Innovation, the seven pillars of prosperity, geography, and demography

I recently read four books that changed my world view greatly. I recommend them highly. They are:

• Smaller Faster Lighter Denser Cheaper by Robert Bryce (recent and near future innovation)
• Inventing Freedom by Daniel Hannan (subtitled “How the English Speaking Peoples Made the Modern World”)
• The Accidental Super Power by Peter Zeihan (how geography and demographics determines national destiny)
• The End of Doom by Ronald Bailey (Environmental renewal in the Twenty-first Century)

The first and third books are very uplifting for Americans. The second is a very interesting revelation about our history with regard to our democratic principles and laws.

Recent and near-future innovation

The good things that have happened or are about to happen because of the latest technology are solving a whole lot of the world’s problems and making life much better—more than I was aware. Americans do not have a monopoly on innovation, but we are probably best at it. And even if we were not, innovation spreads rapidly around the free world.

To put it another way, many things people are worried about, they should stop worrying about. We’re not gonna run out of food or energy or much else, among many other things.

The seven pillars of prosperity

When you look around the world and at history, you find that prosperity comes from the presence of seven things:

1. free markets (minimal or no restrictions or taxes on transactions)

2. sound money (neither inflates nor deflates)

3. rule of law

4. property rights

5. minimal taxation

6. minimal regulation

7. minimal creation of artificial uncertainty by the government

Here are the top 20 highest GDP per capita countries according to the International Monetary Fund:

1	Qatar	145,894
2	Luxembourg	90,333
3	Singapore	78,762
4	Brunei	73,823
5	Kuwait	70,785
6	Norway	64,363
7	United Arab Emirates	63,181
8	San Marino	62,766
9	Switzerland	53,977
10	United States	53,001
—	Hong Kong	52,984
11	Saudi Arabia	51,779
12	Bahrain	49,633
13	Netherlands	46,440
14	Australia	45,138
15	Ireland	44,663
16	Austria	44,402
17	Germany	43,475
18	Sweden	43,407
19	Oman	43,304
20	Canada	43,100

Some obviously are sparsely populated middle eastern oil countries. They are not on the list not because of the seven pillars of prosperity but simply because of mineral luck and low populations to split it with. San Marino is a tiny micro state that used to be a monastery in northeastern Italy.

But all of the rest are British or former British colonies along with some non-British northern European countries. Are they prosperous for racial reasons? Hong Kong and Singapore are not the same race as Britain and America. Daniel Hannan, a British member of the European Parliament, does a fascinating job of showing how British history sort of accidentally stumbled into some of the seven pillars. Hannan’s Anglosphere is more precisely defined by individualism, rule of law, honoring contracts, and freedom being a highest value. Power to the people, not to the monarch.

He talks a lot about the Anglosphere, Britain and its former colonies. He sort of makes the Scandinavian countries, Netherlands, and Switzerland honorary members of the Anglosphere.

Much of the discussion about is about religion. Centuries ago, religion was extremely important in day-to-day life. Most of the developed world is pretty secular now, but the vestigial influence of those early religious rules still controls a surprising amount of what happens.

I was raised Catholic but I stopped going to church after college. I would have stopped during college but my college, West Point, forced us to go to church every Sunday during the academic year and during sumer camps at West Point. We had three choices: Protestant, Catholic, and Jewish. I chose Protestant because it was less hassle than Catholic—no kneeling—and the sermons were a greater part of the service. A lot of non-Jews chose Jewish because there were so few Jewish cadets that it was easy to make the choir and the choir got to go on trips to New York City often. Really. But I digress.

When you think about it, the Catholic religion is top down. The pope is like a king. There is a military chain of command from him to the parish priest and nuns. Your parish priest is assigned by the pope and his chain of command.

In contrast, the Protestant religions are bottom-up. The congregation elects and hires and employs the pastor.

People sue the Catholic church all the time—successfully—because it is a monolith. But when they try to sue, say, the Presbyterians, they find there’s no there there. No higher Presbyterian church authority tells a local Presbyterian church what to do so no other Presbyterian entity has any legal responsibility.

Anyway, the bottom-up nature of the Protestant religions sort of resembles some of the seven pillars.

Hannan says he has incessant arguments with the continental members of the European Parliament in which he wants no regulation of the subject at hand and the Europeans think all human activity must be regulated. This matches the Catholic church’s top-down rules like the Pope’s “infallibility,” mandatory weekly and holiday church attendance, the Catechism and lists of sins.

Roughly speaking, northern Europe is Protestant; southern Europe, Catholic. And, apparently related, Southern Europe is less prosperous than Northern Europe and South America is less prosperous than North America.

Another part of the bottom up versus top-down is common law versus statute law. Common law, which is entirely court decisions, is better than statute law—laws passed by Congress or state or local legislatures.

Here is a bit of a Rudyard Kipling poem in which he discusses the difference between the Saxons—who are ancient British and German tribes—and the Normans—who are an ancient French tribe from the region named after them: Normandy. It is the advice of a dying Norman baron to his heir.

The Saxon is not like us Normans. His manners are not so polite.
But he never means anything serious till he talks about justice and right.
When he stands like an ox in the furrow with his sullen eyes set on your own,
And grumbles, ‘This isn’t fair dealing,’ my son leave the Saxon alone.

This is the greater British affinity for the rule of law compared to the relativist French philosophy. Wikipedia defines relativism thus:

Relativism is the concept that points of view have no absolute truth or validity, having only relative, subjective value according to differences in perception and consideration. As moral relativism, the term is often used in the context of moral principles, where principles and ethics are regarded as applicable in only limited context.

For this article, all you need to know is the rule of law promotes prosperity and relativism or “it’s who you know not what you know” prevents prosperity.

