HS 312 - America, "The Accidental Superpower" with Peter Zeihan

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It's my pleasure to welcome Peter Zeihan to the show. He is founder of Zeihan on Geopolitics. He's the author of the Accidental the Next Generation of American Preeminence and the Coming Global Disorder. He is also former VP of Strategic Intelligence at Stratfor and Peter, welcome. How are you?

I'm doing well. How about yourself?

Good, good. Where are you located today? Just give our listeners a sense of geography.

Sure. Austin, Texas. I've actually been home for three whole days, which is my first time in two months.

Sounds like my travel schedule. Although I think yours is slightly worse than mine. So congratulations on being home in Austin. Good place. Tell us a little bit about your book. You know, there's a lot of content here. It's pretty heavy. You know, I want to get your. Your feeling on where America is going. There's a. There's a lot of doom and gloom out there.

Of course, the book runs the gamut everywhere from ancient Egypt to modern Japan. The core concept is to illustrate how geography shapes how countries evolve and where that's going to take us over the course of the next 30 to 40 years.

The US has been pretty lucky geographically, and I think that's, you know, that's a contributing factor, of course, to its success. Will that continue? I mean, is geography that big a deal anymore?

Geography absolutely is that big of a deal. And it really comes all down to transport. If you can move people and goods cheaply and effectively, everything is easier. From building your house to growing jobs, to defense. Moving stuff by water costs about 113 of what it does by land. The United states has about 15,000 miles of waterways, and that is more than the of the world combined. Add on the fact that serious challenges to the United States are literally an ocean away, and the United States has discovered that it can be ruled by monkeys and do just fine.

Love it.

I'm not too pleased with our government lately either, but that's been a long time. Well, other than the geographical issues, so we've got these nice water borders that protect us. Certainly European countries don't have that advantage. I mean, transportation is changing, new technology. You know, certainly there's a lot going on out there.

Yes, I would say that geography is obviously not the only factor. In fact, the second biggest one, the United States, also does well demography. You can split any age structure apart into a couple core chunks. People roughly age 20 to 45. These are your young workers. They're starting out, they're having families, they're buying houses. This is where most of the consumption in a modern economy comes from. So this is where the growth is. People roughly 40 to 65. These are your mature workers. They're saving for retirement, but they've probably sent the kids on. They probably have the house mostly paid for. So this is where all the investments, all the tax payments come from. We're in this weird moment historically on a global scale where we have more mature workers than young workers. That has never happened. So right now, capital is cheap, investment is everywhere. And that's allowing the Chinese to prospect for oil in Ethiopia. It's allowing the Brazil to be an exporting commodity superpower, and it's allowing China to be a big deal. It's allowing subprime to happen. All of the economic headlines of the last 15 years because we have all this investment capital. Well, as soon as this group of people retires, they take all that money with them. And we go from the most capital rich world we've ever had to the most capital poor world we've ever had, except in the United States. Because while the boomers are a big group here, our boomers actually had kids, Gen Y. So we still have the consumption, we still have the investment building up from below, but we're going to be the only ones who can boast that.

Right. That's very interesting. I know. I mean, you look at Japan and then China in about 15 years, both with really huge demographic problems, for sure. And the US because of its immigration and because of generation Y being slightly larger than the baby boomers, just by about 4 million, depending on who you talk to, of course. But I say it's 80 million and 77 million, respectively. That's very good. But.

What are you saying when you say they take the capital with them when they retire?

Well, think about what you do when you're preparing for retirement, you're saving a chunk of your paycheck. As you get older, you save a larger chunk of a larger paycheck in preparation for the big day. And in your last paycheck, you probably put the whole thing in your 401k. What happens two weeks after you never contribute to that savings again. And what you do have in savings is no longer in foreign stocks or mutual funds. It is primarily going to be in cash and government debt here in the United States. So the velocity of your money comes to almost a screeching standstill. So instead of having things that push for growth, push for return, you're more concerned about preserving what you have. So once you turn 65, your money becomes very uninteresting. That's a real problem if you're anyone from Exxon to the corner store to the admiral of an aircraft carrier battle group that has to be funded by the irs. Without that velocity of cash, everything slows down. And in most of the world, it's simply going to stop.

