Wiggin Sessions

Surviving and Thriving The Post-Pandemic Economy 2021, Episode 62

Featuring David P. Goldman

Addison Wiggin

Hosted By:

Addison Wiggin

The Wiggin Sessions, conceived during the COVID-19 pandemic and tornado warning in Baltimore, Maryland. Addison started interviewing key thinkers on Politics, Science, Economics, Philosophy and History to find out how their ideas impact financial markets and our financial lives. Key thinkers include Jim Rickards, Bill Bonner, George Gilder, James Altucher and over 50 others.

In 2020, he launched a new project called Consilience, which is an enlightenment era term that means “the unity of knowledge”. He is the co-author of the New York Times best-selling books Financial Reckoning Day and Empire of Debt, as well as The Demise of the Dollar and The Little Book of the Shrinking Dollar. Addison is the writer and executive producer of the documentary I.O.U.S.A., an expose of the national debt, shortlisted for an Academy Award in 2008.

David Goldman

Featuring:

David P. Goldman

David P. Goldman is a columnist for Asia Times and a principal of Asia Times Holdings. He writes frequently for conservative publications, including PJ Media, Claremont Review of Books, the Journal of American Affairs and Standpoint. His writing has appeared in The Wall Street Journal, Forbes, Commentary, First Things, the American Interest and other venues. He is the recipient of several awards for journalism, including the Pulliam Fellowship at Hillsdale College, and fellowships at the London Center for Policy Research and the Middle East Forum. Previously he directed fixed-income research groups at major securities firms, and was elected to Institutional Investor magazine's All-American Research Team. His book How Civilizations Die appeared in 2011. His latest book is You Will Be Assimilated: China’s Plan to Sino-form the World.

“Why Does China Even Matter”

Addison:

Okay. Welcome to the Wiggin Sessions. I'm your host, Addison Wiggin. Today I have with me David Goldman, who is an expert on all things China. And I'm going to say that with broad reach, because I have personally been looking for someone who can explain all of the stories that are coming out about the US competing with China in trade wars, and also the new Cold War, Cold War 2.0, which I think is really just a manufactured idea from the media. But David has been a calmness for the Asia Times for a number of years, and has published several books.

And I actually want to take issue with your title here, David. But before I do that, I will welcome you to the Wiggin Sessions. Thank you for joining. And I hope to have an interesting conversation about what China means to the US.

David:

Addison, thank you for the kind invitation. I'm honored, and delighted to be talking to you. Thank you.

Addison:

Yeah. Let's actually begin with the title, "You Will Be Assimilated." One of the root questions I want to ask is central to my own philosophy, which is that I don't believe that centralized systems of organization, whether that be corporate, or government, or whatever, can sustain themselves. And I do believe that random associations of people, and mistakes lead to progress. And that's just my own personal philosophy. The title of your book is, "You Will Be Assimilated." This is a "Borg" reference if I'm correct?

David:

Exactly.

Addison:

I just don't believe it's going to happen. I just don't think that human beings are capable of assimilating in that way. And then it's also the reason why, if you're a Star Trek fan, you're afraid of the Borg. The Borg are not bad entities, but they control the destiny of the universe. Let's begin there.

David:

The issue is always the time frame. Totalitarian Germany crushed democratic France in 1940, because democratic France had no will to fight, and no sense of its own identity, no reason for being there, and totalitarian Germany had a great deal of determination. Now, Hitler lost the war, ultimately, because he made any number of catastrophic mistakes. Many historians have shown that if Hitler, for example, had not declared war on the United States after Pearl Harbor, the United States wouldn't have ended the war. He probably would have won the war in Europe if he hadn't let the British escape at Dunkirk, he probably would have won the war. Nazi Germany empowered a lunatic who made catastrophic military blunders. And it was the totalitarian system, ultimately, that led to their losing the war.

China always collapses. It has periods of rise and decline, and the system always fails. The question is, will it fail in time for us to avoid a strategic disaster? That to me is far from clear. I believe in democracy. I believe in individual initiative. I don't like anything about China, not the food, not the political system, not the architecture, not the literature. But I respect their energy, intelligence, and determination. And it's entirely possible that the timeframe in which the failures of an authoritarian system catch up with it, will be very different from the timeframe in which China asserts dominance over the United States.

Although I agree with you in principle, I don't think that it's the case in every situation, that an authoritarian system always loses to a democratic system. We could lose this one.