On property rights, I was surprised to learn that the Anglo concept of property rights—that any buyer can become the owner of all the rights to a particular property—is utterly beyond the comprehension of most people in the world. For example, some countries could benefit from fracking, but the government owns all the mineral rights so the land owner, who would be greatly inconvenienced by the drilling, has no incentive to cooperate politically or otherwise. So we boom because of a resource that they also have but they cannot develop because they have no individual property rights therefore no incentive to develop.

When a resource is owned by everyone, it gets treated as if it were owned by no one, to the detriment of everyone. Countries where real estate is owned by the state make extremely lousy use of that real estate. It’s hard to be prosperous when you do that.

In 1900, 75% of Americans in rural areas owned land; in Argentina, 25%; and in Mexico, 3%. Like I said, property rights are a pillar of prosperity.

In one interesting passage, Hannan says the anti-pillars of prosperity left are to a large extent, underdogism gone too far. My underdog right or wrong, which explains why leftists today are so fond of Palestinian terrorists and looters. The pope, remember, makes a big show of washing the feet of the poor each year—without regard to how the poor in question got that way and why they remain that way. Merely being poor makes them objects of admiration and deserving of charity. Liberals are not so much fond of the pillars of prosperity as they are fond of the lack of them for giving them a chance to show off their virtuous caring for the underdog and a chance to claim moral superiority to the non-underdog no matter how the non-underdog achieved that status.

Hannan also quotes Gilbert and Sullivan from their 1885 operetta The Mikado. Did you note that year: 1885? This is another manifestation of those who hate the seven pillars of prosperity—among other things.

The idiot who praises, with enthusiastic tone,
All centuries but this and every country but his own.

Geography is destiny

Americans’ knowledge of geography is typically little more than very faded memories from middle school. And that was mainly being able to fill in the names of the states, continents, or countries. We had “Environment” freshman year at West Point. It covered “Physical and world geography.” I don’t remember much.

Then, in 2014, I read The Accidental Super Power by Peter Zeihan. It is about geopolitics, which is the study of how geography affects politics, prosperity, culture. It blew my mind.

Americans tend to think every country has roughly the same geographic features: mountains, plains, lakes, rivers, ocean coast and that saying your country is better than others in terms of geography is just parochial, “Be true to Your School,” chauvinism.

Uh, no.

America is the best country in the world in terms of geography—by far. Inarguable.

Furthermore, geography really matters. It sort of sets a baseline for how rich your county is.

What we’re talking about here is climate, rivers, ocean ports, mountains, land borders with other countries, minerals, soil, fresh water.

Climate

Does every country have climate? Sure, but what makes you richest is not any old climate, but a Goldilocks climate: not to cold, not too hot, not too dry, not too wet, just right. The continental U.S. lies roughly between latitude 50ºN to 25ºN. Who else is there?

Southern Europe—below Paris and Vienna. Not Northern Europe—that’s where Canada is. North Africa, the Middle East, Afghanistan, Pakistan, China, Korea, Japan. The corresponding latitudes in the Southern hemisphere put you in Argentina, South Africa, Southern Australia, and New Zealand. Want to move to any of those places to get a better climate than the U.S.?

Why are the tropics, which are typically glamorous vacation destinations, not good? The heat is oppressive. Remember that relatively few Americans wanted to live in the American South before air-conditioning. The tropics are also often extremely wet with tons of rain and high humidity which can be costly to deal with on a daily basis. Perhaps most important is there are more serious diseases and vermin in the tropics.

I hope you have recognized at this point that there’s more to climate than latitude. Santa Barbara CA, for example, has a fabulous climate year round. But it is at the same latitude, 34º N, as Central Libya, Bahrain, and Bangladesh. Being on an ocean, among other things, makes Santa Barbara’s climate mild.

There are a whole lot of other aspects to climate namely bodies of water, mountains, altitude, ocean currents.

Navigable waterways

Then there are navigable waterways for moving people and goods around inside the country in question. Don’t all countries have about the same number of navigable rivers? Hell, no!

America has by far the most—17,600 miles of them if you count the Intra-coastal Waterway (about 3,000 miles), which you should because it requires neither blue-water navigation skills nor big strong boats the way the ocean does. The number two countries in terms of navigable domestic waterways are China and Germany, which each only have about 2,000 miles. This is like God dropped a free, interstate highway system on us. Many, maybe most countries, have bupkis for navigable waterways. If they have a way to get around inside their country, they had to build it at great expense—railroads and highways.

We also have the Great Lakes and the St. Lawrence Seaway which enable oceangoing vessels to get to all of the Great Lakes. Is there another group of lakes comparable to the Great Lakes anywhere in the world? Nope, not unless you count the combination of the Mediterranean Sea which is connected to the Red Sea by the Suez Canal and the Gulf of Aden which is connected to the Red Sea by the Bab el Mandeb Strait—a rather scary set of waterways to rely on long term.

Farm land

I suspect most people figure all countries have farm land except maybe desert nations.

Nope. We have tons of it in the West Coast states and almost everywhere east of the Rocky Mountains.

Doesn’t Canada have lots of farmland? In Alberta, yes, but the rest of the country is mountains, rock, or ice roughly speaking.

How about Europe? France, Northern Germany, Poland, Ukraine, yes. But the rest of Europe is pretty lumpy and rocky. China and Japan can’t feed themselves. Argentina has a lot of farm land. The rest of the world? Too hot, too dry, too cold, too lumpy.

The line “America, America God shed his grace on thee” is not something every other country can claim, or maybe even any other country. It’s a jungle out there in ROW (rest of world), literally in some places. Pretty hardscrabble places to make a living.

