So Trump is in China. This happened about 30 minutes
ago, an hour South of us. So Trump came in last night and
this morning he met with President Xi 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 Marco Rubio, the
Secretary of State, as well as Peter Heckstev, who is the
Secretary of War. The last time an American
president visited was nine years ago, November 2017.
So this is a very historical meeting.
And as you may remember, after Trump visited Beijing, 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. A lot has to do with who came
with Trump. So this is from Weibo, 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, his start in law,
Lara, and they were excited about coming to China.
Team China guys. OK.
Much more important is the number of business executives
who came with Trump. So you have Elon 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 sale to Chinese
airlines. And so these are are three very
important business people. And then you have some of the
leading financial people in America, including Larry Fink of
BlackRock, Steven Schwartzman of Blackstone, Derek Solomon of
Goldman Sachs, You have Citigroup, you have MasterCard
and Visa, OK. And these are the leading
financial companies in America. And all together 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 one room unless you
have a mega deal to announce to the world.
OK, so my prediction is that by tomorrow we should have the
broad contours of AUS China grand bargain where the two
nations reconcile their differences and they start a new
chapter 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 Greg bargain will happen, and
what does Greg bargain will look like.
OK. All right.
So let's discuss some of the events that led to this meeting
between XI and Trump. This is David Lee from Twitter.
OK. And he's he's talked about like
the past month. What happened?
So the first thing that happened is that China blocked Menace.
Menace is an AI company that Mark Zuckerberg tried to buy and
Menace was incubated in China. And if you're an air 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 it was
incubated in China, China said no, you can't go to United
States because this was set a bad president.
China is trying to grow its own talent.
So this shows the AI war being fought between China and the
United States. OK, 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, teapot
refineries which take Iranian oil and then convert it into
energy that China can use. OK.
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.
And this is 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 U.S. sanctions. And this is the first time the
Chinese government said to Chinese people, if you're a
Chinese citizen and you comply with U.S. sanctions, then we
will sanction you. OK?
So this is a very big deal. NVIDIA was not able to sell
chips into China and this is going to affect Nvidia's bottom
line, OK? Nvidia's is right now the
world's the world's most valuable company, primarily
because AI depends on their chips.
OK China invited Iranian Foreign Minister Arachi to Beijing
because China is very interested in the outcome of this war
between United States and Iran. Right now, Iran is blocking of
Hormuz and China depends on 50 to 60% of its energy needs from
the Middle East. OK, Jezhen Huang was not on the
China list. OK, So before Trump took off, it
was announced that Jezhen Huang, who is the head of NVIDIA, would
not come to China. And it's a very big deal because
in this grand bargain, what China would want is access to
NVIDIA chips, semiconductors in order to fuel its AI.
OK, the United States and six, seven nations had a war game in
the Philippines and the China sent 28 warships, OK?
Trump sent Iran an MOU, Iran make modifications and Trump
said no. OK, So it seems like the war
will only increase in the Middle East after Iran had responded
trying to announce Trump's state of visit.
And then yesterday and the day before, Holy Fung, who is The
Who is a vice premier in China, and Scott Benson, who's the
church secretary, met in South Korea to try to negotiate a
deal. OK.
And then what's going to happen is that Putin will visit China
after Trump leaves. So if you just 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, OK? 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.
OK, so all this, I think it's just theater, all right?
China and United States are not actually fighting AI war.
It's all theater. They're actually working
together to promote AI. 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. OK.
China cares first and foremost about the relationship with
United States. And one piece of evidence for
that is that when Foreign Minister Arachi went to Moscow,
Putin met with him for 90 minutes and Putin expressed his
sympathy and support to Iranian people.
When Iraqi came to Beijing, he only met with his counterpart,
the foreign Minister, Wang Yi. OK, All right.
Another important thing is that Scott doesn't is the one who is
leading the US team in China. Scott Doesn't is the Treasury
Secretary. This goes against protocol
because it's usually the Secretary of State, Marco Rubio,
and the national security advisor, who also happens to be
Marco Rubio. This team is the one that sets
the agenda for the US China visit because it's God pleasant.
We can probably guess that this is probably going to be an
economic negotiation and the focus is on we're going to
finance. Basically what America wants is
for trying to open up its financial sector for companies
like BlackRock and blacks sort of come in to sell financial
instruments to Chinese people. OK, That that's what America
wants and we'll talk about this as we go along.
