The War On China

Yesterday I began the first post on Rubio’s crazy Munich speech by quoting Glenn Diesen, who, in my view, presents a fair characterization of what Rubio was saying:

Marco Rubio portrays decolonisation as a sinister communist plot that destroyed 500 years of Western empires. Rather than adjusting to multipolarity, Rubio hints at restoring the empire and invites America’s European vassals to join the US. This reads as a declaration of war on multipolarity and sovereign equality.

Rubio did in fact romanticize and laud the “vast expansion” of Western empires around the world, and he decried “anti-colonial uprisings” and the end of “Western dominance” in the wake of WW2. He also went on to state forthrightly that everything the imperial Euro powers and the US had done in the past to establish Western dominance, Trump intends to do again. Europe has the opportunity to join in:

This is what we did together once before, and this is what President Trump and the United States want to do again now, together with you.

In this version of The Empire Strikes Back Rubio embraces a frank nihilism, an amoralism in which anything goes as long as it increases our wealth and power.

What stands in the way? In a word, or acronym: BRICS. And, above all, China. That’s why, from top to bottom, the Trump regime is stacked with China “hawks”. Military hawks, economic hawks—it’s all hawks. China is what Trump’s trade war is all about and it’s also largely what the proposed war on Iran is about. The aim is to strangle the Chinese economy. At the same time, the US military is aggressively attempting to strengthen its ring of bases to hem China in, to prepare for an economic naval blockade to choke China off from Middle East energy.

China, of course, has seen this coming and has been preparing. Militarily and economically. I found I nice thread on this military aspect at Luke Gromen’s X account, which I’ll present first. There’s a lot of denialism and China hate going on in the thread, which starts with a comment from the Australian defense minister:

I will comment this: The minister specifically refers to a “conventional military buildup,” which allows him to ignore the vastly larger—multiple times larger—US offensive nuclear arsenal, compared to China’s nuclear deterrent force.

Luke Gromen engaged:

Luke Gromen @LukeGromen

“What is it for?” This is not a tough one to figure out.

The Chinese know what the Anglo-Americans did to both:

a) China during its “century of humiliation”, and;

b) A rising Germany the last time the world found itself in its current “Thucydides” situation (1873-1914).

And here’s a selection of responses to Luke:

Luke Knight_SHA256 @LukeKni40895721

Feb 14

In fairness the “rising Germany” was responsible for triggering the 1914 conflict (along with its Austro-Hungarian allies).

Luke Gromen @LukeGromen

Feb 14

Disagree

Germany offered UK partnership in Berlin-Baghdad Railway, amongst other concessions

UK declined and chose war instead

I basically agree with Luke on this and. More selected commentary:

The Brawl Street Journal @TheBrawlStreet

Feb 14

How many countries did China invade in the last 500 years? The answer should calm the defense ministers’ nerves.

When confronted with this pretty inarguable fact, prominent China hater John Mearsheimer simply responds, ‘Well, I disagree.’ I’ve actually heard him do that—refuse to actually engage with that reality.

Space respecter @GatorCosmist

Feb 14

US government/military literally say they want to go to war with China, and physically interrupt maritime oil shipments to China as we speak by detaining tankers. That’s practice for upcoming trade blockade. Why would China want to improve their military? It’s a mystery indeed.

Gerard @GerardRoth1

Feb 14

China knows if Russia fails, they’re next. I believe it’s Russia, Iran, Cuba, Venezuela, North Korea, etc. Look out India, you’re on the list too.

LeGrande @zorathruster

Feb 14

The reason Japan HAD to move to military action was the restricting of strategic resources. Very much like cutting off China from Iranian, Venezuelan and Russian oil.

I Nompelis @nompelis

Feb 14

Studied Easter civilization history in college. The Brits created the problem with China with the Opium Wars. China has always had a isolationist doctrine (like Japan), until they were dragged to war. They know the West’s roots, and want this to not happen again.

I’ll finish this part with a very strong—and IMO unanswerable—comment:

cj hill @finius1904

Feb 15

The military buildup took place after we blew up China’s embassy in Belgrade, Serbia for no reason. The Russian military build up started after wars in Chechnya and Georgia that we started. Had the US behaved neither rearmament program would have shifted into overdrive.

Now, for the status of the economic war, we turn to Sean Foo. Let me just say something here. All those people who whine about me criticizing Trump, please read this closely and then tell me that this is what you voted for. Yes, I voted for Trump—but not for this. More fool me.

Bessent Demands China COLLAPSE Its Global Exports As MASSIVE Layoffs Hit The US Economy

The US is gearing up for a summit with President Xi of China. Now we had Rubio meet [foreign minister] Wang Yi, and the results were very mixed. Rubio of course calls it a good step ahead, but the Chinese had a very different experience. Wang Yi gave the neocons in Washington a really tough warning--especially when it came to Taiwan. He also warned about trying to decouple from Beijing and destroying Chinese supply chains. China knows the game the US is trying to play and we can expect absolutely nothing concrete from the upcoming meeting. US policy on China has not changed. Bessent and Rubio are reading from the exact same playbook as Yellen and Blinken: Neocon Basics 101.