Addison:

Yeah. But, well, I guess maybe I'll phrase it in this way: we're mostly speaking to individual investors that are trying to figure out what to do with their own money. Right? When I was looking at some of your material, and reading the book as well, why does it matter what China does? I think that you've thought about this more deeply than most people who are going to see this video.

David:

Well, I think what worries me, what worries many observers, is the United States now has a net foreign investment position of negative $14 trillion. We ask ourselves, how is it possible for us to run federal deficits equal to 10% of gross domestic product, accumulate debt well in excess of our GDP, federal debt of about $30 trillion, run a current account deficit of a trillion dollars a year, and still have extremely low interest rates? And a lot of market valuation, certainly for tech stocks, and very prominently for houses, have been sustained by negative real interest rates. There's an alternative to equities because you have to pay the federal government to hold your money for you. If you lend it to the federal government, then that's even true of high-grade corporate debt.

And I think that levitation is due to the fact that the United States dollar is the world's reserve currency. More than half the bank deposits off shore are held in US dollars, even though the United States is, what? 10% of world exports. And that reserve currency status, which simply means the world holds its transaction balances in US dollars, and central banks hold roughly half of their reserves in US treasuries, that's about $8 trillion worth of US treasuries people hold, and about $16 trillion worth of bank deposits as transaction balances for international trade. That's roughly equivalent to our national debt.

If China's economic dominance asserts itself over hours, and the US dollar loses ground, or ceases to be the dominant reserve instrument, our ability to borrow cheaply is going to disappear. We'll have to pay much higher interest rates, the way say Britain did in the 1970s when the pound sterling reserve status disappeared. And the effect of that, given the size of our debt and our deficit, would be extremely painful.

We've got what? A hundred trillion dollars worth of unfunded social security and medical liabilities right there. We have an enormous farm requirement as far as the eye can see. And if we can't borrow at negative, real interest rates, if we have to pay 4 or 5% real interest rates for money, then we're Italy, or we're Britain in the 1970s, or we're a third world country struggling to pay its bills. And that would be a devastating blow to American prosperity, asset valuations, the social fabric, and so forth.

It's not just a matter of cheaper toasters appearing at Walmart. It's a matter of our ability to continue to live beyond our means, as we have for so many years.

Addison:

And one of the points you make in the book, and I'm going to hold it up again, just because I think it's entertaining.

David:

Oh, thank you. And your readers can buy it on Amazon.

“China’s Goal to Dominate The 4th Industrial Revolution”

Addison:

Yeah. One of the points you make though, is it's not too late. But let's go to the example that you brought up about the UK, England, and it's subordinate parts, and their money. It really started in the 1950s, where post World War II, the reserve currency of the world shifted towards the US dollar. And then the US took advantage of that.

I feel like we're in the twilight years of the US having the reserve currency of the world. And as you point out, it gives us a certain amount of latitude when we make trade deals, or even in political discussions with a country like China over Taiwan, for example. We still hold some sway because of the fact that a lot of banks around the world, and countries use the dollar as the pricing mechanism for what they own. A store of wealth.

It took two world wars for the UK to lose reserve currency status. I personally am afraid that as we move forward into whatever it is, the Chinese Century, that we're going to end up with armed conflict based on economic headwinds, that we as Americans, we in the West, don't really understand. And it seems like the body of your work is studying the rise of a new China, and trying to explain it to guys like me.

David:

Well, armed conflict is a risk that keeps me up at night. My view is that a war between the United States and China would be one that everybody loses, like World War I. The Chinese probably have the capacity, for example, to sink American aircraft carriers. The massive numbers of surface to ship missiles, against which we have some defenses, but not defenses against a depth attack.

If we were to have an armed confrontation with China, where, for example, China sank an aircraft carrier, what would we do? Blow up a Chinese city? Destroy the Three Gorges Dam? The Chinese have the capacity to hit American cities. Which American city would you like to give up? I was just giving a speech in Las Vegas, and I volunteer in Las Vegas as first in the line, but that's just a personal preference.

Addison:

That's an awful thing to say by the way.

David:

Well, I'm trying to be grimly ironic here, Addison, because this is a dangerous situation, and it could end very badly for millions of Americans.

