chinese are absolutely dependent on American market access and American security involvement in the world. Their economy in its current form can't survive without the United States at all. I think that's exactly where we're heading.
Mark: Sure. Well, let's explore a little bit more, because I think that is another non-mainstream point, where right now there is this fear of rising China. There is this sense, for example, even though they suppressed information about COVID early, subsequently they have appeared to have had a much more effective response than most Western countries. Obviously you have East Asia, Taiwan, South Korea that have also responded effectively. But there is this growing sense with Belt and Road, for example, the US is playing what might be described as a responsive game in Africa, in parts of Southeast Asia.
There is this sense that China is a growing power. Their purchasing parity power is higher than the US. They are beginning to float a deep-water navy. Their population is much higher. They are still able to build. Shenzhen’s subway miles are comparable to New York’s subway miles. There is at least, among part of what might be described as the elite intelligentsia, of this China envy. Why is that wrong?
Peter: Well, there's a lot to unpack there, because pretty much all of that is wrong. Let's start with the navy. The Chinese in terms of number of hulls do have a larger navy than we do. In terms of tonnage, there's something like one-third. About 90% of their ships cannot sail more than 1,000 miles from a home port. They can't even break out of that first island chain, much less reach American shores, much less patrol the Persian Gulf, much less protect a globe-spanning merchandise and supply chain system.
It is well designed for taking on Taiwan, assuming no one comes to help Taiwan and that's it. Let's talk commerce. The Chinese are export-dependent. They absolutely have to have access to consuming markets. Let's talk tech, the Made in 2025 program that everybody's been talking about. If you talk to any Chinese bureaucrat behind closed doors where they're not being recorded, they'll freely admit that 2025 is the first signpost and they don't expect to hit technical parity with the West, until at least 2080. They've got a lot left to steal and their capacity to generate the tech at home honestly just has not worked out to the direction that they hoped it would.
Let's talk demographics. Yes, it's a larger population, but on average it's already older than the United States population. The one-child policy means that the Chinese have already run out of 25 and 30-year-olds and it's aging, aging, aging. It’s the third fastest aging society in the world. They are going to get old long before they get rich.
Let's talk energy. This is a country that imports over 80% of their energy, most from a continent away. In order to import that energy, they've got to sail by Taiwan, the Philippines, Vietnam, Singapore, Malaysia, Indonesia and India. Any one of which could easily interrupt all tanker traffic. Don't even get me started about a military conflict with a real country like Japan or the United States that could just stop all of their commerce without sailing within 3,000 miles of the Chinese shore. This is the biggest paper tiger in human history. It's going to burn this decade.
Mark: What does that look like when it burns? I'm of two minds; one is that I think a lot of the points you've raised are valid. At the same time, there's this idea of organizational capacity, where the US has lost the will to have big dreams, to have big visions, to be able to execute.
On Twitter recently, we saw at Elon Musk was considering moving his factory from California and then a California congresswoman tweeted, “F Elon Musk,” except not as politely. He was like, “Okay, message received.” The US has this anti-building culture, while China still builds, still believes in things. Their science fiction is representative of that, because some of the people who are writing it grew in rural abject poverty and have seen China industrialize.
How do you balance what might be called the “general organizational competence?” Then, what are the specific sequences of events that lead to China burning, or at least a plausible sequence to do that?
Peter: Organizational competence is a normal part of the development process. As most countries develop, they go from relative centralization with relatively low regulation to a more diversified governing system that has a higher regulatory burden. I don't just mean that in terms of business regulation, but cultural constraints. The United States is now a little over two-and-a-half centuries old. We have evolved to the point that we have a much more diversified political system than we used to. Diverse means many voices. Many voices means we don't always agree and that does keep things in check.
I'm not saying that we couldn't use a bit of an overhaul here. That would be really useful. I'm just saying that it's not exactly beyond the pale. It pretty much fits the historical pattern with other countries.
While Han Chinese culture is maybe 3,000-years-old, the Chinese governing system is really only about 40. It took them a while to recover from the Japanese occupation, from the Korean War, from Mao's tender mercies, and they really only turned into the governing system that we now understand today in the late 70s. Then they only really started to develop in an economic sense after the Mao-Nixon Summit and getting into the global order in 1980.
When you only have one voice, it is really easy to make things happen. It is really easy to build skyscrapers and subways and high-speed trains and those all look great and they're flashy. I'm not suggesting that they're not useful, economically, politically, and otherwise. You also make a lot of mistakes, because there are fewer things to stop you from doing things that are just monumentally stupid.
Probably 40% of all the housing units in China right now are unoccupied and they probably always will be. China has far more construction than they need for an economy of their size or urban structure of their situations. I don't mean to take away from some of the Chinese accomplishments, especially considering the long arc of Chinese history, they've been monumental. That doesn't mean that they're sustainable.
The real problem we have in China is financial. The Chinese basically confiscate most of the savings for private citizens and force-feed them into projects that achieve national goals, whether it's full employment, or a great infrastructure system, or it's a new skyscraper. That sounds good. It generates a lot of economic growth and that's why the headline numbers will always look great. If it's not productive growth, if it's not profitable growth, then all of those loans can never be paid back.
The Chinese today probably have corporate debt, which honestly this is mostly state-run corporations, of about 300% of GDP, which is the highest in the world in absolute and relative terms. They basically run their country on the Enron model of throughput over profitability. That's great until it's not. Every country that has ever attempted to follow that path has eventually had a really hard crash, whether it's Indonesia, or Korea, or Japan.
The difference between China and everyone else is the Chinese have prevented themselves from having a correction. All their inconsistencies have built up decade after decade after decade. When it does go down, I fear it's going to be absolutely catastrophic. Now to answer your other question, how can this all go wrong? Chinese history is rich with examples of how the whole place can go to shit in a very short period of time. This is a country that has never held together well and it's a country that has always been vulnerable to threats internal and external.
Foreign invasion is always a fun one. I don't think it is particularly likely right now. Internal breakdown of some sort is usually the more likely vector for breakdown, some implosion. The Chinese can face that in consumption, they can face that in energy, they can face that in finance, they can face that in government.
If I had to guess, I would expect a hybrid this time around, that we have a financial collapse and a demographic collapse on one hand internally that threatens the power of the party internally. At the same time, there's some external crisis that inhibits either the export of finished goods to generate income, or the import of the raw materials that are necessary to keep their system going, most notably energy. One could trigger the other very easily and honestly one would almost certainly fold them to the other. If that happens, I would say the most likely outcome is that the southern tier of city states from Shanghai south become de facto independent, just like they have been for the vast, vast majority of Chinese history.
The North drops into a famine-ridden, neo-Maoist tyranny, where it just reverts to a pre-industrial status and half the people die. I know that sounds awful, but honestly when you are as exposed to American kindness as China is and the Americans stop being kind, I honestly don't see how this even holds together, much less thrives, much less keeps the lights on.
