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 Pete Hegseth, who is the Secretary of War.

The last time an American president visited was 9 years ago, November 2017. So, this is a very historical meeting. And as you may remember, after Trump visited Beijing, 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 David Solomon of Goldman Sachs, you have Citigroup, you have MasterCard, and Visa.

Okay? And these are the leading financial companies in America. And all together, these business executives, if you put all their net the companies' net worth together, their companies are worth over $12 trillion. That's a lot of money.

And these are very busy people. And quite honestly, I've worked in business negotiations. You do not bring these people together in one room unless you have a mega deal to announce to the 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 in world history where they work together to stabilize the global 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.

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 Manus. Manus is an AI company that Mark Zuckerberg tried to buy. And Manus was incubated in China. And if you're an AI company, you 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 the United States because this would set a bad precedent. 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, teapot refineries, which take Iranian oil and then convert it into energy that China can use.

And in response, China said, "No, you cannot impose sanctions on us. If you impose sanctions on us, and if people comply with these sanctions, then we, the Chinese government, will sanction these people as well." Okay, this is something called the blocking... this also seems like an escalation in the US-China trade war, where previously Chinese institutions, banks, individuals complied with US sanctions. This is the first time the Chinese government said to Chinese people, "If you're a Chinese citizen and you comply with US sanctions, then we will sanction you." Okay?

So, this is a very big deal. Nvidia was not able to sell chips into China. And this is going to affect Nvidia's bottom line. Okay? Nvidia is right now the world's most valuable company, primarily because AI depends on their chips.

China invited Iranian Foreign Minister Araghchi to Beijing because China is very interested in the outcome of this war between the United States and Iran. Right now, Iran is blocking the Strait 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 this is a very big deal because in this grand bargain, what China would want is access to Nvidia's chips, semiconductors, in order to fuel its AI.

Okay? The United States and six other nations had a war game in the Philippines, and then China sent 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, China announced Trump's state visit.

And then yesterday and the day before, He Lifeng, who is a vice premier in China, and Scott Bessent, who is the 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 just look at what's happening, it seems as though there's still a lot of friction between the United States and China. What I want to show you today is that all of this you can just ignore, 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 the United States are not actually fighting an AI war. It's all theater. They're actually working together to promote AI. These sanctions are happening, but the US and China will come to a grand bargain, and they will become much more economically integrated. And Iran, China doesn't really care about, okay? China cares first and foremost about the relationship with the United States. And one piece of evidence for that is that when Foreign Minister Zarif went to Moscow, Putin met with him for 40, for 90 minutes, and Putin expressed his sympathy and support to the Iranian. Zarif came to Beijing, he only met with his counterpart, the Foreign Minister Wang Yi.

All right. Another important thing is that Scott is the one who is leading the US team in China. Scott Bessent 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 Bessent, we can probably guess that this is probably going to be an economic negotiation, and the focus will be on finance. Basically, what America wants is for China to open up its financial sector for companies like BlackRock and Blackstone to come in to sell financial to Chinese people, okay?

That's what America wants. And we'll talk more 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... 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 the land route that Beijing wants to take in order to maintain trade with Europe. As you can tell from this map, Tehran is the pivot or the hub of this trade network, okay?

Without Tehran, Beijing could not access Europe. And then Moscow also sees Tehran as very important as well for its north-south trade access. 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 From a geopolitical perspective, China doesn't want to become partners with either the United States 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 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. And 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 Okay? I think this deal will happen, but this is a deal that shows that China is ultimately dependent on America as opposed to China wants to take over America.

All right. 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.

So, you don't know this, but before 1972, America was hostile towards China, primarily because of Taiwan, where during the Chinese Civil War, the Americans were supportive of Chiang Kai-shek 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, it's the Nixon shock. 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 was 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's something that historians made up. The real reason is that in 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 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. The petrodollar is where Saudi Arabia and other Middle East countries, like UAE, they only sell their oil in US So now, before, the value of US dollars was pegged, 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 that's something called the 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 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 going to do now is I'm going to explain to you why America did this, okay? This is what we call the Shanghai This is published 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 the Taiwan question, America practices strategic ambiguity.

