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The Naked King: Exposing U.S. Dollar & Diplomacy Weakness
September 7, 2021

“With the issue of our security apparatus and the projection of US military power around the world being somewhat in question, it’s not clear which comes first, the deterioration and decline of our international security or of our international monetary system. When one or the other goes, I think, you’re talking about not only the end of pretense, but the beginning of a very hard, hard reality.”
— David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. 

I was having lunch at one of the oldest restaurants in Durango, Dave. Here in Durango, restaurants come and go, especially right now when people are having a hard time getting help. I was sitting and talking to the owner of a Chinese food restaurant over on main street that I like to go to, and I like to buy a book every once in a while, just sit, have Chinese food, read for an hour or two. And as I was talking to her, it was interesting. We’ve been here almost 30 years here in Durango, I had talked to her, but I had never really sat down and talked to her about who she was before Chinese food restaurant ownership. And she had higher degrees in international diplomacy. What started the conversation, Dave, was I had said, “Are you doing any traveling right now?” Because I knew she had family in Taiwan. And she said, “No. No, I’m not doing any traveling right now.” And I saw actually a tear start to well up in her eye. And the longer we talked, the more I realized that what occurred in Afghanistan a few weeks ago had direct impact on her and her family in Taiwan. The elephant in the room, Dave, is not Afghanistan. The elephant in the room is that we’ve been putting on airs of supremacy that maybe we as the nation no longer have.

David: It’s pretty interesting to watch the news feed from the Financial Times. Xi Jinping is aiming to redraw China’s social contract, or Chinese control revolution, or even allowing George Soros to have a voice in the op-ed section. Investors in Xi’s China face a rude awakening. There’s a reality, which is firming up within China. And we’re talking about the economy and the financial system, which necessitates a certain political activity. And all of these things are happening at a very unique time, perhaps it’s coincidental. But we can look to our own economy. Last week we had non-farm payroll numbers which were not as bad as they sounded. They were worse. The expectation was for 750,000 jobs to be created. It was far less than that, 235,000, that was the reported number. But 143,000 of those were created statistically from the birth death models, not real jobs created. So that’s an issue. On top of that, you had wages which were increasing, supporting the idea of inflation coming at the same time an economy is slowing.

Kevin: There’s a word for that.

David: Stagflation.

Kevin: Yeah. And China, their economy is slowing too. So you can see different types of actions maybe on the horizon based on that.

David: Right. And it was consistent both looking at their purchasing managers indexes for manufacturing and services. Both numbers were ugly. You could argue it’s temporary, except the dominant growth factor in China has been in that massive malinvestment in real estate development. And as we’ve talked for a number of weeks now, Evergrande is circling the drain, this $300 billion— This was a very large company.

Kevin: Their bonds were paying 40 some odd percent, you had mentioned last week. I mean, that is the sign of bankruptcy.

David: And the value of those bonds declined between 25 and 35% again, last Friday.

Kevin: Wow, wow.

David: So yields even higher. So yeah, again, you can argue it’s temporary, but if it is the malinvestment in real estate, which has given them very high growth rates, then you have to expect that slower growth is an inevitability now that they’re looking at that not being a huge contributor to those economic growth rates. So to my mind, it does not come as a surprise. Again, if they’re headed towards a longer term economic decline that these appeals to patriotism and political fundamentalism are on the rise. The changes in tone from Xi Jinping are very ominous. And I think they’re emboldened by Biden’s debacle. So the primary audience for Xi is a domestic one, it’s not an international one, and convincing the Chinese that a hard road ahead is a good one if they’re committed to the party. What that sounds like is preparation for conflict of one sort or another. Domestic? Is it geopolitical? Time will tell.

Kevin: It’s important to note when we look at world politics, not all countries are operating out of the aggressive boldness standpoint. A lot of times they’re very defensive. And Xi Jinping probably is looking at his economy and saying, “You know what? Time to ramp up the patriotism.” 

When I talked to the lady who owned this restaurant, like I said, her major was international diplomacy, and she joked, she said, “I came fishing here in Durango 30 years ago. I thought I was going to actually go into diplomacy at the UN. And I realized, I think I’d rather just own restaurant in Durango.” And she said, “I think I made a good decision. I’m doing diplomacy one stomach at a time.” But as we talked, she said— Because I brought up China slowing down, and I brought up the credit bubble in China, and the vulnerability that you’ve been bringing out, Dave, as we’ve been talking. And she said, “Yes. But they probably can use that as a negotiating chip against America.” And her concern, of course, she said 24 million people in Taiwan, that’s where her family’s from, can’t possibly stand up to over a billion people in China should that become the decision.