Yeah. So, I mean, I certainly agree with you that older people and retired people become more conservative. But, you know, the new problem, Peter, is too much life at the end of the money. I mean, you look at the unfunded entitlements coming up, and, I don't know, it doesn't look very good. I had Lawrence Cutlikoff on the show, and he's done extensive studies on that. Some people say it's $60 trillion. Some people, like him say it's $220 trillion. And I don't know how we're gonna pay for that except with a printing press. You know, it's. It's not gonna be through taxes, right?

Absolutely. And I'm not gonna put a number on it. It's absolutely massive. There's no way around that. But we're already spending one third on pensions. What the Europeans do, on average. The problems that the Europeans and the Japanese are experiencing right now are far worse than anything that we will actually ever face. And the Chinese are now the fastest aging society in the world. But fun fact, you brought up the printing press. I don't like saying this because I'm a bit of a libertarian, but that's actually an option here because the United States is the only hard currency in the world that exists in sufficient volume to loop the global system. All the other players, like the Japanese and the Chinese, those aren't internationalized currencies. They keep those at home because they realize if they open them, they'd have massive capital flight. The Euro because of the Cyprus bailout a few years ago, they decided to pay for the bailout by using insured bank deposits. Well, that meant that everybody who had euros in a euro account tried to move them if they could. And we've seen the euro absolutely wither as a global currency of exchange, much less a reserve currency. So the next country down with the naturally stable currency is the United Kingdom. Well, the pound only has half, excuse me, one third the circulation of the US dollar. After that, you're talking about the Canadian dollar and the Australian dollar. If you take all the hard currencies that are left and put them together, it's less than half the circulation of the US system. Two thirds of our currency is held abroad. So even if we print currency, 2/3 of the inflation is somebody else's issue. To paraphrase, it's our currency. But it's your problem.

You know, I couldn't agree more that. That's exactly. And I'm not saying it's fair by any means. I am a libertarian, so I'm not saying it's fair by any means.

There's nothing about geopolitics.

Yeah, well, that's a fair statement for sure, but, but you know, the US is in a very enviable position. I have all these doom and gloomers, you know, on the show occasionally from time to time that talk about how, you know, we're going to lose the reserve currency status. And I don't think that's even a possibility. You know, I mean, granted, you know, we see some trading outside of the dollar with the BRICs and so forth, but you know, the U.S. has the largest military humankind has ever known. And you know, between that and the other facts that, you know, we're the biggest customer the world has ever known. We can kind of throw our weight around and make sure we retain that status of having that reserve currency so that we can inflate our problems away.

We certainly can throw our weight around. But the big argument with the accidental superpower is that we don't have to. The global system of free trade was created by the United States at the end of World War II to fight the Cold War. We basically said everybody could trade with whoever they wanted, they could sell whatever they want to us. We don't have to be able to sell back. And we will guard everyone's trade globally. The oceans are now a global commons that we maintain. In exchange, we got to fight the Cold War our way. But we never bet our economic system on global trade. Even today, it's only about 10 to 12% of GDP from the United States is involved in the wider system that is the lowest in the world. For a while we were neck and neck with Rwanda, but because of shale that cut down our exposure just enough that we are absolutely number one. Now even compared to landlocked Central Asian and African countries, that gives us an inordinate flexibility and we can throw our weight around in that regard. But what I see happening is the United States sliding back from its commitment to free trade, which is only going to be a minor inconvenience for us. But imagine what that means for everyone else. If you're an export led system like the Koreans or the Chinese or the Germans and the Americans are no longer committed to keeping your trade safe and your market open, there's a disaster on the horizon.

Wow, that's interesting. So you're saying that, you know, we won't maintain the waters and the shipping and these other countries will have to secure their own exports through, through military.

Well, there, there's a pair of challenges that everybody faces as the United States steps back. Step one is of course, yes. Finding out ways to protect your own international trade, whether that's the export of finished goods or the import of raw materials like energy. So that's challenge one. And there's really only three countries in the world that can do that reliably outside of the United States. Japan, United Kingdom and France. That's it. The second problem is much bigger. If the United States takes its market and goes home. And with the re industrialization we're seeing in the American manufacturing base right now, that's absolutely happening. Where do you sell? You can't just go out there and conquer a country for the market. That's a little difficult. There are a few places where that might be possible on a small scale, but that's not going to allow countries like China to maintain not just the growth rate, but the economy that they've built up over the last 30 years.