Zeihan says these unique and amazing geographic advantages made American rich almost from the Mayflower’s landing in 1620. Here’s a line from a Wall Street Journal article:

[In 1776] Americans had the highest per capita income in the civilized world, paid the lowest taxes—and were determined to keep it that way.

Obviously in 1776 we did not have the highest income because of our railroads or highways or being the financial capital of the world or oil drilling or mining. We were the richest because we did not have to fight our terrain and weather as much as everyone else.

Cost of defense

If a country has land borders with hostile neighbors, they must have a standing army along the borders to keep out the enemies. But water borders are far easier to defend. In World War II, Hitler intended to invade Britain. It was only 21 miles across the English Channel from France, which the Germans occupied. But he never did.

Ditto the Island of Malta. It took a tough fight to keep the Germans from taking it, but being surrounded by water was the key.

France had land borders with Germany. Britain was an island. The last time Britain was invaded successfully was 1066. France and other land border countries got invaded all the time.

True, the Allies got across that 21 miles going the other way on 6/6/44. And that was after the main and crucial ally, the United States, had come across 3,000 miles of water with unbelievable quantities of men, weapons, ammunition, fuel, boats, and on and on. But America is, and was, the one super power. No other country has ever even tried to do such a thing. Nazi Germany, at the peak of its power and empire, did not even try to cross that 21 miles before America got into the Second World War!

America was last invaded in 1814 during the War of 1812.

What about China? They are getting their first aircraft carrier. We had 100 at the end of World War II. We have 19 now, 14 of them super carriers. China’s is not a super carrier. The number 1, 2, and 3 navies in the world in 2014 are USA, U.K., and Japan. Japan has a bigger navy than China. (According to Zeihan. Other Internet sources say the U.S., Russia and China have the three biggest navies. Russia has no winter port except in the Black Sea. To get out of the Black Sea, their vessels have to pass through the Bosporus Strait, a 700-feet wide channel in Turkey, a NATO ally, then pass through the Suez Canal or the Strait of Gibraltar to get out of the Mediterranean. Gibraltar is controlled by the U.K. and Suez by Egypt. Russia’s frozen in winter ports in the Baltic Ocean must pass under a Danish bridge to get to the North Sea and the world’s oceans. Denmark is a NATO ally. It makes one wonder why Russia has a navy at all.

Capital

Zeihan says America has the most capital because of our rivers, ports, and other geographic features. I cannot explain what he means by that. But he also says that we have the world’s highest capital base, yet among the lowest need for that capital. That I understand as a Harvard MBA. Our stock and bond markets and the deposit base of our banks are gargantuan and far bigger than any other country’s. Plus, every time there’s a hiccup anywhere the world outside the U.S., people from that county and others get scared and move their money, and maybe themselves, to the U.S. thereby making our capital markets even bigger. That is one of the reasons we have such low interest rates, which make it easier for us to build and innovate.

Urbanization

America is the least urbanized of all major nations. Urban areas, to increase populations must build higher, which becomes prohibitively expensive and impractical after a point. The higher you go, the more elevator shafts you have to have. The more elevator shafts, the less rent you collect. You can do the same to an extent with retail and office buildings, but there are no high rise streets. So urbanized countries have little slack to get bigger and better. The U.S. has tons of slack.

The U.S. ranks 180th in the world in people per square mile: 84. Among the G-7, Canada has far fewer, 9, but the others are all in the top 100 for population density.

Demography

Today, most developed countries are in big trouble demographically. The U.S. is not. Not that we were smarter than the rest. It’s part that we have a decent number of babies and part that we have a lot of immigrants.

Think about this for a minute. There is a standard graph of a country’s demography. It looks like a fluted triangle. By fluted I mean it curves inward at the top. It’s also called the population pyramid.

Here is a web site where you can see the population pyramids of most of the countries of the world. On that page, you can select any country and see their pyramid.

Here is a link to perhaps one of the healthier ones on earth: India’s pyramid It has what’s called a chimney for the bottom two age groups—straight up. After that it’s a triangle with a fluted top. Meaning: there are always lots more people working than retired or too old to work.

Perhaps the unhealthiest major country population age-wise is Japan. This is a graph of a country that is really screwed. It looks like a Native American arrow head with notches to attach it to the shaft of the arrow. Those notches mean there are significantly fewer young people compared to the number of old people.

The biggest age group in Japan is 40-44 and the second biggest almost the same size is 65-69. But all the others are much smaller. 0 to 4 is the smallest. They will have to start paying for all those elders in about 20 years. Paying for the older Japanese retirement and health care will crush all the below-65 age groups other than the 40-44 group.

Russia is another slow-motion car accident. They, for some reason, have a lot more older women than older men.

China is another arrowhead disaster, albeit younger at present. Their one-child policy is a big part of the reason.

Here’s the U.S. pyramid. It is a chimney with a pyramid on top. A triangle bottom is better because it provides more young workers to support the older people. But at least we avoid the notches. Ours are barely visible. One is generation X (born in 1965 to 1979) but behind them are the Baby Boomer’s kids—Generation Y (born in 1980 to 1999) which is as big as the Baby Boomer generation. Generation Z (born in 2000 to 2019) will be another notch, but it won’t cause a problem until 50 years from now. America is the only country with a large Generation Y saving us from crushing too few young with old people costs.

Three things happen that strongly affect the finances of a nation when a person retires or reaches the age at which they may collect pensions and subsidized government health care.

