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This week Dr. George Friedman joins the McAlvany Weekly Commentary: CLICK HERE to learn more about this week’s guest
George Friedman is an internationally recognized geopolitical forecaster and strategist on international affairs and the founder and chairman of Geopolitical Futures. Dr. Friedman is a New York Times bestselling author and his most popular book, The Next 100 Years, is kept alive by the prescience of its predictions. Other best-selling books include Flashpoints: The Emerging Crisis in Europe, The Next Decade, America’s Secret War, The Future of War and The Intelligence Edge. His books have been translated into more than 20 languages. Dr. Friedman has briefed numerous military and government organizations in the United States and overseas and appears regularly as an expert on international affairs, foreign policy and intelligence in major media. For almost 20 years before resigning in May 2015, Dr. Friedman was CEO and then chairman of Stratfor, a company he founded in 1996. Friedman received his bachelor’s degree from the City College of the City University of New York and holds a doctorate in government from Cornell University.
- Oil Glut – Those who control the oil no longer dictate world politics
- Iran interior struggle: Bazaar (economy) VS Khamenei (Religion)
- South China Sea: China is terrified that the U.S. will blockade trade
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
Sanctions, Viruses, War & the Geopolitical Long Game – Dr. George Friedman
February 5, 2020
“The United States goes through periodic crises. But the next ten years are going to be very difficult for the United States internally, and therefore externally, as well, so we really have to watch over the next ten years. You have to keep watching the scared countries – China and Russia – and watch how they behave, because being weak doesn’t mean you can’t get hard.”
– George Friedman
Kevin: I always look forward to the interview with Dr. George Friedman. I look forward to every book that he publishes. What is interesting to me is that any book that I have read of his, he seems to talk about things that, as I watch the news 5, 6, 7 years later, it’s like, “Wow, he called that a little bit like calling a move on a chessboard during a championship game.”
David: Lou Dobbs says he is one of the country’s leading strategic affairs experts. I reminds me of dinner table conversations we would have growing up where my dad loved talking about geopolitics and things that we would talk about casually at dinner all of a sudden would be in the news 5-6 years later. And so there is, for me, almost a bit of nostalgia in talking with George. It sometimes feels like I am visiting with my dad again.
Kevin: Strangely, it has been a couple of years, and I know you would like to check in every year, but I know every few years we try to get with George Friedman.
David: Every few years we do check in with George Friedman for his views on geopolitical events and their significance, and we have learned a lot from his approach to international relations, and, of course, from the insights that he has explored, both in writing and as he shared them on our program. Love reading through The Next 100 years, which he wrote a few years back, and The Next Decade: Flashpoints. There are actually a number of books which George has written which have been influential in my thinking, very helpful in clarifying sort of who is who, and who is doing what in the world. And I strongly encourage the curious among you to check out his articles and timely offerings at geopoliticalfutures.com. It is a great resource, and to subscribe there and have daily inputs, you will find that you have, compared to just your regular news outlets, really some intriguing insights, whether it is Brexit, things relating to geopolitics in the Middle East or in Asia. It is information that I simply won’t do without. So context is critical to understanding, and, of course, depth of understanding is critical to improved planning and strategic implementation. Although we are a financial company, we are always interested in a multi-disciplinary approach to understanding, and George brings many of his insights into that.
* * *
Our conversations with you, George, have spanned now over a decade, and they have always been refreshingly insightful. So, let’s dive in.
There are three areas I would like to cover, and I will pose some specific questions for each of these. But, as kind of a preview, not in particularly any order of priority, I want to talk with you today about, in the specific realm, thinking specifically of China’s changing economic stature in recent decades and their more recent geographical extensions. There is a lot there we can talk about, whether it is Hong Kong, issues relating to Taiwan, issues relating to the Paracel and Spratly Islands. So that is number one. We’ll come back around to that.
Number two is the Middle East. We know from past conversations that the balance of power, disturbed through the elimination of Saddam Hussein, has brought Iran and Turkey and even other non-state actors into action in very significant ways, with either dreams of a caliphate or resurgence of an older empire. And so I would love to explore that with you today, as well, looking at Iran and Turkey and some current events in the light of history.