Yeah, I think China is in trouble. I think China just. I would not bet on China.

As pretty as it looked for a while. It reminds me of Japan in 1989.

You know, or the Soviets in 1970.

You know, fair enough.

Or subprime in 2006. It's a bubble.

But, but I mean, you know, many people argue that China will be able to create its own middle class. I mean, I think they're far from doing that. But is that a possibility? I mean, they've probably got a decade and a half to do it.

Yeah.

That is certainly and then they can sell to themselves.

That is certainly their goal. I don't find it very realistic with what Xi is doing currently with his big corruption crackdown, that that is the goal. But this is just step one of about 30 to get there. The Chinese problem is that they basically took a page out of a Japanese book from the 1960s and 70s, which is more or less what we did with Enron and Subprime, and said that anyone who could employ somebody could get a loan, a subsidized loan, typically at 0% rate. And when you have a bottomless supply of 0% money, of course you can have a lot of employment, of course you can have a lot of growth. The Chinese concern is twofold. One, if they stop this system, if unemployment actually drops, then people start getting together in large groups and going on long walks together. And the Politburo knows that that's a problem because that's how they got their jobs. The second problem is much more damning. The system has now been in place for so long that the vast majority of economic growth in the Chinese system comes from investment, which is basically funded by borrowed money. That's great, so long as you never have to pay the loans back, and so long as the money never runs out. And as soon as it does, you have the Enron model collapse on you.

Very interesting. I really like how at the. At the beginning of our discussion, you talked about how interconnected this is, and I just want to make sure I drill down on that a little bit, because it was fascinating the way you posed it. Are you saying that the baby boomers in the US Are funding, through investment, the growth of these other economies in a big, big way?

Absolutely. But it's not just the American baby boomers. The baby boom phenomenon exists across the developed world up to and including even in China.

However, as large as the boomers are, and they as a percentage of the population, they're the largest generation we've ever had. It's only because of mortality that the Gen Y is starting to populate.

Right? But ours has the money.

Though unique among the world's baby boomers, ours is actually smaller compared to everybody else's bulge. And ours actually had kids, but so did the Germans, so did the Dutch, so did the French, so did the Brits, so did the Japanese. And so the boomer bulge, as I call it in the accidental superpower, has absolutely spammed the global system with capital. And it started happening in the early 1990s, which is about the time that the Cold War ended. And Everyone started to take a good hard look at what other things that you can do with really cheap Credit. When the 2000s came around, the Europeans launched the Eurozone and that allowed all of this boomer cash to flood into Italy, Spain, Greece and the rest. So the subprime, the Chinese boom and the European financial crisis are all pieces of this puzzle that have all happened for the same reasons. Open markets, cheap credit, you close the market. But if credit becomes more expensive and it all comes tumbling there.

So when does this end, this boomer and, you know, bulge this, this, this spamming the world with capital. I love the way you put that. When does it end? Is there a, you know, like, you know, if you talk to Harry Dent, he would say 2013, 2014. And I remember him predicting that back in the mid-90s when. And, you know, there was something to that theory, I guess. I don't know. You know, he's been right and wrong on a lot of things. But, you know, what is your timeline for that? Because, gosh, if you run an investment company or you want capital for anything, even for a business that's not investment or real estate deal or whatever, knowing when that capital is going to dry up or taper is a really important thing to know.

Absolutely. You just have to look at the age structure. The oldest of the baby boomers started retirement in 2007. That actually means that we're in a period of ever greater capital right now, because until the majority of the boomers hit, they're putting more and more away in their final years. In the United States, the majority of boomers will probably be retired in 2019-2022. And for the rest of the developed world, you can probably put a little bit of a shoulder on that, roughly 2018 to roughly 2024. So we're going to have stranger and stranger things happen. We'll have more bubbles here and elsewhere, probably bigger places like China than elsewhere. And then countries will start sliding off the map from a financial point of view, first in Europe, and then there will be a big push everywhere around 2021. So that's kind of what we're going for. Assuming everything goes in an orderly manner, there is a possibility, perhaps even a probability, that one day the Americans will wake up, will be scared about something, and we'll just pull the rug out from under the free trade system in one idle Tuesday. And if that happens, then this happens in six weeks instead of six years.