The Chinese want to dominate what's broadly called, "The Fourth Industrial Revolution," the industrial revolution of artificial intelligence, and that's the assimilation to which I referred in my title, which of course is a reference to the Borg in Star Trek.

The transformation of the world economy, by big data and artificial intelligence, is already underway. And the Chinese, by dominating, for example, the technologies associated with 5G mobile broadband, are trying to create a base for the transformation of any number of spheres of economic life. So for example, with 5G, you can get industrial robots to program themselves. You can vastly increase the efficiency of logistics, warehousing, shipment, and so forth. You put a cheap computer chip in every product, so it's whereabouts and state of production is tracked continuously. You can do just in time inventory in a much more efficient way. You can do telemedicine, so a triage nurse sitting in a trailer somewhere in Zimbabwe can do diagnostics and have patients treated by robotic surgery, operating out of Vladivostok. The transformations are enormous and the Chinese are putting vast amounts of money into it and want to dominate. So the possibility that China dominates production, trade, telemedicine, pharmaceutical research, and other key elements of the world economy is a real risk.

At that point, the United States whose industrial base has been declining for the past 20 years and more might end up being a second rate economic power, and our relative decline in terms of economic power could lead to the erosion of the dollar's reserve status and the end of our ability to borrow at low interest rates, exactly when we have a massive foreign requirement. We've got American constituencies that seem conditioned to the idea that another few trillion dollars here in their off the federal budget is no big deal. We're fighting that out in Congress right now with Biden's three and a half trillion giveaway to democratic party constituencies. And under those circumstances, what would the expectations of the American people be if we were to have to tighten our belt drastically, the way in fact the British did in the 1960s?

Addison:

Yeah, can we dig into that a little bit? Because one of the things I've noticed from the work that you've produced, articles and videos and things like your book, that I've read, you are making the argument, I believe, that we have lost our way in the West. Like the things that made the West productive, the things that made us capable of winning World War II for example, the things that allow people of lesser means to like grow in the world and become economic producers. So, this is really a question more than anything; I want to say that you believe that we're teaching the wrong things to our students, at a time when China is teaching engineering and whatever, computer science and things that will improve the world, we're teaching things like critical race theory and social justice, and that kind of thing.

David:

Addison, I think you put your finger on the critical issue. In China, 1/3 of all students study Engineering. STEM is the dominant thing that people study. And China now each year produces seven times as many bachelor's degrees in STEM fields, as does the United States, and three times as many doctoral degrees. 20 years ago, you could say, well, these were ho mills producing fourth rate graduates who weren't much use, but over the past 20 years, American universities have trained up world class faculties for Chinese universities, they're staffed with people with PhDs, from MIT, Stanford, and you university of Illinois and Texas A&M and so forth, and Chins' universities are pretty good.

In the United States, only 6% of our students study Engineering. Favorite major is Business, which is kind of a soft major to put them on. And then we've got engineering schools run by diversity managers to make sure that our diversity, inclusiveness and equality, quotient or DIE is big enough. So the idea of inclusiveness has replaced the idea of competence and meritocracy. China has many faults as a society, and I don't really like anything about it, but for more than 2000 years, China's bureaucrats have been chosen by standardized exams. And the one thing you can't cheat on in China is the university entrance exam. Xi Jinping sent his daughter to Harvard. You can't get into top Chinese universities unless you've got the test score to do it. That's the only criteria. You can't donate a building, you can't pull influence. So China does have a meritocracy of people who are selected by standardized exams, which are incredibly difficult. The Gaokao, the Chinese university entrance exam, has sample questions on the internet. I'm not terrible at math, but I'd have trouble answering a lot of them. So they're producing a lot of ferociously ambitious, extremely well trained young people. And just as you said, we seem to be steering our young people towards resentment studies and basket weaving.

Addison:

Do we care? I honestly want to answer that question because, whatever is going on in the US where we're concerned about social justice, it's an emotional issue for a lot of people and it means a lot, but do we care about scientific studies? Do we care about innovation anymore? If it feels like we don't care about that stuff anymore, and is that a concern?