And then last but not least is Europe. Of course Russia factors into the Iranian and Turkey relation significantly, but also let’s see what your thoughts area on Russia’s strategic shifts as they relate to Europe, NATO in general, and specifically, with Poland, Ukraine and Belarus.
So I guess before we dive into those areas, any initial comments you would like to open with, or by way of framing our conversation today?
George: Well, first, thanks for having me. I really enjoy being here and it is interesting to match geopolitics and financial markets. The financial markets are affected by, and they, in turn, affect, the geopolitical balance, so from our point of view there is just one. They are the same things – different aspects of the same thing, just in different ways.
I think the point that I would really emphasize is that, look, we’re still in the grips of 2008. 2008 changed the way the world worked. It put a premium on importers. They were more strong than the exporters have been. It changed the dynamics of national power, and we still haven’t worked out all the things that emerged there. We’ll get to talk about it, I hope.
But I think we all have to understand that 2008 ended the post-World War II world. It undermined the principles of interdependence. It made it much more difficult to build the kind of international structures like the EU, and it really created new coalitions. So we’re in 2008 and still trying to work it out.
David: I wanted to begin with the Middle East. You were recently in Istanbul and Recep Tayyip Erdogan gave the keynote immediately following your speech. Maybe from a high level you can describe sort of the Turkish interlude in recent decades, referencing sort of the Ottoman Empire that has come before it, and what you see emerging, or re-emerging, in future decades. Maybe juxtaposing the 30,000-foot view with the ways that Turkey is re-asserting itself in the present in the region. Libya comes to mind as a particularly interesting aspect.
George: Well, the past 1,000 years, Asia Minor, Turkey, has always been the home of a critical empire, be it the Byzantine Empire, the Ottoman Empire, or what not. The last 100 years have been freakish because the Ottomans collapsed and no great power replaced it. What Erdogan did was say, with the rise of radical Islam affecting Turkey, it could no longer be simply a secular country. It had to make its peace. Other parties didn’t want to do that. He did it. It was an unpleasant process to watch it happening. But he is now the head of a united Turkey, and it was a fitting thing that I have written in the next 100 years that Turkey would emerge a great regional power.
And at my speech, which was on the anniversary of the publication of my book, I said, now is the time when Turkey will start reaching out, perhaps first to the Eastern Mediterranean and North Africa. And this was three days before Turkey reached out into the Eastern Mediterranean. But I had been with President Erdogan and we had talked a little bit. He actually does English fairly well. He made not a mention of [the fact] that he had already intended to do what I had said theoretically was going to happen.
What had happened is that Turkey had asserted itself. It had asserted itself in the regions it was always powerful. It has just made a very large loan to Bosnia in the Balkans. It has entered the Mediterranean. It has entered North Africa. It is fishing around in Somalia and other African countries. Turkey is historically the home of a great regional power, sometimes an empire, and that is what we are seeing emerge, and it is not always visible what is going on, but, as with my speech and my mention of the Eastern Mediterranean and a complete poker face on Erdogan as we talked, they plan ahead and they are planning big things.
David: Well, clearly, to literally fuel their endeavors and ambitions, Turkish interests have to locate a reliable source of oil. And it seems that Libya is a go-to in that respect. Maybe you could explore with us what that means for other interested parties in Libya – Russia, not too keen on the move that Turkey is making right now. Tell us a little bit about that complexity.
George: At the moment, the world is swimming in oil. People are eager to sell. Buyers are fewer than they should be. So right this minute, the Turks aren’t worried. The Russians will sell them oil because they have to because they balance their budget off that. So will Azerbaijan and other countries. But they are looking for the future. They need a steady supply of oil, hydrocarbons, and they think they have found that in the Eastern Mediterranean in deep sea drilling where they are competing with the Israelis and the Greeks.
