February 13, 2024
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The “Two Chinas” And
How
Putin Saves Face
Ed D’Agostino // Publisher & COO, Mauldin Economics
George Friedman // Founder & Chairman of Geopolitical
Futures
Ed D'Agostino:
George, great to see you. Really appreciate your time. I was
spending some time earlier today
with the Geopolitical Futures Annual Forecast, and I was
somewhat disheartened to see that it
looks like you're not predicting any kind of negotiated
settlement between Russia and Ukraine
anytime soon. At least that's what it looked like to me, is that fair?
George Friedman:
Discussions are going on, but Putin needs a win to make peace. He spent a lot of time, a lot of
money, a lot of lives, and he's failed to defeat the
Ukrainians. That's embarrassing. So what he's
trying to do, and I don't think we're unwilling to help him,
is to score a win and use that as the
basis for a settlement. Now, every one of his attacks have
failed. They've never been able to
take what they needed to do. He, after all that happened,
can't make peace without a victory.
He just cannot let Ukraine end this as equals. So the
United States just wants it over and there's
a messy situation.
Ed D'Agostino:
So are you predicting that this ends in somewhat of a
stalemate where both sides can claim
victory?
George Friedman:
The problem is a
stalemate is a defeat for Russia. Right now we are in a stalemate. We have
been for two years, and at no point did the Russians get
into a position to completely dominate
Ukraine, crush its military. At no time did Ukrainians face
defeat. So we have been in this
stalemate that can't go on and in this stalemate, Russia
cannot make peace. And that's the
basic problem. It has to have, for its internal politics, if
nothing else, it's got to show that this
was worth something. And right now he doesn't have what he needs.
Ed D'Agostino:
So that's interesting because recently a lot of commanders
in the European and NATO field
have been talking about their concerns specific to Russia
and saying that they feel like if Russia
were to win, that Russia wouldn't stop at Ukraine. There's
been talk about Moldova or Georgia
being at risk, but I'm not hearing that sort of threat concern from you.
George Friedman:
If Russia suddenly broke out and took a position on the
border of Ukraine, it would be facing
Poland, Romania, Hungary, NATO. We would be back in the Cold
War. Now remember that
Putin once said that the collapse of the Soviet Union was
the greatest disaster in history. When
he said Soviet Union, he didn't mean just Russia, he meant
the Russian Empire. He was a KGB
officer in Germany when the wall came down. And he's always
remembered that moment, I
think.
And so the problem is that if he wins in Ukraine and really
opens the door, he has every motive
to go farther into there. And that's one of the reasons the
Americans are so eager to support
them, to support Ukraine, because they'd rather fight them
there on Ukrainian grounds than
have a swirling armor battle in Poland or something like
that. In the middle of those politicians,
the Americans want peace. They’ve really had enough of
this. But the Russians are not ready to
make peace under the current circumstances, and the
US is certainly not prepared to allow
them to move into Western Europe. So we're at this stage
where Russia wants it over with,
Ukraine wants it over with, America wants it over with. The exit is not visible.
Ed D'Agostino:
On the flip side, what are the chances that the battlefield moves beyond just Ukraine into
Russia? That
really hasn't happened for the most part yet. Why is that? And do you see that
as a
risk and what would the ramifications be?
George Friedman:
To go on the offensive, there has to be a much more
sophisticated Ukrainian force. Defending is
relatively easy. Attacking is hard because you have to
deliver your logistics, get them there on
time, coordinate with airstrikes, everything else. The
Ukrainian army is an infantry army that
has been quite good at a defensive position. The only way to
go into Russia is the Americans
going into Russia, and that's not going to happen.
Ed D'Agostino:
Okay. How much do you think China's involved in this conflict, George?
George Friedman:
Very little. But when
the conflict began, China was a much more important country. What has
happened over the past two years has been the dysfunction
of the Chinese economy to a point
that it cannot support many other things. For example,
the naval capability that it has, okay, it's
quite expensive to maintain. They're not doing that. So at
this point, they have a situation
where they've arrived at the place that the United States
did after the Civil War. After the Civil
War, we started being an exporting power, and we did very
well—50% of the world's exports
came from the US until World War I broke out and nobody
could buy any, and we went into the
Great Depression.
