Transcription
So, Trump is in China. This happened about um 30 minutes ago, an hour south of us. So, Trump came in last night and this morning he met with President C at the Great Hall of the People. And let's just have a quick look. This is him getting out of his limousine. This was brought in from the United States by a military transport. He brought his entire cabinet including uh Marco Rubio, the secretary of state as well as Peter Hexev who is the secretary of war. Okay.
The last time an American president visited was 9 years ago, November 2017. So this is a very historical meeting. And as you may remember, after Trump visited Beijing, um they start the trade war and we've been in a trade war ever since. I think that this meeting is very optimistic for US China relations and a lot has to do with who came with Trump. So um this is from wayore the Chinese Twitter and what Chinese are focusing on is who came with Trump. So many of his family members came with Trump including his son Eric uh his daughter-in-law Lara um and they were excited about coming to China. Team China guys. Okay.
Much more important is the number of business executives who came with Trump. So you have Ellen Musk of Tesla and of course he does a lot of business in China. Tim Cook of Apple also does a lot of business in China. Boeing is trying to secure a $50 billion um sale to Chinese airlines. And so these are are three um very important business people. And then you have some of the leading financial people in America including Larry Frink of Black Rockck, uh Steven Schwarzman of Blackstone, uh Der Solomon of Goldman Sachs, you have Cityroup, you have Mastercard and Visa. Okay. And these are the leading financial companies in America. And altogether these business executives if you put all their net the company's net worth together their companies are worth over $12 trillion. That's a lot of money and these are very busy people and quite honestly I've worked in business negotiations. You do not bring these people together in one room unless you have a mega deal to announce to the world. Okay.
So my prediction is that um by tomorrow we should have the broad contours of a US China grand bargain where the two nations reconcile their differences and they start a new chapter uh in world history where they work together to stabilize the global economy. So, what I want to do today is discuss how we got here, why a grand bargain will happen, and what this grand bargain will look like. Okay. All right.
So, let's discuss some of the events that led to this uh meeting between C and Trump. This is David Lee from Twitter, okay? And he's he's talking about like the past month what happened. So, the first thing that happened is that China blocked Manis. Manis is an AI company uh that Mark Zuckerberg tried to buy and Manis was incubated in China and if you're an AI company you get become very successful you want to go United States because that's where all the money is that's where all the talent is that's how you become really really big but because it was um incubated in China said no you can't go to United States because this will set a bad president China is trying to grow its own talent. So this shows um the AI war being fought between China and the United States. Okay, so that's one thing that happened.
Another thing that happened is that the US imposed sanctions on Chinese companies that do business with Iran, including satellite companies that sell commercial intelligence to Iran on where US bases are. um teapot refineries which take uh irritant oil and then convert it into energy that China can use. Okay. And in response, China said no, you cannot impose sanctions on us. If you impose sanctions on us and if people comply with these sanctions, then we the Chinese government will sanction these people as well. Okay, this this there this something called the blocking order. And this also seems like an escalation in the US China trade war where previously Chinese institutions, banks, individuals complied with US sanctions. And this is the first time the Chinese government said to Chinese people, if you're a Chinese citizen and you comply with US sanctions, then we will sanction you. Okay, so this is a very big deal. um Nvidia was not able to sell chips into China and this is going to affect Nvidia's bottom line. Okay, Nvidia is right now the world's the world's most viable company primarily because AI depends on their chips. Okay. um, China invited Iranian foreign minister Arai to Beijing because China is very interested in the outcome of this war between United States and Iran. Uh, right now um, Iran is blocking the show of Humus and China depends on 50 to 60% of its energy needs from the Middle East. Okay. um, Jet Hang was not on the China list. Okay. So before Trump took off, it was announced that Justin Hang, who is the head of Nvidia, would not come to China. And this is a very big deal because in this grand bargain, what China would want is access to Nvidia uh chips, semiconductors in order to fuel its AI. Okay. um the United States and six other nations had a war game in the Philippines and they're trying to send 28 warships. Okay. uh Trump sent Iran anou Iran make modifications and Trump said no. Okay. So it seems like the war will only increase in the Middle East. After Iran had responded, China announced Trump's state of visit. um and then uh yesterday and the day before, Hulong, who is the uh who was a vice premier in China, and Scott Bezen, who's a Treasury Secretary, met in South Korea to try to negotiate um a a deal. Okay. And then what's going to happen is that Putin will visit China after Trump leaves. So if you look at what's happening, it seems as though there's still a lot of friction between the United States and China. What I want to show you today is that all of this you can just ignore. Okay, this is all that's happening right now. But if we use game theory, if we just look at the broad contours of what's happening, we would make much better predictions as to what will happen. Okay. So all this I think is just theater. All right. The China and United States are not actually fighting AI war. It's all theater. They're actually working together to promote AI. um these sanctions are happening but eventually the US and China will come to a grand bargain and they will become much more economic integrated. And Iran, China doesn't really care about Iran. Okay. China cares first and foremost about um the relationship with the United States. And one piece of evidence for that is that when foreign minister Arachi went to Moscow, Putin met with him for for 90 minutes and Putin expressed his sympathy and support to the Iranian people. When Aranchi came to Beijing, he only met with his counterpart, the U foreign minister, Wangi. Okay. All right.