And they believe they have found it in Libya, where the Russians are supporting Khalifa Haftar, who is trying to overthrow the legitimate government, if you want to call it that, of Libya. So they are going around, and one of the things they are thinking of is [unclear], about oil, but one of the other things they are thinking about is using the dependency of the seller of oil as a means of controlling them. So we are used to 30 years ago really being concerned about the buyer being dependent, now we are in a different situation where the seller is dependent. And that makes it a lot easier for them to get the long-term power. They can control these areas. And not really care what the Russians do.
David: Do the Russians have any concern about losing access to the Bosporus?
George: The Russians are concerned about everything. Russia is a third world power. It has not developed a modern economy. It depends on the export of a single industrial commodity – oil – and doesn’t control its price or have any control over it to the extent that it is a victim of the fluctuation of oil prices. So it is worried about the Bosporus, but the problem is the Bosporus. If you ever take a look at a map or if you ever visit it, it can be closed so easily that it is not a joke.
And therefore any access that Russia has in the Mediterranean really depends not just on Turkey but on the United States or anybody else who would want to close it. So the Russians have many, many concerns. They are great bluffers. They are great at pretending that they have everything under control and they are a great power. But they are a country that is worried about a great deal of things.
David: It is fascinating to watch the oil markets these days. As you say, the world is swimming in oil. We didn’t have much of a response when we were getting feisty, we could say, with the Iranians. And here in recent weeks with the Libyan oil production decline, it is now down 75% from 1.2 million barrels a day to just over 200,000 barrels a day. The oil markets are giving preferential attention to the Corona virus, and potential demand destruction, but in real time we have actual supply destruction, yet no impact on the price, again, these weird dynamics, given the fact that we are swimming in oil.
Talk to me about the long game that Turkey plays because we tend to think of China as a people group that plays the long game, geopolitically, geo-strategically. But to be organizing supplies that they don’t need now, or whether it is years or decades ahead, just tell us a bit about the Turkish approach to the chessboard.
George: It’s like the Americans. We played out the game for 200 years, [unclear] global pre-eminence, so all serious geopolitical players play long game [unclear] long. But what they see around them is weakness. They see Russian weakness, they see European weakness, they see not American weakness but relative indifference, and what they are looking at is a vacuum. Whereas this used to be the most contentious and crowded area of the world, you now see a situation where Israel, Saudi Arabia, and United Emirates are allied against other Arab countries. So they look at this and they say, “Okay, first of all, we can’t afford the chaos in the Arab world. We can’t afford the chaos in the Balkans. This is our neighborhood and we can’t afford it. Nobody else is going to put it down.
And the second thing they look at is, if we can organize this region, as the Ottomans and Byzantines did, we can come out in a controlling position. So right now this is a region that was heavily dependent on oil sales and had the control of much of the world’s dynamics because of oil. Now all these countries, Saudi Arabia, are weak hands. They don’t control. Part of this was the United States. The United States surprised everybody, including itself, that we could be a major oil producer and not an importer at all.
And so areas that used to be filled with power, jockeying for position, like the Persian Gulf, well, it would be a pity of they closed it, it would certainly cut off some oil, maybe 20% of the world’s supply if it happened, but the world will go on increasing oil production elsewhere. So what Turkey sees around it are weak hands, and it knows that it can play the game now more than ever, and it has been waiting. When I wrote my book about this, that was ten years ago, and Turkey held its own, dealt with a coup d’état, and so on, and now it is has picked a bone.
David: It also is one of the only countries with a very diversified economy in the Middle East. So major modern economy, upscale, diversified – that puts it in stark contrast to anyone else in the Middle East who might have either religious or political – to categorize it as that – ambitions – they actually have something to work off of. Perhaps you could describe it as a greater resilience.
George: [unclear] Europe. The Balkans are equally weak. They see the EU as fragmented and weak. So it is not just the Middle East region, the Islamic world, that they look at, although that is clearly weak. They see the Eastern hemisphere, in a way, as going through a period of weakness beginning in 2008, and so their view is, if there is going to be order around them, and they need order around them, they don’t want their southern border to be filled with violence, they are going to have to move into Syria and other countries, and take control of the situation.