1. They stop earning money and saving.

2. They start withdrawing their savings.

3. They start collecting pensions from the government and/or private company and subsidized health care.

These things typically happen all on the same day! So the U.S. government’s fiscal situation cannot be ascertained without considering the population pyramid each year. When it changes, it changes fast, like a speeding car suddenly being thrown into reverse! This will happen around 2020. I expect the government will try to paper over sudden drop in tax revenue by “printing” money to pay the increased entitlements. “Printing” money increases the risk of hyperinflation.

That triple whammy hits hardest when the taxes paid and savings of the pig in the demographic python peaks and starts to decline. For example, I was born in 1946, the first birth year of the baby boom. We started collecting Medicare in 2011 and social security in 2012. And each person stops earning income at their own point. Many never stop. I do not expect to ever stop.

Did my birth year slam into the social security and Medicare systems and shock them? No. Because the youngest Baby Boomers are still only 50. Obama is a Baby Boomer. So the net effect of my birth year retiring and collecting age benefits is made invisible by the youngest Boomers being still at the age where their income is increasing. The shock comes closer to 2020 when the middle of the Baby Boomers income starts to decline even though many are still working, but the number no longer paying taxes and starting to collect old-age entitlements turns into a net drain on the economy and federal government.

Japan is already there and compounding the problem by “printing” money like crazy when they already have the worst debt-to-GDP ratio on earth: 227%. America’s is 105%, which is too high.

“Printing” too much money causes hyperinflation. And who does hyperinflation hurt worst? People who own currency-denominated assets like bonds and persons receiving annuities like government pensions—old people. I shudder at the thought of where Japan is heading with their debt, age, and other structural problems compounded by their suicidal “solutions.”

Zeihan makes an interesting point. All federal government policy assumes that seniors are idle just collecting social security and maybe another pension. The policy is just to keep the social security coming and to enable them to live and be idle as long as possible. What is needed is to help seniors work for money as many years as possible, because of these various demographic time bombs. But there is no politician who would dare utter such a thing. Idleness has been promised so much it is now a given that no one would ever question. You as an individual, however, should try to keep working for as long as possible unless you have enough private assets to live off forever.

It is really in the interest of the politicians that social security and Medicare/Medicaid recipients die soon and the greater the strain on those entitlements because of too few young people paying for them, the greater the need for you to die.

In an unguarded moment, Obama admitted that he would like a lot of seniors to just get some pain medication and go home and die rater than get a lot of expensive end-of-life care. Here’s the YouTube of him saying this: http://www.johntreed.com/watch?v=U-dQfb8WQvo#t=89

How do you fix an arrowhead population “pyramid?” Either immigration or having more babies, but the latter takes 60 years! In other words, the countries with the ugly population pyramids—the ones that are unfortunately NOT pyramids—are really screwed for many years to come. Plus, none that I know of are even going to fix the shape of their population in 60 years. They are unable to fix it at all ever.

Immigration

Immigration can change the shape of the pyramid over time. Without immigration, it will unfold exactly as depicted. Some countries can increase immigration by just letting it in. The U.S. has the highest percentage of immigrants on earth. About 20% of all the immigrants in the world live in the U.S.

Canada and Mexico do not represent a threat to invade us militarily, but Mexico does represent a threat with regard to uncontrolled immigration. It would be easier to control if we were an island like Australia, but Australia is not without immigration controversies. About 3,000 boat people arrive there monthly and then demand asylum.

Immigration to the U.S. and Canada, and maybe Australia and New Zealand, are different from in the rest of the world. We are a nation of immigrants. Everyone here is an immigrant or descendant of an immigrant other than the Native Americans but they are only 1.7% of the U.S. population and that includes many who are only partly Native American, like me at 1% Cherokee.

Because we are a nation of immigrants, new immigrants can easily assimilate and fit in.

In contrast, back in the “Old Country,” the Eastern hemisphere—Europe, Africa, Asia—the immigrants are typically Muslims who are extremely hostile to assimilation (e.g., “honor” killings of their own daughters because they assimilated, attempts to create unauthorized local sharia law courts) and the existing populations of the old countries are anything but nations of immigrants. They are nations of Germans or Japanese or Greeks and are generally hostile to, and isolate, newcomers. So the U.S., Canada, and maybe Australia and New Zealand can use immigration to correct population “pyramid” notches relatively quickly, but the “old World” countries—the ones with the biggest demographic problems—cannot.

Zeihan calls this problem in those “Old World” countries “…chronic capital poverty and permanent recession will be the new normal from which there is no return. …as early as 2030 the United States will emerge as the only country that is capital-rich, the only country with a growing economy, and the only country with a growing market. And all this without any conscious demographic policy on the part of the Americans.”

So don’t be too quick to renounce your U.S. citizenship to become a citizen of, say, Singapore. Here is their disastrous population “pyramid.”

Energy

The United States is now the world’s largest energy producer—lately because of shale and fracking. We produce more oil than Saudi Arabia and more gas than Russia. And if allowed, we can produce a whole lot of coal, too. We are essentially energy independent although we still export and import for technical reasons relating to where the people are versus where the oil and gas are and a bunch of stupid laws that hurt our energy production and movement. Remove the laws and we are an even greater energy producer. Think of places like CA and NY where there is lots of energy that the environmentalists won’t let us get as stored wealth that will be used in a crisis big enough to overcome liberal ideology.

We have the lowest electricity prices in the developed world. German factories are moving here to get away from their high electricity prices (They are trying to shove wind and solar down everyone’s throats).

We import far more than we export. But much of that is importing oil from Canada and Latin America. Shale and fracking will cut our international trade deficit in half by reducing imports of oil.

Exports

Most countries depend heavily on exports for their economy. The U.S. is one of the least dependent on exports countries—only 10% of our GDP. Furthermore, 1/3 go to Canada and Central America; one half to Canada, Central and South America and the rest go mainly to close friends like Australia, Netherlands, Singapore, and the U.K.