Uh, another important thing is that Scott Bezant is the one who is leading the US team in China. Scott Bezant is the Treasury Secretary. This goes against protocol because uh it's usually the secretary of state Marco Rubio and the national security adviser or who also happens to be Marco Rubio. This team is the one that sets the agenda for the US China visit. Because it's Scott Bessant, we can probably guess that this is probably going to be an economic negotiation and the focus is on will be on finance. Basically, what America wants is for China to open up its financial sector for companies like Black Rockck and Black Star to come in to sell financial instruments to Chinese people. Okay, that that's what America wants and we'll talk about more about this as as we go along. All right, let's continue. Okay, so in the geopolitical landscape, um it seems as though America is trying to contain China. So, uh this is Tran and this is what China is trying to do. China's trying to build a high-spe speed rail network from Beijing all the way across central Asia and into Europe. Okay, this is a land route that Beijing wants to take in order to maintain trade with Europe. As you can tell from this map, Tran is the pivot or the hub of this trade network. Okay, without Tran, Beijing could not access Europe. um it and then Moscow also sees Tran as very important as well for its north south trade axis. Without Tran, Beijing is completely reliant on Russia. Beijing does not want to become reliant on Russia. Beijing sees itself as the third axis of power in the world. All right? You have the United States, you have Russia, and then you have China. From a geopolitical perspective, China doesn't want to become partners with either United States or or or Russia. It it wants to become independent. It wants to create its own sphere of influence. Okay? And that's why Iran is very very important. So a lot of geopolitical analysts believe that Beijing is forced to support Iran in this war. And what I want to show you is that's not actually the case. All right. China's China may want to become independent of the United States and Russia, but it cannot actually. All right. um, now there's a rumor a couple of days ago that one deal that Trump and C will will sign in Beijing is Sidin Ping will commit $1 trillion $1 trillion investment into America primarily factories that manufacture EV cars. This is a huge deal. Okay. And Laura Laura uh Ingraham who works at Fox News, she thinks it's a bad thing. She thinks that this is about uh China coming in and trying to buy out the uh United States. As I'll show you later, this is Okay, I think this deal will happen. But this is a deal that shows that China is is ultimately dependent on America as opposed to China wants to take over America. Okay. All right.
So um how can we understand the Trump visit? Well again in this class what I want to show you is that historical analogies is a really powerful way to understand the present. So the Trump visit today is analogous to Nixon's visit in 1972. Okay. So you you you don't know this, but before 1972, America was hostile towards China primarily because of Taiwan where during the Chinese civil war, the Americans were very supportive of uh Chiang Kai and the KMT. They lost. They went to Taiwan. And when that happened, America said that first of all, we will only recognize Taiwan as the official government of China. Second of all, we will refuse to do any business with the PRC. And third of all, we will help Taiwan eventually try to take over uh uh China. 1972 when Nixon visited this marked a radical departure from 20 years of um American foreign policy. Okay. And the question then is why would he do that? And the answer is in 1971 the Nixon shock. So if you talk to historians, they'll give you lots and lots of different reasons as to why Nixon visited uh China. The main reason in their pers from their perspective is that um Harry Kissinger who is national security adviser to uh Richard Nixon, he was trying to triangulate uh between China and the Soviet Union, right? he was trying to get China on the side of the United States in order to um defeat the Soviet Union. That's not true. That's just something that historians made up. The real reason is that in 1971 Nixon removed the US dollar from the gold standard. And now the US dollar is worth nothing. Before you could take the dollar and change it for gold. Now it's worth nothing. If it's worth nothing, what to do now is create a demand for it. you basically have to create a Ponzi scheme. And so Nixon did two things to resolve this issue and create the US dollar Ponzi scheme. The first thing he did was create something called the petro dollar. Okay. The petro dollar is where Saudi Arabia and other Middle East countries like Qatar, UAE, they only sell their oil in US dollars. So now before the value of US dollars was pe was tied to gold, the gold standard. Now the value of US dollars is tied to oil. Okay? If you want to buy oil and everyone wants to buy oil, you need US dollars and there something called a petro dollar. Okay, that's the first thing. Second thing which is relevant to us is China. Okay, opening the strategy is to turn China into a manufacturing base for the global economy. Right? So the Middle East sells oil to the world but China now will sell manufactured goods to the world and China will also do so using US dollars and these two things together create um the current global economy. All right. Okay.
So what I'm going to do now is I'm going to explain to you um why America did this. Okay. um this something called the Shanghai communicate. This is published in 1972 and this basically spells out the basic premise framework for all future US China cooperation and dialogue. And the Shai framework basically resolves the Taiwan question. And with regard to Taiwan question, America practic strategic ambiguity. meaning the United States will not be clear about the issue of Taiwan with regard to China. So what the United States has been saying for a long time is we do not support Taiwan independence. Okay, that's a strategic ambiguity. China would prefer the United States to say we oppose Taiwan independence in which case United States is obligated now to prevent Taiwan from becoming independent. Okay, that's what China would prefer but United States practices strategic ambiguity saying we do not support. I would not be surprised if over the next few months Trump radically changes this attitude and declares that the United States is opposed to Taiwan independence. In fact, United States supports the unification of China and Taiwan. Okay, this would be a radical sea shift from previous administrations. And I'll explain why later on why Trump would do this and also why it's actually very strategic and smart for the United States to want to support Taiwan and China reinvig. Okay. All right.