David: So let’s shift a little bit because as important as Turkey is, they are not in the headlines, so it seems that Americans, and perhaps the rest of the world, doesn’t know how to keep the bigger issues in mind. But Iran is on everyone’s mind. We took out Qasem Soleimani just a few weeks ago. Talk to us about the Shi’ite Crescent and Iran’s work in Lebanon, Yemen, Iraq, with reference to Soleimani and the Quds Force.
George: The story really begins in the 1980s when Iraq and Iran fought a war, and over a million casualties in Iran were caused. It was a terrible war. The Iranians are absolutely committed not to ever allowing an attack on Iran from Iraq to take place. This is their number one goal. And therefore, when the United States began to withdraw from Iraq as, in fact, the Iranians expected, they moved to fill in the blank space. In fact, when fighting ISIS, the U.S. and Iranian forces collaborated in [unclear]. As it moves into that area, obviously, Syria was the next area they were interested in, and they collaborated with the Russians to save the Assad regime. And finally, there is Hezbollah in Lebanon. So they have done some extraordinary things in recent years. They have created this sphere of influence that stretches from Iran to the Mediterranean. That’s a long way.
The U.S., however, surprised them. The traditional U.S. response to any problem has been to send in troops. Well, for 18 years we sent in the troops to the Middle East and it didn’t work. So starting with Barack Obama and following the same policy with Donald Trump, the United States has shifted away from using forces, and we did something else. We imposed sanctions, heavy sanctions, on the Iranians. And we were able to do that because we’re the largest importer in the world. And if we don’t import their goods, or we stop other countries from exporting to the United States if they work with the Iranians, well, that causes them huge problems.
And what has happened is, they have a broad empire, if you will, but at the center a very weak one. There is tremendous unrest inside of Iran, and it was interesting that when they shot down the Ukrainian airliner, mobs were demonstrating against the Iranian government. So what we have here is a very temporary situation of the Iranian empire with the American economic sanctions really creating havoc, and now there are more of them.
And this is one of the really important things to really recognize that is new. We always used sanctions in one way or the other, but now our primary weapon is not military, where we haven’t done very well. It is economic. We imposed sanctions on China, tariffs on Russia, we imposed them on North Korea, we imposed them on Iran. And this is incredibly effective weaponry.
David: So the last time we interfered in regime change in Iran we move out Reza Pahlavi, helped usher in Khomeini. What is your opinion of regime change in this environment? Sanctions seem to be causing some street level unrest, stress and strain, and so far it has not reached sort of the Arab Spring type tipping point. What are your thoughts on U.S. foreign policy as it relates to regime change in Iran?
George: Well, the Arab Spring was replacing one radical Muslim regime with even more radical Muslim regime, so it was an interesting thing. Inside of Iran you have a strong secular group, and they are religious, but they are not driven by it. These are the businessmen, we call the Bazaar. The Bazaar is the place where small businessman have their shops and where people shop. When they rose up, that’s what pulled the Shah down, because when they rose up the army split and the Shah could no longer survive. So we see a lot of student demonstrations, and student demonstrations don’t achieve much. They don’t stick with it because they graduate or something.
But we are all watching the Bazaar and how we have seen at a certain point, the Bazaar rise and that was when inflation got completely out of hand before sanctions. And the government had to produce several maneuvers to bring the price down. So right now the regime is in danger. President Rouhani is balancing between Khamenei and the Bazaar and if it has to come down to picking one, he will pick the Bazaar. So keep your eye on the Bazaar and the Bazaar is driven by one thing. Yes, Friday is time for going to services and the rest of the week is making money, and they’re not making money, and that’s the danger.
David: Before we transition to Europe and Russia, any comments on our relations with Saudi Arabia or Israel, the role they are playing in the region?
George: Israel is now more secure than it has been ever in history. In fact, ever since it made its treaty with Egypt when Israel was opposed, it lost the threat of multi-front war. Jordan is essentially a protectorate. Syria, well they control the Golan Heights, and yet they have their own problems. Lebanon, Hezbollah, are fighting with Syria and they are in no position to do anything. The Israelis are in a pretty strong position.