But America is in a much better position even with this going on than other countries around the world.

Right, Absolutely. As broken as our Social Security and Medicare and Medicaid problems are, it's nothing compared to the problems that the Europeans have. And the promises that have been made to our soon to be retirees are not nearly as robust as the ones that have been made to the Japanese and the European year retirees. So the overall cost here is extreme. I do not mean to belittle that at all, but it's less than half of what they're facing everywhere else. And then you've got countries like China which are now the fast. China is now the fastest aging demography in the world because of one child policy. But they don't have a social support infrastructure. So you have what they call the four, two one problem. Four grandparents, two parents, one child. And as those four grandparents move into retirement, they are dependent upon two children.

So if we think we have a big social pressure cookie coming up because of the financial issues that we have with our new retiree class, nothing compared to what the Chinese are going to be wrestling with.

Yeah, in the US they call that the sandwich generation, but boy, that sandwich is a lot worse in China, that's for sure.

Absolutely.

That one child is going to have to work awfully hard to provide for those aging parents and grandparents, you know.

Yeah, the parents and grandparents will be moving in and that means they won't be able to have their own children, which only compounds the problem 10 years down the line.

The thing to remember with all of this is economics is relative. You know, if the world all goes to hell in a handbasket and everybody gets poor, if Peter and I have $100 and all our nation neighbors have 50, we're rich. You know, it's all a relative thing. That's the important thing to understand. Ostensibly the, the goods and services in the marketplace, the prices will adjust to whatever happens. The part that kills you is the lag time when it's adjusting, you know, in all these markets and bubbles. But you know, I like your theory a lot. The one hole I might poke in it a little bit is the retirement age. 65 is the new 45. And I don't think many 65 year olds feel 65, if you will, you know, just because they can start collecting Social Security. And granted the age might increase for that if the government is smart, but you know, like with what's going on with longevity sciences and so forth nowadays, it's quite fascinating. And I mean, I don't know, people just appear to be. And Peter, you can tell by literally just watch a movie from the 70s and look at their depiction of a character who's say 50. And you know, someone turns 50 every what, you know, eight seconds in this country and 60, about every eight seconds or maybe even less for 60 now, because that's a moving target too. But you know, 65 ain't what it used to be. I mean, you know, for, for most people, unless they're diabetic and obese and, you know, it doesn't have to be what it used to be. Right.

There are certainly people who are working older or working for longer than the law requires, but there's certainly a small minority. One of the key things to remember about the age structure here of boomer versus X versus Y is that the boomer is the largest generation, Y is the second largest, and X is a very distant third. And so if you're a boomer and you want to take your retirement and enjoy your retirement, because physically you, you can, there's nothing legally to stop you. And your vote is almost certain to guarantee that position moving forward. Because the boomers have electoral allies in their children, Gen Y. Because if the Gen Y ers vote to water down the benefits and reform Social Security, Medicare and Medicaid, that means that their parents move in with them. And from their point of view, living with your parents, that's a one way street. And they're in the process of finally.

Moving out now at age 28, by the way. Yeah, yeah, finally, finally. Good point.

The problem with Generation Y in that scenario you just painted is they actually like their parents, unlike Gen X.

Fair enough, fair enough.

Yeah.

But this electoral alliance between those two generations will stick. Gen X with the bill and what Gen X can't pay will have to be printed away. So there are definitely some movements on the fringe for people to work longer, but it's not the rank and file. So you might get some people who are in that legendary 1% who are willing for their own reasons to keep on working. But that's not what you're going to be seeing out of a blue collar worker.