So when you have an exporting power, you're looking at an
accident that will happen. They're
dependent on the internal capability of their customers. And
when the customers either no
longer have the resources to buy or when they're not
interested or whatever, it's a fad, we saw
Japan have its lost year, lost decade. This is what happens
with exporters. And this is why we
forecast a while ago that China can't sustain its growth because you cannot sustain
reliably an
economy based primarily on exports unless you own the
countries you're exporting to. And
they don't. And the United States had the Great Depression
and what we're having now is a
greater depression in China.
Ed D'Agostino:
Yeah, I've been doing a lot of work on the economics of
China and the amount of leverage,
amount of debt in their system eclipses by an order of
magnitude the amount of debt that we
had in our system in 2007. So you've got a real estate
crisis underway there. You've got a stock
market that's under a lot of pressure. What does that mean
for Xi Jinping? I mean, you've got a
regime that has been trying to project power and yet seems
so fragile internally, and if they
don't maintain control of their economy, they're at risk of losing power. Are they not?
George Friedman:
I'm not sure he
hasn't lost power. There's all sorts of maneuvering going on around him,
and
I'm not sure how much he's controlling it, but they don't
want to do this publicly. Look, he came
in as the prime minister, as the president at a time when
they were the economic miracle of the
world where it was clear that they were going to overwhelm
the world with everything, invade
the United States, and put everything into that. He at
this point has created a disaster. Now, it's
not really his fault. It's not an economic policy that could
have been averted. You cannot build
your economy on
foreign purchases and maintain an aggressive foreign policy at the same time
because you can't
deal with your customers in that way. And that was his mistake. He had to
make a deal with the United States on military matters, and
that would've made it much easier
for first Trump and then others to do something about China's problems.
Well, right now the situation is that they have to talk to
the Americans. There are meetings
going on between the Americans and the Chinese. Xi does not
appear to be at the meetings,
but he's somewhere. But the real question is they need
American investment. The only thing
that's going to bail them out here is investment and they
can't generate it domestically. So are
the Americans interested? Yes, we want everything from them,
all their weapons, all their
wives, everything that is available. We want to take them
immediately. Americans are very
reasonable negotiators. So the problem they have is the
American price essentially is becoming
sort of a vassal of the United States. The Chinese can't do
that. The Chinese price is that the
United States invest and they guarantee those investments,
which are not worth much. So
China has a real problem because there's also unrest
developing inside of China, all sorts of
demonstrations, major lockdowns on security—going into
people's houses, checking them for
what they have there, and so on.
So you have this situation there where China must break out of its seclusion and can't. So what
probably happens in the history of China is civil war. China
historically has been filled with civil
war. And the civil war has been in general between the
interior part of the country, agricultural,
and the coastal region. Mao Zedong came from the
coastal region of the Long March into the
agricultural region, came back to the country.
Now, it's very hard to say that there's going to be civil
war, but on the other hand, when you sit
down and exclude everything else that's possible, you see
this as they're going to have to fight
with each other to settle this and they're going to try to
hold together as long as possible. But
the problem that I saw was that at the beginning, China was
an illusion. China had its ability, but
there was no infrastructure beneath it, no financial system
that was coherent underneath it.
And while it showed enormous growth, a lot of that was fake.
Not in the sense that it didn't
happen, but in the sense that it was based on a hill of
sand. And so I still hear people talking
about China as a superpower, but it isn't, and it's not
going into Russia and it can't carry out
that mission. It's not going to be there.
Ed D'Agostino:
Does all of this make
China more dangerous for some of its neighbors in the South China Sea,
the Philippines, the caged animal theory?
George Friedman:
Well, it goes one of two ways. A victory against India, for
example, might build morale. It would
also cost them a lot of money. A defeat by the Indians would
be devastating. The problem that
the government has is that every one of its options on
the upside has a huge downside if they
hit that. And so what you've noticed is paralysis.
They're not quite able to get themselves
together because you sit there and you say, okay, "What
are the risks? Rewards?" And the
rewards are there, but they're not big enough to float them.
The risk there is high enough to
sink them. Therefore, you wind up with the Chinese in this
position. As the possibility of using
war as a cover, if it weren't for the United States, they
might do that. The problem is the United
States is much more powerful than China is, and the illusion
that the United States wasn't was
always amusing. But the Seventh Fleet is out there and they're not going to mess with it.
Ed D'Agostino:
So I think after the elections in Taiwan, a lot of people were holding their breath waiting to see
what would happen. And we have a mutual friend Louis Gave
who is on record saying, "Look,
the Chinese are not going to militarily invade Taiwan."