The Saudis are far less important than they were ten years ago. One of the reasons we have a 32-year old prince running the place is the panic that the Saudi regime felt as the price of oil declined and as their control of markets declined, as OPEC declined, Saudi Arabia became just another nation. And it is held together with money. There are many tribes there and the way they keep the royal family and the other tribes happy is by paying them.
And they’re short of cash because their oil capabilities are limited. And this is why the Iranians attacked one of their oil fields, just to let them know that if they play too hard against them, they are going to pay a price. So when you look at the region, Israel is doing fine, the Saudis are a shadow of what they used to be. They used to be at the center of American attention, and now not so much.
One of the countries that has emerged that is interesting is the United Arab Emirates. When I go there to Dubai, I feel like I’m in Singapore. And it works like Singapore. It has become a financial center, a center of technical innovation. They have a Minister of Space that I met. You don’t imagine the Emirates having a space program, but they do, and they plan to go to Mars to see [unclear] moons there.
So a very different Middle East is emerging, even different from the one Al-Qaida tried to create. They failed. They failed to overthrow any of them at all and create the foundation of the caliphate. And so the strong hands are the ones who didn’t play that game, the Emirates, and the weak hands, the Saudis, they did play the game and they played it badly and they forgot that the real business was oil.
David: So to Europe and Russia, but first I want to brag on you a little bit because you were discussing the power vacuum in the Middle East and the ambitions of the caliphate long before anyone else I know. And you also were describing what would happen in the Ukraine long before it did happen, looking at the geographical and topographical buffer which Ukraine and Crimea played for the Russians.
So if you would, start by describing Putin’s recent constitutional changes, and maybe comment on his somewhat bizarre references to Polish culpability for World War II and Russia being a victim of aggression.
George: Begin with this fact. Russia has just about returned to the borders it had in the 17th century. Russia survives by the buffer zone that the Baltics, Belarus and Ukraine provide it. That’s where they defeated Hitler, that’s where they defeated Napoleon, and that’s gone. The Baltics are in NATO. Ukraine is a giant buffer zone that the Russians don’t enter, the Americans don’t enter. It’s just a buffer between us. And so the Russians are looking at Belarus as the key country. Belarus is a country between the Baltics and Ukraine. And it’s a key country, it’s the crucial one, which is that if the West controls Belarus then Moscow is 400 miles of flat road away and Smolensk, a major Russian city, is now a border town.
If on the other hand, Russians take Belarus, they wind up in a position where their forces are right on the Polish border, on a broad front, and that is a threat. The Russians want to integrate Belarus into the former Soviet Union, and in fact, into Russia like the former Soviet Union, and they’ve talked to other countries about recreating it. But this is crucial to Belarus. They’re not going to get Ukraine back, they’re not going to get the Baltics back. Belarus is the name of the game.
Now, I think that what he was doing with this before he restructured the civilian, he restructured the military. He fired a bunch of senior officers, replacing them with young fire-breathers. And I think he stripped down the government here so that decisions could be made very efficiently. Their government like ours has trouble making fast decisions. What he has done is not so much made himself more powerful. He was very powerful. He simply created a new decision-making structure because I think he anticipates a crisis in Belarus, and the crisis will be with Poland because Poland cannot afford to have them in there. And there are a lot of U.S. forces in Poland who are backing them up.
The business with the crazy things that he says that Poland started World War II and stuff like that was not intended to be true, it was intended to lay a framework of Poland as an aggressive power and Russia as its victim, which if things break out in Belarus is exactly how the Russians want Europe and the rest of the world to think about Poland. And so as the Europeans really dislike Poland right now, they are threatening to throw them out of the EU for its policies, he sees an opportunity here, both to get part of his buffer zone back and entente with Europe so long as he demonizes the Poles. So it all makes sense, even though it looks crazy.
David: So Putin’s audience, and the actions are somewhat preparatory. He is in the process of justifying action through Belarus directed toward Poland.
