Game Theory #25: Trump Visits China

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 Hegsev, 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 started 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 daughter in law Lara, and they were excited about coming to China. Team China, guys. Okay? Much more important is the number of business executives who came with Trump. So you have 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 our three very important business people. And then you have some of the leading financial people in America, including Larry Fink of blackrock, Stephen Schwarzman of Blackstone, David Solomon of Goldman Sachs, you have citigroup, you have MasterCard and Visa. Okay? And these are the leading financial companies in America. And altogether, these business executives, if you put all the company's net worth together, their companies are worth over $12 trillion. That's a lot of money. And these are very busy people. And quite honestly, I've worked in business negotiations. You do not bring these people together in one room unless you have a megadeal to announce to the world. Okay? So my prediction is that by tomorrow we should have the broad contours of a US China grand bargain, where the two nations reconcile their differences and they start a new chapter in world history, where they work together to stabilize the global economy. So what I want to do today is discuss how we got here, why a grand bargain will happen, and what this grand bargain will look like. Okay? All right, so let's discuss some of the events that led to this meeting between Xi and Trump. This is David Lee from Twitter. Okay. And he's talking 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 Manus was incubated in China. And if you're an A company, you get become very successful. You want to go to the 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 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. Okay? So that's one thing that happened. Another thing that happened is that the US Imposed sanctions on Chinese companies that do business with Iran, including satellite companies that sell commercial intelligence to Iran on where US Bases are tpot refineries which take Iranian oil and then convert it into energy that China can use. Okay? And in response, China said, no, you cannot impose sanctions on us. If you impose sanctions on us, and if people comply with these sanctions, then we, the Chinese government, will sanction these people as well. This is something called the blocking order. And this also seems like an escalation in the U.S. 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. Okay? 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. Nvidia is right now the world's. The world's most valuable company, primarily because AI depends on their chips. Okay? 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 the share of Hormuz, and China depends on 50 to 60% of its energy needs from the Middle East. Okay? Jensen Huang was not on the China list. Okay? So before Trump took off, it was announced that Jensen 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. Okay? The United States and six other nations had a war game in the Philippines, and they're trying to send 28 warships. Okay? Trump sent Iran an MOU. Iran made modifications, and Trump said no. Okay? 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, he Lifung, who was the Vice premier in China, and Scott Bezin, who is a Treasury secretary, met in South Korea to try to negotiate a deal. Okay. And then what's going to happen is that Putin will visit China after Trump leaves. So if you look at what's happening, it seems as though there's still a lot of friction between the United States and China. What I want to show you today is that all of this you can just ignore. Okay? This is all that's happening right now. But if we use game theory, if we just look at the broad contours of what's happening, we would make much better predictions as to what will happen. Okay? So all this, I think, is just theater. All right? 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. Okay? 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 the Iranian people. When Orechi came to Beijing, he only met with his counterpart, the Foreign Minister, Wang Yi. Okay. All right. Another important thing is that Scott Bezant is the one who is leading the US Team in China. Scott Besant 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 Scott Besant. We can probably guess that this is probably going to be an economic negotiation and the focus is on will be on finance. Basically, what America wants is for trying to open up its financial sector for companies like BlackRock and BlackStar to come in to sell financial instruments to Chinese people. Okay? That's what America wants. And we'll talk about this as we go along. All right, let's continue. Okay. So in the geopolitical 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. Okay? This is a land route that Beijing wants to take in order to maintain trade with Europe. As you can tell from this map, Turhan is the pivot or the hub of this trade network. Okay, well, to ran, Beijing could not access Europe. It. And then Moscow also sees Turan as very important as well for its north south 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 United States, you have Russia, and then you have China. From a geopolitical perspective, China doesn't want to become partners with either United States or, or, or Russia. It wants to become independent. It