Mark: That's a somewhat depressing perspective.
Peter: Remember, the Chinese agricultural system uses five times the inputs of the global average. They don't have good farmland. The only reason it works is they apply a bottomless supply of inputs, like fertilizer and pesticides, all of which are made from imported materials. China's dependent on the world, not the other way around.
Mark: Let’s get into this, because I think this is one of your other major theses, that geography is somewhat deterministic in terms of outcomes. What is Chinese geography and, beyond being a net energy and food importer, what other important characteristics of Chinese geography are there that has shaped its direction in the past and will in the future? And then more generally, how does geography play out in Europe and US?
Peter: When you're looking at food, or raw materials, or energy, or whatever it happens to be, China is typically the largest importer of pretty much everything. There are some exceptions, there are some things where the Chinese excel at processing, and so they do play a supplier role to the world. For the most part, they're an absorber. The geography really is the problem. The biggest problem is strategic, the first island chain from Japan down to Singapore, the Chinese have never been able to punch through that and interact with the world in a corporate manner ever within their entire history with the exception of during the American-led order when the Americans put everyone on the same side.
That is the factor that has changed, is that the Americans have neutralized the geographic factor that most heavily has constrained Chinese development since the dawn of the Han ethnicity 3,500 years ago. All the Americans have to do if they want to destroy China is go home and geography will take care of the rest.
Within China itself, the North China Plain is where the majority of the Chinese live. That's where the Han ethnicity originated, the center of their power, but it's not like the American Midwest. The soils are thinner, they're not as fertile, and they don't have a river transport system. Moving things by water is about 1/12 the cost of moving them by land, and so American farmers can tap the greater Mississippi system to shuttle stuff around very cheaply.
The Yellow River not only is not navigable, it's both drought and flood prone. You have very few average years. If you have a flood year, it tends to overthrow its banks. The last time it did that, it killed about a 100,000 people. If you have a drought, that's not useful for much at all. If your homeland is both drought and flood prone, it's difficult to have continuity there.
Most of Chinese governance until 20 years ago was focused on managing the water system, because if you couldn't manage the water system, you couldn't irrigate, you couldn't farm, you couldn't have a population. At multiple periods in Chinese history, you'd have some disruptor that would come in, whether it was an internal warlord, or an external power, and they'd smash the waterworks. That would just shatter Chinese civilization for 30 years and they'd have to start over completely.
I'd argue that the Chinese really didn't get the Yellow River tamed until this century. Beyond that, this is the good part of China up north. If you move south of there, you'll hit a series of highlands and mountains and you'll get to the Yangtze Valley. The Yangtze is a little bit like the Mississippi in that it's navigable 2,000 miles inland, but it's broken up by a series of mountain chunks and cliffs that make it difficult for the entire zone to integrate with one another. There are no huge chunks of flat land, except for the very, very bottom and at the very, very top.
Those two areas, Sichuan at the top and Shanghai at the bottom, are world-class geographies and cities and economic zones. They've always existed somewhat apart from Beijing in the north. These areas actually do have a degree of continuity and economic success independent of being part of China, which is something that drives the northerners absolutely batty.
Then if you move further south, you start getting into the subtropical zone, a much more rugged terrain and those southern city states, Fujian south to Hong Kong, have basically existed on their own throughout almost all of Chinese history. Through at least the last 1,400 years of Chinese history, they've traditionally gotten the bulk of their food stuffs not from northern China, but from trading partners in the wider world.
These are the areas that can be very economically successful, but by linking with non-Chinese entities. So what happens is you have a political-military system in the north that is, to be blunt, despotic, because it has to be in order to mobilize the population to manage the land. You get a more mercantile, industrial culture in the center, which is successful when it's not part of northern China. And your southern city-states can really only function, can really only eat, if they deal with outsiders.
The further south you go, the more economically viable the territory, but the less likely it wants to be part of Han China. Of course, when you're in a situation like you are today when the northerners are calling all the shots, they're worried about separatism, because they should be.
Mark: That's Chinese geography. Let's go to Europe. You discussed Germany, you discussed France, as well as Russia. If we're thinking back in the last 200 to 300 years of European history, how do those geographic factors then impact the cultures, the empires, and the wars that have been fought? How do those play into the post-American order after America gets bored and withdraws the global defense umbrella?
Peter: You just summarized a question for a why dealing with Europe is such a nightmare. European geography is all over the place. I mean, the northern European Plain, it's flat, it's well-rivered. The rest of Europe is peninsulas and islands and mountains. Very difficult to control. You'll always have this impetus in the French-Dutch-German-Polish-Russian belt for control, because these are the places that succeeded in trade, these are the places where movement is easy, these are the places where capital generation is easy.
You can get centralized political control fairly straightforward and then it can expand. This is the land of Hitler. This is the land of Charlemagne. This is the land of Napoleon and of Stalin. Big names, big countries, big empires. Then you move to the rest. When you have an area that's mountainous, or an island, or peninsula, it's much more difficult to consolidate control. You're going to have a more fractured political system and it's going to resist control from any central authority locally or God forbid, from the northern European plane.
European history is always this massive pendulum that swings between periods of extreme efforts at centralization and extreme efforts at fractionalization. There's conflict on the way in and there's conflict on the way out. Once you threw in industrial technologies, the conflict got crazy and we had the World Wars. The World Wars were only different because of the technology. Everything that caused those wars had been in existence in Europe for 2,000 years and we had seen it play out over and over and over and over and over. It's just we had bigger guns this time.
Then the Americans come in. They’re like, “Geography doesn't matter. You're all on the same side. None of you have to fight for anything anymore. You can all just grow.” We got the longest period of peace and prosperity in European history. Finally, for the first time, Europe is united, at peace, and free, and it's entirely artificial.
You remove the Americans, and even if countries on the outside, whether it's China, or Turkey, or Russia don't try to take advantage of the situation, Europe will probably fall back into its old patterns. Because consumption is not even, investment isn't even, infrastructure money isn't even, financial strength isn't even, and that means it’s silly to think that without a broker to force the issue that the Europeans can figure out this by themselves, because they've never been able to do so before. That doesn't mean that the Europeans aren't smart or creative, it's just a fact of geography.
Mark: Given the importance of geography in outcomes, why was there only one Roman Empire?
Peter: I'm not sure I follow.
Mark: If geography is determinative, then presumably if we run history again, the political units running the second time around look somewhat similar to the political units the first time around. There might be some differences around the borders, but presumably, France is still approximately France, Germany is still approximately Germany.
The Roman Empire is a very successful political unit for almost 1,000 years around the Mediterranean. There is access to a lot of green land, there is access to a large trade network in a semi-enclosed sea. Given the importance of geography in political determinism, then why did that not reform, given that there was a sufficiently long period after it devolved until the Industrial Revolution, and geography put that forward again?
Peter: Why was there only one Rome?