David:

Well, some of us certainly care, but going back to the comparison of Nazi Germany and democratic France in 1940, the French elite certainly did not care enough to fight, that's why the French collapsed in six weeks. A lot of our elite, particularly the big international tech companies, liberal universities don't seem to care. They seem to think the United States is a malignant entity founded in 1619 to promote slavery, and that everything we've done is misogynist, homophobic, racist, imperialist, and so forth. And that if somehow we were wiped off the Earth or at least humiliated, it wouldn't be such a terrible thing. So we have an elite which thinks so badly that the United States of America, it's hard to imagine a John F. Kennedy getting up and saying, "We will pay any price and bear any burden in the cause of liberty," and inspiring people. I remember that when I was 10 years old, and God, if Kennedy was inaugurated. I remember Ronald Reagan with, "Morning in America," we don't seem to have as many leaders on either the Democratic or Republican side who want to inspire us for that. So exactly, as you say, that's the greatest risk doesn't mean we all feel that way, but too many of us do.

“Debt, Debt, and Evergrande Debt”

Addison:

So let me just bring it back to individual investors. What does that mean right now, the stock market is still doing well, and I guess I'm looking for some kind of vision of what will happen in the future. If China is ascending and the US, the ideology behind which we train our children and that kind of thing, if that's going by the wayside?

Actually, let me, let me add to that, if you will. We published a book in 2006 called Empire of Debt, and we were concerned about the rising debt on the national level. It has since exploded beyond our imagination. But even at that time, we were worried about just the idea that America was paramount in the world, and that we could get away with things for a long time. Reserve currency is certainly part of that, but also just the idea that American culture was paramount to other cultures and that kind of thing. If China is ascendant in the way that you're suggesting, that's going to be a huge blow to our ability, to literally invest in the companies we want and raise our families in the way that we want, value our property in the way that we want. So, I'm trying to take sort of a macro view and pull it down to the individual.

David:

I think you're focusing on exactly the right questions. Years ago, there was a popular phrase, Chimerica, that expressed the idea that there was a mutual benefit between what China was doing and what America was doing. And to some extent you could do it might have been true. We lost more industrial jobs during the George W. Bush administrations than in any eight year period in American history, and what we got in return was cheap toasters at Walmart. We got a flood of cheap Chinese goods, and that certainly helped some people, it certainly made some people's wages go farther, but it wasn't particularly good for industrial communities that lost employment and lost tax base, people lost the value of their homes. So that was something of an arbitrary distribution of rewards.

After 2008, after the popping of the home equity bubble, we got what I consider to be an even bigger bubble. If you look at the $8 trillion on the Federal Reserve's balance sheet, and just plot that against the S&P 500, this is a pretty close relationship. The quantitative easing, the expansion of the Federal Reserve's balance sheet, the monetization of debt, brought interest rates down to extremely low levels. And as interest rates fell, prices of equities went up, because people couldn't buy bonds; they had to buy equities. Of course, the rewards to equity investors were heavily concentrated in a relatively small number of tech names, as we all know, and those tech names are particularly interest rates sensitive, as rates have gone up just in the past few weeks you've seen in the NASDAQ underperform significantly.

So I think in terms of valuations, the key to it is our ability to keep real interest rates negative, and keep interest rates so low. We've got several challenges, so that one obviously is inflation. The last round of quantitative monetary easing and federal stimulus gave us consumer inflation, apparently in excess of 5%, which I personally believe will continue much longer than the Federal Reserve gives it credit for. But the most dangerous thing is that the US dollar, as China comes to dominate the fourth Industrial Revolution, will cease to have the attractiveness as a reserve instrument that it has, and our ability to reserve instrument that it has, and our ability to not just borrow from abroad, but to maintain our current level of about $25 trillion dollars of borrowing from abroad will diminish and interest rates will be forced up substantially, and then we'll have a real serious budget problem. Huge difference between 1% interest rate with a $30 trillion debt and a 5% interest rate or 10%.

Addison:

Okay. I've been thinking about and writing about this for a long time, but I'm interested to hear your thoughts on Evergrande and a potential debt crisis in China and what the impact would be on the US markets. We have been running these deficits and, or growing the national debt for what? I mean, going back to the early Reagan years, we're looking at like 50 years of growing the national debt year over year at an unprecedented rate. At the same time, the central banks of the world have mimicked the Fed rates and especially during the pandemic, we're just giving money out to everybody just to make it through. I guess I'm just looking for the thing that is going to pop the bubble. What's going to deflate the debt bubble?