wants to create its own sphere of influence. Okay? And that's why Iran is very, very important. So a lot of geopolitical analysts believe that Beijing is forced to support Iran in this war. And what I want to show you is that's not actually the case. All right? China's. China may want to become independent of the United States and Russia, but it cannot actually. All right, now there's a rumor a couple of days ago that one deal that Trump and Xi will sign 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. Okay? And Lara, 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. Okay? I think this deal will happen, but this is a deal that shows that China is ultimately dependent on America and as opposed to China wants to take over America. Okay, 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. Okay, 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 very 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. Okay? And the question then is, why would he do that? And the answer is, in 1971, the Nixon shocked. So if you talk to historians, they'll give you lots and lots of different reasons as to why Nixon visited China. The main reason from their perspective, is that Henry Kissinger, who is National Security Advisor to Richard Nixon, he was trying to triangulate between China and the Soviet 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 that in 1971, Nixon removed the US dollar from the gold standard. And now the US dollar is worth nothing. Before, you could take the US dollar and change it for gold. Now it's worth nothing. If it's worth nothing, what you 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 petrodollar. Okay? The petrodollar is where Saudi Arabia and other Middle east countries like Qatar, uae, they only sell their oil in US dollars. So now before, the value of US Dollars was tied to gold, the gold standard. Now the value of US Dollars is tied to oil. Okay? If you want to buy oil and everyone wants to buy oil, you need US Dollars. And there's something called a petrodollar, okay? That's the first thing. Second thing which is relevant to us is China, okay? Opening the strategy is to turn China into a manufacturing base for the global economy, right? So the Middle east sells oil to the world, but China now will sell manufactured goods to the world. And China will also do so using US Dollars. And these two things together create the current global economy. All right? Okay, so what I'm gonna do now is I'm going to explain to you why America did this. Okay? This is called the 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 Shanghai framework basically resolves the Taiwan question. And with regard to Taiwan question, America practicement called 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. That's just strategic ambiguity. China would prefer United States to say we oppose Taiwan independence, in which case the United States is obligated now to prevent Taiwan from becoming independent. Okay? 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, United States supports the unification of China and Taiwan. Okay? This would be a radical sea shift from previous administrations. And I'll explain why later on why Trump would do this and also why it's actually very strategic and smart for the United States to want to support Taiwan and China. Rein vacation. Okay. All right. So let me explain now what the China US Relationship really is, using the theories that we've learned in this class. Okay? There's something that you will never learn, that you will not learn anywhere else, and this is speculation on my part. Please take it with grain of salt. Please question me. Please debate me, okay? But this is my theory of how the US And China work together. And once you understand this theory, you can then go on to make certain predictions about how United States and China will behave moving forward. And based on whether these predictions are correct or not, you can then figure out if this theory is correct or not. Okay? All right, so the first thing to understand and something I've been teaching a lot in this class, is that reality is a hallucination. It is something that we collectively imagine together. And again, the analogy, the metaphor I use is Plato's allegory. The cave where you imagine about a million people chain together, and they're all looking at a wall, okay? This wall is empty. Behind the wall, behind the people is this great fire where the elite, okay, we don't know who they are, okay? But they project shadows onto the wall. And then the people who are chained don't know what's going on behind the scenes. They only see what's in front of them, which is the wall. They see these shadows, and they start to create a reality around these shadows. They think these shadows are real, and they think and they create mythology, religion, an entire framework around these shadows, okay? And this is what we call reality, right? So the main message here is that true wealth is our attention. The. Okay, our consciousness is what's true wealth. In fact, our consciousness is what's real. Everything else is an illusion. Everything else is a shadow. Your body is a shadow, okay? The person in front of you is a shadow. This blackboard is a shadow. What's real is the thing inside your head. Your conscious is what's real. Now, what power is is the capacity to direct and control this attention, okay? How I drew power over you is by making you think the way I want you to think, by making you see what I want you to see, okay? So I can make