Peter: Part of it was technological. Until you get to the 14th century, the technology of movement was relatively limited, roads were incredibly expensive, and navigating the oceans was dangerous, until we got deep water navigations, compasses, bigger ships, better sailing systems, all that good stuff. It was really hard to do the Atlantic. Until the Iberians figured that out in the 1400s and combined all the technologies from the previous hundred years, we were stuck in the Mediterranean as being the largest enclosed sea that was safe.
What set Rome apart, a couple of things; number one, they had a slight technological advantage, especially in military technology. Then you throw in their road building program and that allowed them to move troops relatively quickly for the era. When I say for the era, I mean really up until the 1700s. We didn't get concrete until relatively recently in human advancement, it was one of the early industrial technologies.
As for why it wasn't copied, we had a number of other powers, Persia being the big one. The Russians there on the flanks starting to pop up. That started to take advantage of the situation and started to pull the power that constrained the possibility for a new Roman growth. Mostly, it was the Schism. Rome split in half and we had the Eastern Roman Empire and the Western Roman Empire.
The Eastern Roman Empire, headquartered at Constantinople, today’s Istanbul, had access to better lands. The Nubian Valley was easy to settle and the Eastern Roman Empire was able to settle that zone pretty easily, which left the Western Roman Empire with land that wasn't quite as good.
Spain was probably the best territory and it's not the best agricultural land. The rest of the Mediterranean was a little touch-and-go, and it was about between the time of Christ and roughly 1,000 AD when the Sahara went from being a desert to a severe desert. A lot of the capabilities of the northern African coast just became a lot less interesting from an economic growth point of view. If you throw in a few plagues that destabilized the Western system and Rome collapsed, the eastern system lasted on longer, but before somebody else could recreate the empire, the eastern system collapsed because of the Turks.
The Turks almost became a second Rome. They conquered all the good territory in the east, they grabbed Egypt, they grabbed the Balkans. If they had won their sieges of Vienna in the 1200 and 1300s, they would have probably been able to spill out into the northern European plain and dominate it. Then we would have had a very different chapter of world history and we would have had your second Rome.
They came close, but ultimately it was an alliance, Swedes and Poles, of all things, that beat them back at the second siege. That broke Turkish power in the region and set them on a 200 to 300 year collapse, while what we now know was Europe started to pop up. It was a near thing.
Mark: You talked a little bit about American geography, but America is a largely self-contained economy in that our percentage of trade is low compared to the global averages. I think 8% of American GDP is based on trade. Obviously, we have neighbors and a lot of the resources we need. Could you go into a little bit more into the specifics of the advantages of American geography and why America benefits from this coming disorder and is willing to abandon the global system like you suggest?
Peter: Well, I'd first argue that the Americans really haven't thought this through. The fact that this is going to work out for the United States is largely coincidental. We're not very good at strategic planning in the best of times and we now have for presidents in a row that haven't even spared a spare thought. We'll see how this works out.
The United States’ geography is fantastic. The Midwest is the largest chunk of high-quality temperate zone agricultural land in the world and it's directly overlaying the world's largest interconnected, naturally navigable waterway system. The greater Mississippi by itself has about the same number of miles of navigable internal waterways as the rest of the world's river systems combined, and the United States has some subsidiary systems in California and the Pacific Northwest, and the Northeast and of course, the Great Lakes. All told, we're just shy of 20,000 miles here. The rest the world combined has about 11.
We've got that. It's easy just to move things around the system. In addition, our coasts are fantastic. Most of them are heavily indented, allowing for a lot of internal merchant trade on the ocean and we can then trade internationally if we want to. Europe is the only other part of the world that has anything like that. In addition, we're all in the temperate zone, so we don't have to worry about overly cold winters, we don't have to worry about overly hot summers. We get insect kills every winter, which keeps disease and healthcare costs down. That's something that you're not going to see in most of the global south.
Those rivers generate capital, and that capital is what funded at our industrial experience. There's really no security threats. We've got oceans that protect us from the bulk of the human population. Canada, we had a couple of spats with early in our history, but we eventually settled those. The same thing went down with Mexico. All of that was sorted out within the first century of the United States. We haven't had an assault on the mainland from a conventional power since the Mexican-American War. That's spectacular.
Mark: What exactly do you mean when you say that rivers generate capital?
Peter: If dragging something from point A to point B costs you a lot of money, you're not going to drag it very far. Most of the world's cities, until the Industrial Revolution, were only about 6, or 7, or 8 miles square. That includes the huge cities that we think of, like Paris and Moscow, because if you could only move it by horse, or in a backpack, and you had to eat stuff to get there, you're not going to go very far.
The zone at which a city can tap the surrounding countryside for agricultural produce is very limited. That limits what you can do with population density because we're talking pre-industrial here, so you can't have a 20-story high-rise in the year 1400. You maybe have a 2 or 3-story building, and the bigger the city is, the longer it takes to get things to the city core. There's only so much useful territory you can grab.
Rivers allowed you to cheat, because if you can get it to a river, then you can float it anywhere. The American cities were able to feed themselves with things that were literally grown in the middle of the continent, because we could float it down to New Orleans and sail it up the East Coast, or send it up the Great Lakes and get it in the Erie Canal and get it straight to New York. That allowed us to use roughly a third of a continent to fuel whatever city we wanted. When you can do that, when the transport is that cheap, you generate a lot of capital and a lot of internal trade from that, and that's what gives rise to a financial system.
The world's major financial centers are where they are for good reasons. Tokyo, London, New York. They weren't hubs of maritime empires. The only thing that was different about the American empire is that ours was internal.
Mark: How does shale enter your thesis?
Peter: Shale certainly helps. The technology of shale is to basically go down a mile or two and then drilling laterally a mile or two in order to get crude that’s trapped in little pockets. There's nothing secret about the technology anymore. It is starting to disperse, and most energy producers use some of the techniques everywhere. Whenever somebody says they want to ban fracking, what they're really saying is they want to ban all fossil fuels. I wish they would be a little less disingenuous about it, but whatever.
It's a technology. What it has meant is that the United States has gone from a total oil production of about 6 million barrels per day to, based on how you define the term crude oil, about 18 million barrels a day, which puts the United States into a net export situation. This does not mean that the United States is done playing in energy markets, but it does mean that with hundreds of billions of dollars of tweaks to our industrial infrastructure, the United States does have the option now, simply ceasing to participate in global energy markets and just worry about the regional market.
Now if you had asked me back in the year 2005, what the future of the world was, I would have still said that the United States was going to back away from most everything, but it was going to have to remain aggressively involved in a handful of locations, in order to protect its energy needs. That is no longer the case.
Instead of the United States needing to man an almost neo-imperial alliance of 20 to 30 countries, it now is disengaging completely. We have gone into a world now where the United States is likely to only have a half a dozen allies, and maybe not even that many. The United States is going to be very bossy within that network.