All right, let's continue. OK, so in the geopol landscape,
it seems as though America is trying to contain China.
So this is Tehran and this is what China's trying to do.
China's trying to build a high speed rail network from Beijing
all the way across Central Asia and into Europe, OK.
This is a land route that Beijing wants to take in order
to maintain trade with Europe. As you can tell from this map,
Tehran is the pivot or the hub of this trade network, OK, It
well, Tehran, Beijing could not access Europe.
And then Moscow also sees Tehran as very important as well for
its NS trade axis. Without Tehran, 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 ninth stage, you have Russia, and then you have
China. From a geopolitical perspective,
China doesn't want to become partners with either the United
States or or, or Russia. It wants to become independent.
It wants to create its own spirit of influence.
OK. 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's may want to become independent of the United
States and Russia, but it cannot actually.
All right. Now, there's a rumor a couple of
days ago that one deal that Trump and XI was signed in
Beijing is Xi Jinping will commit $1 trillion, $1 trillion
investment into America, primarily factories that
manufacture EV cars. This is a huge deal, OK?
And Laura, Laura Ingraham, who works at Fox News, she thinks
it's a bad thing. She thinks that this is about
China coming in and trying to buy out the United States.
As I'll show you later, this is retarded, OK?
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.
OK, All right. So 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. OK, so 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 supportive of Chiang Kai shed 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 China. 1972, when Nixon
visited, this marked a radical departure from 20 years of
American foreign policy. OK.
And the question then is, why would he do that?
And the answer is in 1971, the Nixon shock.
So we talked to historians, they'll give you lots and lots
of different reasons as to why Nixon visited China.
The main reason in their from that perspective is that Henry
Kissinger, who is national secret advisor to Richard Nixon,
he was trying to triangulate between China and specific
union, right? He was trying to get China on
the side of the United States in order to defeat the Soviet
Union. That's not true.
That is something that historians made-up.
The real reason is in 1971, Nixon removed the US dollar from
the gold standard, and now the US dollar is worth nothing.
Before, you could take the US 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.
OK, The Petro dollar is where Saudi Arabia and other Middle
East countries like Qatar, UAE, they only sell their oil in U.S.
dollars. So now, before the value of U.S.
dollars was tied to gold, the gold standard.
Now the value of U.S. dollars is tied to oil, OK, If you want to
buy oil and everyone's buy oil, you need U.S. dollars.
And there's something called the petrodollar, OK, That's the
first thing. Second thing which is relevant
to us is China. OK, 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 U.S. dollars.
And these two things together create the current global
economy. All right, OK, so.
What I'm going to do now is I'm going to explain to you why
America did this, OK, this, I'm going to call it Shanghai
Communique. This is published in 1972 and
this basically spells out the basic premise framework for all
future US China cooperation and dialogue.
And the SHINE framework basically resolves the Taiwan
question. And with regard to Taiwan
question, America practicing call 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, OK, that's our strategic ambiguity.
China would prefer the United States to say we oppose Taiwan
independence, in which case the United States is obligated now
to prevent Taiwan from becoming independent.
OK, that's what China would prefer.
But the United States practices strategic ambiguity, saying we
do not support. I wouldn't be surprised if over
the next few months, Trump rapidly changes this attitude
and declares that the United States is opposed to Taiwan
independence. In fact, the United States
supports the unification of China and Taiwan.
OK? This would be a radical C 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 reinvocation, OK?
All right, So let me explain now what the China US relationship
really is, using the theories that we've learned in this
class, OK? 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. We're going to salt.
Please question me. Please debate me.
OK, 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. OK.
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 of The Cave, where you imagine about a million people
change together and they're all looking at a wall.
OK, There's walls empty behind the wall.
Behind the people is this great fire where the elite, OK, we
don't know who they are, OK, 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 and they create mythology, religion, an
entire framework around these shadows, OK.
And that's what we call reality. All right, So the main message
here is that true wealth is our attention.
That OK, our consciousness is what's true wealth.
In fact, our consciousness is what's real.
Everything else is as an illusion.
Everything else is is a shadow. Your body is a shadow, OK?
The person in front of you is a shadow.
This blackboard is a shadow. What's real is the thing inside
your head. Your conscience is what's real.
Now, what power is, is the capacity to direct and control
this attention. OK, How is your 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, OK?
So I can make you see the shadows and make you think it's
real. And that's what true power is.