David: Right. Well, thinking about Afghanistan and the realization that our dysfunction as a nation is very much in focus, it took me back to an old memory: Brookline, Massachusetts, 1999.

Kevin: That’s when you first got married, right?

David: First got married, and it was our first dinner party.

Kevin: Oh, yeah. Really?

David: Our first dinner party as a couple. So we had a dear friend of mine from Denver. He was on the east coast. All American lacrosse player, had recently graduated from Middlebury, and was an aspiring professional musician, already traveling with a band, still traveling with that band, still playing music, traveling the world, honing his craft. There was also a freshman from Harvard that was a good friend then, still a good friend today. And then there was an accomplished couple that I had known for half my life. He was working on a PhD at Boston University. So it’s a fun mix of people.

Kevin: Yeah. Well, and that’s something you and Mary Catherine love to do. I mean, you love to invite a different type of group together because you like the conversation and the food.

David: Yeah. And we thought this was well curated. So anyways, the PhD candidate shows up an hour late and completely sauced.

Kevin: Now he showed up already drunk. Huh?

David: He immediately starts in on an art critique explaining all the unfortunate choices that we’ve made. The things that are hanging our walls and why those canvases reflect the worst of continental philosophy and the postmodern ideal. Little did he know that half of those canvases were painted by my wife.

Kevin: Oh no.

David: And so I was thrust into this intellectual debate on art and how not all art has to be mimetic to be meaningful. It doesn’t have to be a perfect replication of the natural world in order to be “beautiful,” or have significant message.

Kevin: What did the other guests do? I mean, this had to be uncomfortable.

David: Oh, it’s very awkward, awkward to say the least. Our other guests, I think, they were stunned. And here is the eldest among us acting worse than a frat boy in spite of all his attempts at scholarship and elevated importance and literary reference.

Kevin: Well, he was working on a PhD, Dave. I mean, everyone should stop and listen.

David: He was also working on the better part of a fifth, I think, before he got there. Yeah, as he moved from sauced to belligerently drunk, he excused himself for a few minutes to go to the powder room. And I looked at his wife and I simply said, “Bless your soul.” For everyone at the table, it was obviously uncomfortable. But his wife had become so accustomed to keeping up appearances. She thought that his behavior and their family dysfunction was concealed. I mean, covered over by eloquence and astute observation, and her very honed ability to distract from his personal weaknesses and proclivities, which—

Kevin: But there was an elephant in the room.

David: Yeah. And it turns out this is a way of life, not just a one-off event for him. He’s got some addictive issues, and she was the classic enabler. So for the first time in her adult life, pretense comes crashing down with three words, bless your soul. And that moment where she knew that we knew that the king had no clothes was enough for her. Pretending was over after decades of playing games so that he, or I guess, they didn’t look bad. It was done. She left him the next day.

Kevin: Really? Wow.

David: All I said in a sympathetic tone was, “Bless your soul.” Revealing a fragility that had long existed, but was rarely exposed.

Kevin: But this time it was absolutely obvious.

David: Yeah. So I mean, Afghanistan, again, it’s this issue of revealing a fragility. And yeah, I go back to The Clash, if you know the band. I’m into musical references these days.

Kevin: Well, I don’t know. Yeah. But you, if you’re going to sing—

David: No, I won’t.

Kevin: Yeah, because Robert told me I can’t sing anymore.

David: I know. Should I Stay or Should I Go? Should I stay or should I go now? If I go there will be trouble, and if I stay, it will be double. So there’s that issue. And I think this is again where I think back to Brookline, Massachusetts, and I think there’s dysfunction. We know there’s dysfunction in the American system. I’m not a complete cynic, I’m not a total cynic. There’s some observations from our 20-, or I guess you could count it even 40-, year failure in Afghanistan.

Kevin: And you were thinking about this because of Afghanistan because, should we stay or should we go, or should we have ever been there in the first place?

David: But also it doesn’t take much to reveal weakness. And I think that’s where, again, the Chinese are our audience, and the whole world is our audience. They look and they have a different set of questions they can ask.

Kevin: Isn’t it amazing how Afghanistan has been so revealing to the two superpowers because in the ’70s, when Russia came into Afghanistan, it revealed that they ultimately were going to fail. I mean, that was the precursor to, I mean, Reagan coming in and ultimately the whole thing falling apart.

David: And the British failed there twice in the 1800s. So it’s, I mean, what’s the famous quote from “The Princess Bride”? Never get involved in a land war in Asia.