George: Well, first he wants to see if he can get Lukashenko, who is the head of Belarus to agree to reintegration. And Lukashenko is a smart old guy. He has been balancing like crazy between the West and the East. But Putin has pushed him to the point where he is spending an awful lot of time talking to Europeans. Also, the U.S. Secretary of State is going to be visiting Belarus this week, so that is not something that Putin wants to hear because the last time that kind of stuff happened he lost Ukraine. But the interesting thing is, the media is missing, very busy with the impeachment, or non-impeachment, whatever it is, is missing this game that is being played out in the Eurasian heartland, the Belarusian game. But the Secretary of State is on his way.
David: Poland has been in a very interesting, maybe awkward position, both past and present. You go back to 1939 and Germany having designs, Russia having designs, and the battleship Schleswig Holstein showing up near Danzig. It is a fascinating history and here we are again, Poland being at a critical juncture in the development of this European narrative.
George: If you look at a map, there is something called the North European plain. It runs from Normandy all the way to Moscow. It is flat. It is traversable. This is the path armies take. It is the path that France sits on, that the Benelux countries sit on that Germany sits on, and right in the middle between Russia and Germany is Poland. Poland has had, apart from this period now, in the past three centuries, only about 20 years that it has run its own life, and then the period since the fall of the Soviet Union.
So Poland is normally being torn apart by its neighbors. In this particular case, its two neighbors are weak in a number of different ways. One is Russia, one is Germany. And right now, while Germany and Russia kind of have a strange romance going on, Poland is maneuvering to not only be the blocking point between the two countries, but really taking control of this region, to have influence in Belarus, to have influence in the Baltics. And not surprisingly, the Germans via the EU are talking Poland everywhere they can.
David: This was a major feature in The Next 100 Years: A Forecast for the 21st Century, where you are looking at declining influence in Germany and increasing influence in Poland. Part of this is bolstered by our support. We’re completing a missile defense system in Poland this year. That has never been popular with the Russians. You like this theory of empathy as you look at how various players experience things and how they respond. What is the Russian experience of NATO in recent years?
George: Their view is that the most important country in their buffer zone is Ukraine, and the United States staged a coup d’état against a legitimately elected president to replace him with a pro-American government. The Russians would say, “Yes, we hack your computers, you send NGOs.” And yes, the NGOs in Ukraine were heavily supported by human rights groups, the National Endowment of Democracy, and so on. So Putin views the United States as an aggressive power. And aggressive power using covert force to put anti-Russian powers in place.
His view is that we promised that no former soviet republic would be included in NATO, and that included the Baltics. The American government denies that it promised it. It’s a long story. Either way, Putin believed it, and he had some reason to. He saw the Ukraine, fundamentally important to Russia with a chaos in Maiden Square in Kiev, and the pro-Russian leader who had been elected, and he said, “Look, the Americans are trying to crush us by taking away our strategic necessity.” It is as if we were staging uprisings in Texas,” something he once said.
So he looks at the U.S. as much more aggressive than we do, and he looks at his counters, things of that sort, as simply counters to what the Americans have done. So in every case you will find each country has its own narrative, and each country finds the narrative of the other preposterous. But when you look at his point of view, he is fighting for his life in the buffer zones, and we’re doing everything to take that life. We look at it and say, “Why in the world would you be interfering in American elections? Why are you trying to create chaos?” And his answer is, “Welcome to the world you created.” So you can be empathetic, not necessarily agree with him. That’s how he looks at it.
David: We can have a lengthy conversation on the Eurozone, Brexit, and before we transition to China I want to know if you have any reflections on, broadly speaking, European integration or disintegration.
George: Europe had a very good entity, the European Economic Community. It was a free trade zone, very much like our North American Free Trade Agreement. We don’t tell Canada what kind of schools to have, and Canada doesn’t tell us about our legal system, and all that. They went from that to Maastricht to this highly entangled entity where the center is telling various countries not just about their economy, but about rule of law and things of that sort.
