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David Goldman: Will China overtake the U.S. as the world’s leading superpower?

Will China overtake the U.S. as the world’s leading superpower?
(David Goldman, October 25, 2017)

Watch his speaker playlist here

About the speaker

David Goldman is an American economist, music critic, and author, best known for his series of online essays in the Asia Times under the pseudonym Spengler. He is the Wax Family Fellow at the Middle East Forum, a Senior Fellow at the London Center for Policy Research, and a member of the Board of Advisors of Sino-Israel Government Network and Academic Leadership (SIGNAL). According to the Claremont Review of Books, the “Spengler” columns in the Asia Times have attracted readership in the millions.

His analyses of global events have become highly regarded. Former C.I.A. National Intelligence Council Vice Chairman Herbert E. Meyer said, “Ask anyone in the intelligence business to name the world’s most brilliant intelligence service, and we’ll all give the same answer: Spengler. David P. Goldman’s ‘Spengler’ columns provide more insight than the CIA, MI6, and the Mossad combined.” Goldman concealed his identity under the “Spengler” pseudonym until 2009, when he revealed his identity in the Asia Times article, “And Spengler is…” and the First Things article “Confessions of a Coward”.

Goldman regularly appears as a guest on CNBC’s Larry Kudlow Program, where he has been an outspoken critic of Federal Reserve efforts to resuscitate the American economy. He is the author of How Civilizations Die: (And Why Islam is Dying Too) and It’s Not the End of the World, It’s Just the End of You: The Great Extinction of the Nations.

For more on China, see Chen Guangcheng’s Westminster talk, Civil Rights in China.

Transcript

Robert R. Reilly:

David Goldman is not only an economist with a lot of experience on Wall Street, he’s a music critic and a music theoretician who has taught on that subject. Of course, he’s best known not as David Goldman, but as Spengler through his years and years of extraordinary articles and columns in the Asia Times, which I avidly followed, which I’m sure many of you did as well, always wondering who could this man be who knows Islam so well, who knows the Middle East so well, Turkey, who knows of course the Asian- who knows everything.

David Goldman:

I was wondering about that too.

Robert R. Reilly:

And so finally he’s been exposed as indeed David Goldman, who’s going to talk to us tonight on, “Will China Overtake the US as the World’s Leading Superpower?,” question mark. I just want to share with you, because it’s such a delicious quote and there are a number of you in the audience tonight who have worked in the intelligence world, the quote about our speaker by the former CIA National Intelligence Council vice chairman Herbert E Meyer. Quote, “Ask anyone in the intelligence business to name the world’s most brilliant intelligence service and we’ll all give the same answer: Spengler. David Goldman’s Spengler columns provide more insight than the CIA, MI6, and the Mossad combined.” Please join me in welcoming David Goldman.

David Goldman:

I’m humbled to be invited to such a distinguished group in the presence of so many people whose work I’ve admired for many years, including Bob Reilly’s. Bob’s work on music by the way is some of the most interesting and important I’ve read. His book on 20th century music I think should be the standard on the subject, so I’ll throw that in as a free advertisement.

The simple answer to the question, “will China try to overtake the United States as leading world as a new superpower?” is yes, unless we change course. The hour is late and it’s time to be alarmed. I’ll explain the point of my title, “Geeks in a new Roman Empire in a moment.

Depending on how you measure the Chinese economy, the Chinese economy is either 20 percent larger than ours or 20 percent smaller, what the World Bank calls purchasing power parity, that’s the actual cost to do business. So, for example, if you want to create a research lab and develop a new hypervelocity missile in China, the costs of the engineering personnel will be considerably less, so the GDP of China, that respect, should be upgraded a bit.

If you calculate it in ordinary U.S. dollar terms, they’re still somewhat behind us but even so, given the growth rate of the Chinese economy, sometime in the early 2020s, it is very likely that China will overtake us in nominal dollar terms and however we measure it it will be roughly our size. Given that China is growing at six or seven percent a year, which is say doubling every ten or twelve years, not very long from now the Chinese threat that we have now will double.

We’re like Hercules wrestling the giant and Antaeus, the daughter of Gaia, the earth goddess who every time he touches the ground, doubles in strength. Hercules finally had to strangle him in midair. And the problems that we now face are going to be much greater in the future and if we don’t address them, we’ll be dealing with a power that will in many ways swamp us. I’ll try to explain what those ways are.

First, I’d like to say something about what China is. China is a civilization that has been with us for five thousand years. It is much older than us. It has had periods of extreme decline and chaos followed by periods of reconstruction, but overall it’s certainly one of the world’s few truly successful civilizations.

According to the linguists, not quite a hundred and fifty thousand languages have been spoken on planet earth since the dawn of man. Of those, perhaps five thousand are still spoken, but if you eliminate the languages spoken by a few hundred people in the New Guinea Highlands and the ones that are likely to survive another 100 years, you get into the hundreds. So, of this enormous pool of languages and cultures, Chinese culture has been one of the very few successes.

Coming from a younger and also reasonably successful culture, which is the Jewish culture, I look at the Chinese in awe. They should never be underestimated. What makes China China? What is it? How does it understand itself? Until the Jesuits turned up in the 16th century, Matteo Ricci and his colleagues, China simply understood itself as civilization. China was a civilizing principle. It was a means of unifying different ethnicities on the basis of a very different principle than Rome or Alexander or the Holy Roman Empire or any entity in the West or its antecedents, and I think that’s best illustrated by what it’s like to be a Chinese child.

