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For these reasons both countries, especially China, are shifting to more domestic production and “decoupling.”
THE TECHNOLOGY WAR The technology war is much more serious than the trade/economic war because whoever wins the technology war will probably also win the military wars and all the other wars.
The Chinese tech sector has rapidly developed domestically to serve the Chinese in China and to become a competitor in world markets. At the same time China remains highly dependent on technologies from the United States and other countries.
The United States appears now to have greater technology abilities overall, though it varies by type of technology and the US is losing its lead.
China will probably advance its technologies, and the quality of decision making that is enabled by them, faster than the US will because big data + big AI + big computing = superior decision making.
To fight the technology threats, the United States has responded at times by preventing Chinese companies (like Huawei) from operating in the United States, trying to undermine their usage internationally, and possibly hurting their viability through sanctions that prevent them from getting items needed for production.
Regarding the stealing of technologies, while it is generally agreed to be a big threat,2 it does not fully explain actions taken against Chinese tech companies.
there is a tech decoupling going on that is part of the greater decoupling of China and the US, which will have a huge impact on what the world will look like in five years.
The United States has a technology lead (though it’s shrinking fast). As a result, the Chinese currently have great dependencies on imported technologies from both US and non-US sources that the US can influence. This creates a great vulnerability for China, which in turn creates a great weapon for the United States.
If the United States shuts off Chinese access to essential technologies, that would signal a major step up in the risk of a shooting war.
Probably the most dangerous sovereignty issue is Taiwan.
earlier, I would worry a lot if we were to see an emerging fight over sovereignty, especially if we were to see a “Fourth Taiwan Strait Crisis.”
Because the dollar is the dominant currency in world trade, capital flows, and reserves, it is the world’s leading reserve currency, which puts the US in the enviable position of being able to print the world’s money and to inflict sanctions on its enemies. The US now has an arsenal of sanctions, which is its most used arsenal of weapons.
Holding debt as a medium of exchange or as a storehold of wealth during wartime is less desirable than during peacetime, so if there were movements toward war, the value of debt (which is a promise to receive fiat currency) and fiat currency would likely go down relative to other things.
The roughly $1 trillion of US debt that China holds is a risk but not an unmanageable one as that equals only around 4 percent of the roughly $28 trillion outstanding (as of May 2021). However, because other countries realize that actions taken against China could be taken against them, any actions taken against Chinese holdings of dollar assets would likely increase the perceived risks of holding dollar-debt assets by other holders of these assets, which would reduce the demand for such assets.
So there are no attractive world reserve currencies to compete with the dollar. History has shown that whenever a) currencies are not desired and b) there are no other currencies that are attractive to go into, the currencies are still devalued and the capital finds its way into other investments (e.g., gold, commodities, stocks, property, etc.). As a result, there is no need to have a strong alternative currency for a devaluation of a currency to take place.
It is impossible to visualize what the next major military war will be like, though it probably will be much worse than most people imagine.
Based on what we do know the headline is that the United States and China’s geopolitical war in the East and South China Seas is escalating militarily because both sides are testing the other’s limits. China is now militarily stronger than the United States in the East and South China Seas so the US would probably lose a war in that region, while the United States is stronger around the world and overall and would probably “win” a bigger war.
Some people imagine that China could achieve broad military superiority in five to 10 years. I don’t know if that is true. As for potential locations of military conflict, Taiwan, the East and South China Seas, and North Korea are the hottest spots, and India and Vietnam are the next
In thinking about the timing of a war, I keep in mind the principles that: when countries have big internal disorder, it is an opportune moment for opposing countries to aggressively exploit their vulnerabilities.
History has taught us that when there are leadership transitions and/or weak leadership at the same time that there is big internal conflict, the risk of the enemy making an offensive move should be considered elevated.
THE CULTURE WAR How people are with each other is of paramount importance in determining how they will handle the circumstances that they jointly face, and the cultures that they have will be the biggest determinants of how they are with each other.
Chinese culture compels its leaders and society to make most decisions from the top down, demanding high standards of civility, putting the collective interest ahead of individual interests, requiring each person to know their role and how to play it well, and having filial respect for those superior in the hierarchy. They also seek “rule by the proletariat,” which in common parlance means that opportunities and rewards are broadly distributed. In contrast, American culture compels its leaders to run the country from the bottom up, demanding high levels of personal freedom, favoring
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The main challenge the Chinese and Americans have with each other arises from some of them failing to understand and empathize with the other’s values and ways of doing things, and not allowing each other to do what they think is best.
I think the main thing to realize and accept is that the Chinese and Americans have different values and will make different choices for themselves than the other would like.
The United States’ ability to impose things on the Chinese and China’s ability to impose things on the United States will be a function of their relative powers.