And this idea, once you understand it, explains the
reality that we live in. OK?
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, OK, and it's the American Empire that's able to
force you to sit down and look at the wall.
Then the people manipulating a fire, casting shadows are the
game masters. And these are the financial
elite, OK, including the bank, financial settlements, the
Federal Reserve, Wall Street, City of London, basically
private capital. OK.
They together create the conditions for this game.
They're able to direct our attention, OK.
And the mechanism they do this with is of course with capital,
OK, or U.S. dollars. And then from, and then again we
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 in fair but out of fact control by
the game masters. These are include, of course,
the UN, the WTO, the EU, the World Bank, OK, lots and lots of
these organizations. And then in order to justify and
legitimize this system, in order to make you think these shutters
are real, they media, education and culture brainwash you,
indoctrinate you into doing this system is real when it's all
just a hallucination, OK. And then from this, of course,
you have the legal system to enforce the system as well as
customs and habits, values and norms, OK?
So this is an enforcement mechanism to force you to
believe that the system is real, OK?
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.
OK, now this is a very fragile system because it's all just a
hallucination. So there are enforcement
mechanisms, OK, that make sure this system is stable.
And these enforcement mechanisms are crime, intelligence, spies,
basically spy networks and science, OK?
And they, these three mechanisms are controlled by the true
powers of this world. And they include transnational
capital, basically private capital, civil societies and
elite families. And what binds them together.
They're basically software. The operating system is what we
call the occult. OK.
And we're saying about the occult later on.
All right. OK.
So this is how the world is designed.
Again, this is all hallucination.
One thing that you don't appreciate of the system is that
from this hallucination, I can actually project myself onto
another force and create another hallucination, OK?
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, OK? He created 2 new hallucinations
and they are the GCC and China. OK, GCC and China.
All right, So what underpinned this system before was gold, the
fact that U.S. dollar could always be exchanged for gold.
Once that's gone, then you need to create new 2 new
hallucinations in order to disguise the the hallucination.
OK, So what happened was that over the next few decades, this
system will transport itself and impose itself on the GCC and
China, OK? This system here will impose
itself into the GCC as well as China.
In other words, and it's really important for you guys to
understand, China is a hallucination of a
hallucination. It's not real.
OK? I'll explain more about this
later on, OK? All right.
So. Once this illusion is imposed
onto the GCC in China, this creates demand for the US
dollar, OK, And this creates certain stability for the US
dollar. And it made China very, very
wealthy. OK.
But it's all just an illusion. It's all just a mirage.
There's some problems with this system.
First of all, China doesn't have any creativity, OK?
Why? Because if you're a
hallucination of a hallucination, there's nothing
for you to base yourself on, OK? You're a shadow of a shadow.
That's the first problem. Second problem is wealth
extraction, OK? The idea here is that whatever
wealth trying to create has to return to the source because the
people inside China appreciate that the rimming B, its entire
value is based on the US dollar. So you're going to have rimming
B or U.S. dollar. Of course you want U.S. dollar.
OK. And the third problem is the
fragility of this system, OK? Meaning that if this system, the
hallucination, is unstable, then China is even more unstable
because it's a hallucination of a hallucination, OK?
Do you understand? OK, so once we understand this,
then we begin to re reassess what happened these past 10
years, why the United States and China fight this trade war.
The reason why is that China believed that it could be
independent of this hallucination.
In fact, it could create its own hallucination in the United
States says no, no, no guys, no, no, no, you're going to be
dependent on us. So then they sort of 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, OK.
And now what China has recognized is, OK, first of all,
we can't actually leave this hallucination because if this
hallucination would collapse, we collapse as well.
So one of the things we can do is actually to recouple, OK, to
buy ourselves even greater to the system.
Now we're saying this is that the US, the global economy is
under a large 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.
OK. And to appreciate how fragile
all this is, think of the UAE. OK, 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 has lost a missile at UAE, but the illusion
shatters, and now the UAE is gone, You understand?
That's how precarious these hallucinations are.
One hit at the right spot, the entire illusion is shattered.
You can never bring it back, OK. And so that's what China's
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.
OK. Does that make sense, guys?
Any questions so far? Are we clear about this?
OK, All right, so how how now that with this theory, let's
talk about this idea concretely, OK?
All right. So.
The United States used to be the world's most powerful
manufacturing country. OK, So before it was the UK,
then you have the United States. OK, And the United States is in
the blue, right? And then it and then China
surpassed it. It's intentional, OK.
