Caught in the Thucydides Trap

A Weakened China Is a Dangerous China Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] Caught in the Thucydides Trap - “China is the most important and possibly most dangerous factor in the world of finance today”… - The elites’ vision of China has crumbled before their eyes… - Then Jim Rickards shows you the severe challenges China faces, and why it could lead to war sooner rather than later… Recommended Link [Urgent Note From Jim Rickards: “You’re Running Out Of Time!”]( [Read more here...]( [Your exclusive “Pro level” upgrade to Strategic Intelligence is ready to be claimed.]( This is your chance to claim 3 exciting new benefits along with a whole new level of service. Hurry… you only have until the timer hits 0 to act. After the timer runs out, you’ll forfeit your chance to upgrade… and you may miss out. Please don’t waste any time. Just click below to see how to confirm your upgrade. [Confirm My Upgrade Here]( Portsmouth, New Hampshire November 16, 2021 [Jim Rickards]Dear Reader, China is the most important and possibly most dangerous factor in the world of finance today. Most of what the world believes about China is not true. Growth is not strong. The yuan will not be a world reserve currency. Their future is not bright and China will not dominate the 21st century. I realize that goes against the mainstream narrative. But I’m a lot more interested in the truth than the narrative. The last 30 years have witnessed one of the greatest political self-deceptions in history. The elite view was that engagement with China would lead to gradual internal reform. If trade were expanded, cultural exchanges encouraged and the Western education system thrown open to Chinese students, then the Chinese would see the benefits of capitalism and open discourse. The expectation was that the Communists would drop their hard line, adopt market systems and gradually become “just like us.” At that point, China could join the community of nations as an equal partner despite its authoritarian leanings. This would ensure peace and productive collaboration. The reality was nearly the opposite. It’s true, China did join the World Trade Organization in 2001. The Chinese yuan was included in the IMF’s world money basket (the special drawing right, SDR) in 2016. Tens of thousands of Chinese students flocked to U.S. universities. A visit to any Chinese government agency today will bring you face to face with graduates of MIT, Harvard, Stanford, Johns Hopkins and other pillars of the U.S. higher-education edifice. The engagement took place exactly as the elitists hoped. Yet the effect was the opposite of what the elites expected. Instead of becoming Westernized, the Chinese became more efficient Communists. Chinese students took the best of what the West had to offer in terms of technology and education and turned it to their own purposes. China has grown rich by stealing Western technology, adopting Western manufacturing methods, developing some of its own technology and piling up multitrillion-dollar reserves of hard currency and gold. Still, the world-historic economic growth of the Chinese economy over 30 years from 1989–2019 has not fulfilled the elitist delusion that they would become “just like us.” Instead China is more Communist, more ideological and more threatening to the West than at any time since Genghis Khan. The market implications of this are already playing out. Chairman Xi has crushed the equity valuation of DiDi, a popular ride-hailing service sometimes called the Chinese Uber, because it did not kowtow to Communist demands to change its app and other tech features before going public. This approach is now being applied to a long list of Chinese financial giants. Western observers are mystified. Why would the Chinese government destroy the value of their most successful companies? That question reveals the ignorance of Western analysts. They are approaching this through a market-oriented frame where governments regulate businesses but don’t destroy them. The Chinese are not market-oriented — they are Marxists. They simply ask who gains and who loses with the goal of making sure the Communist Party gains. Since when do Communists care if their own oligarchs lose money? That helps to reduce a rival power center. Since when do Communists care if U.S. investors and funds lose money? That’s like weakening your enemy. The Chinese Communist Party is glad that oligarchs and Western investors are getting crushed. All they care about is the power of the party. By that measure, their actions make perfect sense. The elite vision has been discredited, although some still cling to it. Now, this does not mean that China is not powerful. It is. China has the third-largest landmass in the world, after Russia and Canada as well as the largest population in the world, about 1.4 billion. It has the second-largest economy in the world, after the United States. It is the third-largest nuclear-armed power in the world, after Russia and the United States. By every conventional measure, China is a superpower and will remain so. Still, superpower status does not automatically translate into economic success or political stability. The Soviet Union became a superpower in August 1949 when it detonated its first atomic bomb, nicknamed Joe-1. Yet it collapsed uneventfully on Christmas Day 1991. The Soviet Union’s landmass, nuclear power and military did not produce economic success beyond a certain middle-income status. China is facing the same conundrum today. Below, I show you the strong headwinds that China faces and why they’re so dangerous for the U.S. and its Pacific allies. Read on. Regards, Jim Rickards for The Daily Reckoning P.S. [This could be the most important message you see all year if you are serious about securing your financial future.]