Chinese children [are] very bumptious and sort of have a free happy-go-lucky kind of existence until they’re about six at which point they’re given a pen and the pot of ink and a piece of paper and they’re told now you’re going to learn the characters and for the next six or seven years they’ll spend four hours a day learning the characters.

China managed to combine roughly 70 major language groups by having a unified written language and entirely diverse spoken languages. It’s not until very recently with the advent of telecommunications and the centralizing influence of the Mandarin dialect, the old Beijing imperial court dialect, that China has said anything like a unifying culture in the sense that we understand culture. Know what Chinese mother for thousands of years sang a lullaby to a child in Chinese. Chinese was what you wrote.

This duality lies at the heart of Chinese strength and Chinese fragility. China has never quite been unified. It’s like a bag full of oppositely charged magnets held together by super glue. China spent a hundred years until the Communist revolution, the so-called century of humiliation, disunited. dominated by warlords, with civil wars that may have cost up to a hundred million lives in the middle of the 19th century, the Taiping Rebellion for example. This is still a living memory. There are people who remember this in the 1930s and 1940s.

So, China’s paranoia about a rebel province, Taiwan breaking away, or Tibet, is deeply rooted in the fragility of Chinese history, but at the same time the process of acculturation of Chinese citizens is so intense and so deep, requiring so much effort in childhood, that the unifying characteristics have a kind of- have a different kind of strength, which no supranational entity in the West has ever achieved.

Important to remember that China had by some estimates 30 percent literacy 2,000 years ago when literacy in the West was a tiny fraction of that. Now, China essentially grew from the tiny area denoted by the Shang Dynasty 3,500 years ago by making its neighbors an offer they couldn’t refuse. The offer was you become Chinese, which is you learn the characters you adopt Chinese dress, Chinese customs, and you pay taxes to the Emperor who will be the arbiter of conflicts among various ethnicities and so forth. That’s a option one.

Option two is we kill you all and it worked quite effectively. China basically reached its current geographical boundaries, which were natural, the Gobi Desert, the Himalayan mountains, and the oceans by the year 700. They haven’t changed substantially since then nor are they likely to change. This is not Rome or Alexander or the British Empire or the Comintern, which wants to conquer masses of territory. China wishes to project influence but it does not look- it has not in thirteen hundred years, fourteen hundred years looked for territorial expansion.

The differences between China and the West are deeply set. The most important thing one notices in China is that there are no subsidiary institutions to use the terminology from Catholic social theory. There’s no Football League, no Church bingo game, no Board of Education that’s organized outside the imperial structure, which is run by the Communist Party, which tolerates no competition.

The fundamental unit in Chinese society was never a subsidiary organization like the New England churches that elected their own clergy and didn’t like Anglican bishops telling them what to do. It’s nested dolls. The fundamental unit was the extended family form in which the head of the form was a miniature Emperor and many forms formed a clan, which had a head who was another slightly less miniature Emperor, going up to a provincial governor, going up to the Emperor. It was a structure that reproduced itself down to the capillary level of society. That, in a deeply oversimplified summary, is what Confucianism is.

My friend Francesco Sisci, an occasional writer for Asia Times, points out that the Chinese conception of law, rights, and obligations is radically different from the West, starting with the Romans and certainly ancient Israel elsewhere the state was an entity to which one had obligations and from which one derived rights and privileges.

In Rome you paid your taxes, you served in the army, you could demand certain things of the state, you had certain economic benefits as it is in you’d deserve protection and so forth. It was a very well defined quid pro quo engraved in common law.

In China, you do what the emperor feels like at the moment and you hope you get a reward. There’s no sense of rights and privileges. China is radically different than Japan. Japanese love their emperor. The Chinese have never loved their emperor. The emperor is a necessary evil. Chinese will tell you today we’ve always had an emperor. Why should we change now? When we didn’t have a strong Emperor we killed each other. Look at the century of humiliation, so we don’t like the Communist Party, we don’t like any of these people. They’re tax collectors, they’re brutal, and they’re arbitrary, but without them we would all kill each other.

[I’ll] close this part of it with an anecdote. I worked for several years for an investment banking boutique in Hong Kong, Chinese-owned. We took a number of tech companies public and got a good view of some of the more interesting things happening in the Chinese economy.

And once I wrote a research report and included the name of a young Chinese colleague on it. He said, “why did you do that?” I said, “well, I’m trying to give your career a little help. It’s what we do.” He said, “No one in China does that.” I said, “Really?” He said in China, no one has any friends.

At age six you look around yourself in primary school and try to figure out whom you’re going to walk over to get ahead. That is not a lack of altruism. It’s the way the system is gamed because in parallel to this arbitrary, imperial structure, China’s had for 3,000 years a form of meritocracy, which has been on many occasions highly effective. That’s the Mandarin system.

You passed the Mandarin exams, your family becomes rich, so a vast number of people spend their- family’s will find one talented boy, invest all the resources to try to get him to pass the Mandarin exam, so it can elevate the entire family. China has no hereditary aristocracy unlike the West, no Dukes, counts, princes and so forth. There are aristocratic families, but they tend to last two or three hundred years. They keep turning over because talent from the base is allowed. It’s a cold-hearted and merciless meritocracy but it still works.

The one thing Xi Jinping cannot do is to get one of his children into Peking University or Tsinghua University. You have to pass the exam and get the right score. Of course, there are people who hire professional exam passers and with fake fingerprints to get through the security. There’s a whole industry in cheating on exams, but the principle is nonetheless there.