you see these shadows and make you think it's real. And that's what true power is. And this is. This idea, once you understand it, explains the reality that we live in, okay? So I'm going to take this idea and apply it to reality and show you how it works. So at the very basis of reality is the empire, okay? It is the American empire that's able to force you to sit down and look at the wall. Then the people manipulating the fire casting shadows are the game masters. And these are the financial elite, okay? Including the bank of International Settlements, the Federal Reserve, Wall Street, City of London, basically private. They together create the conditions for this game. They're able to direct our attention. And the mechanism they do this with is, of course, with capital, okay? Or US Dollars. And then from. And then the game creates something called the global economy. Of course. Right, the global economy. But in order for this game to work, it has to. The game masters have to disguise the fact that they're really in charge. So they create institutions that pretend to be objective, international and impartial and fair, but. But are in fact controlled by the game masters. These are include. Of. Include, of course, the un, the wto, the eu, the World bank, okay? Lots and lots of these organizations. And then in order to justify and legitimize this system, in order to make you think these shadows are real, the media, education and culture brainwash you, indoctrinate you into being the system is real when it's all just a hallucination, okay? And then from this, of course, you have the legal system to enforce the system, as well as customs and habits, values and norms. So this is an enforcement mechanism to force you to believe that the system is real. Media, education, culture brainwashes you to believe the system is real. And then you yourself want to enforce the system on others through customs and norms, okay? Now, this is a very fragile system because it's all just a hallucination. So there are enforcement mechanisms, okay, that makes sure this system is stable. And these enforcement mechanisms are crime, intelligence, spies, basically spy networks and science, okay? And they. These three mechanisms are controlled by the true powers of this world. And they include transnational capital, basically private capital, secret societies and elite families. And what binds them together, they're basically software. The operating system is what we call the occult, okay? And we'll study more about the occult later on, all right? Okay, so this is how the world is designed. Again, this is all hallucination. One thing that you don't appreciate about the system is that from this hallucination, I can actually project myself onto another force and create another hallucination, okay? That's what Richard Nixon did from this system in order to maintain the empire, in order to maintain the supremacy of the US dollar, okay? He created two new hallucinations, and they are the GCC and China. Okay? GCC and China, right? So what underpinned this system before was gold. The fact that US dollar could always be exchanged for gold. Once that's gone, then you need to create new. Two new hallucinations in order to disguise the hallucination, okay? So what happened was that over the next few decades, this system will transport itself and impose itself on the GCC and China, okay? This system here, it will impose itself into the GCC as well as China. In other words, and this is really important for you guys to understand, China is a hallucination of a hallucination. It's not real. Okay? I'll explain more about this later on. Okay? All right, so once this hallucination is imposed onto the GCC in China, this creates demand for the US dollar, and this creates certain stability for the US dollar. And it made China very, very wealthy, okay? But it's all just an illusion. It's all just a mirage. There's some problems with this system. First of all, China doesn't have any creativity, okay? Why? Because if you're a hallucination of a hallucination, there's nothing for you to base yourself on, okay? You're a shadow of a shadow. That's the first problem. Second problem is wealth extraction, okay? The idea here is that whatever wealth trying to create has to return to the source because the people inside China appreciate the that the renminbi, its entire value is based on the US dollar. So you're going to have renminbi or US dollar. Of course you want US dollar, okay? And the third problem is the fragility of this system, okay? Meaning that if this system, the hallucination is unstable, then China is even more unstable because it's a hallucination of a hallucination, okay? Do you understand? Okay, so once we understand this, then we begin to reassess what happened these past 10 years, why the United States and China fight this trade war. The reason why is that China believe that it could be independent. This hallucination, in fact, it could create its own hallucination. The United States says, no, no, no, guys, no, no, no. You're completely dependent on us. So then they start to fight this trade war. Once this trade war happened, what happened? A lot of money and people start to flee China and move back to the United States, okay? And now what China has recognized is, okay, first of all, we can't actually leave this hallucination because if this hallucination were to collapse, we collapse as well. So one thing we can do is actually to recouple, okay, to buy ourselves even greater to the system. Another way of saying this is that the us, the global economy, is under a lot of strain. There are two main beneficiaries of the global economy, the United States and China. So both are heavily invested in maintaining the illusion, the hallucination, that is the global economy, okay? And to appreciate how fragile all this is, think of the uae, okay? The uae. The UAE seen as though it was a very prosperous place, right? At 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 Iraq lobs a missile at uae, 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, and you can never bring it back, okay? 