Yeah, okay, okay, fair enough. That's probably true. On the whole, the people I know are pretty vibrant and you know, I can't imagine them retiring at age 65. You know, I know I'm not interested in that when I, when I get there, but talk to us, I know we've got to wrap up, but talk to us just for a moment about the shale oil boom. And you know, is, is America going to become an oil exporter? And you know, I don't, I don't think the Middle east is in very good shape at all. I mean, they've ridden a very nice wave, certainly. And, you know, look at some of these very rich Middle Eastern countries. But I think that monopoly is probably drying up, isn't it, between alternatives and between domestic oil and natural gas production.

Well, there's three angles to this. Let's address them all in order. First of all, there's the trade angle. The single largest connection between the United States and the wider international community for decades now has been energy imports. And because of shale that is going down to zero by this time next year. It is entirely possible that North America will also already be oil independent from the rest of the world. Doesn't mean we won't take the odd cargo from the Middle east. But the 2 to 4 million barrels per day that we have imported over the course of the last 20 years, that is already a thing of the past. We're just working on the margins to mop up the last couple of bits now. So that's the trade point of view. It reinforces everything I've been talking about, about American exceptionalism and splitting off of the world. Second is the.

That is phenomenal, by the way. Wow, talk about a decoupling. Oh, that. And that is gonna hurt the Middle east. And.

Well, let's deal with number two first, because there's something else going on here. There's a 4 to 5 to 1 price disconnect between natural gas and oil in this country because of shale. They started drilling for shale gas and we had a lot of it. And then they started for shield drilling for shale oil. And what they discovered was almost every single shale oil well also produce natural gas as a byproduct. So aside from a couple of big projects in places like Marcellus, we are not drilling for natural gas on purpose in this country almost anywhere. Natural gas is a waste product, which means it is being produced well below the cost of production. Everybody's just after the oil.

That is allowing the United States to have the cheapest electricity costs anywhere in the world. It is allowing us to see massive reshoring of industry, taking advantage of the cheap natural gas and the cheap electricity. So from a completely unintentional point of view, we are facing an industrial renaissance at the same time as the rest of the world is starting to envision market and capital crunches.

Very interesting. Yeah. And then you take into account technology, and I just think 3D printing is going to bring a lot of that back onshore, too. You know, it's.

That's a great example. 3D printing is a technology that basically you use something that looks like a dot matrix printer to print layer for layer after layer until a 3D object emerges. It's a fringe technology for most industries. But what they're discovering is because you can print objects that normally require a lot of assembly, supply chains are collapsing in on themselves. So you're seeing these at Ford and Chrysler plants, for example, and they're shrinking the supply chain of a car from 30,000 parts in 50 different countries at 100 different facilities to 10,000 parts in six different countries at a dozen facilities, most of which are in North America.

It's going to allow for a lot more vertical integration. You know, I mean, when you look at, you know, producing something like SpaceX. Right. And you know, I mean, the fact that you can just make these parts and experiment with them and iterate really quickly is this is going to be phenomenal, you know. Absolutely.

But we're seeing the collapse of the supply chain model of the last 50 years. And for every roughly 1% of the manufacturing base that gets shifted over 3D printing, you're probably going to see a 10 to 15% decline in shipping because all of a sudden you don't have to shut all those intermediate parts around. And so the Pacific becomes lot a, a lot less busy. China becomes a lot busy because you can just print the part that you need at the car dealership, for example.

That's a stunning number, by the way. I mean, I don't know if everybody. Do you want to repeat that? That's a, that's an amazing number. Like what you, what you just said, 1%, 1% decline. Go, go ahead.

Yeah, roughly. If 1% of the global manufacturers market is taken over by 3D printing, that will probably result in a 10 to 15% drop in shipping cost.

Wow, that's startling. I mean, and what that means to energy cost deflation too, potentially, you know, because those ships use, use fuel. Okay?

To ship, we use roughly 8 to 10 million barrels per day of crude oil just on transport in this world. And if the Americans all of a sudden are producing their energy locally, they're not shipping it in from the Middle East. That cuts off a bit. If we're using 3D printing in mass and that cuts off container shipping, you're seeing a real secular decline in a lot of the industries that we just assumed that were forever and it's all coming home. But you asked another question. So let's get to the third piece of shale, and that's the middle East. This is where, of course, from a geopolitical point of view, things get really messy very quickly.