David:

Well Evergrande I think is a good comparison would be the S&L crisis of the late 1980s, which was extremely painful, but it didn't pop the bubble. It was a reorganization. Remember China has about

$3 trillion dollars in foreign exchange reserves. It has a current account surplus. It sells us $600 billion dollars a year of goods at an annual rate. And the central budget deficit itself is in surplus. Countries with large foreign exchange reserves and a current account surplus don't have debt crises. They have reorganizations because they have the money to reorganize their debts. China's real estate situation is really unique in the world. Real estate is 25% of China's gross domestic product. That's a huge number. For most of the world it's closer to 10%. There's a reason for that. China in the last 35 years has moved 600 million people from countryside to city.

That's the biggest migration in human history. It's both the source of their previous success and of their current problems. It's the source of their success because instead of having people engaged in nearest subsystems agriculture in the countryside, they moved those people to the city where they got industrial jobs and the boost to productivity has been enormous. Per capita income in China has increased nearly tenfold in real terms in the past 30 years and moving 600 million people is a staggering job. That's the population of all of Europe from the Russian euros to the Atlantic ocean.

Addison:

It’s double the population of the US.

David:

Imagine building two Chicago's, two San Francisco's, two Memphis's to house all those people. That's why real estate is such a gigantic part of the economy, but the communist system in China or what they call socialism with Chinese characteristics is pretty well summed up by the Three Stooges, all for one, one for all and every man for himself.

The amount of chicanery, corruption and bubble manufacturing that's arisen from this massive expansion to the real estate market, particularly the local government level is problematic. Evergrande is one of the world's great scams. They have hidden huge amounts of debt. And the Chinese press is now detailing the regulators' reports and all the chicanery they were involved in. And then there are a number of other companies like this. So the Chinese needed to pop this bubble and they did. The people who are running this reorganization, I know some of them. They're people with resumes that include many years at tier one investment banks of the International Monetary Fund or World Bank. They're not little guys in Mao jackets and workers caps riding a bicycle and holding up Mao's sayings. They're financial professionals.

And the reorganization of Evergrande will be painful, but it's not going to lead to a global crisis. It's a stage managed preemptive attack. It's something like what would've happened in the United States if the Federal Reserve had popped the home equity bubble in 2004 and 2005 before the banks had bought $2 trillion dollars worth of phony AAA structured products based on that bubble and essentially destroyed the capital base, the banking system. So it will certainly be painful for a lot of people, but I think it's a managed deflation of a real estate bubble and not an out of control crisis.

Addison:

What do you think the knock on effect in the US is going to be? It looks like so far it's very early stages, but looks like it's a non-event in a way.

David:

I don't think it's an event.

Addison:

The stock market collapsed by 20% in a very short amount of time, but then it rebounded and people are like, oh, it's not a big deal.

David:

I don't believe it has a big knock on effects in the United States. The amount, if you look at the performance of Chinese high yield debt, property companies high yield debt has collapsed. Some of the secondary banks have taken a big beating, but industrial companies, non-financial sectors have largely been completely unaffected. What the Chinese government will do, I believe, is to ensure that the contracts of Evergrande to individual homeowners and suppliers are made whole. They'll let the equity holders of Evergrande settle wherever they can. They're already down 90% or so. And they'll give the bond holders a substantial haircut. They've already brought in a couple of the well known Western reorganization firms like Houlihan Lokey, who will offer the bond holders a substantial discount, but not too much that is held by foreign investors.

China has a very large corporate bond market, but participation in that market on the part of foreign investors in the property sector is somewhat limited. So most of that is from mutual funds. So some of the emerging market mutual funds may take a bit of a hit, but that simply means that mom and pop have less in their brokerage account or a pension fund has a bit less. The debt of the property companies is not held on a lever basis by say deposit taking institutions. Some of the secondary banks may take a hit, but I don't think it's triggered by a global crisis at all.

“David’s Forecast - China in 2031”

Addison:

How do I ask this question? If you could forecast, especially having said that you don't think Evergrande is going to be big, we call it a snowflake that's going to lead to an avalanche. Like you don't think that it's going to precipitate a debt crisis, but I do feel like you think that China is ascending in a way that's going to be difficult for the US to deal with. If you could forecast like 10 years from now, let's call it 2031. What do you think that it looks like?

David:

Worst case scenario, China is the dominant force in the 4th Industrial Revolution.

Addison:

Can you just outline what you mean by the 4th Industrial Revolution one more time? That's artificial intelligence, right?