The United States will not be clear about the issue of Taiwan with regard to So, what the United States has been saying for a long time is we do not support Taiwan independence. Okay, that's a strategic ambiguity. China would prefer the United States to say, "We oppose Taiwan independence." In which case, the United States is obligated now to prevent Taiwan from becoming Okay, that's what China would prefer, but the United States practices strategic ambiguity saying, "We do not I would not be surprised if over the next few months Trump rapidly changes his attitude and declares that the United States is opposed to Taiwan independence.

In fact, the United States supports the unification of China and Taiwan." Okay? This will be a radical sea change 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 reunification. Okay? All right. 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 not learn anywhere else. And this is speculation on my part.

Please take it with a grain of salt. Please question me. Please debate me, okay? But this is my theory of how the US and China work together. And once you understand this theory, you can then go on to make certain predictions about how the United States and China will behave moving forward. And based on whether these predictions are correct or not, you can then figure out if this theory is correct or not, okay? All right. So, the first thing to understand, and something that I've been teaching a lot in this class, is that reality is a hallucination.

It is something that we collectively imagine together. And again, the analogy, the metaphor I use is Plato's allegory of the cave, where you imagine about a million people chained 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 the shadows, and they start to create a reality around the shadows. They think these shadows are real, and they create mythology, religion, an entire framework around the shadows. Okay? And this is what we call reality. All right. So, the main message here is 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 This blackboard is a shadow. What's real is the thing inside your head. Your consciousness is what's real. Now, what power is is the capacity to direct and control this attention. Okay? How I exert power over you is by making you think the way I want you to think. By making you see what I want you to see.

Okay? So, if I can make you see these shadows and make you think it's real, then that's what true power is. And 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.

At the very basis of reality is the empire. Okay? It is the American empire that's able to force you to sit down and look at the wall. Then the people manipulating the fire, casting the shadows, are the game masters. And these are the financial elite, okay? Including the Bank of International Settlements, the Federal Reserve, Wall Street, City of London, basically private capital.

They together create the conditions for this game. They're able to direct our attention, okay? And the mechanism they do this with is of course with capital, okay? Or US dollars.

And then again they create something called the global economy, of course, right? The global economy. But in order for this game to work, 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 are in fact controlled by the game masters. These 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, and culture brainwashes you, indoctrinates you into believing this 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. Okay? So this is an enforcement mechanism to force you to believe that this system is real. Okay? Media, education, culture brainwashes you to believe this system is real, and then you yourself want to enforce the system on others, customs and norms. Okay? Now, this is a very fragile system because it's all just a hallucination. So, there are enforcement mechanisms Okay? That make sure this system is stable.

And these enforcement mechanisms are crime, intelligence, spies basically, spy and science. Okay? And 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, their basically software, their operating system, is what Okay? And we'll say more about the occult later on. All right. Okay, so this is how the world is designed. Again, this is all a One thing that you don't appreciate of this 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. All right. So, what underpinned this system before was gold. The fact that the US dollar could always be exchanged for gold. Once that's gone, then you need to create 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. Once this hallucination is imposed onto the GCC and China, this creates demand for the US dollar. Okay? And this creates certain stability for the US dollar. And it made China very, very wealthy.

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, wealth extraction. Okay? The idea here is that whatever wealth China creates has to be turned to the source.

Because the people inside China appreciate that the renminbi's entire value is based on the US dollar. So, you have renminbi or US... Of course, you want the US dollar.

And the third problem, the fragility of the system. Okay? Meaning that if this system, the hallucination, is 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 do the United States and China fight this trade The reason why is that China believed that it could be independent of this hallucination. In fact, it could create its own hallucination. And the US says, "No, no, no, guys. No, no, no.

You're going to be dependent on us." So, then they started to fight this trade war. Once this trade war happened, what happened? A lot of money and people started to flee China and move back to the United States.