Throughout the Cold War and the post Cold War era, Iran was a big problem because Iran controlled the Strait of Hormuz. The Strait of Hormuz allowed energy to flow and we used energy flows to guarantee global trade, to guarantee our alliance system. Well, the Americans have now evolved beyond the alliance system. We never used the trade. We no longer need the energy. And all of a sudden the Persian Gulf is no longer Iran's pressure point. But that doesn't mean it's not a pressure point. It's just that it's ours now because Iran is still an oil exporter, as is every other country within the Gulf. So instead of us being the country that has an aircraft carrier battle group on station in the Gulf of all times, in order to ensure global energy flows, global trade and global security, all of a sudden were the wild card. And the only country. Yeah, and the only country that really seems to have registered this is the Saudis. Because the Saudis realize that they are absolutely hopeless in defending themselves. Their army just does not do well outside of air conditions and without American demand and American security guarantees for their exports. They have to find a new way of protecting their own. And the tools that they're starting to reach for are not looking very friendly to the region.

They're starting to dust off the playbook from before 9, 11, and they're finding people throughout their system with a history of violence. They're getting them high on cot, putting a bomb on their back and a in their pocket and sending them into places like Syria, Iraq and even Iran. Their goal is to set the entire region on fire so that their potential rivals cannot consolidate that region and ultimately conquer them. It's a risky strategy, but if you don't have the capability of deploying in the conventional sense and you have a very deep pocketbook, they're making it work so far. But it makes places like Syria very ugly.

Yeah. This is why I would love to see those countries, especially the more depressed countries in that region, create some wealth and have vibrant economies. Although I don't know if they can with their governments because then, you know, it probably be a lot less likely they would turn to terror. I just think people would be happier.

So I'd love to see it too, but I don't think it's very likely because at the core, if you are going to have a.

Democratic, and I'm using that word in quotes, economic and political system, you have to have a people who have a stake in that system. The easiest way to do that is to have people who have a certain degree of ownership and wealth. And the easy way to get that is to have a navigable waterway that allows you to generate the wealth in the first place. There isn't a navigable river anywhere in the Middle east. And most of the land of the Middle east is of course, arid.

Very good points, Peter. Give out your website and tell people where they can get the book.

Of course you can get the book the Accidental Superpower on any bookshelf in any bookstore these days. It has gone global already. You can get it on Amazon, Barnesandnoble.com, books, a million, your local bookseller, any of them. The site itself is Zion.com that is spelled Z E I A.

Where you can find out more about my speaking business, the book, and a lot of other fantastic.

You are a very interesting guy, Peter. I gotta ask you one last question, and that is about Argentina. Just quickly before you go, do you think Argentina is really an up and comer finally or no?

Well, not currently, but in the future I'm actually quite bullish on Argentina. Argentina boasts the world's second densest concentration of navigable waterways and the fourth largest chunk of arable land in the world. They are in many ways the United States in slight miniature. So if there is a country in this world that has the capability of consolidating a unified identity like the United States, a rich capital system like the United States, and becoming a major exporter of everything that matters like the United States, it's Argentina. They even have great shale reserves. Of course, the Argentina that we know today does not fit that description. But I like to bring up Argentina when I'm talking about the United States as an example, how you can screw it up, but think about what it took every day. The leadership of Argentina waking up, looking at themselves in the mirror and said, okay, how can I screw this up a little bit more today? If you do that for 90 years, you can turn the United States into Argentina.

And they're working on it over here too.

I'm not too worried about that because really we just don't have that kind of attention span. But we can screw it up. Just takes a lot of effort.

Yeah, yeah. One of the shows I do is about expat living and, you know, looking at different countries around the world as places to invest and so forth. And, and one of my guests said something really kind of funny and cute. She says, you know, I, I love Argentina. The problem there is corruption and corruption is almost part of its charm.

You're here.

Well, Peter, thank you very much for joining us. Very insightful discussion. And I agree with you wholeheartedly on almost everything you said. It's very insightful. And again, the book is the Accidental the Next Generation of American Preeminence and the Coming Global Disorder. Peter, again, thank you for joining us.