Kevin: Yeah. That’s right now. I think he was talking more about what Napoleon did and what Hitler did, but you’re right Afghanistan’s a place to hands on off. But you said a 20-year failure in Afghanistan or a 40-year failure, because really, if you go back to the 1970s, that failure started with Russia.

David: Yeah. And we were involved in fighting not against the Taliban, but with the Mujahedeen, which basically became the Taliban.

Kevin: And we did leave our weapons there last time too and they used them against us later. Yes.

David: But again, so under the facade of strength, there are dysfunctional aspects to our foreign policy and strategic military engagements around the world. It’s not the military or our technological capabilities on the battlefield that are lacking. And as we’ve watched, I mean, this is where the dysfunction comes in. You’ve got every arm of government, now the intelligence community and the military stepping into partisan politics. That to me does cast a shadow over how our democracy is functioning because there’s certain aspects that should not involve who’s in office and what policies are in play that are strictly nonpartisan. I think that should be the intelligence community. I think that should be the military. I think basically you look at the military’s creeds and codes and they tie to the Constitution. They don’t tie to personality or particular political party.

Kevin: And speaking of personalities, I mean, the White House is more than a man. We oftentimes get distracted by saying, “Well, this was Joe Biden and this is ineptness on his part.” No, no, no, this is much bigger.

David: Yeah. It is. It goes beyond Biden and a teleprompter. But I think what’s missing today, and I say this somewhat cautiously, waiting for my dad to scold me or something, but there is no Kissinger. There is no Zbigniew Brzezinski.

Kevin: You didn’t have to agree with these guys, but they did play chess with the entire world chessboard.

David: That’s right. Love them or hate them. They both thought in grand strategy terms and operated out of a robust framework, but you may not have liked the framework.

Kevin: No. And back then we really were unchallengeable as the superpower. But if you look at our allies right now, they’re looking at us and they’re going, “I don’t know that I like you as the hegemon of the world.”

David: Harold James is keen to point out the not-so-coincidental cracks that emerge in a currency system alongside the collapse of a security system.

Kevin: We’re going to have him on here in a few weeks, right?

David: Yep. He’ll join us in a couple weeks. And he says, “It becomes more likely that the old security system will be tested in ways that previously seemed unimaginable. In the current case, all eyes are on the Baltics and Taiwan.” So he looks at 1931, where, again, we had the League of Nations, but that came to be known as a real paper tiger as Japan orchestrated a false flag event, invaded Manchuria, and, again, we couldn’t do anything. None of the members of the League of Nations could do anything. And at the same time, you’ve got the British coming off the gold standard that same year, massive devaluation. Fast forward in 1971, you’ve got the Nixon Shock, post-Vietnam debacle, US dollar devaluation. And the question there is 2021, Kabul. And who knows what happens to the dollar. But James points out that the international security system and the monetary order seem to be disrupted at the same time.

Kevin: Well, and as soon as you challenge the hegemony of the United States, you immediately challenge the value of the dollar.

David: Yeah. So here we are sitting around the table, today we have NATO, we have our allies in Asia, we have more than a few countries that neither relish our role on the world’s stage or, at this point, respect what we’ve become. And they’re looking and saying, “Look, we don’t like unilateral actions. We don’t like egocentricity. We don’t like your narrow focus. We don’t like your nearsightedness. Not particularly self-aware.” I mean, these are all criticisms that can be laid at our domestic policies, at our foreign policies. There’s a likeness of the 1970s here. And it’s not just in the unstable condition set for our currency, I think we can agree that that’s there, but it’s in our standing globally. 

And again, go back to the ’70s, post-Vietnam, post-Nixon, pre-devaluation, pre-economic stagnation, we had a decent guy in office that was not a strong leader. And Nixon, in some respects like Trump, toxic enough for the personality pendulum to swing towards feebleness. And that’s what we’ve ended up with, this generation’s Jimmy Carter. 

Kevin: So that’s an interesting read there because Nixon— Yeah, I remember Nixon. I remember Nixon and a lot of the listeners do. And then we remember Carter. It’s funny, I was out running this morning and I was actually thinking about Carter and what a nice guy he was. But what weakness that he exuded as far as international politics? It was horrible, really, at the time.

David: It’s difficult for me to say this because I’d like to think that the quality of a person is what shows up in the quality of the job that they do. And yet here is a quality human being who wasn’t a very good president. And it didn’t matter how good he was as a human being.

Kevin: Probably a very nice guy have dinner with. He might have been a nice guy. He probably wouldn’t have criticized your art. Let’s put it that way. 

David: He would’ve been much more diplomatic.

Kevin: He would have shown up sober. 

