The politics behind putting the Cold War on hold

The US and China have good reason to defer hostilities. How long may it last? It's time to take The Sniff Test.

Where there’s a will there’s a way

In 2008 the smog over Beijing disappeared ahead of the summer Olympics as businesses and factories were forcibly shuttered. A few weeks ago California did something similar as San Francisco swept humans off its streets for the duration of President Xi’s visit. This in a city that wears its homeless people as a badge of honour for its progressive politics.

On a given night there are over 8,000 homeless in the city, while a goal of the Home on the Bay plan is to permanently house 30,000 homeless people. For every one homeless person housed, four more go on the streets. One response is to point out that we’re not as bad as Los Angeles.

Source: US Department of Housing and Urban Development

The clean-ups are a show of strength to demonstrate to important visitors that they are meeting with people who get things done. The Chinese authorities can command businesses to suspend operations and a US Democrat politician does what the country’s quintessential Democratic city council cannot. Gavin Newsom, Governor of California, is the man.

Biden may have fluffed his lines by calling Xi a dictator, but Newsom was word perfect welcoming Xi a couple of weeks after meeting him one-on-one in Beijing. Newsom is the next generation of Democratic leaders (he’s 56) and primed to take over should Biden falter. Democrats may roll their eyes at the President’s faux pas but deep down the secret smiles show the times are changing.

Why is Xi happy to play along?

China must prioritise economic growth

Countries whose economies are driven by exports focus foremost on the great consumer that is the US. This is the economic model sponsored in the post-war years by the US for Japan and Germany and extended to South Korea and ultimately China. We buy, you make, provided we pay you in dollars and you send them back to our banking system. The UK runs a mini-version of this through London.

It's my unscientific observation that export-driven countries tend to have weaker banks, characterised by lower margins and tacit if not outright state control over lending. Vast sums are required to build and maintain an industrial machine and this is the primary purpose of the country’s financial system. Profitability comes second.

A consequence of this is less room to lend for mortgages and subsequent house price speculation. Elevated house prices relative to rents and income are a feature of Anglo-Saxon economies.

China is a significant exception to this, just as Japan was up until 1991, which is the reason the two situations are frequently compared in financial media. China has weak banks after decades of state-directed lending but it also has one the most bloated property markets in the world. High interest rates and slow growth spell double trouble for political leaders.

Via: Crypto Market Digest

The Chinese authorities require economic growth to maintain domestic peace and to drive the long-term aim of overtaking the US. Officially 0.4% of people are poor in China, which means they earn the equivalent of $400 a year, but push that figure up to a more realistic $5,000 a year and we’re talking a fifth of the population, or over 300 million people. That’s quite the peasant army.

The Chinese economy remains reliant on the US to buy its goods, for investment and for the sharing of know-how, legitimately or otherwise. The Trump tariffs and Biden’s further restrictions on technology transfers reflect a State Department that did a 180 sometime in the middle of the last decade, after realising China was the number one threat.

Xi recognises the dependency and welcomes the leader of the US tech state to Beijing and returns the visit. Newsom signals he is the man that China can deal with, a global statesman and someone to replant the Chinese money tree for the West Coast’s technology behemoths. A dangerous confrontation is avoided, stock and bond markets rally, interest rate risk subsides and gold and bitcoin reach previous resistance levels.

All this is great news for California and its governor, but what about those State Department hawks?

The US must stop the spread of hot wars

The role of foreign policy is to further the economic interests of a country. Money buys power and influence and none have more than the US. Every political situation the world over is reviewed for its potential significance and threat level to the dollar-based global financial system.

You may be forgiven for forgetting there is a war in Ukraine as the conflict in the Gaza Strip dominates the news morning and night. To date, for all the local atrocities on both sides, the conflict has not spilled over into new arenas and the threat of Hezbollah and other Iran-backed militia remains a threat. This is in no small part down to China.

The US won the Cold War with the Soviet Union by outspending it. The same strategy is being deployed in dealing with China, but less directly in an arms race and more in terms of technology spending. Hence the desire to re-shore semiconductor factories and the unlimited budget to subsidise green technologies.

The world economy is much larger now than in the 1980s and the cost of outspending everyone is rising. Subsidising Ukraine to keep the Russians from NATO’s doorstep is manageable, but a second financial front in the Middle East is unappealing, both in money terms and diplomatically. The US is also the prime sponsor of Israel’s neighbour Egypt. To stop things getting messy someone needs to rein in Iran.

The Iranian economy is struggling, but its leadership is used to this and to dealing with the unrest of urban populations concerned about inflation and job prospects. Stirring up the Middle East and preventing its Saudi Arabian and Israeli enemies growing closer, allows Iran to maintain its influence throughout much of the region. But in the face of US hostility it needs outside backing and that means China.