The rest of the world constantly worries about exports and the relative values of their currencies and maintaining good relations with bad countries and protecting sea and other transport lanes. We have virtually no such problems plus with our reputation in the world and huge military, we are the country best able to deal with any such problems.

“Mighty” China got that way mainly from cheap labor. But recently their labor costs increased 600% and they are no longer competitive. Factories moved from Japan to China for cheap labor. Now those same companies are moving from China to Vietnam, Bangladesh, and, wait for it, Mexico, where labor is still cheap and will remain so, and where transportation costs and tariffs on trade with the U.S. are low. So our international trade situation is great and getting better at the expense of the Chinese and others.

Future of other countries

Zeihan paints a grim picture of other countries by name. He says U.K.’s aging welfare state means their status as a an industrialized country are almost over. They will be nothing but a financial center.

One theme is when these Old World countries start to recognize they are in an economic tailspin from which they cannot extract themselves, their geezer governments may revert to pre-1945 methods—military conquest. Russia and China are already doing this. Japan has the third largest navy in the world. Why would they need that?

Zeihan is not optimistic about Germany. He thinks they will be crushed by aging, hardly any ocean coast, surrounded by countries it has warred with in the past, being dragged down by having to subsidize the rest of the EuroZone financially, shoot themselves in the foot environmentalists who are killing nuclear power and demanding the switch to wind and solar.

He is somewhat surprisingly optimistic about Poland and Sweden. Apparently Sweden is a fairly powerful military power in spite of their traditional neutrality. Of course, if you are not adequately powerful to deter or win against your likely enemies—Russia— being surprisingly, relatively powerful is worthless and being neutral is a bad idea.

He generally does not like the future of Europe. A bunch of countries who are used to being rich, big shots suddenly tuning into exploding demographic time bombs with fairly strong militaries and not enough to eat.

Countries versus empires

The U.S. has the third largest population in the world after China and India. But we are a country. You can travel all over the U.S. and you will find that the people are proud and happy to be Americans. Apparently that is not the case in many large countries in the “Old World,” especially Russia and China. They are empires where many are happy citizens and the rest are subjugated “prisoners.” China has almost daily riots in its western territories. And what percent of the populations of these countries would emigrate to the U.S. if they could? I wonder what the population of people worldwide who want to be Americans is compared to the population of those inside and outside of China who want to be run by the dominant Han Chinese (Northeastern part of the country). I doubt China would look so big in that comparison.

The non-Muslim populations of Western European countries seem happy like the Americans, but those Muslim populations are growing. I believe I read that Austria is on the verge of becoming majority Muslim. The citizens of places like Australia, New Zealand, Japan, and Korea all seem happy to be citizens of those countries. But outside of those countries, the rest of Europe, Asia and Africa seem to be endlessly quarrelsome tribes and ethnic groups. So their size on maps and populations lists is misleading.

Canada

I attended a Commonwealth Club lecture in San Francisco in the last year or so where the speaker was a Canadian who was advocating Canada and the U.S. merging. I forget all his arguments but he was quite serious. If I recall correctly, he said there were ten provinces but that Canada should only expect to get five states because they were so sparsely populated. The average U.S. state has 6.34 million people. The average Canadian province only 3.5 million

Zeihan also states compelling reasons why Alberta, at least, should merge with the U.S. And once they did, if they did, the continued existence of the rest of Canada as an independent nation would be dubious.

Canada’s 2015 population “pyramid” stinks. Their biggest population age group is 50-54. The later ones are much smaller. Merging with the U.S. would make ours a little worse, but we have nine times the population so it would be hard to see the change in our “pyramid.” But not merging sends Canada into big trouble around 2020. Not merging may not be demographically viable for Canada.

Quebec is an economic parasite on Canada, especially on Alberta which is the richest province. (Alberta’s population “pyramid” is much more like ours than all of Canada’s.) Alberta is their oil province. They ship that oil south to the U.S. That’s what the Keystone pipeline is about. There are already a half dozen Canadian pipelines to the U.S. Keystone would not be the first. Canada has talked about shipping it east or west, but that’s easier said than done. The Canadian Rockies are blocking it to the west and the Canadian Shield (surface rock) to the east.

Here is a powerful paragraph from Zeihan’s book:

The core issue is pretty simple. While the Quebecois—and to a lightly lesser degree the rest of Canada—now need Alberta to maintain their standard of living, the Albertans now need not to be a part of Canada in order to maintain theirs. [Emphasis in original]

Could Alberta be better off as an independent country instead of either part of Canada or the U.S.? Hard to see. They would be a landlocked country. Alberta has a labor shortage now which would be alleviated by merger with the U.S.

Albertan grain and oil and other exports would stop being exports and would no longer be subject to tariffs or other international trade restrictions. Being a state would give them access to the world’s biggest capital markets. Most Canadian taxes are higher than U.S. so Alberta would be more attractive to Americans as a state.

Alberta would be the state in the U.S. with the highest per capita income $82,000, same as it is now in Canada. Alberta now has great access to U.S. markets as part of NAFTA, but the access would be even better and the best possible as part of the U.S. Zeihan says the best gain would be having the USD as their local currency.

I would add based on my extremely limited experience in Canada, and my research, that Albertans like Americans more than other Canadians and Albertans are more like Americans than any other Canadians.

The X factor is spiritual. Canada includes two population groups that are, by definition, hostile to the U.S.: the loyalists who left America during the Revolutionary War because they did not want independence from Britain and the Vietnam War draft dodgers and deserters who were given amnesty by Jimmy Carter but refused to return to the U.S.

