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- Welcome to The Hunger Games
Welcome back to The New Rules
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Let’s dive in…
The Hunger Games have begun. In the movie, a successor country to the US has been divided up into districts by the Capitol in the wake of an unsuccessful rebellion. To remind them of their subordinate status, each district must choose two young people by lottery to participate in an annual fight to the death called The Hunger Games.
Over the course of the televised games, each participant forms and breaks alliances in a deadly game similar to Survivor until only one victor emerges alive.
As the movies go on, the victors eventually team up to defeat the game and the government that inflicts it. It goes from a battle to the death between the contestants to a battle in which many of the contestants team up to defeat the Capitol. It’s a good analogy to the state of the world today, particularly in the wake of Trump’s reelection.
While I think the breakdown of the geopolitical order of the Cold War was inevitable, the election of Trump sped things up. The former alliances and assumptions that shaped our world view will be challenged and we need to look across the major regions of the world with fresh eyes. Who’s up, who’s down, and what are the prospects of each player? This is my first attempt at outlining the map so I’ll probably shift my analysis over time but let’s start with the biggest player.
The United States
The US remains in the preeminent position. We have a large population, the largest economy, and the best military. If fact, we are the only country that can project power to any corner of the world. We have peaceful neighbors and two oceans on either side that protect us. Our government is resilient and capable of adaption and change. We boast the deepest capital markets, abundant food and energy, and have a world-leading edge in many key technologies.
Finally despite recent resistance, we remain able to integrate large numbers of immigrants to our society. We can effectively co-opt portions of other countries to fuel our own.
We are the stars of the Hunger Games. Citizens of the Capitol are betting on us. I’d rather play our hand than any other. But what are the downsides?
We are divided as a country with a large split between the college-educated and the non-college educated. We have a relatively large deficit and we have allowed our currency to serve as the global reserve currency. This has pushed up the value of the dollar making US exports expensive. Most our manufacturing base has migrated to China as a result.
I see all these issues as fixable. Political polarization as a net positive. It forces difficult discussions that other countries avoid. In the last election we saw a huge decrease in voting based on race and when you really compare the policy ideas of each party, the differences are relatively small.
Our debt is managable through three mechanisms. First, we need to raise taxes on corporations and the affluent, not cut them as the incoming Administration desires. Second, we need to restrain the growth of the fastest growing part of the budget which is Social Security and Medicare. We can do this by changing the cost of living adjustment formula, taxing higher levels of income, or raising the retirement age or some combination of all three.
Third, much of our deficit is actually caused by the reserve status of the dollar. We need to produce financial assets that other countries can buy or else there aren’t sufficient reserves. We need to moderate this trend.
I don’t see the US completely ending the dollar’s reserve currency status but I could see us allocating reserves to countries that are in our coalition. If you don’t play by our rules, you don’t get access to dollars. When we move from The Hunger Games of fighting each against all to combining our forces to attack the Capitol. This will be amongst the US’s biggest weapon.
China
Now on to the villain of our story, China. On paper China should be the up and coming heroes. Their ace in the hole is an unbeatable manufacturing capability. It can out produce any country anywhere and second isn’t even close. On top of this, China has begun investing heavily to take the lead in the most advanced forms of manufacturing and technology. These are higher margin and higher productivity areas. China boasts a large population of 1.3 billion people. It has a government that is focused on building strength for the future but there the advantages end.
While its manufacturing base is enviable, China serially overproduces. The government subsidizes overproduction through a series of policies and then exports that overproduction to other countries.
As China has had to wind down over-investment in real estate and domestic infrastructure, it has double down on this policy. Now the rest of the world is beginning to wake up to the danger and has begun erecting walls to keep Chinese overproduction out. China is playing a game of chicken with the world and it will lose.
Second, China’s advantage in population has peaked and is beginning to reverse rapidly. While China’s population is still vast, the number of retirees is ballooning while the number of births has collapsed. This will put a massive burden on those still of working age and since China has almost no social safety net, that burden will be high.
Third, China’s debt is both much larger than that of the US and much more problematic. China has spent trillions on useless infrastructure, industrial subsidies, and unoccupied housing. Eventually the losses for that over-investment will have to be realized by someone.
China should centralize its debt at the national level, force losses on local governments and state owned enterprises, and focus on readjusting its economy to serve domestic consumption. Essentially it should become more like the United States. However, the prospects for this are low.
The US was very similar to China in the late 1800 to early 1900s. We were the excess producer to the world and needed to adjust to a more consumption based economy. We did it through the crisis of the Great Depression and the Second World War. The massive unemployment required to reorient China’s economy from overproduction for exports to a more services based domestic consumption model would probably take down the Communist Party. China seems stuck in a failing strategy with no way out.
China is a dangerous player in the Hunger Games. While its population is decreasing sharply, it’ll still be a massive country for years to come. Its economic strategy is doomed but it can still take the lead in multiple key technological areas before it implodes. In fact, the more that China’s leadership realizes the long term isn’t looking positive, the more likely it becomes to lash out in the near term.
Europe
Europe looks like one of those nervous players who you know is going to get knifed by someone on the first night of the games. We’ll see the Arc De Triomphe projected up in the sky pretty quickly.