For now the US and China both benefit from parking their differences. The US contains the military distractions that threaten to get out of hand and in return eases the economic pressure on China. Key to this is a peak in dollar interest rates, which had been keeping a lid on bond markets, which may have been lifted after November’s jump in prices (shown as a fall in rates).

US 10 Year Interest Rates (Source: RealVision)

Whether rates can be reduced depends a lot on inflation, which in turn depends on the availability of Chinese goods. As a signal of intent the Biden campaign leaks that it is considering using TikTok, previously a national security threat, to appeal to younger voters. Newsom is already a user.

If all of this goes to plan, then easier financial conditions return in time for the 2024 election and the genuine threat of a return of Trump is challenged, if not yet overcome.

Consequently and once more, the third year of the election cycle proves to be the best for stock markets, as it has been by an average 6.7 percentage points since 1945.

None of this conflicts with the predictions of the Doomsday Cycles, which generally target 2030 for when things fall apart. Expect however, these to take a back seat for a while as short term economic, financial and political matters dominate the next 15 months. Meanwhile, preparations for the new Cold War continue in the background.

The US is no longer the world’s policeman

Palmer Luckey is the Hawaiian-shirted, unevenly facially-haired, 31 year-old founder of Anduril. The defence contractor funds its own research and development and sells finished products off-the-shelf to the US and its allies. There are strict rules and an approved list for who you can sell what to, and you don’t violate them.

Palmer Luckey (Source: David Paul Morris/Bloomberg via Getty Images)

Luckey designed the Oculus Rift virtual reality headset and sold the company making it to Facebook for $2.3 billion. While he would rather be designing rocket ships like other tech leaders, he turned to defence of the realm because of the pressing need to keep America great. The endless list of available jobs on the Anduril website are some of the best technology career opportunities on the planet.

If London or Washington was subject to the missile bombardment regularly thrown at Tel Aviv both would be rubble. That the Israeli city still stands is down to Iron Dome, a missile defence system funded by, and in technological collaboration with, the US. This is a short-range interceptor missile system for shooting down rockets and mortars.

Patriot missiles are used for longer distances up to 100 miles to take out incoming projectiles and aircraft. Each one costs $2 million and may be unaffordable in a battle with fleets of drones that cost hundreds of dollars a unit. Palmer Luckey is obsessed with bringing down the cost per kill, where other defence suppliers focus on fattening their contracts.

The US aim is no longer to be the world’s policeman but it’s weapons supplier. You can do your own fighting but if you’re on our side we’ll sell you the latest gadgets. Anduril is changing what those gadgets are rapidly.

A new kind of warfare

While the US won the last Cold War, it abandoned nuclear technology for the peace dividend. The Russians kept going and have tactical weapons that can take out tank squadrons or naval formations and a fleet of civilian owned nuclear icebreakers. As the US has surrendered its industrial base to China, Mexico and increasingly India, it is not in a position to fight a conventional war requiring constant replenishment of vehicles, guns and ammunition.

Luckey envisages a very different war in the future. He believes the next contest will be subterranean, with super thin but very long vehicles delivering electronic and kinetic payloads at above ground targets. Imagine a remote controlled cable that bores under your house and then knocks out all the lights. But a hundred times worse.

Biological warfare is a growing risk. If you share genetic data with a website you are vulnerable to it being hacked for information that will help build bio weapons. 23andMe was hacked by criminals looking for Jewish people’s data.

Against this, artificial intelligence nanobots would scan your body regularly and remove anything alien that appeared since the last scan. A single technology could block all pathogens, both man-made and natural. These kind of technological advances are the reasons that exporting technology is the hottest of political potatoes.

Luckey does not use TikTok and believes the case for banning it is entirely commercial. The US cannot sell similar products in China, so why let the Chinese sell in the US. He sees a unifying politics of union workers and right-wing defence dudes, which others call patriotic, nationalistic or worse.

But he won’t rule out selling weapons to China or North Korea and cites the example of Germany and Japan. These were sworn enemies of the US during World War II and now are staunch allies. Futuristic weapons, technology and cheap energy will be the rewards of being on the US side, while unexpected mass power outages and unexplained illnesses may be the costs of opposition.

The question is what China, Russia and Iran will be subject to before a new breed of deadly weapons keeps the peace and what they will return in kind.

The desire for fewer veterans

The annual PM 2.5 level pollution in Beijing has fallen over 80% since 2008, due to closing polluting factories, cleaner energy sources and reduced vehicle emissions. China is the world’s leading manufacturer of green power solutions and electric vehicles. Its western deserts are scheduled to house massive solar and wind farms.

San Francisco’s homeless are disproportionately ethnic minorities and people with disabilities. In better news, at the latest count the number of veterans homeless in the city was down to 400. The US is losing its appetite for creating veterans of its own citizens but will continue to protect its interests through proxy battles.

The risks of those spreading is being averted for now.