For example, the Koreans were one of the first countries to figure out what was going on here in the United States. The Korean president came to the Trump administration and basically sought out a bilateral deal on America's terms, knowing that if the Americans were not involved, if they didn't want to be involved, they just leave Korea. There's still a chance that we will. The United States is now presenting the Koreans with a 5 billion dollar annual bill in order to keep American troops.
The Koreans are saying, “No,” and the Americans are saying, “Fine, we'll leave, because we don't care about the trade deal.” The Koreans only have a few months left to figure out if this is a price they're willing to pay. The Japanese paid the price. They basically put their entire navy, which is the world's second largest, at the disposal of the American Navy when it comes to combat operations, something that the Chinese should keep in mind.
The Brits thought there were our best friends. But with this whole Huawei thing, the Americans are basically canceling trade talks, until such time as the Brits come around. We're actually removing military assets from the United Kingdom now. Really, unless you're in Mexico, which is a special case, any other country that wants a relationship with the United States has to both do things our way and pay us. After 70 years of the Americans doing all the heavy lifting, that's a big concept to get your mind around.
Most countries don't think the Americans are serious. Most countries think the Americans have too much sunk cost. As an American, that's how I feel, but people who believe my way have now lost eight straight presidential elections. We’re gone, and everyone else, left, right and center, has moved in a different direction. They're taking the country with them.
Mark: In one of your books, you discussed how the culture of Germany allowed it to industrialize extremely fast after being united. How do you think about cultural formation and the effect of geography on cultural formation? Islands have different cultures that emerge, versus plains people, versus river people. Then what effect does that have on their ability to adopt new technologies?
Peter: Well, it's going to be different for every country in a different era. In the case of Germany, it was a fractured land among major powers, whether it was Denmark, or Britain, or Austria, or France, or Poland. It's always pressed in. It was a very difficult geopolitical environment to exist in. The Germans have always been better planners than everybody else.
At the local level, so in the case of Germany, you had Bavaria and you had Munich and all these other regions. At one point, there are like 800 different Germanies that had top-notch local planning, because they had to punch above their weights, because they were dealing with the French Empire and they’re dealing with the Polish Empire. Once industrialization happened, the first thing each of these little city-states would do is build a local rail network. Since they were so close together, it was child's play to take two of them were next to each other and link the rail networks.
In less than 20 years, Germany was railed. That is what started the German Empire almost overnight. They went from all these feuding, disputing city states and regions to an explosive industrial growth. That took Europe by storm in a series of seven major wars, two of which we know as the World Wars. Of course, the Germans won all of them, until everybody else ganged up on them.
That cultural muscle tone still exists in Germany. Germany is capable of extreme political and economic achievements when the geopolitical circumstances are right. Since 1960, they haven't been right. All of that energy has gone into economic development, which has made Germany the manufacturing powerhouse it is today. Throw the Americans from the equation and take the security blanket off of Europe and Germany is likely to start acting a lot more like Germany and the same energy and organization and capacity and competence that they direct towards economic strength can very easily be turned and used towards military strength.
Again, does that mean we're about to have a new Nazi Empire? No. Does it mean that this concept of Germany as a pacifist, socialist utopia is probably over? Oh, yeah. Germany acting like Germany, even if they're nice about it, it's still going to scare the crap out of everybody else in Europe. It should. In contrast, let's look at France, very different. You've got an area where three different river systems intersect and that's Paris.
Paris has always been at the center of everything and that's one of the reasons why the Parisians are so cocky, because they’re used to be in charge and they're used to being successful and they're used to everyone looking up to them as the pinnacle of human culture. There are pros and cons in this. It means that when the French decided to throw resources against something, they can throw a lot of resources.
Here in America and in the Anglo world, we're always focused on all the wars that the French have lost and cutting their sheets in the easy to way of white rectangles. Aside from Britain, the French have won more wars than anyone else in history and they're very good at it. They just have lost wars to us.
Mark: One of the main factors of history is the Industrial Revolution, where if you look at living standards, Malthus was right until about 1800. After which, there was a sustained rise in personal living standards, as well as growth in population. The economic story is that this was driven largely by technological innovation, that there were a series of innovations from rails to steam to steel to internal combustion that allowed for this tremendous increase in living standards.
That is effectively what allowed England to conquer the world. You don't have a very small rainy island that is able to become the largest empire the world has ever seen without this technological advantage. How do you see geography and technology interplaying? There's also the subset of future of technology like AI. If China is able to get AI first and, depending on exactly how you conceive of AI, can you think of it–.
Peter: Changing the rules of the game. The technologies that have shaped the human condition, the three since the very, very beginning, sedentary agriculture, deep water navigation, and industrialization. Sedentary agriculture preferenced certain geographic zones, terminal river valleys, places where you could have high productivity per unit of labor, per unit of land. We don't think of this as part of our collective, cultural experience, but it is. Before sedentary agriculture, most successful cultures, if that's the right word, because you're really in a big political unit, basically went up and down the mountains with the seasons, because they just followed wherever the frost wasn't.
Sedentary agriculture allowed us to, for the first time, have food surpluses and allowed us to store food. If you’re going to store food, you need a mathematical system and you need a road network and that put us on the road to civilization and that brought us Mesopotamian Egypt and so on.
That spread out in bits and pieces was based on wind power, because if you could build a windmill, you could grind grain. You could widen the zones that you could have a successful culture. We went from having a half a dozen places around the world where you could have successful governments to hundreds of thousands over the course of about a 500-year period, where technology spread.
That eventually brought us to deep water navigation, which allowed us to travel the world and that allowed us to take zones that had huge agricultural potential, but not a lot of security potential. An empire could capture them and then bring the food to other locations where it wanted a city or wanted to wage a war. Egypt was the premiere territory that everybody wanted to capture, because you had a slave population that could basically grow all the food you could possibly want.
This is the era of the Japanese Empire, the British Empire, the French Empire, and so on. Industrialization kicked that into high gear and allowed us to use road and rail and power, increase the amount of power by a factor of roughly a 1,000, and allowed us to transfer power itself independent of wind and water and muscle. That brought us the world we know today.
What is unique about these technologies, or what you have to keep in mind about these technologies, is each technology suite has a different terrain and a different geography that it preferences. Sedentary agriculture, regionally terminal desert valleys that had a degree of security insulation, so you could have your people working 12 hours a day in the fields and not have to worry about defending themselves and that gave us the pyramids.
With deep water navigation, peninsulas were great, because you could only need an army on one side, but islands were better. It started out in Iberia, it migrated to the United Kingdom. Industrialization was all about capital, because you actually had to build infrastructure on a large scale for the first time. Navigable river valleys did great. It started in Britain with the Thames, it graduated over to Germany, which has a much better river system, about 2,000 miles, versus about 500 miles.
One of the reasons the United States has done so well in the last couple of centuries is that we are the best deep water power, because we basically have a continent to ourselves and two ocean coasts, and we’re the best industrial power because of our river network. That's the simple reason for why the United States has done so well.