Well, the difference between Poland and Portugal is pretty radical, culturally, historically and everything else. They talk about a European identity, but the one identity of Europe is that it doesn’t have a single identity. It has a lot of different countries and many of them with bad memories of each other. And having Germany lecture Poland after its occupation is not something the Poles appreciate. And this is the essential problem, which is, what is Europe? Is it a United States of Europe? No. Sovereignty is in the states. Is it simply a free trade zone? No, it’s not that.
And now the second-largest economy in Europe, Britain, has decided to return to its historical roots, keeping distance from Europe. And the Europeans are raging and promising all sorts of disaster for Britain without understanding how much they depend on Britain. This is the second-largest economy. It is a huge importer of European goods. If they do what they think is going to happen, they’re going to get even worse.
Plus, Trump has indicated, and I think Congress will pass it, the British can have a free trade agreement with the United States any time it wants. And never forget that the North American Free Trade Zone has a higher GDP than the EU. The EU always thinks of itself as the great economic block. Mexico, United States, and Canada together are somewhat bigger economically.
David: So with China the coronavirus is on everyone’s mind at present. Not to minimize that, but let’s look at context first, where we have Xi-Jinping who has given himself plenty of political runway, not unlike Putin, sort of leaders for life, restructuring so that they can make strong political moves, organize and control the military more constructively. What is the current narrative in China? Is this resurgent superpower, challenger to U.S. global hegemony? Does it end up being like Japan in the 1980s?
George: Japan in the 1980s would have been exactly what I would have picked. China has grown tremendously. The idea that you could sustain that level of [unclear] growth for all of eternity is nonsense, of course. The Chinese banking system is in complete chaos. One week they want to build reserves, the next week they are telling the banks to cut reserves. They don’t know how to handle the situation. The situation is very simple. China, like many post war economies, built itself on exports. Its entire economy was built on that.
In 2008 consumption of exports by the United States and Europe declined fairly dramatically. So China had to face the fact that every businessman has. You depend on your customers, and customers weren’t there. And nobody was in a position in China to buy all the goods they were producing. So China went into a profound tailspin, and has not been able to solve the problem. The U.S., using the Obama/Trump model didn’t really worry about military matters, they slammed tariffs on them.
So it is now in a confrontation with its largest customer. That’s about the worst you can do. In addition, Xinjiang, which is a Muslim area which was somewhat in rebellion, basically had a reign of terror placed on it. Hong Kong is rising up because China threatened to extradite people from Hong Kong. This is a deeply troubled country.
The coronavirus is interesting. I really can’t get my hands around how serious it is as a disease and so on, but I do know this much. The Chinese are absolutely panicking, and Xi is panicked. Xi has had a tremendous amount of opposition in the Central Committee. He was appointed to be a dictator. You don’t appoint a dictator when you’re doing well. You appoint him when you’re worried. Well, he has not managed the economy in any way that solves the problem. They say they grew 6.1% GDP. But they announced the GDP figures two weeks after the end of the year. So they had no idea, they’re making it up. They’re down a lot.
And it’s very much like the problem Japan has. Japan was once a great exporter. It depended on it. One of the things you saw in Japan was its GDP was rising, its exports were increasing in number, but its banking system was collapsing at the same time. Well, you can get in this situation because your creditors are more important than your shareholders in these countries, and your creditors want cash flow, and not rate of return on capital. They want to be repaid. And so you are surging exports even at very low profit margin, if any, to keep paying them back. Eventually you can’t and Japan crashed.
Well, China is like Japan with an added problem. It has a billion people who live in abject poverty in the interior. So unlike Japan, which was fairly a unified country with relative equality, China is desperately trying to maintain its stability. So it did beautifully, it did an amazing job since Mao died. It was lucky for them that he did. And now they are in a fall. The problem is they’re finding it very hard to try to [unclear]. So the idea that they are going to overtake the United States, which was a myth a few years ago [unclear], this is not going to happen.
David: This goes back to your comment you made about the world still being in the grips of 2008, and there being a premium on importers. This is something we learned in the 1930s when we went into a global depression in the 1930s. We were running trade surpluses and it’s the trade surplus countries that are far more vulnerable. So here we find Germany under significant pressure, we find China under significant pressure.