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 if people wake up from the stream, everyone collapses all at once. Okay? Does that make sense? Guys, Any questions so far? Are we clear about this? Okay. All right, so now that we have this theory, let's talk about this idea concretely, okay? All right? So the United States used to be the world's most powerful manufacturing country, okay? So before it was the uk Then you have the United States, okay? The United States is in the blue, right? And then China surpassed it. This is intentional, okay? The intention is to use manufacturing to extract the wealth of China and transfer it to America, okay? So now China is the world's most powerful manufacturing country, okay? And this is a map that shows it better, okay? Where China is now. Number one, United States has moved on. Number two, Japan and Germany are pretty flat. This is intentional. The intention is to bind China to the global economy, to become dependent on the global economy and therefore save the global economy when it's under strain, okay? One major consequence of this, of China's rise is the trade deficit between America and China. Okay? Unfortunately, this trade deficit is a natural consequence of China's manufacturing ascent. Okay, why? Because the purpose is to force China to buy more US dollars, okay. In order to support the PONTI scheme. So this is a system that benefits the Americans. When Trump came into power in 2016, he said, no, no, no, no. It shows that China is taking advantage of us. And Trump doesn't really appreciate that. No, it was designed this way. You need to create demand for US dollars. If China is buying a lot of US dollars, that's a good thing, right? China's trading real assets, they energy of its people for fake assets, which is this US dollars, okay? So it's a great deal for America. But Trump said, no, this is a bad deal. And this, and this was what led to the trade war. Okay? So what led to the trade war is the WTO. So in 1999, China negotiated to join the WTO, the World Trade Organization. And this is, this is what's going to make China rich and the largest manufacturing power in the world. But in order to join wto, China had to agree to a lot of conditions. The two most important conditions was protect ip. Okay? You have to protect other nations intellectual property and you have to enforce it. The other thing was open the financial sector. The goal is USD renminbi convertibility. Okay? So these are the two things America wanted from China. First of all, to ensure that all US IP will be protected in China, rigorously. Second thing is to allow any Chinese to convert their money into US dollars. As you can appreciate, these two demands are actually bad for China. Okay? So China was not very stringent about protecting ip. This is what led to the rise of Huawei. Basically Huawei can take Apple IP and make these great computers. So in the year 2016, when Trump first came into power, Huawei computers are actually better than Apple computers because Huawei was constantly innovating and, and they were trying to make the computers as cheap as possible, whereas Apple was essentially a monopoly. Okay? And this led to United States imposing trade sanctions on Huawei because it was too competitive against Apple. The second problem is even worse because you think about it, if you just open up your financial sector, all the money in China runs off the United States because Chinese appreciate that we are a hallucination of a hill nation. US Dollars is more valuable. It's based on US Dollars. So wouldn't make more sense just convert all your B into US dollars. But then of this would of course cause the collapse of the Chinese economy. Right? So the The Chinese government would refuse to open the financial sector. And that's what started the trade war in 2016. Sorry, not 2016, in 2018. Okay? 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 wants, trying to open up its financial sector. The reason why Trump has come to China, the reason why he's brought so many executives, is because China has essentially agreed to open up its financial sector. Okay, I'll 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 you can see from this chart, China actually produces most of the rare earth minerals. Now, you may not know this, but actually rare earths aren't that rare. The problem is in the extraction. It is very expensive. It is very costly. China is willing to pay these costs. The rest of the world isn't. That's why China has essentially a monopoly over lithium, cobalt, graphite and other rare earths that the EV industry, the solar industry, the semiconductor industry are heavily dependent on. Okay? That's the first attack vector. Second attack vector is the China appreciates that China's value to the global economy is that it purchases a lot of US Dollars. So then China started to buy more gold, okay? So you can see how the US Treasuries