The question moving forward is whether digital technologies put us on the verge of a new fourth stage of human technological prowess and whether that will change the geography of success again. The short version is it's too soon to tell. We're only a couple of decades into the digital revolution right now. Longer version is that it's probably not this one.
Yes, the digital revolution has created new industries. Yes, the ability to transfer information at the speed of light around the planet would suggest that geography doesn't matter as much. The mode of transferring that information has indicated that security issues are actually more important, rather than less, moving forward.
A couple of examples, the Twitter revolution in Egypt at the beginning of the Arab Spring about a decade ago. The military had decided that they really didn't like the Mubarak government. Gamal Mubarak, the son of the president, was someone that they particularly detested, he was trying to basically establish himself as a pharaoh. The military stepped back and let the revolution happen. Two years later, the military decided that they didn't like the civilian government that had replaced the Mubaraks. They stepped in and they disabled the two Internet boxes that allowed information from the rest of the world to come and go away from Egypt.
By doing that, they were able to sever the revolutionaries and the government from the rest of the world and from each other. With two little cable cuts, the military was able to completely disconnect the digital economy and the digital communications network from the population, the military through their own coup. The Russians come to speak to the Egyptian military as is like, “Wow, that was really neat. How did you do that?” The Egyptians showed them and the Egyptians go back home and there are four cables that come into Russia.
The Russians put kill switches on all four and now the Russians have managed to establish a neo-Orwellian information state and they have the capacity of severing Russians from the rest of the system and from each other whenever they want. The Chinese have done something similar. If push comes to shove and there's ever an issue of government continuity, or famine, or war, or any other horseman that pops up, any country in the world can simply limit their connections to the rest of the world. It has not become omnipresent. It has not been put into civilian hands. It is not something that you can take actions against your government should they choose otherwise. That goes to the United States as well.
All of the old rules still apply. Economies of scale, physical security, arable land, temperate zone climates. Digital technology has overlaid that and it is changing things and it is altering industries from the base level, but it hasn't changed the rules of how countries interact, because it hasn't yet subsumed, or overwhelmed geography in the way that industrialization, or deep water navigation did, yet.
Mark: What about anti-aging technology? Can that help overcome demographic changes?
Peter: Oh, God. I hope so. Probably not, or at least not anytime soon. The issue is that most of the research in the last 40 years has gone into extending lifespans, as opposed to extending productive lifespans. Yes, a lot of people can live in their 90s now, but they still can't really work past their 60s, even before you consider things like Alzheimer's and dementia, physical degradation in terms of being able to do work mentally or physically really, really accelerates in your 60s.
Even if people are still mentally capable, they're often not physically capable of doing the work. There are some industries where there's an exception and there are plenty of individuals that buck the trend, but not enough to move the baseline. We would need A, a significant shift in how we do research into aging, not so much can you live till you're a 100, but can we get a cure to Alzheimer's? We just haven't invested in that.
Two, it would have to be cheap enough that could be applied to tens of millions of people a year. Three, we would have a cultural shift, where people in their 50s and their 60s would agree to extending retirement into their 80s. I think honestly, that would be the biggest of the three challenges.
Mark: We've talked about Europe, the US, China, a bit about Southeast Asia. How do you think about India's geography and what that looks like for the coming disorder?
Peter: India has the worst and the best of it. Let's start with the depressing part, India is never going to be a world power. It's blocked in its region by deserts and mountains and jungles. There's no technology that exists that allows us to pierce the Himalayas in any meaningful way. I mean, getting one gravel road up there that's open three months a year. I'm sorry, that doesn't count.
None of the rivers in India are navigable to the coast, so you might be able to use them for a little tourism internally and that's about it. You'll never use them for shipping. The Ganges zone is this weird, very, very strange climatic geography when you look at the global hole in that it's for the most part, temperate, but it really doesn't have snow. You have constant growing seasons without having the damage of the tropics.
Northern India, massive, massive agricultural surpluses, which means massive, massive populations. Without a navigable river, there's no financial capacity, there's very little capital per person. In fact, in northern India, the capital availability per person is much lower than it is in sub-Saharan Africa. That gives you a huge population growth but grinding permanent poverty. India is probably historically speaking, most similar to the Holy Roman Empire, in that it is not really a single entity. It's dozens of entities that just happen to coexist in the same area. It's a great testament to the Indians that these areas are not fighting with one another. It used to. That's the bad.
The good, India's more or less been in this form now for 1,500 years and it hasn't fallen apart. In a world without a global order, where international transport is limited, the Indians never really adjusted their system to take advantage of the global order. They're not going to face the same degree of collapse with a lot of other countries, like say in Europe, or East Asia would. In addition, India's the first stop out of the Persian Gulf, so they're probably not even going to have an energy crisis.
There will be some tough times ahead, adjustment to this new global system. It's going to be difficult for everyone, but India has very little distance to fall. It's actually probably going to see an increase in its international significance as it becomes the arbiter of energy flows from the Middle East to East Asia. That's a powerful position to be in.
Mark: What happens in the Middle East? I think one way to interpret MBS and what he's doing, for example, with NEOM, is basically a Herculean modernization project, where he's trying to prepare for the post-oil world, by creating a new city and new industries. I am wont to believe that it won't be successful, just because of the tremendous nature of the task. If it is, I think it has to basically tap Saudi women, because they're the only people who haven't been on UBI for two generations, and so there's actually a demand from women to work, where most of the men have basically been on handouts for so long that there is little concept of meaningful work remaining. Obviously, all of this changes with changes in oil prices and exports, and what does that look like within your model?
Peter: Whether or not it's women that can save Saudi Arabia or not, that's a thorny question, to put it mildly. If Saudi Arabia is ever going to be anything that is not just an oil emirate, it has to completely overhaul its cultural and educational system. Right now, unless you're doing religious studies, there is no educational system in Saudi Arabia and that is not by accident.
The Saudi royal family is, to put it unkindly, basically the Beverly Hillbillies married to a bunch of religious fundamentalists. In that environment, people who are educated are perceived as threats, because they have capacity that is independent of the Saudi royal family and independent of state, and they probably have some ideas in how to run place better and they're probably right.
It's the same reason why the Saudis don't have a functional military, because they're afraid that somebody from the inside could just take them over. The Saudis are smart and that they realize that their position, their personal position, is not sustainable in an industrial environment. That means no military, that means no higher educational system, and you are never going to be able to turn the economy into anything else without that educational system. An economic transformation in Saudi Arabia, first and foremost means a removal of the Saudi royal family, which they don't want to do.
Everything that has happened with this project is completely an ego project. It would use no local expertise and no local labor, only local money. Honestly, they wanted to get other people to pay for it anyway. It was almost Russian in that regard. No, I don't think this project is going to go anywhere. That was before the Saudi royal family started dismembering journalists in their consulates. Just not going to happen.