Bessent: Yeah, I, I’m convinced that the US is winning the AI race. We have the technological lead. Uh, but in the long run, China must rebalance. We will also see, I think, at the G7, global rebalancing will be a topic. But the, the the world cannot have a situation where China persistently runs a $1 trillion trade surplus. That, that’s just not possible.

And why is Bessent so concerned about China rebalancing? Why does their $1 trillion trade surplus freak him out? We need to break down the real concern Bessent has with regard to China’s export economy. The knee-jerk reaction is that China is eating up America’s export market. If China follows Bessent’s orders, then US exporters could come in and sell more. Right? Bessent also wants China to buy US goods to lower the trade deficit. It’s becoming a crisis because China’s countercount surplus has reached an incredible high. This is ammunition for China to stay one step ahead of the US--not just in trade, but in the financial economy as well.

China’s current account surplus has reached an incredible $242 billion in Q4 last year. That amount is equivalent to 4.4% of China’s GDP. That’s a lot of money that is gunpowder Beijing can use to fight a trade war with the US. If this continues, China will accumulate more money and build their war chest. Conversely, the US will be facing a big gap that can only be covered in two ways. Either Washington begs the Federal Reserve to print money or they will have to issue more financial assets. Normally, this will be a ton of stocks and bonds, but China is buying neither. So, the value of all these assets are also collapsing. It’s a big reason why the US has to go around the world and shake down allies for money--because the US hasn’t been generating a trade surplus-- not for a very long time. There’s literally no spare cash to reinvest or subsidize industries directly. The US is essentially broke.

Trump’s policies are going to add a whopping $1.4 trillion to the US annual deficit over the next decade. Which means that, instead of just borrowing $1.9 trillion this year, the US will eventually need to borrow $3.1 trillion by 2036. And this is annual borrowing. Bessent is frustrated because US bond issuance is trapped. All China needs to do is continue running a big current account surplus and the US debt situation will get worse and worse. China’s surplus keeps growing larger because China also has capital controls. The money earned by Beijing stays mostly within the country and they strategically invest it elsewhere. This includes buying gold, buying mines and other resources, to strengthen the supply chain. Trump, however, is surviving on foreign companies and countries shifting production to the US.

So far there’s half a trillion dollars worth of investment pledges from global companies. TSMC, Hyundai, GSK and Mitsubishi have pledged billions to set up shop in the United States. But if China continues to control global trade, all these companies could simply U-turn their commitments. Manufacturing in the US won’t allow them to export their products. All these commitments, all these pledges, could vanish in a hurry. They are not guaranteed and were probably made to appease Trump. It’s a wait and see strategy for all these countries.

What Bessent wants is for China to consume more and sell less to the world. But there’s a problem with that statement. Even if China consumes more, that doesn’t mean they will buy more US goods. It’s not a 1:1 correlation here. A lot of goods the US sells, China can replace domestically. They can always source it from elsewhere at a cheaper price, as well. There’s really no urgency from the Chinese to buy more stuff from Trump’s economy.

China’s effective tariff rate on the US is well above 30%. That’s the big reason why US exports have fallen by nearly 15% last year. China’s buying oil, they’re buying wheat and other inputs, from the BRICS countries. This year, we can expect US - China trade to decouple even further. The real agenda here isn’t for China to buy more stuff from the US, but for Chinese exporters to sell less to the world in general. The only way to keep US industries alive is going to be for the government itself to spend more. They’ll be spending to oblivion. The US debt crisis and spending problem will continue to get worse.

Trump, Bessent, and Rubio are all taking different approaches with the Chinese, but at the heart of it, they need China to give up global market share for the US economy to stay afloat, to prevent a spending crisis. Now, in the next 10 years, US taxes are going to flatline--that’s even with the tariffs-- but spending is going to rise from 23% of GDP to 24%, and that means the deficit will explode and bond issuance is going to increase. It’s definitely unsustainable for the US to continue on this Doomsday trajectory. But imposing a global trade war is not a miracle cure. In fact, it’s backfiring and just making Chinese exports more desirable.

The US is running out of cards to play, which just points to a bigger crisis in the dollar. The bond markets and everything financial going forward. It doesn’t matter if you’re managing money or you’re just trying to survive. Trump is steering the entire economy into a circus. It’s his own private clown show. And now he is the economic genius:

And please read this part closely. Remember DOGE?

Trump: But I could have it go up or go down, like a yo-yo. I’ll give you an example. Unemployment. I could create the greatest unemployment numbers or employment numbers ever. All I have to do is hire three million people and put ‘em into the federal government and you have 10 people, you know, for one job. Right. That’s right. And what we’ve done is we’ve cut the federal employees and they’ve gone to the private sector. But if I wanted, I could hire a million people tomorrow, put them in the federal government, and she’d be writing a story: Unbelievable employment. Unbelievable employment. But we have great unemployment numbers.

