Discover more from Essays by Matthew Sattler
Contrasting views on the end of the American order - Zeihan vs. Dalio
Reposting an essay from my blog on deglobalization
Recently I read two perspectives on the changing world order. The first is Principles for Dealing with the Changing World Order by Ray Dalio. The second is The End of the World is Just the Beginning by Peter Zeihan.
Dalio is a billionaire hedge-fund manager and Zeihan a geopolitical strategist. This piece compares the two books' perspectives. But why write this piece? Because understanding is the first step to identifying opportunities. Government, entrepreneurs and capital providers should incorporate future theses in their planning processes.
Thanks for reading Essays by Matthew Sattler! Subscribe for free to receive new posts and support my work.
Similar inputs, two different conclusions
Dalio and Zeihan both cite examples dating several hundred years. They both discuss their predictive models and input/output data. Both even agree that the American world order is ending. But they disagree on who will "win" in the post-American world order and why.
Dalio's argument - the US is in decline while China rises
Dalio concludes that there has been one winning dominant global power throughout history. That global power (which can be an aggregate of smaller powers) sets a "world order". The rise and fall of world orders follow a similar pattern throughout history. Dalio describes this pattern as "the long debt cycle".
The long debt cycle follows an internal and external cycle. Each of these affects the formation and, eventual, decline of the order. The internal cycle follows six stages:
A new order begins. The winners of the internal revolution consolidate power.
The power-holders create resource allocation systems and government bureaucracies.
There is a period of peace & prosperity.
Great excesses in spending & debt lead to the widening of the wealth gap.
Bad financial conditions & inequality lead to intense conflict.
Revolutions or civil wars cause a re-baselining of power. Sometimes these transitions of power are peaceful, but mostly they are not.
As an order passes through these phases, several determinants illustrate its status. These determinants are both causes and effects of the power's stage in the cycle. The factors Dalio tracks are: competitiveness, economic output, education, military strength, financial center, innovation/technology, trade and reserve currency status.
As a new order builds, education drives innovation & technology development. Competitiveness from tech leadership and cheap labor climbs. Economic output follows, which leads to rises in military strength. These factors mean heightened security and the creation of financial centers within the order. The order then becomes the most lucrative trading & investment partner. Which results in its currency becoming the preferred global reserve currency.
At this point, the power has reached its peak. Its people are wealthy and they make a lot of consumption purchases. The country becomes less competitive because of high labor costs and complacency. Consumption & uncompetitiveness lead the power to increase debt levels by borrowing. At this point it is over-indebted and has a large chasm between financial wealth and real wealth. (The former are market-inflated values (e.g. equities), the latter is the value of physical or hard assets).
The country should reduce expenditures, raise taxes on the wealthy and start paying down debts. Most generally, though, it will take the easier option of printing more money. This will devalue its currency and lead to a collapse of the financial system. Once restructured, its currency likely will not survive. If it does, it will not be the preferred currency for investment or as a store of wealth.
Dalio's analysis concludes that the US is in stage 5 of the order. Its education, innovation and economic output have fallen. Further, the US' debt levels continue to grow. As the US takes on more debt it is not spending the money on "productive" outputs. Rather it is paying for increased social programs. It also continues to print money to create stabilization measures. Recently these have resulted in a massive inflationary bump. Further the economic gains have benefited the wealthy more than the poor. The wealth gap is helping to fuel a rise in populism.
This means that the US order is likely ending. Dalio's model sees a Chinese-led order as the obvious successor to the ending US order. Deng Xiaoping's government opened China to global trade beginning in the 1970s. Since that time China has climbed the scale of determinants. China, of course, boasts a massive population. This has allowed it to develop quickly.
The CCP, like many Chinese dynasties before it, are planning for the long term. Dalio argues that China's long history has inspired a particular leadership culture. One that respects and observes China's extensive history. Mao’s leadership offered an example of self learning. In the early years of leading the CCP, Mao read the 20-volume Zizhi Tongjian. A set of texts covering 16 dynasties and 1,400 years of Chinese history.
Chinese leaders' couple their observation of history with clear implementation plans and metrics. Two examples include China's Vision 2035 and Belt & Road Initiative (BRI). In Vision 2035, China plans to solve extreme poverty and "create a moderately prosperous society in all respects". Measurable goals will illustrate progress to the wider Vision 2035.
China's Vision 2035 sets internal targets for China. BRI sets up a Chinese-backed network of trade infrastructure. The plan includes maritime and overland economic belt "silk roads". The overland economic belt includes railways, energy pipelines, highways and streamlined border crossings. These initiatives would connect China, Pakistan, India and much of Southeast Asia. The maritime silk road expands Chinese influence to accommodate expanding maritime trade. Initially, BRI would speed up port development. Presumably, over the long term, China would also increase its Naval presence.
As of 2020 more than sixty countries had signed onto the BRI. The projects are debt-funded by Beijing. In turn, this means an expansion of the global acceptance of the Renminbi.