So um let me explain now what the China US relationship really is using the theories that we've learned in this class. Okay. There's something that you will never learn that you will not learn anywhere else. And this is speculation on my part. Please take it with a grain of salt. Please question me. Please debate me. Okay? But this is my theory of how the US and China work together. And once you understand this theory, you can then go on to make certain predictions about how the United States and China will behave moving forward. And based on whether these predictions are correct or not, you can then figure out if this theory is correct or not. Okay. All right.
So the first thing to understand and something I've been teaching a lot in this class is that reality is a hallucination. It is something that we collectively imagine together. And again, the analogy, the metaphor I use is Plato's allegory, the cave, where you imagine about a million people chain together and they're all looking at a wall. Okay, this wall is empty. Behind the wall, behind the people is this great fire where the elite, okay, we don't know who they are, okay? But they project shadows onto the wall. And then the people who are chained don't know what's going on behind the scenes. They only see what's in front of them, which is the wall. They see these shadows and they start to create a reality around these shadows. They think these shadows are real and they think um and they create mythology, religion, an entire framework around these shadows. Okay? And this what we call reality. All right? So the main message here is that true wealth is our attention. The okay our consciousness is what's true wealth. In fact our consciousness is what's real. Everything else is an illusion. Everything else is is a shadow. Your body is a shadow. Okay? The person in front of you is a shadow. This blackboard is a shadow. What's real is the thing inside your head. The your consciousness is what's real. Now what power is is the capacity to direct and control this attention. Okay. How I exert power over you is by making you think the way I want you to think. By making you see what I want you to see. Okay? So I can make you see these shadows and make you think it's real. And that's what true power is. And this this idea once you understand it explains the reality that we live in. Okay? So I'm going to take this idea and apply it to reality and show you how it works.
So at the very basis of reality is the empire. Okay? It is the American empire that's able to force you to sit down and look at the wall. Then the people manipulating the fire, casting the shadows are the game masters and these are the financial elite. Okay, including the bank of financial settlements, uh the Federal Reserve, uh Wall Street, City of London, basically private capital. They together create the conditions for this game. They're able to direct our attention. Okay. And the mechanism they do this with is of course with capital. Okay. Or US dollars. And then from and again to create something called the global economy of course, right? The global economy. But in order for this game to work, it has to the game masters have to disguise the fact that they're really in charge. So they create institutions that pretend to be objective, international, and impartial and fair, but but are in fact controlled by the game masters. These are include include of course the UN, the WTO, uh the EU, U, the World Bank, okay? Lots and lots of these organizations. And then in order to justify and legitimize this system, in order to make you think these shadows are real, um they media education and culture brainwash you, indoctrinated you into the system is real when it's all just a a hallucination. Okay. And then from this of course you have uh the legal system to enforce the system as well as customs and habits values and norms. Okay. So this is enforcement mechanism to force you to believe that the system system is real. Okay. uh media, education, culture brainwashes you to believe the system is real and then you yourself want to enforce the system on others through customs and norms. Okay. Now this is a very fragile system because it's all just a hallucination. So there are enforcement mechanisms okay that make sure this system is stable and these enforcement mechanism are crime intelligence spies basically spy networks um and science. Okay. And they these three mechanisms are controlled by the true powers of this world. And they include transnational capital, basically private capital, secret societies and elite families. And what binds them together? They're basically software. The operating system is what we call the occult. Okay? And we'll say more about the occult later on. All right? Okay.
So, this is how the world is designed. Again, this is all a hallucination. One thing that you don't appreciate about the system is that from this hallucination, I can actually project myself onto another force and create another hallucination. Okay? And that's what Richard Nixon did. from this system in order to maintain the empire in order to maintain the supremacy of the US dollar. Okay, he created two new hallucinations and they are the GCC and China. Okay, GCC and China. All right. So what underpinned this system before was gold. The fact that US dollar could always be exchanged for gold. Once that's gone, then you need to create new two new hallucinations in order to disguise the the hallucination. Okay. So, what happened was that over the next few decades, this system will transport itself and impose itself on the GCC and China. Okay, this system here, it will impose itself into the GCC as well as China. In other words, and this is really important for you guys to understand, China is a hallucination of a hallucination. It's not real. Okay? I'll explain more about this later on. Okay? All right.
So once this hallucinate is imposed onto the GCC and China, this creates demand for the US dollar. Okay? And this creates certain stability for the US dollar and it made China very very wealthy. Okay? But it's all just an illusion. It's all just a mirage. There's certain problems with the system. First of all, China doesn't have any creativity. Okay? Why? Because if you're a hallucination of a hallucination, there's nothing for you to base yourself on. Okay? You're a shadow of a shadow. That's the first problem. Second problem is um wealth extraction. Okay. The idea here is that whatever wealth China Turner creates has to return to the source because the people inside China appreciate that the reming B its entire value is based on the US dollar. So you're going to have B or US dollar. Of course you want US dollar. Okay. And the third problem is the fragility of this system. Okay? Meaning that if this system the hallucination is unstable then China is even more unstable because it's a hallucination of a hallucination. Okay. Do you understand? Okay.