went down, but then gold went, went way up, okay? And so this is the way that China's trying to exert pressure on the United States. The problem is that China is much more vulnerable to attack than the United States. Okay? The United States is a hallucination, but China is a hallucination of a, of a hallucination. The first thing to appreciate is that China's energy dependence is huge. China spent ways, 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. Okay? And so what America is doing right now with this war in the middle, in the Middle east, by kidnapping Maduro in Venezuela, it's basically choking China off from its energy supply. Okay, that's one problem. Second problem is that China is very export orientated, okay? So the entire economy is just basically on exporting manufactured goods cheaply to the rest of the world. And you can tell because most of the world's business ports are actually based in China. Okay? The business is Shanghai, followed by Singapore, Ningbo, Shenzhen, Qingdao, Guangzhou. Okay, so four, four. Sorry, Five of the world's top six export hubs are based in China. That shows you China's dependence on exports. But if. If America is controlling the seas and controlling trade choke points like the Strait of Malacca and the Strait of Horus and Gibraltar Panama Canal, this creates a huge problem for China. Okay? And the third thing is how much resources China uses. China in only three years time, okay, from 2011 to 2013, used more cement than America did in a hundred years. That's crazy to think about. All right, so this shows you how dependent China is on the global economy. It. It also shows you how dependent China is on the USD, okay? It's only because the renminbi 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 policymakers have been, have been trying to change for the past 10 years. It doesn't work because what Chinese policymakers don't understand is that you're in a hallucination of a hallucination, okay? 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, okay? And at this time, people are still, okay, they're still bearing the brunt of it. But then Covid happened, right? And then you saw this massive drop and it never really recovered, guys, right? It never really recovered. Consumer confidence. People don't believe the economy is doing well. People are not willing to buy things. People aren't working, people are losing income, right? The economy is not doing well. At the same time, this is really interesting. More and more Chinese students are choosing to study abroad even as the economy is failing, even as though there are less and less opportunities to do well in China. More and more Chinese are going to America to study. And guess what? The very best are not coming back. Okay? There's a gap of about a million students who stay in the west. And these are often the very best students, right? So I hate to say this, but if you're hallucination, you're anxious, you want to go back to the source, right? So you know the renminbi is based on US dollars. If you can change the renminbi for US dollars, you will do so. If you can flee the country, immigrate abroad. You will do so. All right, this is a pretty stark data. Okay, so 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. Okay, how much Chinese actually traded. The blue tracks the current account. Okay, how much Chinese have in the back because of the trade. The red tracks the actual trade. Okay? As you can see, for most of China's history, up until about, you know, 2022, it tracks pretty closely. But starting in 2022, there's this divergence, huge divert, 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 simple thing. Where, okay, maybe I buy a refrigerator from you, right? It should be $500. We're good for $500. But you charge me a thousand dollars. Why? Because then you take the $500 and you put that money on my behalf into a U.S. real estate. You buy property or buy stocks from you. Okay? 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 as people try to flee the country. Okay? 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. Okay? The highest in the world. Why is China. Why are Chinese savers? Why are they saving 40% of their income? Well, a lot of reason is because Chinese aren't that wealthy, okay? So even though the Chinese economy has boom these past 30, 40 years, the Chinese individual has not seen a huge improvement in his standard living, okay? And so there is not a great confidence in the future. And that's why Chinese save a lot of their money. And there aren't actual that many investment vehicles as well. So from a US Perspective, this is a great opportunity, right? If Chinese are saving all this money, if you're a financier, if you're like Blackstone or Block Walker, you're like, why not give it to me and I'll invest the money for you and give you bigger returns, right? This is why they're here in China, because they want this. They want all that capital stored in Chinese banks. Not doing anything. They're like, give it to us and we'll make you more money. Okay? All right, so this shows you the capital account. All this is saying is that you can't actually convert your renb into Other currencies. So most countries have full open capital accounts. Okay? The black is most countries, the bottom quarter of nations have closed accounts, and China is part of the closed quarter that have closed accounts. Okay? So Chinese can actually take their money and leave the country. Okay? So the other thing that I want you guys to understand is