Mark: Okay. That's what you think about the Saudis. How does that play into the broader Middle East? Because I think there's basically two questions. One is, if there's a removal of the global order, the US is involved in the Middle East. There were recent reports that the US is pulling some Patriot missiles out of Saudi Arabia, so the US is basically acting as the defense guarantor in the Middle East, the same way it is in Europe.
Then secondly, there is the question of exporting oil if there are no US troops there. Then if there are also no US aircraft carriers that are protecting tankers, obviously not directly, but implicitly, then what happens to the broader Middle East?
Peter: Without the Americans being large and charged and preventing other imperial powers from coming in and preventing the locals from going to war with one another, other imperial powers going to come in and locals are going to go to war with one another. It's just a question of order and timing and players.
I expect the first and the sharpest of the conflicts between Iran and Saudi Arabia directly. I don't think that this war is going to go down in the way that most people have always thought. Everyone assumes that the Iranians are going to close the Strait of Hormuz and that's going to cause a global energy conflagration that's going to force the Americans to come in. Well, the Americans don't use Middle Eastern oil anymore. With the shale revolution, they honestly can go their own way. They don't care about the trade situation. They don't care about the global alliance network. There's nothing to draw them in.
In addition, say what you will about the Trump administration, the sanctions regime that he kicked in against the Iranians has actually been wildly successful. Iran today is no longer an oil exporter. You combine that with the fact that the Saudis have a bypass pipeline out of region completely, goes to the Red Sea, and all of a sudden, Strait of Hormuz is not nearly as interesting of a place as it happened to be previously.
If this war does go down, it's basically the Iranians sweeping through Kuwait on their way to the Saudi oil fields and the Saudis trying to see if their air force is up to the task of destroying the columns on their way south. That's an even fight, but it's not nearly as dynamic, doesn't hold nearly as many implications for the wider world now as it did just three years ago. Because if the Iranians fail and they're thrust to a stop, it doesn't impact Iranian oil production, because there isn't any.
If they succeed and they manage to conquer Saudi Arabia, the first thing they're going to do is export crude. This is not nearly as shocking as a development as we've all been conditioned to think it is. The economic geography of the situation has changed. The real power of the future in the region in the midterm, so next 10 to 20 years, is probably Turkey. This is a country that's waking up from a century alone, a geopolitical nap, if you will. It's time to figure out where it fits into the world. As the global system breaks apart, Turkey is no longer this backwards country at the end of nowhere, it suddenly is the nexus between Europe and Asia and between Europe and Africa.
It is a large, powerful country with a diversified economy right in the middle of everything. If global trade goes away, regional trade becomes more important and it is the linchpin. The question is, what does it decide to do with that power? Turkey is very potent, but that doesn't mean it can go everywhere. Is it going to go into the Caucuses, the Balkans, North Africa, or is it going to go after Greece? Is it going to come for the Arabs? There are a lot of options there. We don't know yet, because the Turks don't know yet.
After that, eventually we'll see the recreation of the maritime empires of the past, Britain, France, Italy, Japan. If the Chinese are very, very lucky, they might be able to play a role there. And the Persian Gulf still has oil and it is controlled by an absolutely militarily incompetent regime. Eventually, someone is going to make it to the Persian Gulf and eventually, Saudi Arabia will be someone's colony again. As for who it will be...? A lot of history that has to play out between now and then.
Mark: We do a decent bit of work in Africa. It has the youngest population, it’s rapidly growing. Currently, the geopolitical implications largely have to do with European migration, where Europe five years ago was at least verbally saying, “Yes, we will welcome everybody.” Now there's videos of the Greek Navy basically trying to flip refugee boats. That situation is likely only to continue. One, how does geography fit into Africa’s historical development? Then two, what can we expect from the region in the future going forward with a post-American breakdown?
Peter: The naval path to Europe is now closed, is the short version, because of coronavirus. It's going to be a solid decade before Europeans will feel that the use of lethal force to prevent refugee movements from the northern coast of Africa to Europe is not warranted, because they can say that if you haven't been vaccinated, there's no point in even trying. In fact, you're a health threat. You're trying to kill people by your very presence.
What we're seeing in Greece is probably the start of a new normal and a far more lethal border enforcement mechanism. On land, it gets more complicated, because you actually can bar that with fences and walls and everything. On the sea, it's over. That's that.
Africa's problem has largely been geographic. There's not a navigable river on the continent and the continent itself has an escarpment that averages about a 1,000 feet tall right at the coast. Then there's a series of plateaus. In some places, five. It's difficult to run infrastructure of a plateau anywhere, especially a rail line. You might be able to get a few roads in the interior, but you're never going to have an African rail network.
What that means is we get these little enclaves, places like South Africa, or the Kenya-Uganda corridor, where you can run limited infrastructure in and those areas can interact with the outside world, like those city-states on the southern Chinese coast. You're never going to have an interior system of size. None of these networks can connect to others. The African development model to this point has been tap lines. You build infrastructure to a specific resource that you want, you exploit that resource, you bring it to the coast, and you ship it out to the imperial power who's in control, or the wider world in general.
Under the global order is the first time that these countries have been able to exist in any form and not very many of them have been very successful, because at least they didn't have to worry about being colonized. Any security threats they had were just from one another and the geography of the region tends to limit how these countries can get at each other.
Most military conflicts during the global order structure have been when a country has imploded and everyone else has come to grab a chunk. The Congo Wars are the quintessential examples of that. The Great African War, if you prefer that term.
Moving forward, the global order is over, and so the capital supplies are going to get more difficult. Most of the growth we've seen in infrastructure and most of the growth we've seen in personal consumption for the last 15 years has simply been– we've had a lot of people in their 50s in the advanced world, which has pushed down capital costs, which means that you can apply money to things that you wouldn't have applied them to before, because the cost was lower. It's like the equivalent of buying a slightly larger house, because interest rates are low. You apply that writ large to a continent and you get the Africa story that we have today.
The global baby boomers are all moving to retirement within a few years, so that capital is going to dry up. The infrastructure that is not sustainable and completed within the next two to four years, that's it. It's over. We go back to an imperial mindset when it comes to economic integration, tap lines for resources that are specifically needed, probably with a degree of security assistance provided from the outside, which is a really nice way of saying that these countries will probably apply to be colonies if they want to be successful, with a few exceptions.
The places that do have a local geography that can still be exploited, where they can still have a certain degree of economies of scale, but there's only six: the Luanda Corridor in Angola, South Africa, Kenya-Uganda, Senegal, the Niger Delta. Nigeria is always going to be a regional superpower and I can never remember at the sixth one. They're all in sub-Saharan Africa.
Mark: Your point about the infrastructure projects drying up in two to four years is a little bit depressing from our perspective, because we're working on charter cities. Basically, new cities with better legal systems to accelerate economic growth, sort of how Shenzhen, Singapore, Hong Kong, and Dubai did it. The bet is, to a certain extent, on continued globalization, on the continued differentiation of supply chains combined with rapid urbanization and bad legal systems that are currently holding back some populations.