So once we understand this then we begin to re reassess what happened these past 10 years. Why do the United States and China fight this trade war? The reason why is that China believe that it could be independent of this hallucination. In fact, it could create its own hallucination. And the United States says no no guys no you're completely dependent on us. So then they start to fight this trade war. Once this trade war happened, what happened? A lot of money and people start to flee China and move back to United States. Okay. And now what China has recognized is okay first of all we can't actually leave this hallucination because if this hallusion were to collapse we collapse as well. So one of the thing we can do is actually to recouple okay to bind ourselves even greater to the system. Another way of saying this is that the US the global economy is under a lot of strain. There are two main beneficiaries of the global economy. The United States and China. So both are heavily invested in maintaining the illusion the hallucination that is the global economy. Okay? And to appreciate how fragile all this is, think of the UAE. Okay? The UAE. The UAE seemed as though it was a very prosperous place, right? It had universities from America like Georgetown, Cornell. It had people, the wealthiest people flocking to Dubai. It seemed invincible. But the moment you attack the UAE, like Iran just lobbs a missile at UAE, the illusion shatters. And now the UAE is gone. You understand? That's how pecurious these hallucinations are. One hit at the right spot, the entire illusion is shattered. You can never bring it back. Okay? And so that's what China is afraid of now. So that's why China and United States have to work together because what's important is to maintain the nature of reality itself. The worst thing that can happen is if people wake up from the stream. Because people wake up from the stream, everything collapses all at once. Okay. Does that make sense, guys? Any questions so far? Are we clear about this? Okay. All right.
So, how how now that we have this theory, let's talk about this idea concretely. Okay. All right. So, the United States used to be the world's most powerful manufacturing country. Okay. So, before it was the UK, then you have the United States. Okay. The United States is in the blue, right? And then it and then China surpassed it. This is intentional. Okay. The intention is to use manufacturing to extract the wealth of China and transfer it to America. Okay. So now China is the world's most powerful manufacturing country. Okay. And this this is a map that shows it better. Okay. Where China is now number one. United States has moved on number two. Japan and Germany are pretty flat. This is intentional. The intention is to bind China to the global economy, become dependent on the global economy and therefore save the global economy when it's under strain. Okay. One major consequence of this um uh of China's rise is the trade deficit between America and China. Okay? Unfortunately, this trade deficit is a natural consequence of um China's manufacturing ascent. Okay? Why? Because the purpose is to force China to buy more US dollars. Okay? In order to support the Ponzi scheme. So, this is a system that benefits the Americans. When Trump came into power in 2016, he said, "No, no, no, no. It shows that China is taking advantage of us and Trump doesn't really really appreciate that. No, it was designed this way. You you need to create demand for US dollars. If China is buying a lot of US dollars, that's a good thing, right? China's trading real assets, the energy of its people for fake assets, which is just US dollars. Okay? So, it's a great deal for America. But Trump said, "No, this is a bad deal." And this and this was what led to the trade war. Okay.
So what led to the trade war is the WTO. So in 1999, China negotiated to join the WTO, the World Trade Organization. And this is this is what's going to make China rich and the largest manufacturing power in the world. But in order to join WTO, China had to agree to a lot of conditions. The two most important conditions was protect IP. Okay, you have to protect other nations intellectual property and you have to enforce it. The other thing was open the financial sector. The goal is USD women be convertability. Okay. So these are the two things America wanted from China. First of all to ensure that all US IP would be protected in China vigorously. Second thing is to allow any Chinese to convert their money into US dollars. As you can appreciate these two demands actually bad for China. Okay. So China was not very stringent about protecting IP. This is what led to the rise of Huawei. Basically, Huawei can take Apple IP and make these great computers. So, in the year 2016, when Trump first came into power, Huawei computers were actually better than Apple computers because Huawei was was constantly innovating and they were trying to make their computers as cheap as possible whereas Apple was essentially a monopoly. Okay? And this led to United States imposing trade sanctions on Huawei because it was too competitive against Apple. The second problem is even worse because you think about it if you just open up your financial sector all the money in China runs off United States because Chinese appreciate that we are a hallucination of a hall of a hallucination. US dollars is more valuable mean it's based on US dollars. So wouldn't it make more sense to just convert oil into US dollars? But then of this would of course cause the collapse of the Chinese economy, right? So the the Chinese government would refuse to open the financial sector and that's what start the trade war in 2016. Oh, sorry, not 2016. In 2018, okay, 2018 is when the war actually started up to today. So for for the last eight years, this war has been going on because America is trying to protect its IP and and because America wants China trying to open up its financial sector. The reason why Trump has come to China, the reason why he's brought so many executives is because China has essentially agreed to open up its financial sector. Okay, I'll I'll discuss this later on, but you you have to appreciate how this war started and why and why it's going to end. All right.