Europe does have some advantages. It still has a large population or 450 million people. It leads the world in a few key technologies like pharmaceuticals. It’s people are well educated and productive and I love going there for vacation.
None of these will protect it going forward. Its population is rapidly shirking and it doesn’t tolerate mass immigration well. The EU itself is a halfway union that does enough to block innovation and investment in member countries without the corresponding benefits of an integrated capital market and large, homogenous consumption base.
The EU’s best move would be for Germany to agree to run large deficits and shift its economy toward consumption to allow other areas of the EU to build export industries to serve it. Again, Germany like China should become more like the United States. I should also drink less wine and go to the gym everyday but it isn’t going to happen. We can dream but let’s be realistic.
Germans are allergic to debt and certainly won’t take it on for the benefit of other countries and I don’t think the other EU Nations want to live under a German Empire. This option seems remote. Another option is to try to integrate more with China or to at least try to play both sides between the US and China.
This is also going to be tough. China doesn’t want to partner with Germany, it wants to become Germany. Exports from Germany to China are dropping and I see most Chinese policy aimed at stealing anything good Germany has and then cutting them off.
Companies like Volkswagen and Siemens aren’t reading the room. They’ve begun increasing investment in China proper hoping that being within its borders will protect them. This is picking up nickels in front of the proverbial steam roller. They will lose most of what they invest after the EU must make the inevitable choice to become even more of a vassal state to the US.
Unfortunately, this is the EU’s fate. They won’t live under a German Empire but an American one. You can argue that this is already the case but I see the situation as much more dire for the EU going forward. The US is less and less interested in it. The main theater of action is in Asia as it was in Europe in the Cold War. As a result, the US will keep the EU in its coalition but the bargain will grow increasingly unfair and tilted in the US’s favor.
Japan, South Korea, and Australia
These are more energetic players. As they are on the front lines of the US/China competition, all three of these countries will get good terms from the US. While the risk of getting involved in an active shooting war with China is higher, they will thrive if the uneasy peace persists.
Japan and Korea have horrific demographics but the US interest in them and their technological leadership will mitigate some of the impacts. Japan has shown itself to be very adept at investing in other countries to shift production away from a declining workforce domestically and both lead in the develop and adoption of key technologies for aging societies like automation and robotics.
Australia will be able to maintain its population with high skilled immigration as it is an extremely desirable destination for almost everyone.
The Asian Tigers
I see a similar but potentially even more positive outcome for the other countries in Asia beyond the two biggies. Indonesia, Thailand, Vietnam, the Philippines, etc. have good cards to play but one big danger they must navigate.
These countries are integrated with China to varying degrees. They will be tempted to play the US and China off each other much as the EU will. I think they’ll be successful for some time but eventually they will come to a crossroads.
It’s conceivable to me that China allows these countries to import very low skill products to them. Xi wants to focus on EVs not textiles. I also see the US much less focused on re-shoring these low skill commodity products and much less concerned about Chinese involvement in the supply chain.
That should give these countries a decade or two of room for growth. However, they will eventually want to move up market and China is not going to allow that without controlling the process. The US in turn will not allow more sophisticated products to involve China in the supply chain so that growth is capped.
More concerning is that China will try to bully these countries into becoming vassal states of China and to cut ties with the West. China is close and the US is far but in the end these countries have no choice but to side with the US. China is a dead end for the reasons I laid out above.
Long-term I think the future is very bright for these countries but they will need to navigate an uncoupling with China in the medium term.
India
India is the most intriguing player on the board and it is the one country I see as being able to play the US off of China for an extended period. India’s population and economic potential are huge. The US needs India in its coalition against China. China has to be wary of angering its neighbor and sending them into the arms of the Americans.
This is a great position to be in. Japan and South Korea are too weak on their own to face down China. They are part of the US coalition already and have no other options but India could conceivably balance between the two big players. They will drive a hard bargain and thrive as a result.
The Middle East
Oil and gas still make up 80% of world energy so the Middle East isn’t going anywhere anytime soon. While the US is energy independent because of fracking technology, it will still need to keep any other player from dominating the region.
The Abraham Accords showed us the path forward for the region. Most of the Arab states will align with Israel and the United States against Iran and its allies. Iran will increasingly rely on China for support.
Of course, the Saudi’s need to export oil to China so the alliance with the West will be limited. However, when push comes to shove only the US can project enough power to the Middle East to make a difference. The Middle East will come out about even to its position today.
The Rest
Finally I’ll do some quick takes on a few other minor players:
Russia is an aging petro-state with few prospects going forward. Because it has abundant natural resources and nuclear weapons it will remain somewhat important so it gets a mention. However, it is in an inexorable decline and will have to attach itself to China or reintegrate with the West once the war in Ukraine is resolved. Russia has a role to play but I don’t see it as a major one.
Africa: Maybe someday but that day isn’t this day. Africa might have a large enough population in 50 years to matter but until then it is largely irrelevant.
South America: Similar. Not that important but without a chance of Africa’s demographic dividend.
That’s it, the stage for the Hunger Games is set. Next I’ll write about what it looks like if the US can break out of the game and unite some of the other players against the Capitol.
Keep learning,
Alan
P.S.
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