The intention is to use manufacturing to extract the
wealth of China and transfer it to America.
OK, so now China is the world's most powerful manufacturing
country. OK.
And this is a map that shows it better.
OK. Where China is now #1 United
States has moved on #2 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.
OK, One major consequence of this of China's rise is the
trade deficit between America and China, OK?
Unfortunately, this trade deficit is a natural consequence
of China's manufacturing ascent, OK?
Why? Because the purpose is to force
China to buy more U.S. dollars, OK, in order to support the
Pontius scheme. So this is a system that
benefits the Americans. When Trump came into power 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 U.S. dollars.
If China is fighting a lot of U.S. dollars, that's a good
thing, right? China's trading real assets, the
energy of its people, for fake assets, which is just U.S.
dollars. OK, 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. OK, 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, OK, you have to protect other
nations intellectual property and you didn't force it.
And the other thing was open the financial sector.
The goal is USD women be convertibility.
OK, So these are the two things America wanted from China.
First of all, to ensure that all USIP would be protected in China
rigorously. Second thing is to allow any
Chinese to convert their money into U.S. dollars.
As you'd appreciate, these two demands are actually bad for
China. OK, 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, hallway
computers are actually better than Apple computers because
Huawei was constantly innovating and they were trying to make
their computers as cheap as possible, whereas Apple was
essentially a monopoly, OK. And this led to United States
imposing trade sanctions on Hallway 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 the United States
because Chinese appreciate that we are a hallucination of a of a
hallucination. U.S. dollars is more valuable.
I mean, it's based on U.S. dollars, so it wouldn't make
more sense just convert OMB into U.S. dollars.
But then of this would of course 'cause the collapse of the
Chinese economy, right? So.
The the transcript would refuse to open the finance sector.
And that's what started the trade war in 2016.
I'm sorry, not 2016 in 2018. OK, 2018 is when the war
actually started up to today. So for the last eight years,
this war has been going on because America is trying to
protect its IP and and because America was 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. OK, I'll I'll discuss this later
on, but 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, 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 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 herbs aren't that rare.
The problem is in the extraction.
It is very expensive. It is very rememberly costly.
China is going to pay these costs.
The rest of the world isn't. That's why China has essentially
a monopoly over lithium, cobalt, graphate and other rare earths
that the EV industry, the solar industry, the semiconductor
industry are heavily dependent on.
OK, 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 U.S.
dollars. So then China start to buy more
gold. OK, So you can see how the US
Treasuries went down, but then gold went way up, OK.
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.
OK, the United States is a hallucination, but China is a
hallucination of a hallucination.
The first thing to appreciate is that China's energy dependence
is huge. China waste.
Sorry. China uses twice as much energy
as America for its manufacturing sector in order to create
exports. Therefore, China is vulnerable
to embargoes and sanctions. OK.
And So what America is doing right now with this war in the
middle in the Middle East by kidnapping Mandarin, Venezuela
especially choking China off from its energy, energy supply.
OK, that's one problem. Second problem is that China is
very export orientated, OK? So the entire economy is just
basically on exporting manufactured goods cheaply to
the rest of the world. And you can tell because most of
the world's business ports are actually based in China, OK?
The business is Shanghai, followed by Singapore, Ningbo,
Shenzhen, Qingdao, Guangzhou. OK, SO44, sorry, five of the
world's top 6 export hubs are based in China.
That shows you China's dependence on exports.
But if if America's controlling the seas and controlling 2
points like the show of Malacca and the show of Hormuz and sort
of tribaltar pan of canal, this creates a huge problem for
China. OK.
And the third thing is how much resources China uses.
China in only three years time, OK from 2011 to 2013 used more
cement than America did in 100 years.
That's crazy to think about. All right.
So this shows you how dependent China is on the global economy.
It also shows you how dependent China is on the USD.
OK, it's only because the women B can be exchanged for the USD
that allows China to purchase so many resources from abroad.
All right. The reality is that China is too
dependent on America. This is something that Chinese
policy makers 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 the hallucination of a
hallucination, OK? You only exist because America
created you. All right?
So this is consumer confidence, you can see.
So 2018 is when the trade war started, OK.
And at this time, people are still OK.
They're still bearing the brunt of it.
But then COVID happened, right? And then you saw this massive
drop and they never really recovered, guys, right?