Now, the thing about this war is that for the past eight years, China and United States have been attacking each other. There are two there are two main mechanisms in which China attacked the United States. The first mechanism is by restricting the supply of rare earth minerals to the United States because as you can see from this chart, China actually produces most of the rare earth minerals. Now you may not know this but actually rare earths aren't that rare. The problem is in the extraction. It is very expensive. It is very enormously costly. China is willing to pay pay these costs. the rest of the world isn't. That's why China has essentially a monopoly over lithium, cobalt, graphite and other rare earths that the EV industry, the solar industry, the semiconductor industry are highly dependent on. Okay, that's the first attack vector. Second attack vector is the China appreciates that China's value to the global economy is that it purchases a lot of US dollars. So then China start to buy more gold. Okay. So you can see how uh the US treasuries went down but then gold went way up. Okay. And so this is the way that China is trying to exert pressure on the United States. The problem is that China is much more vulnerable to attack than the United States. Okay. The United States is is a hallucination but China is a hallucination of a of a hallucination. The first thing to appreciate is that China's energy dependence is huge. China sp ways sorry China uses twice as much energy as America for its manufacturing sector in order to create exports. Therefore, China is vulnerable to embargos and sanctions. Okay? And so what America is doing right now with this war in the middle in the Middle East by um kidnapping Maduro in Venezuela is basically choking China off from its energy supply. Okay, that's one problem. Second problem is that China is very export orientated. Okay, so the entire economy is just basically on exporting manufactured goods cheaply to the rest of the world. And you can you can tell because most of the world's business ports are actually based in China. Okay. The business is Shanghai uh followed by um Singapore, Ningbo, Shenzhen, Chinga, Guangjo. Okay. So four four sorry five of the world's top six ex export hubs are based in China. That shows you China's dependence on exports. But if ch if America's controlling the seas and controlling choke points like the sh of Malaka and um the sh of hus and of joltar pan of canal this creates a huge problem for China. Okay. And the third thing is how much resources China uses. China in only three years time, okay, from 2011 to tw 2013, use more cement than America did in a 100red years. That's crazy to think about. All right. So this shows you how dependent China is on the global economy. It it also shows you how dependent China is on the USD. Okay? It's only because the women be can be exchanged for the USD that allows China to purchase so many resources from um abroad. All right. The reality is that China is too dependent on America. This is something that Chinese policy makers have been have been trying to change for the past 10 years. It doesn't work. Because what Chinese policy makers don't understand is that you're a hallucination of a hallucination. Okay? You only exist because America created you. All right? So this is consumer confidence. You can see um so 2018 is when the trade war started. Okay? And at this time uh people are still okay. They're still bearing the brunt of it. But then co happened, right? Right? And then you saw this massive drop and it never really recovered, guys. All right? It never really recovered. Consumer confidence. People don't believe the economy is doing well. People are not willing to buy things. People aren't working. People are losing income. Right? The economy is not doing well. At the same time, this is really interesting. more and more Chinese students are choosing to study abroad. Even as the economy is failing, even as though there are less and le less opportunities to do well in China, more and more Chinese are going to America to study. And guess what? Not the very best are not coming back. Okay? There's a gap of about a million students who stay in the west and these are often the very best students. All right? So I hate to say this but if you're hallucination hallucination you're anxious you want to go back to the source right so you know the is based on US dollars if you can change your for dollars you will do so if you can flee the country immigrate abroad you will do so all right this is a pretty stark data okay so um This shows you the current account balance. Current account. Current account just basically means how much Chinese Chinese have in the bank due to trade. This um is the trade account. Okay. How much Chinese actually traded. The the blue tracks the current account. Okay, how much Chinese have in the bank because of the trade. The red tracks the actual trade. Okay, as you can see for most of China's history up until about, you know, uh 2022, it tracks pretty closely. But starting in 2022, there's this divergence, a huge divergence. You're talking about5 $500 billion a year, guys. Why is this happening? Capital flight, money laundering. People are using exports in order to move their money out of the country. It's a very it's a very simple thing where okay, maybe um uh I buy a refrigerator from you, right? It should be $500. We agree $500, but you charge me $1,000. Why? Because then you take the $500 and you put that money on my behalf into a US real estate. You buy property or buy stocks from me. Okay, does that make sense? This all just money laundering. Okay, so in other words, what's really driving China's export mania? A lot of it is money laundering as people try to flee the country. Okay, so this is not good for China. All right. um, another major problem in China is the household savings rate where it's the highest in the world. Okay, the highest in the world. Why is chi why are Chinese um savers why are they saving 40% of their income? Well, a lot of reason is because Chinese aren't that wealthy. Okay. So, even though the Chinese economy has bmed these past 30 to 40 years, the Chinese individual has not seen a huge improvement in his um standard of living. Okay. And so there is not a great confidence in the future and that's why Chinese save a lot of their money and there aren't that many actual that that many investment vehicles as well. So from a US perspective, this is a great opportunity, right? If Chinese are saving all this money, if you're a financier, if you're like Blackstone or Black Rockck, you're like, why not give it to me and I'll invest the money for you and give you bigger returns, right? This is why they're here in China because they want this. They want all that capital stored in in Chinese banks, not doing anything. They're like, give it to us and we'll make you more money. Okay. All right. um, so this shows you the capital account. All this is saying is that you can't actually convert your room B into other currencies. So most countries have full uh open capital accounts. Okay. the the black um is most countries. The bottom quarter of nations have closed accounts and China is part of the uh quarter that have closed accounts. Okay. So, Chinese can actually take their money and leave the country. Okay. So the other thing that I want you guys to understand is from a US perspective, there's still a lot of potential in China. And the reason why is China still has a lot of debt capacity. Debt capacity just means your ability to carry debt. Why? Because China doesn't have much debt relative to other nations. Look at this. Okay, China in terms of like assets and liabilities don't have much investment abroad. You compare that with like other countries like Japan, United States, Germany, United Kingdom, they have a lot invested abroad. China doesn't have that much invested abroad. So in theory, you can encourage the Chinese to buy more things abroad, which would which would help the global economy, right? In theory. Now what's interesting is that China doesn't invest much abroad relative to other rich nations but China doesn't invest much abroad relative to all nations. Okay, so this is China it's about the same as India which doesn't have that much capital then like if Indonesia, Turkey, Mexico actually invests more abroad than China does. Brazil, Russia, Saudi Arabia invests a lot. South Africa invests a lot more than China. Okay. So again from a US finan financial perspective, China is a last great opportunity in the world. That's why they're coming here. Okay. They want to strike a deal where they can financialize the China the Chinese economy. Basically use uh the Chinese economy as collateral to engage in financial speculation everywhere in the world. Okay. Okay.
