I’m currently drafting a report for the Capital & Conflict website to attract new readers. But I thought I’d share it in the daily letter to begin with – after all, you lot signed up first!
Some of this briefing was featured in a recent issue of Zero Hour Alert, our premium service that I write with Nick Hubble. Nick called the Italian problem last year before pretty much anyone else, and is now ringing the bell on Europe’s banks. Strange goings on have been witnessed in Zurich and Nick thinks it’s the canary in the coal mine for the European banks – click here to learn more.
The letter below is my base case for why I believe Cold War II is baked into the cake, and set to become as overt as the prequel. If I’m correct in my thesis, proxy wars, a new space race, and a spiritual successor to the Cuban Missile Crisis await us.
You’ll need a subscription to Zero Hour Alert to discover the niche investment I reckon will explode when the US and China really kick off, and the regions to watch for Cold War activity… but I’m leaving in an investment that should also benefit, albeit less aggressively.
So here it is: The Blueprint for Cold War II.
Part I: The Achilles Heel of the “World Police”
Since the end of the Second World War, and especially since the fall of the USSR, we have lived through an American epoch of international affairs.
The power of the American military has been key to their dominance. The trillions of dollars that have been poured into it over the years have created a force that is staggering to behold.
Were the US army a city, it would be the 10th largest in the US, with a population of over a million. The total land owned by the army is larger than several US states. The US Air Force (USAF) is the largest in the world, and the second largest in the world does not belong to a foreign country, but to the US Navy (USN) with its aircraft “supercarriers”. (Not to mention the US Air Force “boneyard” in Arizona, where thousands of surplus military aircraft are parked to be harvested for parts, turned into museum pieces, or sold to foreign allies – it too is larger than any foreign air force.)
But for all its strength, the US military has a weakness.
This has developed gradually for more than a decade. Only now being addressed, having been ignored by previous presidents.
China has exploited this weakness for years as it vies for superpower status, and now holds significant leverage over the US thanks to it.
I’m referring to a trend which until recently was considered both inevitable and positive by the global economic and political elites: globalisation.
The story so far
Let’s zoom out a little, and review the story so far in 21st century Chinese-US relations:
- China makes its currency artificially cheap (by printing the yuan and buying other currencies with it). China, having been accepted into the World Trade Organisation in 2001, becomes a very attractive place to manufacture goods.
- Companies in developed nations, especially the US, outsource their manufacturing to China to increase their profits. China effectively steals the manufacturing and industrial bases of the US and other countries by deliberately weakening its currency.
- China amasses a great stockpile of US dollars in payment for their goods. The Chinese government then lends these dollars to the US government by purchasing US Treasury bonds. The US government buys weapons (among other things).
- The US military point these weapons, purchased with money borrowed from China, and which now contain materials from or components built in China, at an ever more powerful and expansionary China.
While this is a rather simplistic overview, you don’t need to be a geopolitical expert to see there are big problems here for the US. As US Navy Admiral and Chairman of the Joint Chiefs of Staff Michael Mullen put it in 2011:
“We are borrowing money from China to build weapons to face down China. I mean, that’s a broken strategy. It may be ok now for a while, but it is a failed strategy from a national security perspective.”
The admiral’s perspective was not shared by the US political establishment at the time. In fact, it was only until very recently, really since the election of Donald Trump, that the mainstream narrative on China changed.
Before, the consensus among the global Western elite was that China would become more liberal, open and democratic once the West opened trade to China. This was completely incorrect, and the extent of the damage China has done to the US in pursuit of its ambitions is only now being examined.
Opium War II
Our “story so far” was of course missing a crucial recent development:
- The hollowing out of the US manufacturing base leaves a trail of economic desolation in “flyover America”. Opioid deaths soar in states that were once the engine of the US economy. Left behind by globalisation, they elect a president sympathetic to their suffering, who understands the source of their discontent – China.
Although previous administrations ignored the threat and damage China was doing, the Trump administration is addressing it head on.
To add insult to injury, not only did China take US manufacturing jobs, in a twist reminiscent of the British Empire’s Opium War on China, it then exported the illegal drugs which further ruined former manufacturing states:
Chemical flows from China have helped fuel a fentanyl crisis in the United States, with significant increases in U.S. opioid overdoses, deaths, and addiction rates occurring over the last several years…
China is a global source of fentanyl and other illicit substances because the country’s vast chemical and pharmaceutical industries are weakly regulated and poorly monitored. Chinese law enforcement officials have struggled to adequately regulate the thousands of chemical and pharmaceutical facilities operating legally and illegally in the country, leading to increased production and export of illicit chemicals and drugs.
– “Fentanyl: China’s Deadly Export to the United States” – staff research report to the US-China Economic and Security Review Commission, 2017
It is worth bearing in mind that “drug warfare” was proposed as a method by which China could defeat a superpower (such as the United States) in a book called Unrestricted Warfare written in 1999, authored by Qiao Liang and Wang Xiangsui, two generals in the People’s Liberation Army of China.
Of course we don’t know that the fentanyl epidemic was a deliberate action taken by the Chinese government. Perhaps the Chinese government did not initiate the drug running, but hasn’t clamped down on it as hard as it could, as it pours accelerant on the already immolating American manufacturing/industrial base, the importance of which cannot be understated.
The damage to the US caused by China, including many of the 300,000 now dead in the opioid crisis, has now been realised. The “opioid crisis” tab now on the White House website is the thin end of a very large wedge.
Few in the mainstream press took notice that one of President Trump’s priorities at the G20 last December was to get President Xi Jinping of China to class fentanyl and all fentanyl-like variants as controlled substances. Trump knows the value of the manufacturing and industrial base. In fact, he made an executive order to assess just how bad the damage is, and what to do about it.
More on that tomorrow. Until then,
Editor, Capital & Conflict