Dalio's conclusion on China is clear: "China is now a major and expanding power." We should expect it to continue strengthening on key determinants. These include education, innovation & economic output. While the average education level in China is lower than that of the US, China's highly educated population is larger than that of the US. This may be a function of overall population size but is a notable advantage. Education and notable government-supported resources will fuel innovation. China already leads in adoption of new technologies. Its current population represents hundreds of millions of hyper-adaptive consumers. This has enabled the Chinese payments space to innovate far faster than those in the West.
It's not only in consumer technology that China is advancing. The country launched more rockets to space in 2021 than did any other. Further, what success the US had was almost entirely thanks to SpaceX. Traditional US government contractors (ULA, Lockheed & Boeing) are atrocious at actually doing anything. At the time of this writing, Lockheed Martin's Artemis I mission has only just launched after failing twice before. The failures marked the culmination of years of project delays and billions of dollars of cost overruns. The Chinese, meanwhile, are testing hypersonic missiles. Their guidance & control systems achieve accuracy within 24 miles of their targets. It's foolish to think that China is not capable of rapid innovation in advanced hard tech.
Zeihan's argument - globalization is over, the US will be the winner. But it's not for the reasons you think.
Growth has allowed the world to produce more, build more and do more. Several systems of government are at work in the world but more is better for people. In one way or another, each system strives for it. Zeihan believes we must now enter a period of less.
Underpinning this shrinkage are three basic principles:
Birth rates are in decline.
Global security provided by the American order will stop.
Geography is critical to success in the post-American order.
Declining birth rates mean fewer workers and consumers in the future
Underpinning the decline in birthrates are trends and policy. Urbanization has meant less space and generally improving wealth and education levels. Standards of healthcare have also improved women's access to birth control. Further, some governments have held restrictive policies designed to deliberately squash birth rates.
These factors combine to mean that humans are having fewer children. But birth rates are not equal by country. China, for instance, could see its population fall by half by 2100. The US by contrast is on track to grow.
Birth rate decline means fewer people in the future. Fewer workers, inventors and consumers. To make matters worse, China's population boomed before birth rates began to fall. This means that China is now reaching a time when the majority of its population are at retirement age. That phenomenon turns the well-fare pyramid upside down. A small number of working-aged people must support a large number of retirement-aged people.
The logical counterarguments to this problem are technology and immigration. Advances in automation allow humans to be more productive. Which then expands the number of services provided with a limited labor force.
Amazon offers a good example. It has progressively increased its use of autonomy in its distribution centers (DCs). Autonomous robots lower delivery costs and improve availability. By removing humans, Amazon reduces its fulfillment processing time and error rates. Robots also allow for smarter inventory management. Which, in turn, means Amazon can make more SKUs available. That's before mentioning that robots need less care than their human counterparts.
Society expects us to fear autonomy, but it's actually the arbiter of opportunity cost.
Immigration is, of course, a way to boost population numbers. Contrasting China's population decline outlook, several countries are on track to grow. India, Indonesia and parts of Sub-Saharan Africa will see strong population growth. If the US or China are willing to accept immigrants, their economic outlook will benefit.
Zeihan believes the US is more likely to tap immigration to its benefit than China. This is because the US was literally built on immigration. It has had a lifetime tradition of accepting immigrants.
Despite much rhetoric, the US has more immigrants than any other country in the world. Today, immigrants represent almost 14% of the American population. That is almost triple the share that it was in 1970. And 2/3rds of Americans view immigration as strengthening the country.
These attitudes favor immigration at large and bode particularly well for skilled immigrants. Immigrants are also most attracted to the US as an immigration destination.
Low tax rates and high earning potential make the US economically attractive. US Corporations can also use the H1B system to match open needs to immigrant talent pools. This allows US firms to select for foreign talent rather than asking the government to do so. The US is also home to almost half of the top 100 universities on the planet. These schools attract talented young immigrants who wish to study with others of similar skill levels.
By contrast, China has a long but mostly isolationary tradition. In recent decades, China has been a net exporter of people. As of 2020 there were only 1.5M overseas residents in mainland China. Compare this to some 10.5M emigrants who left China in the same period.
China's central planning focuses on building 'self-sufficiency'. This is an aim that makes it harder to accept immigration, despite its benefits. That doesn't mean that China cannot change its position on immigration. It does, however, put the country at a disadvantage in the global war for skilled migrants.
The end of global security means the end of globalism
Modern supply chains are global. They break up resource extraction and manufacturing into several steps. In effect, skills and materials can be combined at the 'optimal' place.
The underlying reason for this is that the cost of shipping is low. Large ships, containerization and refined port infrastructure have enabled economies of scale. A 'large' vessel today might carry up to 18,000 containers. Which makes each individual container very inexpensive to move (~$2,100 from Shanghai to LA as of this writing).
The backdrop that has allowed the growth of the sector is maritime security. Zeihan argues such security is in decline. A receding American order means the US is no longer a "global police force". For instance, the US no longer maintains a regular carrier presence in the Persian Gulf.