THE RISK OF UNNECESSARY WAR As I explained in Chapter 6, stupid wars often happen as a result of a tit-for-tat escalation process in which responding to even small actions of an adversary is more important than being perceived as weak, especially when those on both sides don’t really understand the motivations of those on the other side.
Take the issue of Taiwan. Even though the US fighting to defend Taiwan would seem to be illogical, not fighting a Chinese attack on Taiwan might be perceived as being a big loss of stature and power over other countries that won’t support the US if it doesn’t fight and win for its allies.
There is also risk of untruthful, emotional rhetoric taking hold in both the US and China, creating an atmosphere for escalation.
THE WAR WITH OURSELVES: THE ENEMY IS US
have learned to look at the past 1) to determine what’s likely to happen and 2) to protect myself and others I am responsible for against the possibility I am wrong or missing something important.
Dealing with the future is all about 1) perceiving and adapting to what is happening, even if it can’t be anticipated; 2) coming up with probabilities for what might happen; and 3) knowing enough about what might happen to protect oneself against the unacceptable, even if one can’t do that perfectly.
EVOLUTION The most important things evolve in ways that are easy to see and extrapolate forward, so it’s not difficult to get a pretty good sense of roughly where they are likely to be in the future, so long as a once-in-500-years-type game changer doesn’t come along.
while extrapolating the past is generally a reasonable thing to do, also be prepared to be surprised because the future will be much different than you expect it to be.
One of the overarching principles I derived from my research and my 50-plus years of investing experience is in the markets and in life, to be successful one should bet on the upside that comes from a) evolution that leads to productivity improvements, but not so aggressively that b) cycles and bumps along the way knock you out of the game.
HUMANITY’S INVENTIVENESS As previously discussed, innovation and inventiveness are clearly the most powerful determinant of a country’s conditions.
I believe that humanity’s evolution through its inventiveness is accelerating and that most people will benefit from it.
In other words, the abilities of both computers and humans will improve at an increasing pace. Perhaps most importantly, advances in and the wider use of quantum computing with AI will lead to unimaginable advances in rates of learning and improvement and changes in global wealth and power. These changes will occur in varying degrees in the next five to 20 years, but I believe they will add up to the greatest shift in wealth and power that the world has ever seen. Quantum computing with AI will be to traditional computing what the computer was to the abacus, providing humanity with vastly more
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As of this writing there are varying amounts of conflict going on within different countries, as shown in the next chart. Internal conflict is especially high in the United States, which appears to be in Stage 5 of the cycle (when there are bad financial conditions and intense conflict), while China appears to be in Stage 3 (when there is peace and prosperity). Changes to this measure can happen quickly—e.g.,
So what does this all mean for the US? As I explained in Chapter 11, our measures suggest that it is very roughly 70 percent through its big cycle. Can it slow or reverse its relative decline? History shows us that reversing a decline is very difficult because it requires undoing so many things that have already been done. For example, if one’s spending is greater than one’s earnings and one’s liabilities are greater than one’s assets, those circumstances can only be reversed by working harder or consuming less. The question is whether we Americans can face our challenges honestly and adapt
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But while we can’t know for certain whether the splits and conflicts in the US will increase or reverse, we do know that the long-term momentum is toward increasing division and this is a serious risk. The fact that the US is simultaneously deeply indebted, its international standing is weakening, and it is experiencing serious conflict should be concerning both to Americans and to non-Americans who depend on them.
All empires decline and new ones rise to replace them.
So, in summary, my computer and I working together now believe that because for the foreseeable future China and the US will be powerful enough to inflict unacceptable harm on each other the prospect of mutually assured destruction should prevent military war, though there almost certainly will be dangerous skirmishes. I expect this to be true unless some unexpected technological breakthrough, like dramatic advances in quantum computing, gives one of these powers such an asymmetrical advantage that mutually assured destruction would cease to exist.
the best way to fight a war is to get strong and show one’s opponent one’s strength so they don’t want to fight violently.
As Graham Allison explained in his excellent book, Destined for War, in the past 500 years, when two nearly equal powers experienced irreconcilable differences, there were military wars in 12 out of 16 cases, and big military buildups were associated with major wars in 80–90 percent of cases.
Over the next 10 years, the most important dynamics are the short-term debt/money/economy cycle (also called the business cycle), the internal political cycle, and the escalating conflicts/reducing interdependencies between the US and China.
Know all the possibilities, think about the worst-case scenarios, and then find ways to eliminate the intolerable ones.
Diversify. In addition to making sure I’ve covered all the worst-case scenarios I can think of, I try to cover those I can’t think of by diversifying well.
Put deferred gratification ahead of immediate gratification so you will be better off in the future.
Triangulate among the smartest people possible.