from a US Perspective, there's still a lot of potential in China. And the reason why is China still has a lot of debt capacity. Debt capacity just means your ability to carry debt. Why? Because China doesn't have much debt relative to other nations. Look at this. Okay? China, in terms of, like, assets and liabilities, don't have much investment abroad. You compare that with, like, other countries like Japan, United States, Germany, United Kingdom, they have a lot invested abroad. China doesn't have that much investment abroad. So in theory, you can encourage the Chinese to buy more things abroad, which would. Which would help the global economy. Right? In theory. Now what's interesting is that China doesn't invest much abroad relative to other rich nations, but China doesn't invest much abroad relative to all nations. Okay? So this is China. It's about the same as India, which doesn't have that much capital. Then like if Indonesia, Turkey, Mexico actually invests more abroad than China does, Brazil, Russia, Saudi Arabia invests a lot. South Africa invests a lot more than China. Okay? So again, from a US Financial perspective, China is the last great opportunity in the world. That's why they're coming here, okay? They want to strike a deal where they can financialize the Chinese economy, basically use the Chinese account as collateral to engage in financial speculation everywhere in the world. Okay? So let me explain how they're going to do so. All right? So China has a closed capital account. Why do you have a close capital account? Because you know for a fact that if you open it, Chinese take the renminbi and convert it all into US Dollars. All right? And that causes your economy to collapse, your bank system to collapse. So what's the solution here? Okay, first of all, we need to understand something, and this is like, really important for you guys to appreciate. Banks create money out of thin air, okay? Money is just an illusion. So the example is, let's just say you're a depositor and you put a million dollars into a bank. And the way the bank makes money is by lending it to entrepreneurs, right? So you then as a bank, you give a million dollars a loan to a restaurant entrepreneur, okay? And this is how banks work. And you think that, okay, well, if the POTS put a million dollars in the Bank. The bank then loans it to the. To the restaurant entrepreneur. Then in theory, the bank should have zero in the bank, right? No. The bank now has $2 million. Okay? The banks are allowed, according to accounting, they're allowed to create money every time they issue a loan. So not only they keep that million dollars from the depositor, but they also are able to print a million dollars to give to the restaurant entrepreneur. Does that make sense to you guys? Do you guys want to know why this is the case? Okay, I'll tell you anyway. Okay. All right. Okay. So before what were banks? Banks were just merchants, okay? A merchant alliance. Why? Because merchants needed capital in order to trade. So they came together and they 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. Okay? Now, the problem with gold is that it's heavy. It's hard to transport. It's also dangerous because they're pirates. Okay? So the way that they use. The way that they use gold in order to create exchanges, in order to create business is they use receipts. Receipts or contracts. So rather than me giving you the gold physically, I just give you a piece of paper saying that I guarantee that. That this paper can be redeemed for gold at my bank. Does that make sense? All right. And then you have to keep track of these exchanges. So they create something called double entry bookkeeping, which is basically assets and liabilities. Okay? And that's double entry book bookkeeping, something that we still use today. So let's just say I have a million dollars in gold. Okay, well, that's easy. I just put it into assets. Right? Okay? Then someone comes and says, I need to borrow a million dollars of gold. I'm like, fine, I'll give you a receipt for it. Not a problem. My problem is, do I put the receipt in liabilities or assets? Assets, of course. Right. And that's how the system works. And so it's a system we still use today. That's why banks are allowed to create money out of thin air because of double entry bookkeeping. Are you guys clear? Clear about this? Yeah. Is it because that the banks have power to print money when they make loans or because I think, like, if some people deposit their money into the bank and the bank needs to give it back, it might be lied into the liability. Okay, all right. You don't understand what's going on. Okay, all right, listen, it's not that hard, okay? I have gold. I put the gold into the bank. People Come to borrow the gold, right? Then I give a paper saying, this is gold. It's money, okay? Money, Okay? Is this money a debt or a liability? It doesn't make sense. It doesn't make sense as a liability because I don't owe that thing, okay? And the fact that I can use this money in order to create more money, it's an asset. Okay? Does that make sense? All right, 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 their money in the banks. Okay? You have the U.S. government. You have the government, Okay? The US Government does not have any money. The US Government wants to borrow money. The question then is like, how do you borrow money? If you borrow money from these banks individually, that's too hard. Okay, so what happens is this. What happens is 1913, the banks