This is an intergalactic emergency! Buzz Lightyear

I could devote several months’ worth of essays to the question of how and why America became so divided and how and why we lost the stomach for maintaining the global paradise we so painfully created and maintained for so long. But what’s the use? It is what it is. Better simply to accept the fact of America’s abandonment of its role of World Cop and to take a look at what comes next.

In one sense this might seem easy – what will come next is what we had before the American Century, namely, war after war after war. We will relive the five hundred years that existed before 1945.

But actually I don’t think that’s the likely outcome. Modern war technology is too powerful and if any of the roughly twelve countries with nuclear weapons felt genuinely threatened we would face nuclear Armageddon.

Instead, the countries of the world will more likely engage in intense economic competition but, crucially, without America patrolling the world’s trade routes. In broad strokes, this will mean that every nation, unable to trade safely, will be thrown back on its own resources. Let’s take a look at how this will happen and what the (horrific) consequences are likely to be.

Once the countries of the world realized that their trade routes were being patrolled by the US Navy and were therefore safe-as-houses, the great majority followed the advice of global development organizations like the IMF and the World Bank.

That advice was simplicity itself: (a) figure out what your competitive advantage is versus other countries and ride the hell out of it, and (b) use the revenue from that to buy everything else you need, especially food and energy.

For a long time this was a terrific strategy and even small countries with essentially no military capability were able to trade without fear. Billions of people moved from abject poverty to something approaching a decent existence.

But no one seems to have anticipated that the US might retreat from its role as world cop or what would happen to those safe-as-houses trade routes when the US Navy went home. Now we will find out – and, by the way, I am cribbing enthusiastically from Peter Zeihan’s book, The End of the World Is Just the Beginning. (Some of my readers may remember Zeihan from his days at Stratfor.)

Let’s start by taking a look at the societies that are likely to fare worst in the post-Pax Americana world. How does loserdom happen? Suppose you are a relatively poor country in, say, Southeast Asia. You have few natural resources and little tillable farmland, but you have carved out a profitable niche for yourself assembling small-but-crucial electrical components, which you can do cheaper than anyone else.

For decades you have been improving your assembly skills and you are now part of a vast supply chain building expensive electronic products primarily for America and Europe. The revenue from this competitive advantage buys the food and energy your citizens need to survive.

But suddenly the US stops protecting the trade routes you rely on. Cargo and container vessels no longer venture anywhere they wish, but stick close to the trade routes America is still protecting, that is, its own and those of a few close allies.

Since America is no longer interested in protecting the trade routes of our small Southeast Asian country, that country can no longer export its electronic components and therefore it no longer has the revenue required to buy the food and energy its citizens need. Even if it did, that food and energy can’t reach the country’s shores because its trade routes are no longer safe – the likes of Maersk and Hapag-Lloyd won’t risk it.    

Quite suddenly you discover that Thomas Hobbes was right – outside the protection of the US Navy, the lives of your citizens have rapidly become “solitary, poor, nasty, brutish, and short.”

Now let’s suppose that you aren’t a small country but the second most powerful country in the world – China. Unfortunately, you’re little better off. China followed the same playbook – export massively and use the revenue to import everything you need, especially food and energy.

China imports 80% of its oil needs and in the new world order it can say goodbye to most of that. It will have to fall back on far less efficient – and far dirtier – coal, but that won’t fill the gap. China is also not self-sufficient for its food needs – it’s the world’s largest importer of soybeans, for example, as livestock feedstock.

But it gets worse – to the extent that China produces food it does so on soil so poor that it requires massive fertilizer treatments – five times the global average of nitrogen fertilizer according to Zeihan – and most of that fertilizer has to be imported.

China’s population, already in steep decline, will likely collapse, and along with that collapse will come the usual suspects – malnutrition, pestilence, famine, starvation, freezing, revolution. Zeihan states the obvious: “If there isn’t enough to eat, you die.” We will all be glad that we are not the Chinese Communist Party.

But ah, you are thinking, China is a powerful country with a powerful navy – it can protect its own trade routes without depending on the Americans.

Alas, not so. China’s navy is formidable, but only within a few hundred miles of the country’s border. China has little capacity to project naval power over the long distances it will face when America steps back, and those distances are very large, indeed: China’s main trading partners, Europe and the US, are 12,000 and 8,000 miles away, respectively. Japan’s navy, just as an example, is many times as powerful as China’s when it comes to projecting power over long distances.

In short, the countries that faired best during the American Century will fare worst in the century to come. But which countries will fare best? We’ll take a look at the winners next week.

Next up: To Greatness – and Beyond! Part 4

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Please note that this post is intended to provide interested persons with an insight on the capital markets and other matters and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.

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