David: Well, I don’t know, in the South, sometimes they don’t show up sober. But Ken Rogoff agrees, this is more and more like the ’70s and stagflation seems to be more and more probable.

Kevin: Obviously history doesn’t repeat, but it does rhyme. And looking at the ’70s, you look at what happened to the value of the dollar throughout the 1970s. Not only did we have the high inflation of the Carter years, but we actually had a devaluation in the early ’70s when the dollar was taken off the gold standard.

David: Yeah. External pressures mounting, debts starting to rise, fiscal obligations also testing limits. And it would appear that we’re back to that early ’70s scenario: deteriorating fundamentals, which are likely to show up as currency pressure, high levels of debt, shrinking interest in financing our trade deficit; inflationary consequences, both from our monetary and—frankly, even more so—from our fiscal policy. Match that up with economic unproductivity, more people on the dole, less people contributing to tax coffers.

Kevin: Well, we’ve got crisis. We had crisis in the ’70s. Remember, it was crisis management.

David: Yeah. And I think you could argue to some degree inept leadership in the context of crisis today. If the best you can do is berate and justify rather than inspire, you’ve got problems. And it shows up their likability measures. What are the polls? Do people like Kamala Harris and Joe Biden? Those numbers continue to slide.

Kevin: But a lot of people would say, “Oh yeah, but Trump’s the cause of all of this.” I guess people just pick sides and no matter what the case is, they blame the other side.

David: Yeah. I think we tried to blame Trump, but I think you could also go back to Obama. There wasn’t really a clear coherent foreign policy under Obama. If anything, Trump came along and just started blowing things up and a part of what was blown up are agreements that he didn’t think made sense. So he had the brash businessman hat on saying, “It’s not good for me. It’s not good for us as a country. We’re out. We’re done.” But I think you can see that our dysfunctions predated him and are to some degree embedded in our institution. Certainly when you think of Afghanistan, as we mentioned a few weeks ago, this was Bush before it was anyone else.

Kevin: The Republicans treated Bush like a Republican. The Republicans did not treat Trump like a Republican.

David: No, no, no. Trump was never a part of the Republican establishment. He represented a threat to both the Democrats and the Republicans. So his party showed him no loyalty, which is an odd thing. So in the end, going back to the dinner party in Brookline, Massachusetts, the Democrats pretend all is well, and the Republicans pretend all is well—but with the exception of Trump. Again, they have these pretenses and they cover for their man.

Kevin: Until the elephant in the room is exposed. And that happened with— you said she left him the next day.

David: This is where politics and international relations are different than a marriage relationship. When others perceive weakness, there is opportunity to push for an advantage. For Carter, it was the Iran hostage crisis that revealed the softness.

Kevin: That came right before the Russians went into Afghanistan.

David: Yeah. The Russians were operating out of insecurity, and I think that’s worth noting. This was not a thrust of strength. They knew that we held a strategic nuclear advantage, and Afghanistan provided an opportunity to move the Marxist revolutionary needle in country, while projecting strength internationally. Again, even if that projection was coming from an insecurity.

Kevin: And we learned that from Dr. Friedman. When Dr. Friedman comes on, he’s like, “No, Russia may have looked like they were strong, but they were insecure.” We all have our habits of, you can meet with somebody and you can go, gosh, they’ve gone through an awful lot in their past, or a dog that’s been abused. We were just with some people this weekend who adopted a dog that they know was horribly abused the first year of his life. Well, it’s a difficult dog, but they have loved it to where it can be domesticated, but it still has those tendencies of lack of trust. And the Russians— Dr. Friedman has told us that the Russians have been invaded over and over and over. They want Ukraine just to have that 500-mile buffer. So the Russians in the 1970s, I can remember this, they seemed like a superpower because of the way they portrayed themselves. And it’s taken me till now, when you really look under the surface, there was not a lot there.

David: But by the late 1970s, they understood that they didn’t have the technology to respond fast enough. If we sent the first missiles, they would lose their command and control capabilities, and they would be unable to volley back.

Kevin: So they sensed weakness and they went in to Afghanistan?

David: Correct. So November ’79 was the Iranian hostage crisis, that’s November. December of ’79 was the Afghan invasion by the Soviets. Treat it as a coincidence, if you like. The timing looked suspiciously opportunistic by the Soviets. Carter in that context was a weak player. He was a weak player personally. Again, not saying that he was the only person on watch. Carter failed to respond quickly to the Iranian revolutionaries. And that ended up being a defining factor in a single-term presidency. I wonder how much he knew of our state department’s involvement in the overthrow of the Shah and in the rise of Khomeini. Was that why his handlers wouldn’t let him act on Iran? Again, there was a calculus, I’m sure. But as far as the public was concerned, Carter just showed up as a weak guy.