Canadians are proud to be Canadians. The first thing they say when asked about the Canadian identity is “We’re not the same as America.” When traveling abroad, they frequently make sure everyone knows they are Canadians by displaying their flag on their backpacks and clothes.

But you have to wonder about how anti-American the Canadians really are. They own homes here. They come here for medical care. They vacation here.

When confronted with the arithmetic of remaining the sugar daddy of Canada and especially the Quebecois parasites and being part of a new country that does not need to bleed them dry financially to exist, they may find the arithmetic more persuasive than the spirituality of being Canadian. And, hey! The loyalists and draft dodgers and deserters moved out of the U.S. once. They can do it again by moving west to British Columbia or east to the other provinces.

Not so fast says Zeihan. If Alberta leaves Canada, then British Columbia is surrounded by the U.S. no three sides: west, south and east. It’s only connection to Canada would be the Yukon and Northwest Territories to the north. Gee, thanks. Hardly anyone lives there—the Western Hemisphere’s Siberia.

Zeihan says, therefore, that if Alberta joined the U.S., British Columbia and the Yukon would be forced to follow. British Columbia is the westernmost province and home of Vancouver and Victoria, both part of Puget Sound which also includes Seattle and Tacoma, WA. I have my Canadian money in a Bank of Montreal branch in Vancouver, Canada.

Zeihan says Alberta joining the U.S. would force the next domino—Saskatchewan—to do the same. Without Alberta, Saskatchewan becomes the youngest and richest province in Canada. And what happens to the youngest and richest province there? They get crushed by the taxes to pay for Quebec and the rest of aging, relatively poor Canada—even more than they were going to get crushed if Alberta stayed. Zeihan says,

If supporting Canada would damage Alberta’s economy, it would eviscerate Saskatchewan’s. Saskatchewan is like Alberta only less so. Oil and grain, but less than Alberta. After Alberta and Saskatchewan leave, Canada no longer has any oil or grain lands to speak of.

So that would make Canada’s population “pyramid” even worse. Quebec would not become a state. We probably would not want them. They would demand all the signs in America be in French and English. And they would demand continuation of the subsidies they get from the rest of Canada. Fat chance of either. Perhaps they could merge with France—only I heard they pretend to be Americans in France because the French don’t like the Quebecois. Go figure. The Quebecois have even been extremely resistant to fighting in Canadian wars!

Zeihan says if Canada lost Alberta, British Columbia, and Saskatchewan to the U.S., the rest of Canada would split into Quebec and the remaining English-speaking provinces and he says, “There simply wouldn’t be a ‘Canada’ left anymore.” By which I assume he means the other English-speaking provinces would not have much choice but to seek merger with the U.S. The remaining provinces would have the worst geography and geology, would be old and poor and on the road to getting much poorer fast.

I could not find it just now but I think he said an independent Quebec would become Detroit. Not sure about that. My wife and I visited Montreal in the mid 1970s. It seemed far from ever being Detroit. But I expect they would be forced to become more capitalist and less socialist.

I once wrote a web article about the U.S. dividing into Maker Land and Taker Land—Maker Land being the red electoral districts and Taker Land being the blue ones. In Canada, I surmise that BC, Alberta, and Saskatchewan are Maker Land and the rest are Taker Land. In that article, I noted that Taker Land would be an archipelago of liberal urban areas and limousine liberal suburbs surrounded by a sea of Conservative and independent rural and middle-class suburbs.

Someone said that would cause another Civil War. Oh, really? And what are the liberals going to do to us? Throw burning draft cards at us during that war? The anti-gun, draft-dodgers of NYC and San Francisco are going to win a war against the NRA members and vets who vote Republican? They would not even show up for the war, let alone win it. They would negotiate, impose sanctions. But they would have no industries other than Starbucks and delis. No military. They would collapse financially within months and be begging to be taken back. That, essentially, is what Zeihan depicts for Quebec and a Canada without their three current western provinces.

You may wonder if Alberta leaving Canada would be legal. Yes. The separatist morons in Quebec got a Canadian top court decision on that. It said that a majority of a province voting to leave Canada would be legal. It would really piss them off if an English-speaking province used “their” decision to do just that. Zeihan says they will.

Is Zeihan right about Canada? I suspect he has the demographics and economics right. Otherwise, I would like to hear what my Canadian readers think about all this.

I visited Alberta in July 2013. My impressions are at http://www.johntreed.com/observations-of-Canada-2013.html.

I would be delighted if Canada’s three western provinces joined the U.S. Don’t know about the others. But it would force me to find another country for some of my foreign savings.

Mexico

Zeihan is surprisingly upbeat on Mexico. Apparently the lousy Mexican geography, which I surmise most Americans are ignorant of—I was—makes that a screwed-up country. The geography facilitates warlord type fiefdoms around the country and makes it hard for a central government to control the whole country. He likened the Mexican geography to that of Afghanistan which he says is also rotten.

He likes Mexico because of recently high Chinese labor costs combined with the proximity of Mexico to the U.S. compared to China’s distance and pain-in-the-ass political squabbles with America. Mexico is also benefiting greatly from the U.S. having excess natural gas because of shale fracking. That is lowering Mexican cost of living and manufacturing costs. Mexico has a good population pyramid. That means a big market and a large labor pool which will keep costs there down.

Mexico is already America’s third largest trading partner.

China and Russia

China and Russia are impersonating America, and too many educated people are falling for it.

In the case of China, it has lousy geography. One of their Rivers, the Yellow, is a royal pain because of frequent, large-scale flooding. Much of the business of the Chinese government is dealing with this—like Hurricane Katrina being an annual event in the U.S. One flood in 1931 killed more than a million people!