Do you agree with him? And if so, my
guess is you do for different reasons.
George Friedman:
Well, for my reason, it is that an amphibious assault against Taiwan would take a minimum of
10 hours to cross.
During that time, the US satellites would see that fleet. Guam is loaded
with
anti-ship missiles that could take them out. Even if
they landed, they'd have to maintain
supplies. So the problem is that invading Taiwan would put
their forces at risk because the
battle would be fought at sea. And the military possibility
of this is why the Chinese won't do it.
Another reason the Chinese won't do it—if you're going to
invade somebody from the sea, do
not announce it beforehand. They have been announcing this
war forever and everybody's
been backing them up in the Western media, but you come out
of nowhere like the Japanese
did.
Ed D'Agostino:
You mentioned civil war as a possibility in China. I'm
curious, I've always thought about civil war
as a war of factions, but is there another faction in China
to facilitate that or would it be more
just sort of a power vacuum?
George Friedman:
There are two Chinas. There's the China that you see in
Shanghai. There's the one you see way
to the north. China is, in that part, a poor country of
extreme Third World poverty. The other
one is doing business deals all over the world. So that's
the old division in China. So they've not
formed, they've not gotten their little badges and hats that
they're wearing yet. But there is a
fundamental divide in the country that Mao tried to suppress
in the Great Leap Forward and in
various other operations. He couldn't do it quite, but he created terror.
Deng Xiaoping came in, everybody called him very successful.
Yes, he was, except he hadn't
solved the fundamental problems dividing the country. And it
has now been left to poor Xi to
try to figure out how to get out of this. In the history of
China, these things happen a lot. We
think of China as an organized country with a single leader
and very much Western. It isn't. It is
a country with a very different history, and we're not at
the point where this is going to happen.
It may not happen, but it is not going to be settled in a
clean way where we're going to have a
convention.
Ed D'Agostino:
Well, the setup seems pretty powerful. I mean, if you're
saying that China needs foreign direct
investment and yet you've got a country where CEOs fairly
frequently disappear, that's not
exactly comforting to the foreign investor class. So if that
foreign direct investment is going to
come and if it's going to come from the West, something needs to change, I would think.
George Friedman:
I don't see large American corporations that can invest
anywhere and so on wanting to accept
the risk of China unless the Chinese government subsidizes
them in some major way. Problem is
these companies don't want to take yuan. They would like to
take something like dollars and
the country's short of dollars. So you keep coming back to
the question of investment and keep
coming back to the risks that are involved to be able to see China's problem.
Bear in mind that this is one of the most important things we're seeing
this year. Ukraine is
interesting, we’re certainly interested in the Middle East, but China—what
had been the
world's, and still is the world's second-largest economy
with debts all over the world—it is not
in death throes, but it is in one of its historic
transformation moments where all of these things
become questionable. How that unbalances the global
economy, where bets have been made
or expectations have been set on China, is actually more
important than the US debt because
that will be taken care of. This doesn't seem to have a
solution. And a lot of banks, including in
the United States, if they did not invest directly, they
invested indirectly or laid a bet on
something. There's a lot of money out there.
Ed D'Agostino:
Yeah, it's a great point. I've been thinking about that the
last few weeks. If you think back to
2007, 8, 9, China pulled the world out of a global
recession. Is the opposite true? Can the world
avoid a recession if China doesn't have growth?
George Friedman:
Europe and the United States are far more resilient than Americans
like to believe. We're an
operatic country. It's always the fat lady dying. Oh my God.
Oh my God. But that doesn't
happen. China doesn't have that comfort. This is not fooling
around. They're really in trouble.
And this is the problem—who will invest to save China when
China was supposed to produce a
world that would make investment entirely different? So the
prospect of what China was going
to become, that for some reason was universally believed,
has really gone away. And all of the
people who wanted to get to China are trying to get out.
Ed D'Agostino:
All the investors you mean?
George Friedman:
Yeah. A lot of the people who went there for various
reasons. So for example, one thing that'll
change now is the US military stance, which has been heavily
focused on China. The United
States has formed alliances in the Philippines, Papua New
Guinea. We have a blocking system
all the way to the Aleutian Islands down to Australia.
Now, when you take a look at that, that
happened on Xi's watch and they couldn't really stop it. So
you have the military dimension,
which in some ways in China is more important than the
economic. The military
dimension has
shifted to a purely defensive mode for the Chinese. But they will
threaten, you'll hear threats.
Please ignore them.