Kevin: Do you sense something similar right now? Because it’s just awfully strange that Biden is so— he’s just not present at all during this period of time.

David: Well, one thing’s for sure, at least in Afghanistan, coming back to Carter for just a minute, he did have the gumption to mount a response, working with the Pakistanis and Saudis to create a motivated anti-Russian fighting force. And frankly, it was at a low level until Reagan took office. And then that project really started rolling. So the Saudis exported their Salafis radicals, which was an interesting thing to export, solve one problem, solve two problems. And then they provided funding as well. We threw in arms and oversight and training, the Pakistanis threw in intelligence and training. And it was this little triumvirate that was working against the Soviet Union for 10 years. It was operation cyclone.

Kevin: And it just siphoned all their resources, and it weakened them.

David: Yeah. So maybe we did learn something from Vietnam. We bled the Russians of their finite resources, damaged their morale, and ultimately contributed to their collapse.

Kevin: So this owner of this Chinese food restaurant who has her higher degrees in international diplomacy, who has family in Taiwan, who’s watching China, is Xi Jinping watching, as well?

David: Yeah. The Chinese are watching. Xi Jinping has his own domestic agenda, of course, and may very well parlay into a larger strategic canvas. We don’t know that. Time will tell. It’s not just the US pulling away from Afghanistan, which might on one level convey weakness. But it’s the question of where that attention will now be turned. If our resources and energies are no longer going to that segment in the Middle East, where are we going to turn our attention? And I don’t remember if it was Minxin Pei or Victor Shi on our program that described the Chinese as operating with a certain degree of insecurity.

Kevin: Sounds familiar.

David: Only because they were overestimating the US’s coherent US grand strategy. They think we’ve got something going on. They think we’re playing a long game. We think they’re playing a long game. Maybe nobody’s playing a long game. But insecurity is a hell of a thing to deal with when you’re on the other side of the table.

Kevin: Could you imagine a gunfight where you’ve got two insecure guys or at least one insecure guy. He thinks that the other’s going to pull the trigger.

David: Right. So if the Chinese thought we might take our military resources and repurpose them towards an Indo-Pacific theater, the question of White House leadership and actions that they should be taking now, this is the actions of the CCP, Chinese Communist Party, that becomes critical. Because now it’s a question of what can we do? What should we do? If there’s a larger strategic refocus and we all of a sudden are in this influence, this sphere of influence, who are we dealing with today? Who might we be dealing with tomorrow? What are the actions we should take in light of what we see?

Kevin: Well, and if you’re insecure and so far you’ve been running on credit—now I’m not talking about us—but if you’re insecure and you’re running only on this gigantic credit bubble, a slowing of the economy right now may trigger that insecurity index.

David: Well, it may trigger actions which cover over a lot of the things which you don’t necessarily have the resources to deal with in terms of fixing the economic rebalancing. Some of the rebalancing we talked about last week, primary, secondary, tertiary. You remember that? Well, what if you can’t move the needle fast enough? And your economy is moving into a regressive— it’s moving into decline. What do you do? Soros— 

Kevin: Your favorite. 

David: —wrote an op-ed in the Financial Times last week which argues for a collapse in the Chinese financial markets. And his concern is that passive indexing, is your index funds, have allocated trillions of dollars into global markets. And Chinese companies are at the top of those lists. So you’ve got Alibaba and Tencent, they’re everywhere. They’re in everything. ETFs, mutual funds, Buffett owns some Chinese listed stocks as well. Soros was keen to point out that the crackdown in China is real. The CCP is taking board seats and influential stakes in particular companies to gain access to data with these publicly traded companies and to bring influence and control over them.

Kevin: That’s almost nationalization right there.

David: Yeah. Well, and Soros says this, “Xi regards all Chinese companies as an instrument of a one party state.”

Kevin: That is nationalization.

David: Right. Now, to some degree, I think, you could almost say Biden sees all companies as instruments of a one party— I’m sorry. Maybe that’s not appropriate. But speaking to investor Naiveté, Soros goes on to say that Xi’s China is not a China they know. That is, investors don’t know this environment. He’s putting in place an updated version of Mao Zedong’s party. No investor has any experience of that China because there were no stock markets in Mao’s time, hence the rude awakening that awaits them.

Kevin: Dave, that’s the difference between prediction and participation. You can participate in something—like cryptocurrency. You’ve got 13 or 14 years of history with cryptocurrency. So you’re more than welcome to participate, but you can’t predict because you don’t have any history that goes before that. What we have right now, you and I have been intrigued over the last 10 years or so to see China rise, continue to buy gold, and be a quasi-communist, quasi-free market state. It was like, “How are they getting away with this? How do you do both?” But things are changing under Xi.

