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.
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.
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.
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.