Part of this gets me curious and runs my imagination to when you are in an economic period of pressure, and as you said, dictators are appointed in crisis, not in the context of great success. How should we interpret the development in the Paracels and the Spratley throughout the South China Sea, and is that too distant an issue from what we see in Hong Kong and even Taiwan. Your thoughts?
George: First of all you have to understand that South China Sea is deeply linked to trade. If you take a look at a map, it’s surrounded by very small islands, and those islands are very easy to blockade. The choke points are there. China is terrified that the United States will choose to blockade the south of the East China Sea. And China exists by its trade with the rest of the world. So it badly wants to push the United States back, and it has been wanting that for ten years. And in those ten years they had achieved nothing. In those ten years it [unclear] naval forces and [unclear] quite a bit stronger than them.
So this is another failure for the Chinese and for Xi. Their view is, “This is the South China Sea. We don’t want you in a position to blockade us because we believe that you are quite capable of that. And you’re like the Caribbean and you didn’t want the Russians in Cuba.” And we said, “Yes, that’s true, but we’re not going anywhere anyway.” So we talk about the tremendous strength the Chinese unclear] but we talk about it and the fact of the matter is that in ten years the Chinese have not been able to change the balance of power even slightly in the South China Sea. But it is linked to trade. It is what terrifies the Chinese and they can’t move us.
David: So as we wrap up, I just can’t speak highly enough of The Next 100 Years. I mentioned earlier, geopoliticalfutures.com, and, for anyone who is wanting to look at your current work on a daily basis, that is just a great resource. But for perspective, again, coming back to this idea of context being critical to understanding, and depth of understanding being critical to improved planning and strategic choices that we make on a daily basis, your book The Next 100 years is very helpful in doing that, giving some context. And I also liked The Next Decade, kind of shrinking that down a little bit. If you’re writing a new version of The Next Decade, since you wrote that about a decade ago, what would the top three developments be that you would encourage us to stay mindful of?
George: Number one, sidebar, a German economic meltdown. Germany exports 50% of its GDP. This is the fourth largest economy in the world. It is utterly dependent upon its customers’ willingness and ability to buy. Its number one customer is the United States – primarily machinery and automobiles. This is the lynchpin of Europe and the banking system is a shambles, Deutsche Bank and Commerzbank are key banks, and they are a shadow of themselves. So we have seen the Japanese process in place. First your financial system begins to shatter, and then the rest of it comes down. That’s where Germany is, so that is the first thing that we would spend an awful lot of time worried.
The second thing is, and I’ve just written a book called The Storm Before the Calm. It’s going to be out next week. And that is the United States. The United States goes through periodic crises, the 1960s, Russia, whatever. It happens. It is normal for us. We are not yet in it yet. Trump is kind of the forerunner, the Trump administration and the chaos about it. But the next ten years are going to be very difficult for the United States internally, and therefore externally, as well. So we really have to watch over the next ten years – we’ll get better, we always come through these – the instability of the United States.
And finally, you have to keep watching the scared countries – China and Russia – and watch how they behave, because being weak doesn’t mean you can’t get hard, and particularly Russia is being backed against the wall. China, as well. So the two things I would look at are Germany, really, is the one that scares me. The United States bothers me because we’re going into this crisis period, and then you have to look at the former great powers who will try to [unclear] one more time.
David: As always, we enjoy our conversation with you and the insights that you bring, and geopoliticalfutures.com is an excellent resource. I haven’t read your most recent book, The Storm Before the Calm, but I look forward to seeing it and perhaps we can dialogue on that before too much time passes. Can that be pre-ordered?
George: Yes, on Amazon. It will be out February 25th.
David: Excellent. Congratulations. We will take a look at that. The Storm Before the Calm, and for those of you who haven’t read The Next 100 Years, must reading. George, thanks so much for joining us on the Commentary once again. Great to have you as a guest.
George: It was a pleasure. Thank you very much.