And now what China has recognized is, "Okay, first of all we can't actually leave this because if this hallucination were to collapse, we collapse as well. So, what we can do actually is recouple, okay? To bind ourselves even greater to the system." Now, the reason I'm saying this is that 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 Okay? And to appreciate how fragile all this is, think of the UAE.

Okay? The UAE seemed as though it was a very prosperous place. Right? It had universities from America like Georgetown. It had the wealthiest people flocking to Dubai. It seemed invincible. But the moment you attack the UAE, like if you had just lobbed a missile at the UAE, the illusion shatters. And now the UAE is gone. You understand? That's how precarious these illusions are. One hit at the right spot, the entire illusion is shattered. You can never bring it back. And so that's what China's afraid of now. So that's why China and the 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 this dream. Because if you wake up from this dream, everything 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.

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? And the United States is in the blue.

And then China surpassed it. This is Okay? The intention is to use manufacturing to extract the wealth of China and transfer it to Okay, so now China is the world's most powerful manufacturing country, okay? And this is a map that shows it. Okay, where China is now number one, United States has moved on to 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 all of China's rise is the trade deficit between America and China. 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.

In order to support the Ponzi scheme. So, this is a system that benefits the Americans. When Trump came into power in 2016, he said, "No, no, no, no. It shows that China is taking advantage of us." And Trump doesn't really 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 is trading real assets, the energy of its people, for fake assets, which is just US dollars, okay? So, it's a good deal for America, but Trump said, "No, this is a bad deal." And this was what led to the trade war.

So, what led to the trade war is the So, in 1999, China negotiated to join the WTO, the World Trade Organization. And this is what's going to make China rich and the largest manufacturing power in the world. But in order to join the WTO, China had to agree to a lot of conditions. The two most important conditions were protect IP, okay? You have to protect other nations' intellectual property and you have to enforce it. The other thing, open the financial sector. The goal is USD renminbi convertibility.

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 Okay? So, China was not very stringent about protecting IP. This is what led to the rise of Huawei. Basically, Huawei can take Apple IP and make these great computers. So, in the year 2016, when Trump first came into power, Huawei computers were actually better than Apple computers because Huawei was constantly innovating and they were trying to make their computers as cheap as possible, whereas Apple was essentially a monopoly.

Okay? And this led to the 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 all the money in China runs off to the United States because Chinese appreciate that we are a hallucination of a hallucination of a hallucination. Your dollars are more valuable than your renminbi based on your dollars. So, wouldn't it make more sense to just convert all your renminbi into US dollars? But then all of this would of course cause the collapse of the Chinese Right?

So, the Chinese government would refuse to open the financial sector, and that's what started the trade war in 2016. Oh, sorry, not 2016, in 2018, okay? 2018 is when the war actually started, up to today. So, for the past 8 years, this war's been going on because America's trying to protect its IP, and because China wasn't going 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 got to appreciate how this war started and why it's going to end. All right. Now, the thing about this war is that for the past 8 years, China and the United States have been attacking each other. 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 environmentally 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 highly dependent on. Okay? That's the first attack vector. Second attack vector is the China appreciates 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 way up. And so this is the way that China is trying to exert pressure on the United States. The problem is that China is much more vulnerable to attack than the United States. Okay? The United States is a hallucination, but China is a hallucination of a hallucination. The first thing to appreciate is that energy dependence is huge. China wastes... 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 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 oriented. Okay? So the entire economy is basically about exporting manufactured goods cheaply to the rest of the world. And you can tell because most of the world's biggest ports are actually based in China, okay? The busiest is followed by Singapore, Ningbo, Shenzhen, Qingdao, Guangzhou.

Okay? So sorry, five of the world's top six export hubs are based in China. That shows you China's dependence on exports. But, if America's controlling the seas and controlling through its choke points like the Strait of Malacca and the Strait of Hormuz and Strait of Gibraltar, Panama Canal, that shows a huge problem for China. And the third thing is how many resources China uses. China in only 3 years' time, okay? From 2011 to 2013, used more cement than America did in 100 years. That's crazy to think about.