The Northeast Han Chinese have better geography that facilitates their being united. They dominate the less united other regions meaning China is not 1.4 billion people who are happy being part of China as presently governed. Some would like to secede. Roughly speaking perhaps China is a nation with a lot of Quebecs, if not Chechnya’s. China is not really a nation. Too many of its regions do not like the central government. China does not have its 1.4 billion people the way American has its 330 million people. It is more like the Soviet Union before the break-up. A whole lot of regions wanting to be independent.

China ranks 97th in the world in per capita GDP according to the CIA. The U.S. is 10th—beat out by unpopulated Arab oil states, Norway, Switzerland, and a handful of micro-states like Monaco and Liechtenstein. In other words, China is a poor country. It is also extremely polluted, restive, and run by a murderous Communist dictatorship. The idea that they are going to replace the U.S. as #1 is absurd.

We had a subprime mortgage crisis in 2008. In China, the whole economy is a subprime crisis, not just mortgages. But they keep papering over it with pretend-and-extend lender behavior.

The 2014 GDP of the US in current dollars is $17.4T; China, $10.4T. And I sat next to a Chinese businessman who emigrated to the U.S. from China at lunch last week. He said he did not believe the figures put out by the Chinese government. Me, neither. Accurate figures are called transparency. Transparency International ranks China 100th in the world. They call it lack of corruption. Who ranks higher than China? Liberia. Tunisia. Trinidad. Cuba. Swaziland. Rwanda. The U.S. ranks 17th.

China is a banana republic run by a military junta only with no bananas and a future with a hell of a lot of poor, old people. Because of their aging problem, they are stuck with a export economy. That, in turn, means they can’t got to war with anyone because wars are the best way to end exports. Yet they are wandering the Pacific these days threatening their neighbors with takeovers by force of various tiny islands and oil-drilling areas. WTF! See how many exports you sell to Vietnam after you steal their oil. Or how many you sell to the Philippines or Japan after you steal one of their islands. Ditto imports. China is now the world’s biggest importer of everything. See how much the neighbors they steal territory from will export to them.

The IMF recently said China’s GDP has surpassed America’s (in terms of purchasing power within the country issuing each currency), but China itself does not even say that. Plus, their GDP ought to surpass the U.S.’s. They have 4 1/2 times as many people! They were #1 in the world a couple of hundred years ago for that reason. They had the most farmers. Many of China’s top people are trying to emigrate to the west and trying to get their money out of China into the West and its currencies.

The Russian and Chinese navies are largely “green-water” navies (like our Coast Guard) China’s nuclear submarines, however, are blue water navy like ours. Considering how poor their people are—Russia’s GDP per capita ranks 60th according to the CIA—it is odd that they are wasting money on trying to imitate the U.S. Navy in submarines let alone any other naval vessels.

In terms of gross GDP, Russia’s navy should be smaller than those of Germany, France, U.K., Brazil, and Italy—smaller still when you take into account their lack of ports. When you look at a map of the Pacific, you see that China’s coast is sort of ringed by enemy islands and other coastal countries: Japan, Korea, Taiwan, Vietnam, Philippines, Brunei, Singapore, Indonesia, Australia, New Zealand. All off these countries have relatively short-range weapons that can strike any Chinese vessel trying to go through the various between-islands channels into the open Pacific from China. So if they piss off any of those countries, let alone all of them, which they seem to be trying to do, they drive them into the arms of America and that will lead to even more American military bases on those islands and coasts than there are already.

It’s like a little boy pretending to be a grown-up.

Make no mistake, Russia has enough weapons to be dangerous to the U.S.—and that appears to be their goal. But they do not have enough to defeat countries like the U.S. or China. That being the case, what is it they are trying to accomplish? Just a sort of Willy Lohman cry for attention. “Attention must be paid to us Russians.” Pathetic, and dangerous. And with their bad demographics and geography and lack of the seven pillars of prosperity, they’re wasting money on a blue-water navy will simply hasten their financial decline.

Japan

Japan is apparently so mountainous that they used to get around by hopping in a boat and traveling to the village they wanted to visit on the ocean. That, in turn, made them a big navy nation. And back when such was fashionable, they made their living conquering and colonizing neighbors like Korea, Russia, and China. In 1904 and 1905, Japan’s navy sank the entire Russian Navy—both their Pacific and Baltic fleets. Note that the Baltic is a hell of a long way from Japan. Korea, Russia,and China are still pissed about Japan’s bullying back then.

Japan also has zilch natural resources and felt it needed to take them from neighbors—most egregiously in the run-up to World War II.

China would not be much today, Zeihan says, if the U.S. had not eliminated Japan’s navy in 1945, which itself had previously eliminated Europe’s navies from the Pacific. Zeihan says U.S. presence in Europe after WW II also kept Europe’s navies out of the Pacific, allowing China to finally become successful. Asia was still largely full of European colonies after World War II. The U.S.-run financial system of the world was also crucial to recent China’s rise.

I don’t remember China thanking us for any of this. Rather, they are threatening to put nuclear ICBM subs in the Gulf of Mexico.

US dollar

The world is pretty screwed up today. And every new hiccup like Russia trying to take Ukraine, or the ruble falling in value, or China having riots in its western territories—they all cause people around the world to “flee to safety:” the U.S. dollar. In his book The Dollar Trap, author Eswar Prasad says it’s not safety they seek. It’s liquidity and depth of the market for the currency or bond in question. Either way, you end up at the USD.

Even Russia and China, who do not like us, are forced to own about $2 trillion of U.S. government bonds between them. Why? Where else are they going to put that much money?