David: We spent a lot of time last week with the language he was using. Again, weighing the words of Xi Jinping. This is not speculation. He’s calling attention to what he describes as “changes unseen in a century.” Now the Financial Times editorial board interprets that as the rise of China and the relative decline line of US-led Western power. That’s how they translate those particular words: changes unseen in a century. The Bloomberg Wire covered Xi’s comments first, and then over the weekend the Financial Times caught up with an evaluation and an analysis of his words. And to say that the Financial Times was concerned would be putting it lightly. “It’s unrealistic to expect a peaceful life without struggle.” This is all a part of Xi Jinping’s comments. “We must uphold China’s sovereignty, security, and development interests with unprecedented determination.”

Kevin: I’m just thinking out loud here, Financial Times is actually probably analyzing this because they’re British and they’ve been through this before. Financial Times, granted, it’s an international document, but isn’t it British? Aren’t the Brits maybe saying we’ve seen this because we’ve been through this?

David: James’s observation that the cracks in the security system emerge about the same time as you see cracks in the currency system is fascinating, ’31, ’71, ’21.

Kevin: 1931, 1971, ’21. Yeah.

David: 1931, 1971, and 2021. And to see the security apparatus in the world, we are the world security apparatus. To a large degree, when you look at the glue that holds everything together, it was our air base, Bagram, where all of our allies were operating from. We provided a platform for participation. And so when I say our security system, I’m not saying that to exclude any of our allies, who made major contributions. But if our system is cracking, their system is cracking. And if the dollar system is cracking at the same time, that becomes very, very interesting. There’s a Chinese blogger who describes, as he’s looking at the Chinese changes of late, and he says, there is a monumental change taking place in China. The economic, financial, cultural, and political spheres are undergoing a profound revolution. It marks a return of power from capitalist cliques to the people. It is a return to the revolutionary spirit, to heroism, to courage.

Kevin: Wow.

David: So essentially Xi is pivoting from what was a period of opening up, 1978, following Xi Jinping, to at the year 2020. This is a new era, and we can talk about common prosperity. Last week, we said, “Ah, maybe it’s common poverty.” What is clear is that common prosperity is not egalitarianism, there’s still the ruling elite. There still is the Politburo. There still is those who have the power. And then there’s the series of buy-offs.

Kevin: So you’re not getting a nationwide middle class, beautiful, everyone— What you’re getting still is the division between the rich and the poor. It’s just different.

David: Right. And it’s actually returned to pre-democratic ideas of state rule and who were the original 1%. The original 1% were the people who were most connected to power, and you could buy seats of power. You could control seats of power, but if you were in a position of political prestige you accumulated wealth only on that basis.

Kevin: Well, and this was the concern of this lady that I talked to at the Chinese food restaurant. Taiwan has tasted free market economics, and now it looks like that may be taken.

David: Well, and China has tasted of free market economics, but very interestingly, look where the neutralization has occurred as you’re looking at a change in policy on a domestic basis in China. Anyone who could potentially mount an army, and I’m not talking about a physical military army, but an army in the world of social media, an army in the world of public opinion. Just keep in mind China has always been very, very volatile when it comes to peasant uprisings, and this goes back thousands of years. The biggest peasant uprisings, and the most catastrophic in terms of lives lost and anywhere from one million to 20 million people dying in conflicts—welcome to China. 

And that’s where I think Xi’s been very deliberate about making sure that any advancement in an alternative voice simply goes away. So, yeah, again, the comment from the Financial Times, I think it soberly points to an adjustment of internal controls and priorities, and it remains to be seen if those internal priorities coincide with a more expansive foreign policy agenda. Of course, we think of Taiwan as a part of Chinese foreign policy, it’s not. For the Chinese Communist Party, Taiwan is a matter of national security. You go back to Xi’s comment earlier, this is national security. This is sovereign integrity, which is why they may very well take some initiative here.

Kevin: Yeah. And so let’s just look at the rest of the world. I mean, you’re seeing change in the rest of the world from Japan to the United States.

David: Yeah. You’ve got— Japan is losing its prime minister. You’ve got Biden— and he’s not going to stand for the next election. Biden is weak. Other allies might question our resolve and a conflict with China—the Aussies and Brits come to mind. If China thinks we may in time refocus our strategic energies to blocking the development interests of their country, the odds of a Taiwanese invasion are significantly higher post-Kabul. Again, it’s where we put our energy. And if they think our energy is shifting there, they can look at a series of shifts within those who are in leadership, Japan, the US, and say, “If we’re going to do something, we do it now. We can push now. We may not be able to push later.” Imagine if they tried to invade Taiwan and Trump were in power, I think you would see a full-scale military response. I’m not sure we see that under Biden.