So now Trump can control the value of the dollar as and when he wants. He can also create the greatest employment numbers in the world. He just has to hire millions of federal workers. And this is perhaps the biggest fear everyone has. That Trump is going to debase the dollar to spend more. That Trump’s going to goose up the numbers by making big government even bigger. Now, the scary thing is that he might not have a choice here. The labor market isn’t just wobbling. Under the tariff war regime it’s outright collapsing. It’s even worse than we all thought.

The US jobs numbers have been revised lower by over a million jobs in 2025. That’s the worst revision in two decades, even worse than the Biden era. Now, the collapse totaled 2.1 million jobs over the last 3 years. It’s even worse than the ‘08 housing crisis that only saw losses of 1.2 million. This throws into question the payrolls data that came in just a few days back. Did the US really add 130 thousand jobs in January? Or is it going to be revised lower? We could be getting bamboozled again.

This doesn’t bode well for US stocks, the bond market, and the dollar. It all boils down to a failure of the tariff war. Trump and Bessent famously said that exporters will be eating the cost, but we all knew the truth back then: Some exporters might be desperate enough to eat the tariffs, but most won’t. It’s the importers who will bear the brunt of the pain. Most of them today still aren’t passing down the full effects to the consumer-- and that would mean their earnings, their profits, and all their balance sheets taking a beating. The Fed themselves did a study that shows over 90% of the tariff costs are born by the importer. From liberation day until August, importers absorb 94% of Trump’s import tax. Now 10% tariff only caused a 0.6% decrease in foreign export prices. Exporters still have a ton of customers around the world to sell to and most of them are fighting fire with fire and are still charging the maximum price possible to the US. And because the importers are absorbing the pain, they can’t afford to hire people. They can’t afford to expand. In fact, they are firing people now.

Trump is really caught in a quandry. Either he U-turns the trade war or he commits to a much weaker dollar and even bigger deficit spending. We probably know what he’ll do, right? He’ll spend, spend, and spend. And this is one trade war that the US can’t afford to lose. We are beginning to see the entire US system cracking. This hyper financialized economy is buckling under its own weight. And the most immediate crisis today is the AI bubble popping. Trump is making an enormous bet that artificial intelligence will be a gamechanger, but how far away is the payoff? How much longer will money need to be funneled back into the black hole? The horizon for payoff is at least 10 years away. Some put it as far off as 20 years, and the productivity gain will be minimal. We are looking at 5% to 10% at best. Now this sounds weird, but there can be some truth in that. We could be seeing a combination of efficiency and innovation--that’s good--but mixed in with creative destruction--and that’s bad. A lot of jobs will be destroyed and a massive reallocation is going to happen. The machines are going to replace a lot of human labor.

A lot of industries are in trouble. Not just the software companies but even law companies, medicine, and banking are going to get disrupted. We are all moving towards that future and the tech companies are not going to slow down progress for us. For them, it’s a race. They will keep spending a ton of money, especially in the US. Sectors that AI could disrupt are now experiencing a collapse. The stock prices are already starting to plummet down. In just 2 months, we have major sectors collapsing in price. The Magnificent 7 is down by nearly 10%. The same for financial services. Real estate services have collapsed by a whopping 20%. But the worst pain is felt in the software industry. So if you’re a coder, the machines are coming for you! Their shares fell by almost 25%. And if the machines can self-code and self-evolve, are human coders really needed here? Maybe you have a few programmers or managers to oversee things, but hiring an army of coders isn’t necessary anymore.

And that’s why the AI bubble is just so dangerous. You are risking multiple implosions all at once. You’re going to create a whole bunch of jobs that will get automated away, so unemployment could fly to the moon. At the same time, you are funneling a whole bunch of money into the black hole. And a short-term payoff doesn’t justify the immense amount of capital being spent. Profit margins since the AI boom haven’t really gone up.

Now, sure, profits for the Mag 7 are rising, but that’s because they are spending amongst themselves and they are borrowing a ton of money. But within the greater economy, no one is seeing their benefits. If you strip away the tech giants, profit margins are still around 10%--with very little or no growth--for the past 10 years.

This is truly a head scratcher moment. The NASDAQ collapse could be a repricing event that has more room to continue. And that’s just a fancy way of saying tech stocks could continue to collapse. Now, what the administration is really saying contradicts what is really going on in reality. Trump is playing God with the economy while Scott Bessent keeps trying to sell us a dream. There’s a reason why 64% of Americans feel the economy is not doing well. It’s doing poorly. People aren’t hallucinating. They are seeing it for what it really is. And the AI race is going to cripple Main Street.

Bessent: I, I think, as I’ve said many times, 2025 is about setting the table. 2026 is going to be a, a banquet for the American people. The economy is taking off. It says to me, Oh, where are these factory jobs that you planned? Can’t push a button and build a factory. There’s lead time, but what we are seeing is big, big commitments to these factories are going to be built. First, we’ll get the construction jobs and then the factory jobs are going to come.

I have no idea what banquet Bessent is talking about. The construction jobs are focused on building those data centers. Commitments are not guarantees of new factories, especially during a trade war. So we must take what the administration says with a huge grain of salt. This is just one big narrative spin to continue the trade war and to continue running skyhigh deficits. At the end of the day, all these will boomerang back and hammer the dollar. This just won’t end well.