In 2021, the UN reported increases in piracy, armed robbery, terrorism and trafficking. The latter included nuclear materials, firearms and human trafficking.
So if ocean shipping becomes insecure, countries will deglobalize. Without incentive to export, governments will protect their domestic industries. By doing so they'll strive to decrease reliance on imports, which would be more expensive.
The question is whether maritime security can be maintained without a global arbiter. But that's a question of incentives. The Sino-American trade relationship has thrived despite differences of ideology. This is because there was economic incentive alignment for both parties.
Globalization meant countries could maximize the value of their comparative advantages. They will want to do so going forward. So countries reliant on trade will move to fill the pending security void.
Zeihan remains unconvinced that others can do so even if they wished to. Here he contends that only Japan and the US control Navies sufficient to patrol global trade routes. Currently, that is the case.
But the picture is changing. China's Navy (PLAN) is actually the largest in the world. Though fleet count is not a good measure of power. Instead, the technology and capabilities of the relative fleets is relevant. For instance, the US Navy counts 11 aircraft carriers and 92 cruisers or destroyers. By comparison, PLAN operates 2 aircraft carriers and 33 cruisers or destroyers.
It would be insane to judge the future based on current Navy sizes. Especially considering China's recent growth and trajectory. By 2025, China plans to double the size of its aircraft carrier and destroyer fleets.
Of course, the real strength of the US Navy is its ally network of regional powers. Japan, South Korea, Australia, New Zealand and the Philippines are Indo-Pacific allies. China, by contrast, claims only one formal ally, North Korea.
Naval growth and calls to action should improve maritime security, not weaken it. Additionally, economic incentives remain to build global supply chains. That does not mean the future will be the same as the past. Trading partners will change based on political and economic factors. Producers will desire to limit the risk of future supply shocks, like those seen in the pandemic. That will give rise to localized manufacturing. But the pendulum will not swing so far that the situation becomes binary.
A little too excitable?
Zeihan's book is contrarian and thought-provoking. Perspectives like his offer an antidote to conventional wisdom. For me, one example undermines his credibility completely.
In it, Zeihan discusses the effects of de-globalization on commercial aerospace. Here he claims that Airbus will fall apart because Europe will fall apart.
Zeihan claims that Brexit will result in the British aerospace industry aligning itself to Boeing. Which is a problem (for Airbus) because the UK builds engines and wing-structures.
But Airbus has limited exposure to a UK supply chain for those components. Rolls-Royce currently supplies engines only to Airbus' widebody lines (A330 and A350). And those two programs churn out just 10% of the volume of Airbus narrowbodies.
Zeihan argues Airbus' orderbook is at risk because of geopolitics. He's specifically concerned that some of Airbus' largest customers are Persian-Gulf based carriers. "With the Americans abandoning the Persian Gulf region... there is now way in hell that civilian aviation will continue to operate in the area," Zeihan writes.
Boeing's exposure is actually larger than Airbus' in the Gulf. Among the three largest carriers in the Middle East (ME3), 55% of in-service aircraft are Boeing made. From these carriers, Boeing holds 307 future orders while Airbus only holds 98. And Qatar Airways’ recent spat with Airbus makes it unlikely to buy Airbus planes again.
Zeihan's most egregious claim is that Boeing will 'take over global aviation'. This is the same Boeing that created a complete and total disaster of a new aircraft program (the 737 MAX). It's also the same company that needs an act of congress to certify the last two of the models in the family (MAX 7 & 10). And it’s the same company that has only just launched Artemis after spending $35B on the program. Meanwhile, SpaceX's Starship has nearly double the payload and cost a mere $2.5-$5B to develop. Boeing, at least, has a talented lobbying team.
Zeihan's conclusion that Boeing has the right to win on its own merits is laughable. His assertions that the Europeans are worse offenders at protectionist aerospace policy is wrong. This example in reference to the rest of the book’s conclusions leads one to question the quality of Zeihan's analysis.
Takeaways and thoughts on how to use these data points in the future
The American order is in decline. The balance of power is shifting. But this does not mean that globalization is over. The reality seems likely to be a compromise of Zeihan and Dalio's views.
Rana Foroohar, author of Homecoming: The Path to Prosperity in a Post-Global World, summarized globalization's future:
"Some people feel there is no middle ground between unfettered, 1990s-style hyperglobalisation and the nationalism (or even facism) of the 1930s. But there has always been a shifting balance between national interests and global ones; too much of the former results in protectionism or worse. Too much of the latter means that many lose trust in the system."
The exciting thing is the opportunity this shift creates. Manufacturing tech and local industry seem to be the most obvious beneficiaries. But a new world order and deglobalization mean new transportation needs.
Going forward, I'll focus on these opportunities in transportation and logistics technology. I'll begin by evaluating how relative transport systems are going to change. Then, I'll drill further to surface the most impactful trends. After that, I'll work to suggest theories for how we should affect those changes.
Thanks for reading Essays by Matthew Sattler! Subscribe for free to receive new posts and support my work.