Kevin: Well, we’re seeing with Xi that he is serious. He’s already sending that message to those who might oppose him or might have a little bit too much money.

David: Certainly on a domestic basis, he’s consolidated his executive power. And he’s been doing this for a number of years. Corporate Titans have been humbled, some of them have been killed, he has gone after the technology entrepreneurs. That was a way of more firmly establishing his monopoly on communication, and continue to maintain a monopoly of violence, silencing dissent.

Kevin: I one time saw a video that I think Saddam Hussein wanted to be shot. I don’t know if you saw this video but it was amazing. He got his leaders into a room. It was like a movie theater, that size. And he started speaking, and they were all clapping, and what have you. And then he started calling people out, and you could see the fear on their face because what he was doing was he was exercising power. These men knew they were going to go on to be executed. At first, they thought they were being complimented, and then they were being singled out, pulled out, and actually condemned right there in the meeting. That was how he showed his power. I’m wondering, I want to go back to Peasant Uprisings because if you are trying to control over a billion people and the economy’s booming, you’re okay. You can borrow money, booming, booming, booming. If the economy slows, or if we have what Soros was talking about, a literal financial collapse in China, how are you going to consolidate power other than through just bullying basically?

David: Yeah, exactly. Peasant uprisings, as I mentioned, are more common in the history of China than any other country on the planet. And I don’t think Xi is a populist. If you look at his rise to fame, he is not a new Mao. In that sense, he does know how to use populist energy to target his potential enemies. But Xi is not Mao. He is not overthrowing an established order in the name of the people, he is fortifying a power structure that allows for him to maintain control indefinitely, sort of the ruler of a new dynasty.

Kevin: It reminds me a little of Putin. Putin, he always found a way to continue to be a leader.

David: Yeah. It’s interesting to look at the 2012 to present timeframe. And so you’ve got two possible elections, five-year terms, in this period of time from 2012 to the present, Xi has cleansed the party of all opposition and the Politburo competition, which he had, two younger guys, they’re out, gone. And in timeframe, he’s also changed the rules on the limits where you had two five-year terms. That would’ve removed him from office. Next year would’ve been his final year. The move that he made allows him to remain in power indefinitely.

Kevin: Yeah. So who’s king of the world? That would be me. At least king of China.

David: So looking at the leveling taking place across corporate China, you can see that there’s further enclaves of power and alternative voices for opposition which are being neutralized by Xi. Why now? Well, I think it’s very clear. You come into 2022, what would’ve been the passing of the baton of power, This is Hu Jintao, and others have peacefully done this. Well, he has no intention of passing the baton.

Kevin: So you’re a billionaire in China right now, you just became very philanthropic. It’s time to give a little money away, isn’t it?

David: Absolutely, absolutely. And as far as Xi Jinping is concerned, the ends justify the means. He’ll do whatever it takes. He’ll do whatever it takes. To your point, we mention the tertiary form of redistribution last week. Alibaba followed Tencent last week, right after we’re talking about it. On Thursday, Alibaba does the same thing that Tencent did a month ago, pledging $15.5 billion to invest in economic and social development, AKA common prosperity. As you said last week, gun-to-the-head generosity.

Kevin: We don’t want to come across, either, saying that the US military is not strong and not a very pervasive force if it was used in a way that had determination or deliberate action. So from a Chinese perspective, you’re talking about working from insecurity. They have a reason to still be insecure. You had mentioned if Taiwan were invaded during Trump’s time, well, the military would’ve intervened. It’s the same thing with South and North Korea. The military was ready to intervene.

David: Yeah. And so we go back to US credibility, what we lack in grand strategy and credibility related to grand strategy, we may well make up for in the application of brute force. Our military muscle is still a very capable piece on the board, how it’s used, when it’s used, if it’s used, those are all secondary questions. But it’s something you still have to keep in the equation. It’s massive. And it’s tactically very, very effective. So the question returns to Chinese instability, and insecurity, and a desire to act in a timeframe where alliances and partnerships are frayed. Is there a better time for them to act than now?

Kevin: Well, okay. So if perceptions of the dollar start to fail, I mean, the bond market, what is the bond market if the dollar’s not strong, the US bond market?