got together. And created something called the Federal Reserve, all right? Federal Reserve. It's not hard. It's just a cartel of private banks in America, okay? Do you understand? Now, the US Government can just work for the Federal Reserve and borrow money directly from the Federal Reserve, which represents all the banks in America. Okay? So how does the US Government borrow money from the Federal Reserve? It issues bonds. That's called U.S. treasuries. Okay? So the Federal Reserve can print money to buy U.S. treasuries, and then this money goes to the U.S. government, and the U.S. government can then pay for expenses. Okay? Does that make sense? All right, now this system is fine. The problem is that the US Government spends a lot of money. It fights wars. It wants to send men to the moon. It wants people to have a good life. Okay? So Today America has $39 trillion in debt, and you're like, well, who cares? Well, the problem is this. The problem is the interest rate, which is about 5%, okay? 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? Okay, so in other words, 5% means that the US government has to pay the Federal Reserve about $2 trillion a year. Where's the $200 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, okay? Does that make sense? All right, so you can get governments to buy US Treasuries, including the Chinese government, the Japanese government, the UK government. Okay? 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 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. Okay? This is what we call retail. So previously it was only institutions that want to buy U.S. treasuries. And what the strategy now is to get everyone to buy US Treasuries. How? You create a new financial mechanism called stablecoins. Okay? Stablecoins. And the two most popular stablecoins are something called tether and circle. Okay? And the idea is very simple. The idea is stablecoins are backed by U.S. treasuries, meaning Tether and Circle have to buy U.S. treasuries in order to sell stablecoins. And they can sell stablecoins to anyone and everyone, okay? Including in China, which has 40% savings rate. How? Through institutions like Apple, BlackRock, Visa. Okay? Does this make sense? Now you get around the problem of the closed capital account. Closed capital account means you cannot use renminbi to buy US Dollars. With stable coins, you can use now use renb to buy tether or circle. You understand? Okay. So now what the US Government is going to do is they're going to transfer that debt onto the Chinese people. Okay? Okay. And so you're like, okay, wait, wait a minute here. $39 trillion is a lot of money, man. Chinese people don't have $39 trillion. America will never, ever get rid of this debt. Okay? But there's a mechanism American can use to control this debt and this debt, and this is called financial repression. How does this work? Very simple. Okay, so U.S. 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 has zero percent, I'm not going to buy your treasuries. The answer, the solution is I'll make you buy it, guys. Okay? I force you to buy it. How do I force you to buy it? By passing laws called the Genius act and the Clarity act, which compels stablecoins to use US Treasuries as a basis of their digital currency. And again, remember, if you're Chinese, if you can keep renminbi at 5% a year or US dollar at 0% a year? What do you choose? You choose the US dollar at 0% a year. Does that make sense, guys? Okay, so that's the solution. Financial repression, where drop the interest rate of U.S. treasuries to nothing, which case, inflation will destroy the debt over 50 years. And I force people to, to buy it by passing laws that force companies to back the digital currency with US Treasuries, forcing them by US Treasuries. Does it make sense, guys? Okay, and why, and why do they want to do this? Because now they can access a Chinese consumer. You can sell digital currency to Chinese consumers. That's a grand plan. Okay? You're like, okay, wait a minute here. Why would China agree to such a stupid deal? Well, there are actually lots of reasons, okay? The first major reason is Taiwan, okay? So again, the United States doesn't really need Taiwan. Taiwan is over here. And what Taiwan does, that's very important for you, for United States, strategically, is it blocks China from the Pacific, okay? It's 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, okay? If you're American, you're like, wait a minute here, okay, let's just say I lose Taiwan. Let's say I say to China I want Taiwan to return to the motherland. Okay, what happens now? Well, now you create a problem because Taiwan now can block this area, okay? It can separate Southeast Asia into two parts, South Korea and Japan on one part, the Philippines, Southeast Asia, Singapore, another part, okay? Do you guys see this map? You can now divide Southeast asia in the 2. This is important why? Because guess what? Japan, South Korea gets most of their energy for the straight of Malacca. You basically block off South Korea and Japan from a lot of the global economy, in which case there is absolutely no way in hell. South Korea and Japan agree to let Taiwan return to China. Does it make sense? So by saying, by the United States saying, hey, I want China and Taiwan to marry again, what you've done is you've now transferred the power from you, the United States to South Korea and Japan. You understand? That's why strategically, it makes perfect sense for Trump to say Taiwan belongs to China. Okay? Okay, so