That’s one of the great difficulties we have in communication with Chinese. If you meet any Chinese public official of any significant rank, you’re guaranteed that he or she has an IQ of over 150. It’s as if we had a government entirely composed of National Merit Scholars not semi-finalists because out of the vast population you select out the brightest by competitive exam systems and those are the people who manage the government.

The difficulty the Chinese have is understanding that democracies frequently advance stupid people. You’re talking to people who since the age of 12 have never met a stupid person and they’re completely unable to believe that some of the things we do are not conspiratorial subterfuges but simply incompetence and stupidity.

Dynasties have always fallen in China because they become soft and corrupt and then get invaded or because they’re successful and the population expands faster than the arable land. China’s cursed with a very small portion of arable territory, so lack of arable land has always produced peasant rebellions, chronically.

The current dynasty has had a very simple solution: decimate the peasants and there won’t be a rebellion. That’s the reason for the one-child policy. It’s a social control mechanism. Overpopulation overthrew other dynasties. Okay, we get rid of the population. There will always been plenty of Chinese. It’s one of the cruelest policies that any government in history has ever adopted, really ruthless, but that’s the motivation.

Second thing of course, is since peasants tend to be fractious as Mao Zedong observed famously in his report on Hunan in the 1930s, eliminate the peasantry, move them to the cities, put them into a polyglot block of urban residents with people who come from other provinces who can’t even talk to each other. And, of course, keep China prosperous, maintain the mandate of heaven, and make China impregnable.

So, what is China’s problem? China’s problem is the same as that of every other country in the world and I’d like to step back and mention a bit of wisdom from Robert Mundell, the grandfather of supply-side economics, 1999 Nobel Prize winner in economics, who observed that chronic current account deficits are the result of aging. All capital markets are as young people borrowing from old people, old people need to retire, young people need to raise families, start businesses. Old people have savings and they lend money to young people.

What happens if you have a country with lots of old people who need to lend money to retire on, but they don’t have a lot of young people? Well, you find another country which has young people and you lend the money to them. How do you get the money? You sell them more goods than they sell to you. That’s what national savings is. It turns into a current account surplus, so there’s a relationship, a loose relationship, between the percent of population over 65 and the current account balance as a percentage of GDP. This is what Mundell predicts.

Now, of course it’s a loose relationship and how far you are from the regression line is an important data point, so I’ve labeled the one, the countries who have more of a current account balance than their position and age would indicate as the ‘ants’, and the ones below it as the ‘grasshoppers’. The ants are saving, the grasshopper’s are dis-saving, and China is way above the line. We’re way below the line.

Now, since the whole world- The whole world doesn’t appear to be aging. If you look at the UN population tables, it appears static but that’s deceptive because most of the young people are in Africa or South Asia and it’s very difficult to invest Western capital in a politically safe, productive fashion in countries with low educational infrastructure, poor political governance, and so forth, so actually there’s a race on to control those markets, which are investable and that’s the decisive race in the world today.

Chinese have a rapidly aging population. The question for every population of the world is will you get rich before you get old. In the past I’ve drawn attention to the extraordinary fact that Iran will without any doubt be the first country that gets very old without getting rich at all. This is because of the extraordinary fact that the Iranians running around today in their 30s, 40s, childbearing age come from families with an average of seven children. They’re having one and a half to two children, 1.6, 1.7.

Never in the history of the world has there been such a radical and sudden shock to fertility behavior. That means in 20 years from now there will be only one-and-a-half Iranians of working age to support every elderly Iranian, so grandma’s going to be left to starve in a garret and the society will break down. Iran is the Walking Dead, economically.

Now, China has aged not as fast as Iran, but it’s aging as a result of the one-child policy. That’s been rescinded. It’s now a two child policy. It’s yet to be seen whether having been muscled into a certain kind of fertility behavior, the Chinese population will change, but China’s problem is they need to save massively in order to meet their future obligations to an aging generation. Germans will tell you exactly the same thing.

So China is proposing to take over Eurasia and make it a Greater Eursian Co-Prosperity Sphere or in their language, One Belt-One Road. This is a trillion-dollar investment program. Three years ago, this looked like one more propaganda exercise by Chinese leadership that couldn’t find its way to the sanitary facility. It was launched with great fanfare, a lot of publicity, nothing seemed to be happening.

But now a great deal is happening. There are now two rail lines going from China to Iran, which cut the cost and time of shipment to Iran in half. There’s a fast train from Beijing to Istanbul. It goes through a Caspian Sea ferry to Baku and Azerbaijan, then on to Tblisi in Georgia, and then to Kars in eastern Turkey, and then to Istanbul. It also cuts the time in half.

We wonder, looking at Turkey why Turkey seems to be impervious to threats, menaces, bribes or whatever we try to offer them to keep them in the Western alliance. Turkey now is profiling itself as the Western economic province of China and among other things, you can see they’re behaving on the matter of the Uyghurs, which was a sore point between Turkey and the Chinese for quite some time.

The other thing that the Chinese are doing a Turkey, which is a good segue into another aspect of Chinese plans, is transforming the Turkish broadband system. Mobile broadband is having a transformational effect politically and economically that very few people anticipated until very recently. For my sins in the past, I did some development economics. I did some work in places like Mexico, Nicaragua, Peru, Russia after the fall of Communism.

The main thing one notices about so-called developing countries is that most people sit around doing very little most of the day. You work this subsistence plot. You sit in a market stall, swat flies, and wait for someone to come along and buy a liter of cooking oil. You don’t pay taxes, you work off the books, you scrape out a living. 30 or 40 percent of economic life is the so-called informal economy. Official labor participation rates are abysmal. People are locked in a cycle of poverty.