All right? So, this shows you how dependent China is on the global economy. It also shows you how dependent China is on the USD. Okay? Because it's only because the renminbi can be exchanged for the USD that China can purchase so many resources from abroad. All right.

The reality is that China is too dependent on America. This is something that Chinese policy makers have been trying to change for the past 10 years. It doesn't work. Because what Chinese policy makers don't understand is that you're 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. All right? It never really recovered. Consumer confidence. People don't believe the economy is doing well. People are not willing to buy things. People aren't working. People are losing 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 though there are fewer and fewer opportunities to do well in China, more and more Chinese are going to America to study.

And guess... Not the very best are not coming back, okay? There's a gap of about a million who stay in the West. And these are often the very best students. All right? So, I hate to say this, but you're a hallucination of a hallucination, you're anxious. You want to go back to the source. Right? So, you know there will be space on your dollars. If you can change your RMB for dollars, you will do so. If you can flee the country, immigrate abroad, you will do so. All right. This is pretty stark data, okay?

So, this shows you the current account balance. Current account is basically 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 bank because of the... tracks the actual trade. Okay? As you can see, for most of Chinese history up until about 2022, it tracks pretty closely. But, starting in 2022, there's a divergence. A huge divergence. You know what? That's 5 billion dollars 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 five hundred dollars. We agree for five hundred dollars, but you charge me a thousand dollars. Why? Because you didn't take the five hundred dollars, and you put that money on my behalf into US real estate. You buy property or buy stocks from me, okay? Does that make sense?

This is all just money laundering. Okay? 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. The highest in the world. Why are Chinese savers... Why are they saving 40% of their income? Well, a lot of the reason is because Chinese aren't that wealthy, okay? So, even though the Chinese economy has boomed these past 30, 40 years, the Chinese individual has not seen a huge improvement in his standard of living, okay? And so, there is not a great confidence in the future, and that's why Chinese save a lot of their money.

And there are not 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 BlackRock, you're like, "Why don't you give it to me? And I'll invest the money for you and give you bigger returns." Right? This is why they're here in China, cuz they want this. They want all that capital stored in Chinese banks not doing anything. Like, "Give it to us and we'll make you more money," okay? All right.

This shows you the capital account. All this is saying is that you can't actually convert your yuan renminbi into other So, most countries have open capital accounts, okay? The black is most countries.

Bottom quarter of nations have closed accounts, and China is part of the quarter that have closed accounts, okay? So, Chinese can't 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?

In terms of like assets and liabilities, they don't have much invested abroad. You can compare that with like other countries like Japan, United States, Germany, United Kingdom, they have a lot invested. China doesn't have that much invested abroad. So, in theory, you can encourage the Chinese to buy more things abroad, which would help the global economy, right? 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 even Indonesia, Turkey, Mexico actually invests more abroad than China does.

Russia, Saudi Arabia invests a lot, South Africa invests a lot more than China. Okay? So, again, from a US financial perspective, China is a large, great opportunity in the world. That's why they're coming. Okay? They want to strike a deal where they can financialize the Chinese economy. Basically, use the Chinese economy 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.

Create money out of thin air. 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. Right? 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 as a loan to a restaurant entrepreneur. And this is how banks work. And you think that, okay, well, if I deposit a million dollars in the bank, the bank then loans it to the restaurant entrepreneur, then in theory, the bank should have in the bank, right?

No. The bank now has two million dollars. The banks are allowed, according to they're allowed to create money every time they issue a loan. That only they keep that million dollars from the depositor, but they also are able to print a million dollars to give to the restaurant entrepreneur. Does that make sense to you guys? Okay. Do you guys want 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 Why? Because merchants needed capital in order to trade. So, they came together and created their own bank. Okay, so they were an alliance. And so, what merchants would do is basically deposit their gold into this alliance so that it can be distributed elsewhere. Now, the problem with gold is that it's heavy, it's hard to transport. It's also dangerous because there are pirates, okay? So, the way that they use gold in order to create exchanges, in order to create business, is to use receipts.