David:

It's artificial intelligence. So for example, China already has ports that are completely automated, where 5g sensors communicate with each other and you have automated cranes, automated trucks, automated warehouses, where a ship comes in, a crane picks it up, puts it in a truck, takes it to a warehouse, the goods are sorted. There's a little barcode or even a computer chip on every product. Machines route that to their ultimate destination. And there's almost no human intervention. Just a couple of guys in lab coats sitting in an air conditioned bubble monitoring the whole thing. You have factories where industrial robots speak to each other and program themselves for industrial processes. You have telemedicine where remote operations are done over 5g networks. In other words, you've got a huge burst in productivity and China becomes the dominant force in world manufacturing, world trade. It's already the largest manufacturer.

It's already roughly a third of world manufacturing. So China decisively presses its advantage. And because it has such an advantage in manufacturing and logistics in terms of tracking of goods, it's able to force the rest of the world to take its yen and the renminbi as payment instead of the dollar. And the dollar begins to disappear as the main currency in world trade. At that point, China gains the advantage of having a reserve currency. It gets cheap credit from the rest of the world. The United States loses that. Our interest rates go up, our manufacturing declines relatively and our economic and military power shrink because ultimately industrial power and military power are the same thing. So the United States is a second rate power. We're poor. Our social fabric is torn apart because we can't maintain the same level of transfer payments to so many constituencies who've come to depend on them or expect them. We have a prolonged period of, if not social chaos, at least political paralysis and the Chinese, meanwhile, integrate large parts of the rest of the world into their economic system, like the board, they assimilate other people.

Addison:

I'm assuming, so this is an assumption I'm making, that you subscribe to the Hegelian view that the world spirit moves from one place to another. It was in the UK for a while, it's in the US for a while. Now it's moving to China. Is there any way that we can not be assimilated? This is the classic tale of Star Trek.

David:

I have great regard for Hegel as a philosopher in many areas, but I don't believe in this idea that the world spirit does this world tour. I don't think anything is inevitable. I think it's in our hands. In 1973, a lot of people prominently, including Henry Kissinger, were sure Russia had won the Cold War. It was all over for capitalism, Russia was going to be the dominant power. In '73, Russian anti-aircraft missiles and anti-aircraft cannon shot down nearly a hundred airframes flown by the Israelis in the '73 war. And all the NATO types, NATO planners said, "Gee, are they going to win a conventional war?"

By 1982, the Israelis, using American airframes, destroyed almost a hundred Russian airframes in the Bekaa valley. We had a revolution in avionics in just nine years, which shifted the balance of power away from the Russians to the Americans. At that point, the Russians began to know that they were going to lose the Cold War. It took nine years of innovation, but in those nine years, America basically invented the digital age. We invented the semiconductor laser, which created optical networks, we invented CMOS chip manufacturing, which is what put light and fast chips into the cockpit of F15s, making it look down to greater possibility.

We invented all kinds of new displays, the internet itself. American innovation, when we really put our minds to it, has more than once stunned the world and changed all the calculations of where the world's spirit was going to take its next vacation. So I certainly think we're capable of it if we have determination, but back then we had John F. Kennedy go to Rice University and point at the moon and say, "We're going to go there," and inspire the country to dedicate itself to a great goal.

Even Jimmy Carter, who I think was a very poor president, did serve on nuclear submarines, he was an American military officer, and Harold Brown as Secretary of Defense was a great physicist. And the collaboration between industry and defense and public private partnerships was exemplary. And then we of course had Ronald Reagan, the great president of my lifetime, who inspired America, who told his national security team, "My policy on the Cold War is simple. We win, they lose." Determined to do it. So I think it's not that we have to really learn anything, Addison. We have to remember what we used to be and the America of my youth could do it.

Addison:

To what extent is... Let me ask this a different way. I remember in the late eighties, Japan was ascendant because they re- engineered our manufacturing processes. They weren't really a military power and they didn't have an ideology that was like, opposed to the US. They were basically moving forward from the end of world war II, and we're able to take our technology and make it better and produce it more cheaply.

But during that time, that's when we saw the rise of the car companies and whatnot, we were afraid. I remember that growing up, that we were afraid that before long the Japanese were going to take over the world. To what extent is our view of China right now xenophobic in a way, and also a shadow effect of our view of Japan 30 years ago?