What mobile broadband has done is to reach into the capillaries of emerging economies and locate the entrepreneurs, the talent, give them access to a world market platform, and increasingly give them access to micro-finance. And the entrepreneurial genius who created this model in China where it’s most advanced is of course, Jack Ma of Alibaba, now as big as Amazon. Jack Ma is joined-at-the-hip, he’s the Siamese twin, of Xi Jinping.

There are two sides: there’s a bright side and a dark side to what Big Data and mobile broadband do. You have entire villages in China, which are working for one person who figured out how to make a product and sell it on the Alibaba platform and you have something called ant finance and a number of other microfinance platforms, which are making small loans to businessman all over China, something the banking system, state banking system, doesn’t do.

State banking system is basically a bucket full of cash with a shovel, which is used when a state-owned enterprise comes by. And this is transforming the capillary level of China. The most important thing that China has managed to do that no other so-called emerging economy has done in the past – well, Korea has done, it has emerged – is to mobilize the human capital of its citizens, make the whole world available to them, but because the Chinese have successfully protected their intranet, the Great Wall of China, there’s a dark side to this as well.

All the data that Alibaba and Tencent and the other great internet organizations in China collect is of course at the disposal of the Ministry of State Security. The greatest telecom communications equipment provider in the world is now Huawei, founded by a former officer in the Chinese Signal Corps.

A couple of years ago as an anecdote I wanted to get a tour of Huawei headquarters and to do that I had to find some unsuspecting Latin American ambassador to take the tour, so I could tag along as the escort and we were shown the Huawei exhibition hall, which is a three-hour extravaganza. It looks like two wings of the Smithsonian.

We came to a wall, an enormous wall several times the size of that screen, which the city of Guangdong, map with lots of points of light. They said very proudly, ‘Every one of those is every smartphone in the city and we can correlate the location of the smartphone and its movement with online searches, online shopping, Facebook, about Facebook, WeChat postings, and so forth.’

So, they know where everybody is, who they’re with, and what they’ve done and what they’ve said at all little plus, they’ve got cameras everyone meters or so, which do very effective facial recognition, so if you happen to be holding someone else’s smartphone, they’ll figure that out quickly enough, which gives the Chinese Communist Party, without any doubt the cruelest dictatorship in modern history, totalitarian social control capabilities that the likes of a Hitler or Stalin could not have dreamed of.

Overthrowing this entity is not an easy proposition. I don’t know where one begin and I wouldn’t undertake the task. We’re dealing with an entity, which is not going to be cowed politically where a few op-eds about dissidents or human rights are going to have much of an effect. This is not Poland with a subsidiary Catholic Church or a Hungary. It’s a very different entity. It’s a society with no subsidiary hollowed out except for the Catholic Church- except for the Communist Party.

I misspoke for a second. There is a Catholic Church in China. It’s tiny. It’s split into a Catholic Patriotic Association controlled by the state and a very small underground Catholic Church. You do have perhaps a hundred million Chinese who consider themselves in one way or another to be Christian and they’re tolerated as long as they meet in homes and form no visible organizations, so they tend to be very low-profile. For that reason, it’s extremely difficult to gain an overall profile of what the content of Chinese religious life is.

You have many people who identify as Christians who’ve never had a Bible and many who are deeply learned and profound but we only have anecdotal evidence about that. That might be over the very long term a soft underbelly of Chinese culture, but it’s something we can only speculate about and in the horizon of any viable strategy I don’t believe will be a factor.

So, this chart shows the percentage of population owning a smartphone. Turkey and China are right there around 50 percent. China has become a cashless society effectively.

You know, a few years ago the Apple store in Hong Kong had the cash counting machines that drug dealers use, and people would come from the mainland with suitcases full of cash and they go down the cash counter machine and walk out with a hundred iPads, take them back to the mainland and sell them. Not anymore. Ali Pay and other electronic payment systems have largely eliminated cash. This is the core of the anti-corruption campaign, which is enormously successful because it’s technology-driven. The government can track every transaction because they’re electronic.

The most important appointment that came out of the Chinese Party Congress in the view of our China editor at Asia Times, Jeff Pao, was the elevation of Ye He, who was the reform czar under under Xi Jinping. The author of the now famous document called, “A Proposal For Supply-Side Structural Reforms in the Chinese Economy.” What do these reforms look like?

In the case of Turkey, Turkcell is now in a joint venture with Huawei to help the Finance Ministry eliminate cash payments by 2023. Broadband and physical transport are hard wiring Turkey into the Chinese economy. That’s why the West has lost leverage in Turkey, Iran with its two rail lines going to China, they’ve always believed in dependent on the Chinese economy for many years, that’s also a problematic consideration.

What kind of pressure would sanctions effect on Iran given their dependence on China? Russia has quadrupled or quintupled its oil exports to China over the last four or five years, mainly at the expense of Saudi Arabia. Russia would be bankrupt without the Chinese favoring oil imports from Russia. Russia’s been an incredibly important adjunct to China.

One of the things China doesn’t have, culture hasn’t favored it, is a foreign intelligence service to speak of or a diplomatic service. In China, if you meet somebody in the Diplomatic Service who’s lived abroad, speaks four languages, at ease of Western culture, you know for sure he’s the ne’er do well brother-in-law of some party official who didn’t think it was worth putting him up the fast-track of the People’s Liberation Army or the regional party organizations. It’s a dumping ground for people who aren’t that important, so the Russians with their great expertise in Turkey, in the Caucasus, and Persia and so forth, their excellent intelligence service, language capabilities are critical adjunct for China.