So, let me explain how they're going to do so. All right. So, China has a closed capital account. Why do you have a closed capital account? Because you know for a fact that if you open it, Chinese take the Ring B and convert it all into US dollars. All right? And that causes your economy to collapse. your bank system to collapse. So, so what's the solution here? Okay, first of all, what we need to understand something and this is like really important for you guys to appreciate. Banks create money out of thin air. Okay? Money is just an illusion. So the example is let's just say you're a depositor and you put a million dollars into a bank. Okay? And the way the bank makes makes money is by lending to entrepreneurs, right? So you then as a bank you give a million dollars a loan to an to a restaurant entrepreneur. Okay? And this is how banks work. And you think that okay well if the pot put a million dollars in the bank the bank then loans it to the to the restaurant entrepreneur then in theory the bank should have zero in the bank right no the bank now has $2 million okay the banks are allowed according to accounting they're allowed to create money every time they issue a loan So, not only they keep that million dollars from the depositor, but they also are able to print a million dollars to give to the restaurant entrepreneur. Does that make sense to you guys? Okay. Do you guys want want to know why this is the case? Okay, I'll tell you anyway. Okay. All right.
Okay. So, before what were what were banks? Banks were just merchants. Okay. a merchant alliance. Why? Because merchants needed capital in order to trade. So they came together and create their own bank. Okay? So they were an alliance. And so what merchants would do is basically deposit their gold into this alliance so that they can be distributed elsewhere. Okay. Now the problem with gold is that it's heavy. It's hard to transport. It's also dangerous because they're pirates. Okay. So the way that they use the way that they use gold in order to create um um exchanges in order to create business is they use receipts. Receipts or contracts. So rather than me give you the gold physically, I just give you a piece of paper saying that I guarantee that this paper can be redeemed for gold at my bank. Okay? Does that make sense? All right. And then you have to keep track of these exchanges. So the reason call double entry bookkeeping which is basically assets and liabilities. Okay. And that's double entry book bookkeeping something that we still use today. So let's just say I have a million dollars in gold. Okay. Well that's easy. I just put it into assets. Right. Okay. Then someone comes and says, "I need I need to borrow a million dollars of gold." I'm like, "Fine, I'll give you a receipt for it." Not a problem. My problem is, do I put the receipt in liabilities or assets? Assets, of course, right? And that's how the system works. And it's system we still use today. That's why banks are allowed to create money out of thin air because of double entry bookkeeping. Okay. Are you guys clear clear about this? Yeah. >> Is it because that the banks have powers to print money when they uh make loans or because I think like if some people deposit their money into the bank and the bank need to give it back it might be lie into the liability. >> Okay. All right. All right. You don't you don't understand what's going on. Okay. All right. Listen, it's it's not that hard, okay? I have gold. I put the gold into the bank. People come to borrow the gold, right? Then I give a paper saying this is gold. Basic it's it's money. Okay. Money. Okay. Is this money a debt or a liability? It doesn't make sense. It doesn't make sense as a liability because I don't owe that thing. Okay. And the fact that I can use this money in order to create more money creates means it's an asset. Okay. Does that make sense? All right.