David: Yeah. So again, circling back to US credibility, not just from a military perspective, but the US bond market is held together by credibility. The US dollar is buttressed by credibility. And you remove the pretense. Say something like, “bless your soul,” or, “I know it’s not easy.” Or, as they say in the south, “bless your heart.” And the question is, what comes unraveled? Does everything come unraveled? Does nothing come unraveled? There’s a lot of pretense relating to US credibility, and we can maintain it for a long period of time. We don’t see a rival there to take our place. So maybe this game goes on another 40 years. And maybe we see the security apparatus internationally degrade at the same time as the monetary system degrades in a very significant way.

Kevin: And it’s amazing how these wars are played, very similar to the United States with the US Treasury market in the SWIFT transfer system. Again, I go back to this conversation that I had Friday, and it really was a good conversation with a lady that I should have had this conversation with almost 30 years ago, other than just saying hi, and I’ll take the number one, or whatever. But it became very real to me because I’m talking to somebody who understands not only international politics, but she understands it from a personal level. She talked about her parents in their 80s. She would love for them to come over to the United States, but they’re Taiwanese. They’re like, “No, no, we’re home. Whatever happens, we’re home.” We talk about how China may handle Taiwan. They’ve already been handling Taiwan. They cut off pineapple imports into China. And it almost crushed the pineapple industry. I didn’t realize that, but Taiwan needs that. And all China that has to do is say, “We’ll stop buying your pineapples for a little while, or we can do this, or we can do that.” Again, this boils down— war is fought with economics first, right?

David: You look at the technological dependencies that we have as a country on Taiwan. And Taiwan represents a unique opportunity for the Chinese, and a particular vulnerability for the US. An indirect attack on the US economy could include extending our supply chain issues indefinitely, adding to productivity constraints indefinitely. At the same time, you would be pushing up the cost of finished goods. So we’re back to this theme of stagflation. What if stagflation moves into high gear because we can’t access what we need?

Kevin: Like chips.

David: Like chips, I’m thinking Taiwan Semiconductor. We’re almost there now. Nouriel Roubini argues that COVID variants are boosting production costs and reducing output growth and constraining labor supplies. Well, great. What if it wasn’t just COVID variant? What if it was a Chinese choice to be involved in Taiwan, boots on the ground? What does that do to nascent stagflationary trends in the United States? And again, a unique opportunity for the Chinese. 

I say that because it’s very much an indirect attack on the US economy. Very much an indirect attack. They’ve been able to see in real time, if you can disturb the supply chain, there’s all kinds of ripple effects. And we’re now dealing with, again, Roubini sees it as sort of a nascent stagflation. And Ken Rogoff would’ve said, no. Six months ago, I would’ve said not a chance. There’s no chance for stagflation, now we basically have it.

Kevin: Isn’t it amazing that— I like Milton Friedman. The printing of money always is what creates inflation, but there’s always another reason when it happens. What you’re talking about here, the stagflation, we’ll look back in the rearview mirror and a lot of people will say, “Well, yeah, but that had to do with China.”

David: Right. So, I mean, core inflation is now moving, as we get towards the year end, probably see 4%. And again, core takes out the energy and food, the highly volatile stuff. So in the bigger picture, you’ve got deglobalization trends. We’ve talked about that many times, including with Harold James, who’ll be joining us in a few weeks. You have the Chinese trade war, which again began under Trump, but maybe a permanent fixture as trade war becomes cold war, becomes whatever kind of war. The question is, which policies are shifted which have a direct impact on our total supply chain system and turns it to chaos?

Kevin: So maintaining pretense is pretty important. There’s a lot at stake. If somebody says, “Hey, hey, there’s really an elephant in the room.”

David: We’ve moved so far, Kevin, as to make believe our new reality. Modern monetary theory would say, “We can ignore all fundamentals.” You thought that having too much debt was going to cause dollar destabilization at some point in the future. Oh how mistaken you were? We can ignore all the fundamentals. Again, MMT is almost like the grandest of all grand pretenses. We can do anything we want for as long as we want, and there will be no consequences. 

So I would argue that dollar stability is seriously in question, where if you’re looking at the fundamental case for the dollar, we’ve seen deterioration and we should see even more deterioration. Now, like so many straws on a camel’s back, there is an issue in terms of how long the dollar can maintain its pretenses. With the issue of our security apparatus and the projection of US military power around the world being somewhat in question, it’s not clear which comes first, the deterioration and decline of our international security or of our international monetary system. When one or the other goes, I think you talking about not only the end of pretense, but the beginning of a very hard, hard reality.

You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find at, And you can call us at 800-525-9556. This has been the McAlvany Weekly Commentary, the views express should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional, financial advisor, to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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