Now, is China going to go bankrupt? I’ve been reading articles about China’s debt and debt problem and so forth. I think many of the reports we’ve had have been a quick first cut and superficial. I’m a banker and the question bankers want to know is what’s the collateral? If there’s a loan, what’s behind it? The debt to the leverage ratio of a company is less important than its underlying carrying capacity, so our team at Asia Times broke down the balance sheets of the 300 top companies in the Shinjin 300 index, that’s the closest thing China has to an S&P 500 index, and we discovered that two-thirds [of] the total debt is attached to infrastructure companies. [The] biggest is Petro China. The others are rail companies and metal companies, power development, nuclear power, including the financials, a couple of airports.

This is China’s infrastructure, which includes now close to thirty thousand kilometers of high-speed rail, which is an enormous productivity booster. Now, there’s a lot of inefficiency obviously, but it’s not the same thing as the great American bubble of 1998 to 2008 where foreign money bought American mortgages, American mortgages financed house speculation by households, house speculation was used to artificially boost consumption, so the problem we had was financial distress in the population itself. This is debt backed by infrastructure, which has a productivity-enhancing effect.

Why did this happen this way? Well, one of the oddities – I don’t want to go through the details of this – if- I’ve got some data I’d be glad to send you if you talk to me afterwards – but if you look at the debt ratios in China versus almost any other country in the world, you see this huge corporate debt component, very small government and household debt components compared to everyone else.

China until very recently had effectively no tax system. There’s no personal income tax. They had what’s called the corporate tax, which is just a top-line tax. Recently, they adopted a value-added tax being introduced. That’s being corrected. But in the meantime if you wanted to build the infrastructure- oh, and they didn’t have a domestic bond market to speak of.

So in the U.S. you issue bonds and you raise tax revenues down to tax revenues. You borrow money against tax revenues. Those mechanisms simply didn’t exist in China. They’re now being built rapidly. So, to get the infrastructure built, the Chinese government simply told the state banks, ‘We’re printing money. Give that money to state companies.’ So, it shows up as a ballooning of corporate debt.

That’s an inefficiency in the structure of the Chinese economy, which is one of the many things that the Xi Jinping regime will address in the course of the reforms, but it’s not a financial crisis. The hedge fund community is littered with corpses of people who shorted China, believing it was a crisis.

There’s a- before I get to the the R&d stuff, just as a quick aside, China lost a trillion dollars worth of reserves 2015, 2016 and the papers were full of reports, saying there’s a massive run out of Chinese assets. Chinese are panicking. China’s going to go bankrupt. What the papers did not report, but the Bank for International Settlements Economics staff documented in great detail, is that while the Chinese government was losing a trillion dollars of reserves, Chinese companies, mostly state-owned companies, were paying down a trillion dollars worth of foreign debt.

It was simply an internal bookkeeping transaction and it was undertaken because the Chinese had let their currency appreciate for years, so it was to the advantage of the corporation to borrow in dollars, use the proceeds in RMB, and then pay the dollars back at a more favorable exchange rate in the future. But the Chinese were the very fast drives of the dollar in 2015. [The] Chinese had to turn that around, so you had to turn around this super tanker of a balance sheet and replace the dollar debt with local currency debt.

And so anyway, a lot of very poor, superficial analysis has been done on the Chinese economy but also some really excellent work. For example, as I mentioned by the Bank for International Settlements. The data and the analysis are out there if you look for them. Unfortunately, the gullible and lazy reporters of the mainstream media who give us most of our daily feed don’t bother to do their homework.

So, China now has R&D at 2% of GDP. What does that go into? Well, they’ve got the fastest supercomputers in the world. They have a functioning quantum satellite. In other words, a quantum link between satellite and earth means that if there’s any attempt to interfere with a signal for example, to eavesdrop on it, it immediately destroys the signal. It self-liquidates. Chinese scientists had a conversation over the satellite link with a French counterpart.

Massive investments in supercomputing, also investments in things like surface to ship missiles, which may or may not be able to take down an American carrier. We probably don’t want to find out. Diesel-electric submarines of the kind the Germans et for a long time that can lurk on the bottom on batteries and at this point are virtually undetectable. Hypersonic missiles designed to defeat not only THAAD or Patriot or other systems that we currently have, but systems that we might develop in the future, satellite-killer missiles and a range of things to make themselves impregnable.

Now, one important caveat about Chinese military spending is shown by the difference between how they equipped a ground soldier and how they equip their space forces and missile forces. The United States spends, last I checked, something over a $100,000 dollars, maybe $110,000, $120,000 dollars to equip a single infantryman. Chinese spend about fifteen hundred dollars, twelve hundred, fifteen hundred dollars. That’s basically a Kalashnikov rifle, pair of boots, couple spare uniforms, and that’s it. Chinese have no grab attack aircraft, nothing like the warthog, nothing like the Russian frog, simply not in the inventory.

Chinese are not preparing for a land war. The only land where they could conceivably fight might be with India or Vietnam. That really doesn’t fit into their objectives, but they want to absolutely dominate the South China Sea, make Taiwan entirely dependent on them, and control everything around them.

One of the companies that we took public at when I was at Reorient Group in Hong Kong, Kwangji Science, run by a bunch of materials PhDs from Duke. I walked into the office of the chairman and he had his iPhone out and he said I want to show you something. He showed me a little map of the South China Sea with lots of triangles. I said, “That’s cool. What are those triangles?” He said, “That is the location, speed, direction, and condition of a motor of every ship in the South China Sea, so we can distinguish a fishing trawler from a destroyer.” “How do you do that?,” I said. Balloons.