Obviously, these cities need to be in somewhat core regions linked in to the broader economy. If you have these specific regions, South Africa, the Luanda Corridor, Niger Delta, etc., that you believe are going to play out, what does the broader structure look like? Do the arbitrary borders drawn in the colonial world breakdown? Do those continue? Is there continued urbanization, or does that urbanization trend revert and what does that look like?
Peter: I think you're probably going to have both. If the global system breaks down, you're going to have much higher and much more erratic energy prices and the ability to bring in consumer goods to any system that can't create themselves is going to dwindle. In those specific corridors, those are areas where you can reasonably expect a degree of industrialization to continue. It's not that it's going to continue at the same pace that it has in the past, but they will have access, at least theoretically, to the outside world. They will be able to achieve a degree of economies of scale. They will be able to generate some local economic activity.
In those specific clusters, I would expect a degree of industrialization to precede apace. However, for the rest of the system, and even areas immediately adjacent to those systems, the cost of development is simply going to be too high. If that happens, you're going to have a deindustrialization impulse, where people really have no choice but to move back to some subsistence agricultural activity.
Now this is going to obviously be most extreme in Africa, but this is not something that is going to be limited in Africa. I'm really worried about versions of this happening in the People's Republic of China as well.
Mark: One thing we haven't chatted about is currency flows. The US is currently the global reserve currency. How does being that currency play in? How do monetary policy and currency flows play into the coming disorder and what does that look like?
Peter: That's another answer that has evolved over the last five years. A short version is today, it's honestly the US dollar or nothing. There can really only be one global currency, but that doesn't mean that there can't be multiple hard currencies. What we've seen is that the Eurozone has been unable to adapt itself to the changing realities. When you've got a demography that is aging into mass retirement and the incapacity of the EU to federalize, this currency is only stable in the very specific geopolitical environment in which it was born in that environment is now ending.
That was before the Germans last week said that Bundesbank is unlikely to be participating in any monetary policy long-term. By long-term, I mean three months from now, is when the ban is supposed to kick in. That's going to get fully lively very, very quickly. Anyway, the Euro has been the only other competitor to the US dollar for 25 years now and it is now dying. The next biggest currency in terms of global usage is the pound and the Brexit situation I mean… we're in the fourth freaking year of this now and they still haven't figured it out.
No one is using the pound as a store of value and it’ll take the Brits at least a generation to be able to regenerate the trust that they had 10 years ago. That assumes that everything starts going right. Honestly, nothing looks like it's going to go right, because later this year, the Brits are going to realize that they're not going to have a deal with the EU at all. If they're going to have a deal with the United Kingdom, they're going to have to cave in on everything that the US wants them to cave in on, just like the Canadians and the Koreans and the Japanese had to do.
At the end of this year, the United Kingdom is no longer a global economy. It is a subsidiary economy to whoever it decides to throw itself at the feet of. That means they no longer are a financial center among other things. That's the end of the pound.
The Japanese and the Chinese, now both of them actually have more money in circulation than the United States, even with the recent monetization. That's because the Enron model of economic development. The Chinese decided they wanted to rule the world. A couple years ago, they started to open up their current account. They started to liberalize their trading system. In less than six months, over a trillion dollars of US equivalent in cash fled the country. The Chinese slammed that back down, realized that not only does the government not trust their own economy, but the people don't trust their own economy and any opportunity to get money out of the system is taken. They went back into lockdown. They're out of the equation.
The Japanese tried the same thing in the 1980s. Had exactly the same result, so they're not interested. Next currency down is Canada. Canadians run a relatively tight ship, but we have discovered recently that the Canadian social welfare model is basically paid for by financial transfers from wealthy Ontarians who are in their 50s and early 60s, moving into mass retirement and the oil province of Alberta.
Well, this is the decade that the majority of Ontarians move into mass retirement, so that money's gone. Right now, oil prices in Alberta are below $10. This is not an economic system that is stable. This is not an economic system that will survive in its current form, which means the Canadian dollar is no longer in the running. The next one down is the Australian dollar. Australia is the most politically unified, functional economy in the world with hard currency after the United States. 22 million people, or I think that's where we are right now.
After them, Sweden, Denmark, New Zealand. That's it. That's all the world's hard currencies. It's just the US dollar here. As the global system breaks down, the US dollar will become more important. Not less. The important things you want if you want a global currency is that it has to be big, has to be liquid, has to be easily exchangeable, and day-to-day fluctuations in its value have to not bother the people who use the currency. US dollar is the only option.
Mark: How does human capital fit into your thesis? Israel isn’t in a very geographically advantageous location, though they have a lot of water desalinization plants because they don't even have water. They have been quite a successful country in terms of income, in terms of standard of living. How does human capital fit into this thesis, in particular with respect to Israel, but also more broadly, is it possible to overcome some of these geographic constraints with effective education, with effective leveling up of more talented people?
Peter: Oh, absolutely. Remember, geography, I don't mean to suggest it's completely deterministic. It's hugely important. It's the most important factor. Think of it like a tapestry. You can paint on it and make it something else, it's still going to be a tapestry. In the case of countries like Israel and South Korea, you have a very creative, very intelligent, very driven population that has just decided that they are going to make this work no matter what.
In the environment of the order, a lot of the security concerns have fallen away. That has allowed you to try to turn the deserts green or build a manufacturing place where no one would have before. That is the success story of these places. Two cautions; number one, the strategic environment that has allowed this to happen is changing. These countries now have to maintain that themselves. In that, the Koreans probably face a bigger challenge than the Israelis, because their security environment is going to change more and their economic environment is dependent upon exports. If those exports go away, then they have to have a complete retooling of their industrial base and their educational system.
Israel only has to hang on. Israel is more than capable of looking after their own security interests. They're not an export-led economy and the countries that they border are not superior to them militarily. Israel can probably make this work. Korea, looking at the facts, I would say is doomed. If there's one thing Koreans continue to do, it's surprise to the upside, so I'm not writing them off yet.
Second, you have to, have to, have to, have to, take a very clear-eyed look at your vulnerabilities. In the case of Israel, they import 80% of their food. All those kibbutzes, they don't generate crap. They are completely dependent on bringing in food from abroad, primarily Europe right now. Europe under almost any circumstance that I can imagine is still going to be a net food exporter. That's probably going to be okay, but they also important most of their energy. Most of that comes from Russia.
What the Israelis are going to have to do is the same thing any other country that's being proactive about this it's going to have to do. They're going to have to find new security partners, they're going to have to find new economic partners, they’re going to have to find new intelligence partners. In the case of the Israelis, they've been able to partially solve this by getting buddy-buddy with the Saudis. The Saudis hate Iran, the Israelis are worried about Iran, so the Israelis provide the Saudis with intelligence on Iran and the odd bit of military training on equipment that the Americans won't train the Saudis on anymore.