( That’s because we’re witnessing a rare occurrence in the gold market that we haven’t seen for years, and it has serious implications… I urge you NOT to invest in anything until you hear this, gold included. Don’t even buy a single ounce of gold [until you see this message.]( What am I talking about? And why is it potentially so important to you? [Click here to see my urgent briefing.]( Recommended Link [URGENT: Battery Patent No. 3069168]( [Read more here...]( One of Tesla’s senior battery engineers QUIT Tesla and submitted a patent application for a revolutionary new tech process… But he didn’t just quit…he’s brought the chief of Tesla’s entire battery division with him. The man who helped create the original lithium ion battery. And today, you can take advantage of their TINY startup for just $6.00. This stock could skyrocket as much as 100% in a matter of minutes. [Get More Details Here]( The Daily Reckoning Presents: Caught in the Thucydides trap, with few options… ****************************** China: Sick Man of Asia By Jim Rickards [Jim Rickards]China’s economy faces enormous headwinds that will first impede growth and then likely result in declining growth in the years ahead. Three of these headwinds — debt, demographics and geopolitics — I discuss below. The other critical factor slowing economic growth in China is low energy reserves. China is in a debt bubble worse than even Japan or the United States. The extent of this debt bubble is obscured by the fact that trillions of dollars of debt are pushed down by the central government in Beijing to the level of provincial governments, state-owned enterprises (SOEs) and major banks. All of this debt is de facto guaranteed by the central government; it’s naïve or disingenuous to believe otherwise. As a result, this diverse debt must be rolled up in order to analyze the impact of debt on growth. Total debt in China (excluding banks) is about $47 trillion, which is 281% of Chinese GDP. Only about $5 trillion of this is household debt, leaving $42 trillion of government and corporate debt. Much of the corporate debt is issued by SOEs, so it is tantamount to government debt. Even on a conservative estimate, government debt in China is at least 250% of GDP. If a bank bailout were required, it would cost about $1 trillion or almost 50% of China’s liquid reserves. The evidence from numerous academic sources is overwhelming that higher debt levels reduce growth. A comfortable debt level is about 30% debt to GDP. At levels of 60% or higher, growth slows significantly. Everyday citizens see the debt burden rising and adjust their behavior, often in the form of higher savings rates in anticipation of higher taxes or inflation that inevitably follow debt debacles. At 90% debt-to-GDP levels or higher, what physicists call a phase transition occurs. Added output from an additional dollar of debt is less than the dollar borrowed. At lower ratios, a dollar borrowed will produce more than one dollar of growth. But the excess output will shrink as the debt level rises, an example of diminishing marginal returns. At levels in excess of 90%, returns go negative so that each dollar borrowed produces less than a dollar of growth. Those negative returns increase as the debt level climbs. This is why you cannot borrow your way out of a debt crisis. China is well into this negative marginal return zone. China’s debt situation has gone through the looking glass into a bizarre world from which there is no escape except default, inflation or confiscatory taxation (or some combination). In addition to a debt trap, China has fallen into an energy trap. Coal prices are rising because of expanding demand, cold weather and supply-chain disruptions. As a result, China imposed price controls on coal by setting a ceiling on price increases. Of course, price controls never work. They may offer some short-term alleviation, but sooner than later consumers figure out substitutes or structured solutions or move to an outright black market. China is faced with severe energy shortages now. There’s also good reason to expect a colder-than-average winter. The Chinese will be freezing in the dark in Manchuria and in other northern provinces. China is already closing factories on a large scale to conserve energy for residential light and heat. This will get much worse. No political or economic event for the remainder of this century will have more impact on the world than the demographic disaster unfolding in China. Nothing like it has ever happened in world history, not even the Black Death of the 14h century. The birth rate needed to maintain a population at a level size is 2.1 children per couple. If the birth rate is 1.0, the population will be more than cut in half in 40 years. The only exception to these ironclad rules is immigration. Still, China and Japan in particular are highly homogenous and anti-immigration. This means their birth rate will determine their destiny as a society. Recommended Link [Newest book from the author of Rich Dad Poor Dad]( [Read more here...]