They have some very strong materials they developed, so they put up high altitude balloons all over the place with coaxial cables. They can monitor the South China Sea. If God forbid we had a war with China and we each take out of each other’s satellites, the U.S. military is blind. Chinese have a much more primitive but robust technology covering their entire coast. So, that’s what we’re talking about in terms of R&D.

The United States, roughly six or seven percent of undergraduates major in engineering. In China, it is 33%. Chinese produce twice as many STEM PhDs as we do now and four times as many STEM undergraduates. Now, granted the quality of the Chinese educational system is spotty. Remember that the Cultural Revolution leveled the universities. They had to be rebuilt from scratch, but in the view of many, the better schools are as good as ours.

Then you have some crappy diploma mills at the bottom of the pile, but I urge you to go on the internet and simply look at the equivalent of a New York Regents Test for graduating high school seniors in China. I know a little math and it made me sweat. I guarantee that if that were the standard test for Americans, you know, 1/10 of 1% competency rate.

Now, in America where do we stand? Well, there’s a lot of R&D. Plenty of people doing R&D to try to find a better breakfast cereal but federal R&D is a good proxy for hard science, long-range R&D, and that was in the Reagan administration of blessed memory, roughly, you know, close to about 0.8 percent of GDP and it’s fallen by half to about 0.4 percent of GDP.

Remember in the 1980s, we had corporate laboratories. We had GE, RCA, IBM, Bell Labs. None of them exists anymore. They’ve all been shut down. The National Labs are, you know, shadow of themselves. We’ve got plenty of people at universities doing things but we don’t have the kind of concentrated industry-science relationship, which holds these things together and there’s a relationship between this and productivity, which I don’t want to get into.

Where’s the money going in the U.S.? Well, there’s tons of money going into software. This is venture capital commitments, but nothing going into computers, peripherals, semiconductors, telecom, networking. Why don’t we invest in capital intensive high-tech manufacturing? Because every venture capitalist out there is scared witless of the Asians who subsidize this stuff. They’re afraid they’ll get crushed, so we invest in apps, capital-lite stuff. We’ve got a trillion dollar valuation on an app to search for used cars. We’ve got 120 different dating sites. We are geeks in a new roman empire.

Now, what do we do about it? We’re gonna have to do subsidies. I’m a-free marketer. I’m a supply-side. I’m a free trader. This is war. War you do things differently. War you put the subsidies- you put them in the hard science, hard-R&D. Let businesses take the risk but the Defense Department may have to do direct investments in some industries.

We start with – Dr. Henry Kressel and I proposed this in the Wall Street Journal just after the election – start with a rule: sensitive defense goods have to be made in the U.S. under secure conditions, period. That’s a gazillion percent tariff. How do you like them apples? I don’t care about tariffs on steel or aluminum. The Chinese want to get rid of that stuff anyway. Chinese would love us to be Brazil. Let agriculture, energy, and semi-finished goods and of course, politically, a steel plant has more workers to give a speech in front of than a semiconductor fab plant, just not quite as sexy, so politically, it may not fit the profile quite as smoothly as some other things, but if we don’t do this, we’re going to lose this One Belt One Road thing.

Well, lots of people hate the Chinese. They’re horrible, they’re aggressive, they’re nasty, they in-debt countries, they bully them. Well, what if we could get together with the Japanese, who’ve got more foreign assets than the Chinese and the Indians and compete with them.

The Indians and Japanese already have something called the Asian growth corridor, which is supposed to be [big] but it’s tiny. If we got behind that in a three-way effort, we could offer the Chinese serious competition. And then stop Intel and other companies from getting access to the Chinese market by giving away the store. A lot of companies won’t like that because it’s good for their stock price in the short run. A lot of people are getting rich on the decline of the West but there are some things more important than Intel’s stock price. A lot of people don’t like it but it’s got to come down from the top.

My conclusion, ladies and gentlemen, thank you for your patience, is that we have done this before. We did it in World War II. We did it with a Kennedy moonshot. We did it with Reagan and the military buildup in the SDI. We know how to do it. A lot of the people who did it are still around. It’s not that we can’t do it. We just have to determine that we want to do it and get it done. Otherwise, we’re going to live in a world that none of us are going to be really pleased with. Thank you very much for your time.

Transcript

Audience member:

I have a lot of neighbors who are Chinese Americans and they’re on WeChat here, so two questions: one, is there any way that the Chinese government can track We Chat in America and two, I didn’t hear you say a word about North Korea and how that might factor into any of this.

David Goldman:

For lack of time, I think North Korea is a case of the Chinese wanted play arsonist and Fire Brigade at the same time. They’ve encouraged the North Koreans and given them some covert help and then, you know, President Trump will go to China and tell the Chinese we need your help to deal with these nutcases. Xi Jinping will say well, we can help little. It’ll cost you. Now, that’s a dangerous game to play because say, the Japanese decide to develop nuclear weapons. I can tell you the Chinese won’t like that. They’re very afraid of the Japanese, so it could backfire on them. It’s a delicate game but that is an example of the Chinese using well, they play Go.

You surround the opponent with your pieces. You don’t do obvious, dramatic moves. You play for the very long-term, very patient, very strategic, whereas we are impatient and tactical. They’re playing Go, we’re playing Monopoly. Brennan?

Audience member:

Thank you for your time, for coming out here. This was fantastic.