Taiwan issue problem is solved. Now there's another. There's another issue in that China, as we discussed, is very dependent on energy and food from South America, okay? So you can see this is South America, and you can see all these projects in the yellow that China is building, okay, so the pink is something that's already built or under construction. The yellow are planned. These are huge projects. Okay? So what America has done is basically taking over Venezuela. And Trump announced this, like, I think two days ago. We're gonna make Venezuela the 51st state. Why would you want to do that? Because now he blocks China from South America. And if you look at this map, this tells you and energy supply, okay? So if you. So this is war in the Middle east, which means that the Middle east you can forget about. So China now can get energy from Russia or the Western Hemisphere. China doesn't want to depend entirely on Russia. China will buy more Russian oil, but it does not want to become entirely dependent on Russia. Also, Russia cannot actually make meet all of China's energy needs. Okay, so now China is forced to negotiate the United States to have access to the Western hemisphere. Does China care? The answer is no. China only cares about stability and price, stability and cost. I want to get things at a fair price, and I want this to be a stable and predictable relationship. If I'm trying to. I would prefer if America controlled the entire Western Hemisphere because now I can just negotiate with one, 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. Okay. Does it make sense to you guys? Okay, yeah. But does China holds attitude about, like, about America controlling Venezuela because, like, using morals like they said they can't. No, no, no, no, no, no, no. Will they do this? China doesn't care. I don't. Guys, don't talk about sovereignty rights, morality in this class, okay? It's all game theory. I don't care about these things. Game theory is people are going to behave in their best interest. It's that simple. Okay? No morality, no human rights, no sovereignty. All right? Okay. So China doesn't care who controls Venezuela as long it's a stable place where China can get cheap oil. It doesn't make sense. Okay, all right. The last thing is AI. Okay, all right. So as you can see, the United States is the world's leader in simply because it has the most data centers. In fact, America plans to build more and more data centers. China is trying to compete, but its data center development is constrained by the fact that it has limited access to semiconductors, to chips. And so China wants more chips from the United States and The United States can say yes, but you're like, no, no, no, wait, wait, wait, wait. No, no, no. Doesn't that mean that China could one day overtake the United States? Could China just reverse engineer and steal the IP from these semiconductors? No, that's not how semiconductors work. Semiconductors are so sophisticated that it's an entire global supply chain. Okay? These semiconductors are designed in California, then they are sent to Taiwan to be manufactured. Then they're sent onto the Philippines to be value added to China to be added to components. Then they're sold to Europe. And all the while, you have to extract resources from Africa, from South America, in order to feed 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. Okay? 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. Okay? Does it make sense? Okay, so that's why this guy's important. Okay? Jensen Huang of Nvidia, before, he was not supposed to come to China, okay? It was announced he was not coming to China. Then as Trump was flying to Alaska to refuel, he. 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. Okay, so what happened? So I work in business negotiation. I'll tell exactly what happened. What happened was that Scott Besant and He Le 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. Okay? There was impasse. So Trump just basically said, I'm not gonna bring this guy. Okay? And then as Trump was gonna come to China, there was a breakthrough. And Trump's like, okay, as a sign of goodwill, I will now bring him. Okay? That 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. Okay? 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. Okay, so to summarize, what China wants is actually access to cheap energy of the Western Hemisphere. It wants Nvidia chips to fuel its AI and it. It wants access to the US market. Okay, those. Those are three things that China wants. America wants access to Chinese financial markets, basically wants Chinese consumers to buy stable coins 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 point of AI is to create a surveillance state. Okay? Now America has technology, but China has a lot of people and there's no privacy here. So in other words, what. What America can do is use China as a lab in order to test out surveillance technology that it could not test out in America. Okay, 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 US Dollars, but also wants to import manufacturing, Chinese manufacturing into America and to Venezuela as well. Right, Because Venezuela has all these resources that can be extracted and turn 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. Okay, so this is what the grand bargain will look like. Any questions? Okay, so these are predictions. This is the way I see. I see the situation. And we'll know in a couple days if I'm right or wrong. Okay, so we'll talk next week.