David:

Well, I think there are certainly similarities, but there's some very big differences. There are two big differences. One is China's size. So 1.4 billion people, nearly five times the United States population, it's a lot of people. Japan, a third of our population or less. So there's an enormous difference just in terms of scale. The second thing is the Japanese made a very conscious decision to protect a great deal of the core of their economy, agriculture, small business, retail trade, and so forth. So China had a few fantastic companies. I mean, Sony, Panasonic, Toshiba and so forth, the auto companies, Honda, Toyota. Those are great international companies by anyone's standards, but they sat a top an economy that the Japanese did not want to change. They wanted to preserve it.

The Chinese ripped out traditional society by its roots. They transplanted, as I said, 600 million people. They transformed every aspect of society with the idea that they were going to be the dominant industrial power and the will that the Chinese communist party has shown to achieve that dominance is impressive. The last national people's Congress last year put together a budget of $1.2 trillion to foster developing industries, and they've done some pretty spectacular work on it.

Just to give you an idea of the scale of this, China now has 70% of the world's installed 5G internet. What's important about that is not that people can download movies faster, it's that 5G makes it possible to do things in industry which hitherto were unimaginable, it's like the railroads in the 19th century. Huawei told Asia Times not long ago that they have 15,000 contracts to build private 5G networks for factories, for industrial automation, and an additional 5,000 or more for mining. So the application of big data, artificial intelligence controls to industrial mining and logistics productivity is proceeding at a remarkable scale in China. And if we don't catch up with them, they will be the dominant industrial power, and we won't like the result.

Addison:

Well, let me get your opinion on this. Once those technologies are developed and put into play, what stops the US entrepreneurs, or like, Western European countries from adopting the same technology? I mean, to me, technology is an apolitical event.

David:

Oh, absolutely. And Erickson, or Nokia, can do the same things that Huawei can do. If you go to Erickson's website, they have the same kind of propaganda for their private networks and industrial productivity applications that Huawei does. Huawei might be a bit cheaper, but that's not really what determines it.

Addison:

So what makes it different?

David:

Well, one big problem is that our tech structure favors capital light industries, like the big tech companies, and penalizes capital intensive industries like manufacturing, mining, and logistics. I'll give you an example. I was at a Claremont conference last weekend, and one of the organizers said, "Is there some malignant force out there that's sabotaging us and giving the advantage to China?" And I said, "Yes, I can tell you exactly who it is, it's Paul Ryan."

Because when Paul Ryan crafted the Republican tax bill in 2018, he funded the 21% headline rate, the lower rate, by removing incentives for capital intensive investment like depreciation allowances. So in 2019, American companies spent more money buying back their own stock than they did in capital expenditures.

So we have a tax and regulatory environment, an environmental environment, which is hostile to capital intensive manufacturing, transportation, and so forth, and friendly to internet stuff. So what we get is a lot more internet businesses and a lot less capital intensive manufacturing. So we would need, as you point out, not just changes in our educational emphasis. I think we need a considerable overhaul of our tax and regulatory system. I and others have written a great deal about this, and I don't think there's any mystery about what we need to do. We need to find a Republican or other leader who will champion this kind of approach.

Addison:

Yeah, but that doesn't happen because the way people get votes, the way people who are interested in actually being in government get votes, is by pandering to emotional issues.

David:

And taking money from lobbyists.

Addison:

Yeah. Well, that's an issue too. All right. Well, this was a very interesting discussion and I hope that we can reconnect at some time in the future. I have been looking for somebody who has sort of an objective view of China, because I do think that moving forward, even though the ideas and the discussions that get reported in the media and stuff are bigger than the individual choices that investors make, I think that the trends are in place to dramatically change the investment environment. And I'd like to be able to speak with you kind of on an ongoing basis.

David:

Addison, it'd be my pleasure.

Addison:

Yeah. I just think it's a really important development in the way that our economy is going, especially with the political environment that we have to deal with.

David:

Addison, it's been a real pleasure. Thank you.

Addison:

Yeah. All right. Thank you, and I will speak to you again soon.

David:

Well, look forward to that. Thank you.

Addison:

Awesome.

Be sure to get your very own copy of David’s book You Will Be Assimilated: China's Plan to Sino-form the World.

*** For the quickest, least complex tax-free way to trade gold and precious metals, click here: accounts are free! Sign up for a Hard Assets Alliance IRA today and enjoy all its tax benefits. Click here or call 1-877-727-7387.