David Goldman:

Honored.

Audience member:

But my real question is the Russian Far East and how Chinese view it. I personally think they view Russia, at least in the far-east, as kind of a quasi-vassal state. How do we get the Russians to wake up to the fact that China’s not their friend and they’re gunning for, I think, the Russian Far East.

David Goldman:

Well, China’s looking at everybody and thinking protein source, reference included. No, the Russians simply don’t have a population to dominate the Far East, so the Chinese it’s not worth their fighting over it because long term it’ll fall into Chinese hands. The Chinese won’t fight over it because long term it will be theirs just due to Russia’s population attrition.

How do you get the Russians to understand that? Well, I think there are a lot of things we could do with the Russians. That’s a whole other presentation. I think we’ve mishandled it. I think you need a very big stick and a very juicy carrot at the same time. We won the Cold War in large part because Henry Kissinger, god bless him, helped split and Nixon helped split China from Russia and get in the back together again cannot possibly be in our interests but given in China’s the fact that China dominates the raw materials demand side and Russia depends on raw materials there’s very little we can do in the short term to change that dependency that Russia has on China so although in principle I agree with you tactically that’s a much longer term kind of consideration that’s just the way the cards are dealt then you should be writing four times I’m delighted to meet you in person my pleasure – yeah two questions one with China’s economic penetration in the de Central Asia as far as Iran and Turkey what impact do you think this might have along the instability and chaos in the Middle East well that’s one second the US has turned its back on the TPP how serious of blunder do you think that is well I don’t think the TPP is going to help us at this point I think it’s much more a matter of fighting economic war with the Chinese. They’ve got there greater co-prosperity sphere. We want to set up competition, so I think you should just sort of move on and adopt a different policy. As far as instability, it’s very hard to know. It is possible that the Chinese will exercise a moderating influence on the irradiance. The Chinese want to get rich want it but powerful and they want everyone to behave and pay them tribute. They don’t want the meijer tribes to war with each other and they have a 3,000, 4,000 year history of exterminating unruly barbarians, so they would certainly encourage the Iranians to cool it with the Israelis. They like the Israelis. They get, you know, they get along. They want is really technology. They don’t want a war between Iran and Israel for example. On the other hand, all of this may variable embolden an Iranian regime, which is increasingly desperate and strident and Chinese are very poor at managing relation, so they may have quite different effects. Very hard to know. The worlds being transformed so quickly that it’s very hard to make a blank judgment. It’s a great question. I wish I could be are using their gene-splicing to be able to look at embryos and try to determine which are smarter, so parents can create a bunch of fertilized embryos and then decide which to plant later in the womb and create the smartest kids in the world. How effective they will be I have no idea but this is not an urban legend. This is real. They are doing it and that’s how they think. As I said it’s a very cruel society. It’s an absolutely ruthless meritocracy and which does not give any mercy to the hindmost parties consistently. Well, I think China wants Russia to be its cat’s paw in a number of strategic operations. It wants to make the Shanghai Cooperation Organization a successful competitor. NATO wants to harness all of Russian military technology to Chinese ends and China has some significant gaps in their military profile, which the Russians have historically filled. For example, Chinese still can’t make a good jet engine. Their metallicky is behind the Russians, so they use Russian jet engines. They only just got the s400, which is important because with a range of several hundred kilometers it can control the skies over Taiwan from land bases on the mainland. That probably want the s500 so they won thrushes to do their bidding at effectively be their vassal state at a hundred year horizon roughest population will have shrunk it’s even though Russian fertility has actually recovered a good deal, the pool of women of childbearing age fell so quickly that a decline is inevitable and that means that it’ll be the marginal areas like Siberia that lose the most population, so it’ll fall into Chinese hands. The Chinese set up to fight for it. They’re going to get it anyway. You swear well circle for me while while seeing paradox they all have the most strategic nation out there right now but at the same time you correctly demonstrated that they don’t know how to before intelligence. They’re rubbish at the close.

Why is that? There’s a lack of capital empathy. How can they be uber strategic with the One Belt One Road at the same time the further eight intelligence and all Chinese culture has been to push inward to take peach to take the periphery and force it inward and homogenize it with the single written language, with the ideograms because China had no interest in getting through the getting to the rest of all that reached natural natural borders by about 700 with the Tang dynasty.

They really didn’t have pressure to do so, China’s economic basis has always been agriculture never been a colonial power like the British. The Emperor had an annual ceremony where he put his hand on the plow, which say the son of heaven himself is symbolically a plough. It’s deeply embedded in Chinese history.

When you spend your entire childhood – I mean after the age of 11 or 12, if you know working four hours a day you can read 2,000 characters, perhaps that right mm maybe 1,500 to 2,000 and ames 11 means you can read a newspaper to get to 10,000 characters, which is high literate – you do everything else. The ability to learn languages phonetically that we have in the West is something that has never been developed as part of Chinese culture. That Roman polyglot or Greek polyglot capacity was simply never part of the culture.

The Chinese feel so drawn centripetal to their own culture that they simply don’t like living anywhere else. When they go to other countries they bring their own war teams, their own wheelbarrows, their own cooks, their own food that open next to the locals because they feel out of sorts. On the other hand, Chinese who as individuals emigrate er some of those adaptable people in the world from the Chinese diaspora has been remarkably adaptable both culturally and economically, so it is it is a it is a difficult contradiction to shyness.