Here are the market shares of the top currencies (percentages of all currency transactions) in the world:

These and the others below these top ones, add up to 200%, not 100% because there are a pair of currencies in each transaction. In 87% of the transactions, the USD is on one side. In only 13% are neither side either buying or selling USD. In other words, no one who needs a substantial amount of USD or USD bonds can switch to another currency. There is no such currency and none is on the horizon.

Zeihan says the combined value of the only other decent currencies—the British pound, Swedish krona, and the Canadian, Australian, and New Zealand dollars are only about half the value of US dollars in the world. (I have savings in and recommend the AUD, CAD, CHF, and NZD—but I don’t need to place $2T.) The USD is by far the most liquid currency. The euro, yen and pound are shaky because of crises like the PIIGS dramas and Japan’s three consecutive “Lost Decades.”

The GBP could have been hurt badly by the Scottish independence vote if it had gone the other way. They are likely to vote again and lose Scotland in that vote. The U.K. debt-to-GDP ratio is now 91%—an all-time high—and has been going up, up, up in recent decades. In contrast, currencies I recommend like the AUD and NZD have debt-to-GDP ratios of 21% and 36% with both falling recently. Canada is at 89% and slowly climbing of late. I give them bonus points for being where I can walk there if need be. Switzerland is at 35% and has been falling since 2004.

The Swiss don’t want anyone to buy CHF because its hurts their exports which are key to their economy. I’m not kidding. They charge a fee rather than pay interest if you deposit money there.

So what’re you gonna do? Buy Mexican pesos? I didn’t think so.

1. To displace the USD as the main and almost only reserve currency in the world, the contender must have huge daily trading volume of its currency so people all over the world feel they can sell out at any time. Only the U.S. fits that description and the next biggest, the euro, seems more likely headed to extinction than greater market share.

2. Its economy must be huge. The U.S. today is #1 with a $17T GDP; China #2 at $10T; and Japan #3 at $5T. So China has a chance if that is the only criterion.

3. The contender needs to be trusted by the whole world that it will not have huge inflation, capital controls, financial repression, expropriation, criminal prosecution of the rich because they are rich, bond default. Hell, China already has capital controls and financial repression as well as criminal prosecutions of the rich. Russia also has the criminal prosecutions, defaulted on their bonds in memory, has high inflation, and has various half-ass capital controls. The top seven countries on the market share list above are trusted, but China, Mexico, and Russia are not. New Zealand and Sweden are also trusted.

4. The currency that would be king must be freely convertible, that is, any owner of it must be able to buy or sell unlimited quantities of it at free world market rates including residents and citizens of the country in question. China has never allowed that. Russia is mucking around with not allowing it at present.

5. The country in question must have broad, deep, and liquid financial markets: stock markets, bond markets, futures markets, interest-paying bank accounts, with lots of different financial products to choose from.

Does any country have all those? Yes, the U.S. and it not only has them, it generally dwarfs the rest of the world in each case. Does anyone else have all of them? Nope. Is anyone close to having them all in the near future? Nope. Does the big GDP contender—China—have any of them other than big GDP? Not a one.

Is the situation likely to change in the near future? Yes, in the U.S.’s favor! People in the scared countries—Russia, China, eastern Europe, Middle East, maybe Southeast Asia—are trading their local currencies for USD and US treasury bonds.

Migration

Similar story with migration. Where do the world’s most educated, skilled, ambitious people who are unhappy with their native land want to emigrate to? The U.S. We are their descendents. And more are coming.

Terrorism, revolutions

Zeihan’s book has a map of the world with the areas with terrorism, revolution and all that going on colored darker. The dark areas are all in the Eastern Hemisphere, that is, Southern and Eastern Europe, Asia, Middle, East, Africa, Indonesia, Maylasia. The Western Hemisphere is devoid of that nonsense, as are Australia, New Zealand and Northwestern Europe.

Capital and good people are going to flee the dark areas to the light. Young people are going to flee the demographically doomed countries—which include Northwestern Europe for the one rich, safe, relatively young country: the U.S.

2030

Zeihan says 2015 to 2030 will be a Hobbesian period. One of the things Hobbes is famous for is this quote:

During the time men live without a common power to keep them all in awe, they are in that conditions called war; and such a war, as if of every man, against every man.

To this war of every man against every man, this also in consequent; that nothing can be unjust. The notions of right and wrong, justice and injustice have there no place. Where there is no common power, there is no law, where no law, no injustice. Force, and fraud, are in war the cardinal virtues.

No arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death: and the life of man, solitary, poor, nasty, brutish and short.

Zeihan says this Hobbesian world will be the 2015-2030 fate of the Eastern Hemisphere other than perhaps Australia and New Zealand. The Americas, in contrast, will benefit and grow far stronger both in raw terms and especially relative to the Eastern Hemisphere countries, as the safe, prosperous, young, economically growing and not in need of the Eastern hemisphere anymore, shining city on the hill.

Zeihan says America will fix its fiscal excesses by 2030. Well, only if they are forced to. Capital flowing into the U.S. in 2015 to 2030 may allow the excesses to continue. Eventually, the U.S. must default on its unfunded liabilities—either explicitly, meaning no check arrives, or implicitly, meaning inflation, that is, the check from the federal government arrives, but it is not worth enough after high inflation to buy anything.

All the other stuff—the demographics, geography, the productivity, will survive still standing. Debtors will make out like bandits. The U.S. government is the biggest debtor in the world. Only the owners of USD-denonminated assets including annuities will be crushed. Read my book How to Protect Your Life Savings From Hyperinflation & Depression, 2nd edition if you want to know how to avoid being crushed.

Zeihan’s third-from last paragraph is,

Simply put, the world is indeed going to hell, but the Americans are going to sit this one out.