They 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 less 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
cleaned back. OK, 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'd 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 there will be a space on U.S. dollars if you can
change, you mean for your 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. OK, so this shows you the
current account balance. Current account.
Current account just basically means how much Chinese have in
the bank due to trade. This is the trade account.
OK, how much Chinese actually traded the the blue tracks the
current account OK, how much Chinese have in the bank because
of the trade? The red tracks, the actual
trade, OK, as you can see for most of Chinese history up
until, you know, 2022, it tracks pretty closely.
But starting in 2022, there's this divergent, a huge
divergent, you know, about $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, OK, maybe I buy a
refrigerator from you, right? It should be $500.
We're good for $500.00, but you charge me $1000.
Why? Basically you take a $500 and
you put that money on my behalf into AUS real estate.
You buy property or buy stocks from you.
OK, Does that make sense? It's all just money laundering.
So in other words, what's really driving China's export mania?
A lot of it is just money laundering.
That's people trying to flee the country.
OK, so this is not good for China.
All right, Another major problem in China is the household
savings rate, where it's the highest in the world.
OK, The highest in the world. Why is why are Chinese savers?
Why are they saving 40% of their income?
Well, a lot of reason is because Chinese aren't that wealthy.
OK, so even though the Chinese economy has boomed these past
30-40 years, the Chinese individual has not seen a huge
improvement in his sense of living.
OK. And so there is not a great
confidence in the future and that's why Chinese save a lot of
their money. And there are that many actual
that that many investment vehicles as well.
So from AUS perspective, this is a great opportunity, right?
If Chinese are saving all this money, if you're a financier, if
you're like blacks on a block, you're like, why don't you 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 Chinese banks not doing anything they like.
Give it to us and we'll make you more money, OK?
All right. 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 open
capital accounts, OK? The black is most countries, the
bottom quarter of nations have closed accounts and China is
part of the quarter that have closed accounts, OK?
So Chinese can actually take their money and leave the
country, OK. So.
The other thing that I want you guys to understand is from AUS
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 OK, China in terms of like assets and liabilities
don't have much investment abroad.
You can do that with like other countries like Japan, United
States, Germany, United Kingdom, they have a lot invested abroad.
China doesn't have that much investment abroad.
So in theory, you can encroach 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.
OK, so this is China. It's not the same as India,
which doesn't have that much capital.
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, OK.
So again, from my U.S. financial perspective, China is a last
grade opportunity in the world. That's why they're coming here,
OK? They want to string a deal where
they can financialize the China, the Chinese economy basically
use now the Chinese account has collateral to engage in
financial speculation everywhere in the world.
OK, 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
room B and convert it all into U.S. dollars, All right?
And that causes the economy to collapse, your bank system to
collapse. So.
So what's the solution here? OK, 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, OK? Money's just an illusion.
So the example is, let's just say you're a depositor and you
put $1,000,000 into a bank, OK? And the way the bank makes makes
money is by letting it to entrepreneurs, right?
So you then as a bank you give $1,000,000 a loan to an to a
restaurant entrepreneur. OK.
And. This is how banks work.
And you think that, OK, well, if the possible $1,000,000 in the
bank and the bank then loans it to the to the restaurant
entrepreneur, then in theory the bank should have zero in the
bag, right? No, the bank now has $2,000,000.
OK. The banks are allowed, according
to accounting, they're allowed to create money every time they
issue a loan so that only they keep that $1,000,000 from the
depositor, but they also are able to print $1,000,000 to give
to the restaurant entrepreneur. Does that make sense to you
guys? OK, do you guys want to know why
this is the case? OK, I'll tell you anyway.
OK. All right.
OK. So.
Before what were what were banks?
Banks were just merchants. OK, a merchant alliance.
Why? Because merchants needed capital
in order to trade, so they came together to create their own
bank. 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.
OK, Now the problem with gold is that it's heavy, it's hard to
transport. It's also dangerous because
they're pirates, OK, So the way that they use the way that they
use gold in order to create an 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. OK, does that make sense?
All right. And then you have to keep track
of these exchanges. So the person call double entry
bookkeeping, which is basically assets and liabilities, OK, and
that's double entry book bookkeeping, something that we
still use today. So let's just say I have
$1,000,000 of gold. OK, well that's easy.
I just put it into assets, right?
OK. Then someone comes and says I
need I need to borrow $1,000,000 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 so this isn't, this isn't we still use today.