So, so now this becomes a basis of the global banking system. All right. So, what happens is this. You have these banks in America, in the world. They're private banks. They're run by private people who put all their money in the banks. Okay, you got the US government. You have the government. Okay, US government does not have any money. The US government wants to borrow money. The question then is like how do you borrow money? If you borrow money from these banks individually, that's too hard. Okay. So, what happens is this. What happens is in 1913 the banks got together and create something called the Federal Reserve. All right. Federal Reserve don't it's not hard. It's just a cartel of federal banks in America. Okay. Do you understand? Now the government can just work for the Federal Reserve and borrow money directly from the Federal Reserve which represents all the banks in America. Okay. So, how does the US government sell like borrow money from from the Federal Reserve? It issues bonds. That's called US treasuries. Okay? So, the Federal Reserve can print money to buy US treasuries and then this money goes to US government and US government can then pay for expenses. Okay? Does that make sense? All right. Now, this system is fine. The problem is that the US government spends a lot of money. It fights wars. It wants to send man to the moon. It wants people to have a good life. Okay? So, today America has $39 trillion in debt. And you're like, well, who cares? Well, the problem is this. The problem is the interest rate, which is about 5%. Okay. To because in order to get the Federal Reserve, these private banks to lend you the money, you have to give them an interest rate. Otherwise, why would they give why would they lend you the money? Right? Okay. So, in other words, 5% means that the US government has to pay the Federal Reserve $2 trillion a year. Where's that $2 trillion a year? It has to borrow more money from the Federal Reserve. All right. So this system is really really unstable. So now your problem is like how do I solve this problem? You solve this problem by getting more people to buy US treasuries. Okay? Does that make sense? All right. So you can get governments to buy US treasuries including the Chinese government, the Japanese government, the the UK government. Okay. And that's what that's what what's been happening. The problem is they only have a certain amount of money they can borrow. So how do you get rid of this problem? You get you get rid of this problem by getting more people to buy um US treasuries. And who are these people? Everyone in the world. You, me, everyone in the world. Okay. This is what we call retail. So previously it was only institutions that want to buy US treasuries and what they what what the strategy now is get everyone to buy US treasuries. How you create a new financial mechanism called stable coins. Okay. Stable coins and and the two most popular stable coins are something called tether and circle. Okay. And the idea is very simple. The idea is stable coins are backed by US treasuries. Meaning tether and circle have to buy US treasuries in order to sell stable coins. And they can sell stable coins to anyone and everyone. Okay, including in China which has 40% savings rate. How through institutions like um Apple, Black Rockck, Visa. Okay, does this make sense? Now you get around the problem of the closed capital account. Closed capital closed capital account means you cannot use rubing B to buy US dollars. But with stable coins, you can use now use B to buy tether or circle. Do you understand? Okay. So now what the US government is going to do is they're going to transfer that debt onto the Chinese people. Okay. Okay. And so you're like, "Okay, wait, wait a minute here. $39 trillion is a lot of money, man. Chinese people don't have $39 trillion. Ch America will never ever get rid of this debt. Okay? But there's a mechanism American can use to control this debt. And this that and this is called financial repression. How does this work? Very simple. Okay. So, um US treasuries are at 5%, right? Really simple. I'm going to make this 0% guys. And you're like, "Wait a minute here. No, no, no, no. I don't understand this. If it's at 0%, I'm not going to buy US treasuries." The answer, the solution is I'll make you buy it, guys. Okay? I force you to buy it. How do I force you to buy it? By passing laws called the Genius Act and the Clarity Act. which compels stable coins to use US treasuries as a basis of their digital currency. And again, remember if you're Chinese, if you can keep at 5% a year or US dollar at 0% a year, what do you choose? You choose the US dollar at 0% a year. Does that make sense, guys? Okay. So, that's the solution. financial repression where I drop the
Interest rate of US treasuries to nothing, which case inflation will destroy the debt over 50 years. And I force people to buy it by passing laws that force companies to back the digital currency with US treasuries. Forcing them buy US treasuries. Doesn't make sense, guys. Okay.
And why and why do they do want to do this? Because now they can access a Chinese consumer. They can sell digital currency to Chinese consumers. That's the grand plan. Okay? And you're like, "Okay, wait a minute here. Why would China agree to such a stupid deal?" Well, there are actually lots of reasons. Okay.
The first major reason is Taiwan. Okay. So again, the United States doesn't really need Taiwan. Taiwan is over here. And what Taiwan does that's very important for you for United States strategically is it blocks China from the Pacific. Okay. Something called the first island chain. It's part of the first island chain. It that's in the blue. So that's why Chinese American policy makers think Taiwan is important. But you think about it, okay? If you're American, you're like, "Wait a minute here." Okay, let's just say I lose Taiwan. Let's say I say to China, I want Taiwan to return to the motherland. Okay, what happens now? Well, now you create a problem because Taiwan now can block this area. Okay, it can separate Southeast Asia into two parts. South Korea and Japan on one part, the Philippines, Southeast Asia, Singapore another part. Okay, do you guys see this map? You can now divide Southeast Asia into two. This is important. Why? Because guess what? Japan, South Korea gets most of their energy through the SH of Malaka. You basically block off South Korea and Japan from a lot of the global economy. In which case, there's absolutely no way in hell South Korea and Japan agree to let Taiwan return to China. Doesn't make sense. So, by saying by United States saying, "Hey, I want China and Taiwan to marry again." What you've done is you've now transferred the power from you, the United States, to South Korea and Japan. You understand? That's why strategically it makes perfect sense for Trump to say Taiwan belongs to China. Okay. Okay.