Receipts are contracts. So, rather than me give you the gold physically, I just give you a piece of paper saying that I guarantee that this paper can be redeemed for gold at my bank. Okay, does that make sense? All right. And then you have to keep track of these. So, they created something called double-entry bookkeeping, which is basically assets and liabilities.

Okay? And that's double-entry bookkeeping. Something that we still use. 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." Now, the problem, my problem is, do I put the receipt in liabilities or assets? Assets, of course, right? And that's how this system works. And this is a system we still use today. That's why banks are allowed to create money out of thin air because of double-entry bookkeeping. Okay, are you guys clear about this?

"Is it because the banks have powers to print money when they make loans or Because I think like if some people deposit their money into the bank and the bank needs to give it back. So, it might be like into the liability." Okay. All right. All right. All right. 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? And I give a paper saying this is gold.

It's money, okay? Money. Okay? Is this money a debt or a 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 means it's an asset. Okay? Does that make sense? All right. So now this becomes the basis of the global banking system. All right. So, let me show you how. All right. So, what happens is this. You have these 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 US government. The US government does not have any money. The US government wants to borrow. 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. In 1913 the banks got together and created something called the Federal All right? Federal Reserve. Though at the heart it's just a cartel of private banks in America.

Okay, do you understand? Now the US government can just work with 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 US Treasuries.

Okay? So the Federal Reserve can print money to buy US Treasuries. And then this money goes to the US And the US government can then pay for expenses. Okay, does that make 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 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 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 it going to get $2 trillion a year? It has to borrow more money from the Federal Reserve.

All right? So this system is really, really unstable. So now your problem is like, how do I solve this problem? You solve this problem by getting more people to buy US Treasuries. Okay, does that make sense? All right, so you can get people 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 US Treasuries.

And who are these people? Everyone in the world. You, me, everyone in the world. Okay? This is what we call retail. So, previously, it was only institutions that wanted to buy US Treasuries. And 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 simple. The idea is stablecoins are backed by US Treasuries. Tether and Circle have to buy US Treasuries in order to sell stablecoins. And then they can sell stablecoins to anyone and everyone. Okay? Including in China, which has a 40% savings rate.

Through institutions like Apple, okay, does this make sense? Now, you get around the problem of the closed capital account. A closed capital account means you cannot use yuan to buy US dollars. With stablecoins, now you can use yuan to buy Tether or Circle. Do you understand?

Okay? So, now what the US government is going to do is they're going to transfer that debt onto the Chinese people. Okay. 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 America can use to control this debt. And this is called financial repression.

How does this work? Very simple.

How do I force you to buy it? By passing laws called the Genius Act and the Clarity Act, which compel stablecoins to use US Treasuries as a basis of their digital currency. And again, remember, if you're Chinese, if you can keep your RMB 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. I drop the interest rate of US Treasuries to nothing, in which case it will destroy the debt over 50 years.

And I force people to buy it by passing laws that force companies to back the digital currency with US Treasuries. Forcing them to buy US Treasuries. Does that make sense, guys? Okay? And why do they want to do this? Because now they can access the Chinese consumer. They can sell digital currency to Chinese consumers. That's the grand plan. Okay. And you're like, "Okay, wait a minute here. Why would China agree to such a stupid deal?" Well, there are actually lots of reasons, okay? The first major reason is Taiwan.

So, again, the United States doesn't really need Taiwan. Taiwan is over here. And what Taiwan does, that's very important for the 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 and 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 us say I lose Taiwan. Let's say I to 'I want Taiwan to return to the motherland.'" Okay, what happens now?

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 now divide Southeast Asia into two. This is important. Why? Because guess what? Japan, South Korea get most of their energy through the Strait of Malacca. You basically block off South Korea and Japan from a lot of the global In which case, there's actually no way in hell South Korea and Japan agree to let Taiwan return to China.

Doesn't make So, 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? That's why strategically it makes perfect sense for Trump to say, "Taiwan belongs to China." Okay? So, Taiwan issue problem is 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 taken over Venezuela.