That's why banks are allowed to create money out of thin air
because of double entry bookkeeping.
OK Are you guys clear about this?
Yeah. Is it because that the banks
have powers to print money when they 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 light into
the liability? OK, all right.
You don't you don't understand what's going on.
OK? All right, listen, it's not that
hard, OK? 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. Basically, it's money, OK?
Money, OK. 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, OK? And the fact that I can use this
money in order to create more money creates means it's an
asset. Does that make sense?
All right. So, so now this becomes a basis
of the global banking system. All right, so let me show you
how. 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 the money in the banks, OK?
You have the US government. You have the government, OK?
U.S. 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.
OK, So what happens is this what happens is 1913, the banks got
together and crazy, I'm called the Federal Reserve, All right?
Federal Reserve, it's at the heart.
It's just a cartel of private banks in America.
OK, Do you understand now they're just going to make it
just work the Federal Reserve and borrow money directly from
the Federal Reserve, which represents all the banks in
America. OK, So how does a curious
government set like, borrow money from from the Federal
Reserve? It issues bonds.
That's called U.S. Treasuries.
OK, so a Federal Reserve can print money to buy U.S.
Treasuries, and then this money goes to U.S. government and the
US government can then pay for expenses.
OK, Doesn't 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. OK, 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%, OK 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? Why would they lend you the
money, Right. OK, so in other words, 5% means
that the US government has to pay the Federal Reserve about $2
trillion a year, wasting 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 U.S.
Treasuries. OK, Does that make sense?
All right. So you can get.
Governments to buy U.S. Treasuries, including the
Chinese government, the Japanese government, the the UK
government, OK. And that's what and that's
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 U.S. Treasuries.
And who are these people? Everyone in the world, You, me,
everyone in the world, OK, is what we call retail.
So previously it was only institutions that want to buy
your treasuries. And what the strategy now is you
get everyone to buy your treasuries, how you create a new
financial mechanism called stable coins.
OK, Stable coins. And the two most popular stable
coins are something called Tether and Circle.
OK, And the idea is very simple. The idea is stable coins are
backed by U.S. Treasuries, meaning Tether and
Circle have to buy U.S. Treasuries in order to sell
stable coins. And then you can sell stable
coins to anyone and everyone, OK, including in China which has
40% savings rate. How Foo institutions like Apple,
BlackRock, Visa, OK, does this make sense?
Now you get around a problem of the closed capital account.
close capital account means you cannot use Ruben B to buy U.S.
dollars, but with stable coins you can use now use Ruben B to
buy Tether or Circle. Do you understand?
OK, So now what the US government is going to do is
they're going to transfer that debt onto the Chinese people,
OK? OK, And so you're like, OK,
wait, wait a minute here, $3920 is a lot of money, man.
Chinese people don't have 3921 dollars.
America will never, ever get rid of this debt, OK?
But there's a mechanism American can use to control this debt and
this debt, and this is called financial repression.
How's this work? Very simple, OK.
So. Your 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, I don't understand
this. If it's at 0%, I'm going to buy
your treasuries. The answer, the solution is I'll
make you buy it, guys. OK, 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 U.S. Treasuries as the basis of their
digital currency. And again, remember, if you're
Chinese, if you can keep them be at 5% a year or U.S. dollar at
0% a year, what do you choose? You choose the US dollar at 0% a
year. Does that make sense, guys?
OK, so that's the solution, financial repression where I
drop the interest rate of U.S. Treasuries to nothing, in 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 U.S. Treasuries.
Forcing them by U.S. Treasuries doesn't make sense,
guys. OK, 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 a grand plan. OK, And you're like, OK, wait a
minute here. Why would China agree to such a
stupid deal? Well, there are actually lots of
reasons, OK? The first major reason is
Taiwan. OK, So again, United States
doesn't really need Taiwan. Taiwan is over here.
And what Taiwan does that's very important for United States
strategically is it blocks China from the Pacific, OK, Something
called the first island chain, it's part of the first island
chain that's in the blue. So that's why Chinese American
policymakers think Taiwan is important.
But you think about it, OK, if you're American, you're like,
wait a minute here, OK, let's just say I lose Taiwan.
Let's say I save to China. I want Taiwan to return to the
motherland. OK, What happens now?