So, Taiwan issue problem is solved. Now there's another there's another issue in that China as we discussed is very dependent on energy and food from South America. Okay. So you can see this is South America and you can see all these projects in the yellow that China is building. Okay. So the pink is something that's already built or under construction. The yellow are planned. It's these are huge projects. Okay. So what America has done is basically taken over Venezuela. Hey, and Trump announced this like I think two days ago. We're going to make Venezuela the 51st state. What why why would we want to do that? Because now he blocks China from South America. And if you look at this map, this tells you any energy supply. Okay? So if you so this is war in the Middle East which means that the Middle East you can forget about. So China now can get energy from Russia or the Western Hemisphere. China doesn't want to depend entirely on Russia. China will buy more Russian oil but it does not want to become entirely dependent on Russia. Also Russia cannot actually meet all of China's energy needs. Okay. So now China is forced to negotiate with the United States to have access to the to the western hemisphere. Does China care? The answer is no. China only cares about stability and price. Stability and cost. I want to get things at a fair price and I want this to be a stable and predictable relationship. If I'm trying to I would prefer if America control the entire western hemisphere because now I can I I can just negotiate with one government as opposed to like all these other governments many of whom are corrupt. Does that make sense guys? So would China agree to this? Absolutely. China has actually no problem with America controlled in the Western Hemisphere if it means stability and cost are controlled. Okay. Does it make sense to you guys? Okay. Okay.
Um, yeah. >> But does China hold attitude like about America controlling Venezuela because like using morals like they said they >> No, no, no, no, no, no, no. >> Will they do this? >> China doesn't care. I don't guys don't talk about sovereignty, right, morality in this class, okay? It's all game theory. I don't care about these things. Game theory is people are going to behave in their best interest. It's that simple. Okay. No morality, no human rights, no sovereignty. All right. Okay. So, China doesn't care who controls Venezuela as long it's a stable place where China can get cheap oil. It doesn't make sense. Okay. All right.
The last thing is AI. Okay. All right. So, as you can see, the United States is the world's leader in II simply because it has the most data centers. In fact, America plans to build more and more data centers. China is trying to compete, but its data center development is constrained by the fact that it has limited access to semiconductors, to chips. And so China wants more chips from the United States and the United States can say yes. But you're like, "No, no, no, wait, wait, wait, no, no, no. Doesn't that mean that China could one day overtake the United States?" Could China just reverse engineer and steal the IP from these semiconductors? No. That's not how semiconductors work. Semiconductors are so sophisticated that it's an entire global supply chain. Okay. These semiconductors are designed in California. Then they are sent to Taiwan to be manufactured. Then they're sent onto the Philippines to be value added. Then sent to China to be added to components. Then they're sold to Europe. And all the while you have to extract resources from Africa, from South America in order to feed these semiconductors. Do you understand? So in other words, there's actually no way that one nation, only one nation can control the entire supply chain. So as long as America can control the trade network, America will always have the advantage in semiconductors. Okay? There's actually no way China can reverse the production of the semiconductors because it's too sophisticated. It's too expensive. Only only one country can specialize only one field. Okay? Doesn't make sense. Okay?
So that's why this guy is important. Okay. Jensen Huang or Nvidia before he was not supposed to come to China. Okay. It was announced he was not coming to China. Then as Trump was flying through Alaska to refuel, he got on board in Alaska. It was a last minute addition. But not only that, but there were two business people that were with Trump on his plane. Alan Musk and Jen Huang. Okay. So what happened? So I work in business negotiation. I'll tell you exactly what happened. What happened was that Scott Bessant and Hulong they were negotiating this grand bargain just the contours of this grand bargain in South Korea. China wants first and foremost Nvidia chips. Scott Besson wants first and foremost access to the Chinese financial market. Okay, there was there was impass. So Trump just basically said I'm not I'm not going to bring this guy. Okay. And then as Trump was going to come to China, there was a breakthrough and Trump's like, "Okay, as a sign of goodwill, I will now bring him." Okay, that this how business negotiations work. This is confusing for people because usually we don't want business people to run politics to run diplomacy because they are unpredictable. Okay, but this is how business negotions work. All right.
So this is just the uh basic framework for how the US grand bargain will turn out in my opinion. Okay. So to summarize what China wants is access to cheap energy of the western hemisphere. It wants Nvidia chips to fuel its AI. Um um and it wants access to the US market. Okay. Those those are three things that China wants. America wants access to Chinese financial markets. Basically, it wants Chinese consumers to buy stable coins in order to finance the US debt. It wants to better control China's AI development. Why? Because with AI, China and America are not competitors. They're partners. Because as I told you last class, the entire entire part of AI is to create a surveillance state. Okay. Now, America has technology, but China has a lot of people and there's no privacy here. So, in other words, what what America can do is use China as a lab in order to test out surveillance technology that you could not test out in America. Okay. So, America wants access to China's uh AI market. And the third thing that um America wants is Chinese manufacturing. Why? Because Chinese man manufacturing is the best in the world. So, not only does America want China to continue manufacturing in order to buy US dollars, but also wants to import manufacturing, Chinese manufacturing into America and to Venezuela as well, right? Because Venezuela has all these resources that can be extracted and into manufactured goods. The Americans don't want to do it because it's too expensive. It's too hard work. But the Chinese will do this. Okay? So this is what the grand bargain will look like. Any questions? Okay. So these are predictions. This is the way I see I see the situation and we'll know in a couple couple days if I'm right or wrong. Okay. So we'll talk next week.