Ed D'Agostino:
I could talk about China all day, George, and this is
fascinating and not where I expected you to
go—so even more fascinating. But I want to make sure we
leave a little time to talk about the
Middle East. What started as an Israeli conflict
with Hamas in Gaza has escalated considerably.
And now you have the Houthis and Iranian proxies. I'm
curious what your thoughts are about
the Middle East and specifically how Iran influences what's happening there.
George Friedman:
Well, Iran is Shiite. The rest of these people are Sunni.
They hate each other at least as much as
they hate the Israelis. The thing that I remember is the
divisions among the Arabs or Islamists or
whatever you want to call them, no one came to help Hamas. There
was an expectation of the
Iranians sending help. They got no help. They were left out
there to be hammered by the
Israelis. So the thing to understand about the region is
that this is not a two-sided war. There is
the war against Israel by one faction, Hamas, and then wars,
for example, between Iran and
Iraq, which had been going on for a long time, and them
hitting each other. And then there are
the Houthis who are sinking ships that are going to be
taking goods to other countries in the
region. So on the one hand, you have to understand that.
On the other hand, you have to understand this: This is the second time
that Israel has had a
massive intelligence failure. In 1973, the
Egyptians and the Syrians attacked Israel and their
intelligence organization didn't see a massive formation developing.
The same thing happened
here. Gaza, south Gaza, is across the street. They must've
been working for months getting
these things into place—people, tools—and the Israelis
missed it. So the Israelis went into this
war with the sense… you know, 1973 was kind of an outlier.
They're now facing the fact that
they are a small country in the Middle East, and they can be
surprised and they can be
outfought. So the Israeli perception of themselves, it was
not Superman, that overstates it. It
was simply that, "We are a highly competent modern
military. The Arabs are not, we'll take
them." Yeah, but at what price now? So this is
the second time, and they can't deny it, that they
had this intelligence failure and as a result of that, had
to do things they shouldn't have done in
Gaza and elsewhere.
So you have two things happening. One, the standard fight among the Arabs
and the non-Arab
Muslims in the area. And secondly, an internal battle
that's shaping up in Israel because
Netanyahu is not going to be in charge for long. And
the question that they're going to have is a
very painful one. One, are we in a position to survive in
this region? Two, have we forgotten
who we were, which is a small country trying to hang on and
confused ourselves with a
superpower? So that's a crisis inside of Israel, a
psychological crisis where the sense of security
dissolves. The other side is business as usual. It's the
Arabs killing each other and fighting and
not agreeing with each other, all of this. So in a way, the
Arab situation is kind of what you'd
expect. Israel is the shocker. How did they miss this?
And if you've ever spoken to people in Israeli intelligence,
they speak with a God-like voice.
Well, I'm willing to accept that, but that depends on you
being right all the time. And the truth
is that the state of Israel cannot be right all the time.
And when it makes a mistake with
intelligence, it’s going to have Egyptian tanks rolling
there, Hamas jumping on. They need a
settlement. The period in which they could
decide they’re not prepared to settle I think is
coming to an end, and at least some of the Arabs are seeing
that as well. Particularly
the ones
afraid of Iran, of which there are many.
So we're beginning to see the restructuring of the Middle
East with Israel having a different
vision. They're saying, "We're not going to accept a
Palestinian state." Well, what's your plan B
going to be with what you've discovered? So we should be
prepared for unrest, fighting
sometimes, but a new Middle East emerging in a year or two.
Frankly, I look at the United Arab
Emirates as a model. They've sat out of this. They're friends
with everybody, and they have only
one religion, making money—as much as they can. And with
this over, they're going to be
lending the money that's going to save everybody else, and they
are going to want a very
different Middle East. So I'm looking at UAE as being a very significant player now.
Ed D'Agostino:
Is it all bad for Israel though? I mean, we haven't seen
Egyptian tanks rolling over the border.
Saudis have been relatively quiet on this. If anything,
Egypt's being hurt because of traffic not
going through the Suez Canal. It seems like there might be a
willingness, at least on the part of
some countries in the Middle East, to accept that Israel is here
and we're better off just doing
business with them.