And Trump announced this like I think 2 days ago. We're going to 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 energy supply, okay? So, this is war in the Middle East, which means that the Middle East you can forget about. So, China now can get energy from Russia or the Western Hemisphere. China doesn't want to depend entirely on Russia. China will buy more Russian oil, but it does not want to become entirely dependent on Russia.

Also, Russia cannot actually meet all of China's energy needs, okay? So, now China is forced to negotiate with the United States to have access to the Western Does China care? The answer is no. China only cares about stability and Stability and cost. I want things at a fair price and I want this to be a stable and predictable relationship. If I'm China, I would prefer if America controlled the entire Western Hemisphere because now I can just negotiate with one government as opposed to like all these other governments, many of whom are corrupt.

Does that make sense, guys? So, would China agree to this? China has actually no problem with America controlling the Western Hemisphere if it means stability and cost are controlled.

Does that make sense to you guys? Okay. Yeah. "But, does China hold an attitude like America controlling Venezuela because like using morals, like they said they" No.

Game theory is people are going to behave in their best interest. Okay? No morality, no human rights, no All right? Okay. So, China doesn't care who controls Venezuela as long as it's a stable place where China can get cheap It doesn't make sense. Okay. All right. The last thing is All right. So, as you can see, the United States is the world's leader in the I simply because it has the most data centers. In fact, America plans to build more and more data centers. China is trying to compete, but its data center development is constrained by the fact that it has limited access to chips.

And so, China wants more chips from the United And the United States can say yes. But you're like, "No, no, no, wait, wait, wait, no, no, no. Doesn't that mean that China could one day overtake the United Could China just reverse engineer and steal the IP from the 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 then they're sent on to the Philippines to be value added, then sent to China to be added to components, then it's sold to Europe.

And all the while, you have to extract resources from Africa, from South America in order to feed these semiconductors. Do you understand? So, in other words, there's actually no way that one nation, only one nation, can control the entire supply chain. So, as long as America can control the trade network, America will always have the advantage in semiconductors. Okay? There's actually no way China can reverse the production of the semiconductors because it's too sophisticated. It's too expensive.

Only one country can specialize only one Doesn't make sense. So, that's why this guy is important. Okay? Jensen Huang of Nvidia. He was not supposed to come to China. Okay? It was announced he was not coming to China. Then, as Trump was flying through Alaska to refuel, he got on board in Alaska. It was a last-minute addition. But, not only that, but there were two business people that were with Trump on his plane. Elon Musk and Jensen Huang. Okay? So, what happened? So, I work in business negotiation. I'll tell you exactly what happened.

What happened was Scott Bessent and He Lifeng, they were negotiating this grand bargain. Just the contours of this grand bargain in South Korea. China wants, first and foremost, Nvidia chips. Scott Bessent wants, first and foremost, access to the Chinese financial market. Okay? There was an impasse. So, Trump just basically said, "I'm not going to bring this guy." Okay? And then, as Trump was going to come to... there was a breakthrough. And Trump's like, "Okay, as a sign of goodwill, I will now bring him." Okay? This is how business negotiations work.

This is confusing for people because usually we don't want business people to run pure politics, to run diplomacy because they are unpredictable, okay? But this is how business negotiations All right. 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 access to cheap energy of the Western Hemisphere. It wants Nvidia chips to fuel its AI.

And it wants access to the US market, okay? Those are three things that China wants. America wants access to Chinese financial markets. Basically, it wants Chinese consumers to buy stablecoins in order to finance the US debt. It wants to better control China's AI development. Why? Because with AI, China and America are not competitive, they're partners. Because as I told you last class, the 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 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 the AI market. And the third thing that America wants is Chinese Why? Because Chinese manufacturing is the best in the world. So, not only does America want China to continue in order to buy US dollars, but also wants to import Chinese manufacturing into America and to Venezuela as well, right? Because Venezuela has all these resources that can be extracted and turned 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 the situation and we'll know in a couple days if I'm right or wrong. Okay? So, we'll talk next week.