Turkish relations were at a low two or three years ago because the Chinese believed with some justification that the Turks were supporting Uyghurs who were moving in large numbers to Syria, fighting in Syria, getting trained as terrorists. A lot of them. There was a route that went from China to Southeast Asia at the Yunnan Province. They go to Turkish consulates. They present themselves as Chinese. Turks get Turkish passports. Chinese officials locally the Turks had fifty thousand blank passports and their consulates to serve us the Uyghurs. Whether that’s true or not I don’t know but I think the Chinese actually believed that. They were very afraid of Uyghur terrorism.

Since then Erdogan has started behaving himself. He cracked out of the Uyghurs in Syria and Turkey. He’s not letting them travel back and forth without any fanfare. There been a very few reports in the media dothis Erdogan has completely exceeded two Chinese demands, so Erdogan’s national interest, his desire to gain independence from the West, has trumped his ethnic solidarity with his weaker cousins when our people.

Thank you very much for that comment. I deeply share your concern and if it weren’t for the fact that we’ve lost our moral compass, we wouldn’t be having these concerns at all to begin with, but I do. I certainly want trying to do the prosperous and to be a piece and to be secure. I don’t think the United States should attempt to break Taiwan off from China. I think the one policy one China policy simply is a banner of realism. I don’t like it particularly but I think that’s the way the cards are dealt. I don’t think we’re going to get any worth Tibet, so I don’t want to mess with that. I’m all for China being secured at U.S. borders.

However, it’s like steel in 1870 every European country. They don’t have high quality steel mills. You can’t make cannon. You’re dead militarily. If we lose our semiconductor industry, our edge in semiconductors militarily, we become a second-rate power and that has all kinds of terrible consequences, which are almost impossible to predict apart from the fact will be a great deal poorer as well, so I’m all for China being prosperous but I’ve I deeply want America to have a technological edge that’s tangible and keeps everyone afraid of us.

I very much believe if you want peace you prepare for war. Relatively little reserves of energy great day little cold not very much else. 25 million cars that are produced there now running. This is the imported fuel. Well, they’re turning coal into methanol. Well, they do have a huge potential for fracking, probably as large as the United States. Romney takes a lot of water in one hears stories that water is our premium and processes just get a Ford. There’s definitely true.

What do you hear about any plans actual investment going into it’s not my field? That’s a gray. It’s an excellent question. I wish I knew more about it. From what I’ve heard you’d have to construct a pipeline from the sea to bring in seawater because the air is where the shale deposits located or mountainous and extremely dry, so there isn’t any water source ready to have. That would be an enormous expense and the Chinese have to weigh that against, for example, building pipelines interruption. Well, a natural gas, which they’re doing and creating the pipelines to through Pakistan to the Indian Ocean, which would give him better access to Iranian and and belayed and Iraqi crude without going without the vulnerability of going through the Straits of Malacca, so I think the Chinese tension is much more an energy security, replacing the existing routes and increasing their supply from Russia that on fracking they also of course if announced that they’re going to eliminate the internal combustion engine entirely in China but what 2030. I wouldn’t take that too seriously but it is an important effort. They’re building nuclear power plants as fast as they can, several a year. That will not have a huge effect on their total energy output for several years to come but at a 15 year horizon it will make a very big difference. Further alarming they have a plan is beyond the One Belt One Road to build a grave. It connects the entire world including us is but which way do you pay the tolls.

Thank you for that. tTank you good for whom Xi Jinping is a very capable leader and his Chinese patriot is doing what he’s thinking thinks is best for his country in ways that in many cases I found repugnant in the extreme but I don’t propose to criticize and the Chinese are going to have to work out their own problems I think Trump trap is being set for the United States which is will make a fuss about aluminum tariffs and steel tariffs and dumping and various other things Chinese will kick and scream and negotiate and finally they’ll give in and Trump will of a great victory. We saved the American aluminum industry from Chinese dumping. We saved steel. Chinese officials told me why does Trump want to save all the industries who want to get rid of China is happy for us to be Brazil semi-finished goods and raw materials, so I think that’s what the habitus ocean is going to go and I think the first thing I would tell if I were trumpet here’s what I would tell Xi Jinping for the last 30 years you and the Russians have told us it would be unacceptable for us to develop and implement a space-based anti-missile system because he’d consider that a tenable change in balance of power like to acknowledge the presence here the distinguished political scientist Angela Kota Villa one of the world’s experts on this may want to say something more about it I would say see we understand your concerns but you loused up you let the North Koreans get out of control everybody was relying on you and look what a mess you made of it that leaves us no choice so as soon as I come back I’m going to announce the American people to the American people a Manhattan Project to develop a space-based anti-missile system to make the United States impregnable and if you don’t like it go jump on the belief system to sustain is that in China I know she is working hard to promote the per diem ideology and is thinking how vulnerable is it to a change such as that since it’s been said for so many years that is the great question Bob and the riddle wrapped in an enigma is the status of Chinese Christianity if ever a country were ripe for Christianity that would be China look at the late Roman Empire with tribes migrating disappearing losing their national identity losing confidence in their preworld gods well China’s a nation of my currency 600 million people have moved from countryside to the city it’s spiritually empty human beings do not do well in a spiritual vacuum but because the movement has been so subtle and so located it’s been a house church movement not an organized movement it’s extremely difficult to gather data on it there’s a recent book on Christianity in China a good book but entirely Anto almost impossible to get real data on this so that certainly could be a game-changer is not the right word for it that could be the transformational change that would that would make China an entirely different place but I’ve got no means to evaluate it I’ve been trying to learn about it for years and you only hear anecdotes because with very good reason Chinese Christians are keeping their heads down.

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