George Friedman:
And they have and the attack came from the north, from the
Lebanon area that always had
good relations. And the people who attacked didn't ask the
Lebanese if they could use their
territory. The problem is that nothing is permanent in
the region. Nothing is permanent
anywhere. But in this region, you have
constantly shifting alliances, internal pressures by new
groups, and so on. So whatever is promised this week, if
it's promised, may not be true next
week. And the problem of a nation, an intelligence
organization, it has to be prepared at all
times for bad news. And that's very hard. So Israel cannot
be online all the time, just internally,
and the pressure is going to grow inside of Israel for a
permanent settlement. In the end, the
United States is going to be called to guarantee that
settlement. And I would say that is about
as bad an idea as there can be. Guaranteeing peace in the Middle East? Very bad.
Ed D'Agostino:
Yes. What does the future of Gaza look like? What are the options? Because it's bleak.
George Friedman:
Hamas attacked in as ruthless and brutal a way as it could,
doing the one thing that the Israelis
couldn't handle—children as hostages and parading them. Internally, there
cannot be a peace
with Hamas. Externally, there has got to be one.
There’s got to be some sort of understanding.
And this is frequently the problem of war, which is the
anger is so deep that the war can't end.
It goes on. Israel's intention is to destroy Hamas. That's
why it's going to the north. To destroy
Hamas so that the message is sent to the other Arab parties,
that this is what happens to you if
you attack us.
The problem is that what they saw was not the destruction of
Hamas, they saw Israel weak and
foundering. Now, I learned this from my schoolyard in the
Bronx—even if you're going to be
beat up, do not cry, do not look weak. Do not do that. And
so the
problem for the Israelis is a
weakness has been revealed, and they're going to keep
poking that weakness, and Israel has to
make a political settlement to stop it, and it has to make
concessions it never thought it would
make.
Ed D'Agostino:
What might those concessions look like?
George Friedman:
An independent Palestinian state, a redefinition of
Jerusalem, of what is the Mount. These have
been things that the Israelis have been able to brush aside
simply saying, "No, we're not going
to do that." They're entering a world in which they
can't just brush it aside. And what the future
holds… what Hamas has done is revealed that it's monstrous,
but Israel can be beaten or at
least hurt very badly.
The Egyptians and the Syrians didn't manage to do that. They
were very quickly bottled up. This
one is still going on. And the thing to look at to understand the future is Israeli
individuals,
Israeli citizens, what are they thinking at this moment?
Many in the army, many of them seeing
how intensely Hamas fought, remember that the vision of the
Arabs was once a group that
dropped its rifle very quickly and moved out. No more.
They're standing and fighting. And that's
what Hamas wanted to do, to show that they’re going
to stand and fight, and they've done
that. So it's Israel's ball. Netanyahu is incapable politically
of making a decision. So the next
question is, who replaces him? And does that person
understand that we've seen the
weakness?
Ed D'Agostino:
It sounds like the only way that a resolution can even begin
to start is by having a regime
change.
George Friedman:
But I mean, Israel has a built-in culture, built out of
successes, that sees itself as kind of a
regional superpower. Economically and in other ways, it
really is. But it also built an illusion of
being invincible, and that really hurts. So when that
breaks, then the people have to redefine
who they are. And I would guess from some friends of mine, they're
seeking visas to the United
States.
Ed D'Agostino:
Wow. Well, let's end on the United States. George, I'm curious.
I don't want to get into politics.
Let's save that for another day. But I'd be interested in your thoughts on the military. How do
you view US military defense capability right now, given
that we've been sending lots of
munitions outside of our borders? Are we prepared for any future potential conflicts?
George Friedman:
Talking about the sending it out, we would've had to act to
block the Russians, no matter what.
We came up with a solution in which only two Americans from
the CIA have been killed in this
war. And it was actually a very, very bright solution. They
had a motivated friend. They gave
them all the weapons they could and no losses. So really,
our strategy was very good. It's
tapped our ability to have shells and rockets and so on, but
others would've done the same and
done worse.
So basically, our military force is highly capable, the
most capable in the world. It has the most
sophisticated naval power, most sophisticated air force, and
the largest army. So I mean, when
you look at everything, there's a reason why Taiwan was never invaded. They wouldn't risk it.
But we've also now reached a point of sophistication, unlike
Vietnam, where we throw our own
forces directly into the cauldron and start taking
casualties and then up the ante. We are more
subtle in terms of how we handle a battle. And I think the Ukraine model
is going to be one
we'll be looking at for a long time. .
Ed D'Agostino:
George, always fascinating speaking with you. I look forward
to seeing you again at our
Strategic Investment Conference in April. Let's stay in
touch. I appreciate your time.
George Friedman:
We will.
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