In exchange, the Saudis every once in a while lose some crude oil in the general vicinity of an Israeli port. So far, that relationship is beautiful. Between the two of them, two wealthy countries, even if they're both pariahs to a degree, they're going to be able to get food from somewhere, but it does require them thinking a little bit differently about how they operate in their environment and I would say that those are the two countries in the world that are farthest forward in preparing for what is coming.
Mark: After we think about the US action and/or reaction to the coming disorder, previously you've mentioned that the last four presidents have increasingly strayed away from the global order. Right now, your thesis seems to be very much at odds with the current belief of the political class in the US. To a certain extent, the coming disorder requires an American withdrawal from protecting global shipping lanes, things like that. How does that withdrawal necessitate the American political class accepting that withdrawal and then allowing it to occur? What does that changing of minds look like? Is the political class going to remain the same? Is there going to be a new political class that fights them for power? Is there going to be some external shock that leads to this change in view, or is it just going to be a slow, disorganized degradation, like Trump is doing?
Peter: It's all of the above. The global system is messy under the best of times. The United States has injected an incredible amount of order into it over the last 70 years. We now have fewer troops stationed abroad than at any time since the 1920s. That included the more recent surge against Iran to places like Saudi Arabia of a few months ago. Those are what are now being unwound.
We were on deck to not have zero troops stationed abroad, but we're already at historical lows and it's going down. I would argue that the deployment question has already been settled and we've ended every year with fewer troops stationed abroad since year six of the W. Bush administration.
I'd argue that a lot of the political class is already kind of, I don’t know if reconciled is the right word, but it's certainly gotten used to this being the idea. If you look at trade issues of the God knows how many people who were running for president on the Democratic side, all of them said that Trump was being too soft on trading issues. Trump is now what a free trader looks like in American politics.
As to the political class question, that's changing too. The United States, because of the way its political system works, has a reshuffling of both parties every generation or two. The last time we did it, it's almost been a century. We were wildly overdue. Whenever there's a big change in technology, or a big change in geopolitical circumstances, or a big change in financial circumstances, you normally have this reshuffling. Well, we've got all three of those right now. The financial crisis, plus COVID, changes in digital technologies and interaction, and then the collapse of the global system in the aftermath of the Cold War.
We've been edging this way for a while. The factions that make up the American political systems, whether it's the fiscal conservatives or the labor movement, they've all been shifting not just in terms of what they believe, but which party affiliation works for them. Sometimes this is not conscious. Sometimes this is not willing. For example, the Trump administration has largely ejected from the Republican coalition, national security conservatives, business conservatives, and fiscal conservatives. They're just gone. There's very few of them left in Congress at all and the Republican Party has basically been reduced to being an adjunct of Trump's personality.
On the Democratic side, it's always been a more chaotic group because it's a larger group, but we've seen a lot of movement. The labor movement for example, they're no longer Democrats. They switched lock stock and barrel over to team Trump. You remember when the NAFTA Accords was put before Congress for ratification back in December? The reason that happened when it did is that the Democrats had been saying, “No, no, no, no, no. This is a Trump issue. We don't want to give them a win.” Then they looked up and saw that the AFL-CIO president was in the Oval Office praising NAFTA 2. They realized that they had lost the unions.
It got shoved through Congress in a last-ditch effort to maintain any link to organized labor, but that's gone. I'd argue that Hispanics are in play and as a rule, they're very socially conservative. They’re actually the political group in the United States that is most favorable with Mexico. This reshuffling usually takes four to 12 years. We are now in year three, so just at the beginning of the process. We have at least one, probably two more presidential elections to go through before this settles out. Until that happens, Americans are largely incapable of committing themselves to anything international.
We're 30 years out of practice. The national security conservatives are no longer part of the American political process. We're left to the proclivities of whoever happens to be in charge and Trump has a very short attention span and very little patience for international issues. Right now, we're strategically adrift. We've been strategically adrift for almost a decade and yet, the United States is still here. We’re involved in fewer wars, not more. I think the American population writ large is fine with that.
Anyone in the political class as you put it, who wants to have the United States have a strong international position, has to be able to convince their voters as to why that is something we need to do. Unless something on the outside happens, it scares us or spooks us that forces us to get involved again, I don't think that's going to happen in the next decade.
Mark: For the final question, what does the future of political organizations look like in the coming disorder? For the last 70 or so years, it's been nation states, where there is a group that has a pretty clearly geographically defined territory. In the older ones, Europe, it tends to also have a defined national identity. In a lot of the newer ones, because the lines were arbitrarily drawn by the Europeans, or some arbitrary national identities, but there are these older tribal identities that could take precedence.
The nation state is somewhat new in human history, or only a few hundred years old as a form of social organization. Empires are much of older. City states are much older. Obviously, different continents and different locations will have different political organizational forms, but are there any broad ideas for what these future organizational forms look like in the coming disorder?
Peter: Well, the nation-state isn't going anywhere. The nation-state is a creation of the industrial era, because we're able to take these specific geographies that were very successful, locally. They built out industrial infrastructure, which increases their power by an order of magnitude, and then they expanded out and as they expanded thye absorbed territories that aren't quite as good. They assimilate or eradicate people that were not quite as coherent or not quite as advanced. That's what gave us the nation-state model. That's not going anywhere.
If anything, as the global order breaks down, those local successful geographies which now already have the infrastructure are going to remain very, very durable. But we're going to overlay that with a neo-imperial environment, because the countries with geographies that are successful, those core nation states, those now out of necessity or opportunity, are going to expand again. They're going to have a rough transition period, but the weaker places are just probably going to collapse. Then the successful nation-states will be able to use that core zone to expand again, then establish new lines of supply, access to new resources, control of new populations, and we'll have a neo-French Empire again. We'll have a neo-Japanese Empire again.
The United States is unlikely to play that game. We'll probably establish a cordon sanitaire around the entire western hemisphere. If you're a nation-state in the western hemisphere, you'll have to find a way to deal with the Americans, but the Americans are very unlikely to invade anybody. They'll just make sure that no one else can establish a footprint on our side of the planet, if you want to think of it that way.
For Eurasia and Africa, life is about to get a lot more familiar from the point of view of historians, because you're going to see this new struggle for resources, survival, and dominance and some countries are simply better positioned to do that than others.
Mark: Great. Well, thanks for coming on. I’ve really enjoyed this conversation.
Peter: My pleasure.
Mark: Thank you for listening to the Charter Cities Podcast. For more information about this episode and our guest, to subscribe to the show, or to connect with the Charter Cities Institute, please visit chartercitiesinstitute.org. Follow us on social media @CCIdotCity on Twitter and Charter Cities Institute on Facebook. I'm your host, Mark Lutter and thank you for listening to the Charter Cities Podcast.
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