Well, now you create a problem because Taiwan now can block
this area, OK? It can separate Southeast Asia
into two parts. South Korea and Japan on one
part, the Philippines, Southeast Asia, Singapore another part.
OK, 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 for the share of Malacca.
You basically block off South Korea and Japan from a lot of
the global economy. In which case there's absolutely
no way in how South Korea and Japan agree to let Taiwan return
to China doesn't make sense. So by saying by, let's say,
saying, hey, I want China and Taiwan to marry again, what
you've done is you've now transferred the power problem
from you, the United States, to South Korea and Japan.
You understand? That's why, strategically, it
makes perfect sense for Chalk to say Taiwan belongs to China.
OK. OK, 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.
OK, So you can see this is South America and you can see all
these projects in the yellow that China is building, OK?
So the pink is something that's already built or under
construction. The yellow or plant it's these
are huge projects OK So what America has done is basically
taking over Venezuela and Trump announced this like I think 2
days ago we're going to make Venezuela the 51st state.
Well why would he want to do that?
Because now he blocks China from South America and if you look at
this map, this tells you energy supply OK, so if you.
So this is war in the Middle East, which means that the
Middle East, you can forget about South 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.
OK, so now China is forced to negotiate the United States to
have access to the to the Western Hemisphere that's trying
to care. The answer is no.
China only cares about stability and price, stability and cost.
I wanted things at a fair price and I want this to be a stable
and principal relationship. If I'm trying to, I would prefer
if America control the entire Western human sphere because now
I can, 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 we're trying to agree to this?
Absolutely. China has actually no problem
with America controlling the Western Hemisphere if it means
stability and cost are controlled.
OK. Does it make sense to you guys?
OK, Yeah. But does China holds attitude
like about America controlling Venezuela because like using
morals like this that they can't?
No, no, no, no, no, no, no. But will they do this?
China doesn't care. I don't.
Guys don't talk about sovereignty, rights, morality in
this class, OK? 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. OK, No morality, no human
rights, no sovereignty. All right.
OK, so China doesn't care who controls Venezuela as long as
it's a stable place where China can get cheap oil.
Hey, does that make sense? OK, All right.
The last thing is AI. OK.
All right. So as you can see, the United
States is the world's leader in I 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
it's 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 try to just reverse engineer and steal the
IP for these semiconductors? No, that's not how
semiconductors work. Semiconductors are so
sophisticated that it's an entire global supply chain.
OK. 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, they're sent to China to be added to components, then
they're sold to Europe. And all while you have to
extract resources from Africa, from South America in order to
feed the 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.
OK. There's actually no way China
can reverse the production of the semiconductors because it's
too sophisticated, it's too expensive.
Only one country can specialize, only one field.
OK, Doesn't make sense. OK, So that's why this guy is
important. OK.
Jensen Huang, NVIDIA before he was not supposed to come to
China. OK?
It was announced he was not coming to China.
Then as Trump was flying to 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, Elon Musk and Jensen Huang.
OK, So what happened? So I work in business
negotiations. That's exactly what happened.
What happened was that Scott Besant and Hu Li Fang, 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.
OK. There was there was impasse.
So Trump just basically said, I'm not, I'm not going to bring
this guy, OK. And then as Trump was going to
come to China, there was a breakthrough.
And Trump's like, OK, as a sound of goodwill, I will now bring
him, OK, That this is 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, OK? But this is how business
negotiations work. All right.
So. This is just the basic framework
for how the US Grand Bargain will turn out, in my opinion.
OK, so to summarize, what China wants is access to cheap energy
of the Western Hemisphere. It wants NVIDIA chips to fuel
its AI, and it wants access to the US market.
OK, 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 competitive to
their partners. Because as I told you last
class, the entire entire port of AI is to create a surveillance
state. OK, now America has technology,
but China has a lot of people and there's no piracy here.
So in other words, what what America can do is use China as a
lab in order to test out surveillance technology that it
could not test out in America. OK, so America wants access to
China's AI market. And the third thing that America
wants is Chinese manufacturing. Why?
Because Chinese manufacturing is the best in the world.
So not only does America want China to continue manufacturing
in order to buy U.S. 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.
Americans don't want to do it because it's too expensive, it's
too hard work. But the Chinese will do this.
OK, so this is what the grand bargain will look like.
Any questions? OK, so these are predictions.
This is the way I see. I see the situation and we'll
know in a couple days if I'm right or wrong.
OK, so we'll talk next week.