( You don’t have to be a landlord (or even invest in REITs) to earn monthly income from real estate. Now you can start building your own real estate empire today — the “lazy” way — thanks to over a dozen real estate secrets found in his most recently released book. [Click Here To Learn More]( China’s birth rate today is reported to be 1.7. However, there is good evidence that the actual birth rate is closer to 1.1. At that rate, China will lose 630 million people by 2100. Its population will drop from 1.4 billion to 770 million. The phenomenon is not limited to China but is pervasive in developed economies including Japan, Western Europe, the U.S. and Canada. China simply seems to be the most extreme example (with the possible exception of Japan). China will lose productive workers as society ages. The declining birth rate, crashing population and lost productivity will cause a crisis of confidence in the Communist Party and may precipitate regime change independent of other factors including the potential for war. This will be the end of the “China Miracle.” China is making blatant threats to invade Taiwan and is flying fighter jets and nuclear-capable bombers through Taiwanese airspace. China is laying claim to the entire South China Sea (which should be shared among six surrounding nations) and dredging the seafloor to create artificial islands. China then constructs airfields and ports on those islands for military operations. China also launched a trade war on Australia because of Australia’s insistence that independent investigators get to the bottom of the leak of the pandemic virus from a laboratory in Wuhan. China also aimed vague threats at Japan when it voiced support for Taiwanese defense efforts. In short, China is moving aggressively in all directions to establish itself as the sole hegemonic power in the Western Pacific and South Asia. Of course, this kind of hegemony means ejecting the U.S. from the area and turning Japan, Australia and India into tributary states. This aggressive posture has now triggered pushback rather than acquiescence. The U.S., Japan, Australia and India have formed the Quad, which is a four-power soft alliance to contain Chinese ambitions in the region. A quick glance at a map reveals that the Quad control all of the sea lanes and choke points in the Western Pacific and Indian oceans that can be used to cut off energy imports and manufacturing exports by China. China could be choked into ruin by sea in the same way that the Royal Navy choked Napoleon and continental Europe in the early 19th century. Chinese aggressiveness and the allied response have inevitably triggered questions about the potential for war between China and the U.S. and its allies. This risk was described in a bestselling book titled Destined for War by Graham Allison. Allison invokes what is called The Thucydides Trap named after the ancient Greek historian of the Peloponnesian War. Thucydides viewed the Peloponnesian War as an almost inevitable conflict between a long-established military power, Sparta, and a new rising power, Athens. Allison’s thesis was that the established power and the rising power will have many competing interests and eventually come into conflict to see which one can emerge as the sole hegemon. Allison identified sixteen cases of The Thucydides Trap in the past 500 years. Twelve of those cases (75%) resulted in war. That’s not an encouraging track record when it comes to the potential for a U.S.-China conflict. The United States seems to be at one of its interim low points under the hapless leadership of Joe Biden. Still, China realizes it may be at peak power and will be economically and socially diminished in the years ahead. If that’s the case, and if China wants to dominate its region, then the best time to start a war is now. It’s not that China has all of the power it wants. It’s the case that China has all of the relative power it’s going to get. This creates a now or never dynamic that can lead straight to war. Let’s just hope it doesn’t. Regards, Jim Rickards for The Daily Reckoning P.S. [This could be the most important message you see all year if you are serious about securing your financial future.]( That’s because we’re witnessing a rare occurrence in the gold market that we haven’t seen for years, and it has serious implications… I urge you NOT to invest in anything until you hear this, gold included. Don’t even buy a single ounce of gold [until you see this message.]( What am I talking about? And why is it potentially so important to you? [Click here to see my urgent briefing.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [James Rickards][James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! Follow us on social media: [Facebook]( [LinkedIn]( [Twitter]( [RSS Feed]( [YouTube]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [unsubscribe here.]( Please read our [Privacy Statement](. For any further comments or concerns please email us at feedback@dailyreckoning.com. If you are having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox [by whitelisting The Daily Reckoning.]( [Paradigm Press]© 2021 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. We expressly forbid our writers from having a financial interest in any security they personally recommend to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Email Reference ID: 470DRED01