David Goldman: US-China competition, AI, Electric Vehicles, and Manufacturing — #36
Steve Hsu: Welcome to Manifold. My guest today is David Goldman. He's an American economic strategist and author, best known for his series of online essays in the Asia Times under the pseudonym Spengler. The first column of Spengler, at least as reported in Wikipedia, was published January 1, 2000. The pseudonym is, of course, an allusion to German historian Oswald Spengler, whose most famous work, Decline of the West, asserted that Western civilization was already dying.
Goldman held senior positions in banking. He was head of credit strategy at Credit Suisse, global head of fixed income research for Bank of America, and global head of fixed income research at Cantor Fitzgerald. His most recent book is You Will Be Assimilated, China's Plan to Sinoform the World, which was published in 2020.
And, which I hope to discuss in some detail with David. David, welcome to the podcast.
David Goldman: Stephen, it's a pleasure to speak to you. Thank you for inviting me.
Steve Hsu: The pleasure is all mine. As I was telling you before we started recording, I've been reading your column since the early 2000s. And, I was always, incredibly impressed with your both historical insights, but also insights into what was happening, for example, in the Asia Pacific region, which I think you were based there for some length of time. Is that right?
David Goldman: Yes, I was a partner at a little Hong Kong investment banking boutique, then called Reorient Group. It was ultimately acquired by Jack Ma and I spent most of my time in Asia. And I also served on the board of an Israeli foundation dedicated to Israeli Chinese relations. And in that capacity, I got to go to Beijing and talk to people with the Israelis, which gives you a very different perspective than when you speak to them as an American, although I am an American.
Steve Hsu: Yes.
David Goldman: With an Israeli passport.
Steve Hsu: So I've, I've always valued your insights, over, over these decades. As I, again, as I was mentioning to you before we started recording, when there's some, when I get a chance to have a conversation with someone whose work I've been reading for 10 or 20 years, I'm always fascinated to find out about their early life and formative years.
Because it often gives me some insight as to, as, as to how they acquired their insights. So, if you don't mind, maybe you could just tell us a little bit about where you grew up, your education, how you find yourself in banking, how you find yourself in Asia.
David Goldman: Well, the short answer is by lucky or unlucky accident. Actually, all I ever wanted to do was classical music. My constraint on classical music is I had no real talent for it, just a great love for it. I ultimately did everything but the dissertation in a doctorate. In music theory at City University of New York with Carl Schachter, who was the dean of the music theory profession in the United States. Great privilege to study with them.
I was something of an outlier, as a boy, classical music to me was like a religious experience and that was, well, it, it, it meant for some lonely times in the world of the Beatles, and the Rolling Stones. And through classical music, I became interested in broader cultural issues associated with it. For example, I fell in love with the art songs that Robert Schumann wrote to the poetry of Heinrich Haydn, which motivated me eventually to learn German and things like that. And the question which has obsessed me for many years is why the West would develop the most inspiring and elevating high culture in the history of the human race. And then effectively abandon it. It's like being an archaeologist looking at Mayan cities. Why would you have these spectacular works, now consumed by the jungle? And by the same token, why would Bach, Mozart and Beethoven, be so neglected as a matter of popular taste?
So I became very interested in the cultural background to the decline of Western high culture. And as I said, I did most of my doctorate in music theory. I really, by the time I went into Wall Street, I had actually decided to get whatever job I could, you know, teaching music theory at the East Oklahoma State Teachers College for the deaf or, you know, or whoever would have me, and living a very quiet life.
Then, my first child was born and I noticed immediately that she wanted to eat almost every day. And I, I, I'd done some economics. And, actually the, the connection to Wall Street came largely as a result of my political association with the so called supply side wing of the Republican Party, Larry Kudlow, who of course was, President Trump's principal economic advisor, was then the chief economist at Bear Stearns, I had been working for a supply side consulting firm.
In the 1980s, Larry took their product. At some point, I fell out with the colorful and somewhat obstreperous founder of the consulting firm who needed a job. And Larry suggested that I apply for a job opening at Bear Sturm's for a fixed income strategist. I didn't know anything about fixed income, so I went to Barnes Noble and bought a shelf of books on fixed income mathematics.
It's trivial arithmetic, so, you know, I learned it in a month and I walked in and said, of course I know fixed income. I think largely because I talk fast and write well. I ascended through the ranks and eventually became the head of fixed income research at Bank of America.
Had a rather prominent job. I quit that in 2005 because the people I worked for, were asking me to do things which could charitably be construed as felonies. Actually, compared to most of the things people were doing before the 2008 crash, this was fairly mild stuff, but I didn't like it, so I quit and did a number of different things.
I worked for a hedge fund, I spent a couple of years as an editor at First Things magazine, and then, you know, some people who were friends of mine, used to work for me, set up this boutique in Hong Kong, and I thought, gee, that's fun. China's the most interesting new thing happening in the world. That's a chance to learn about it. So really by pure accident. I got into fixed income in the first place. And by another accident, I got deeply involved in the Chinese economy.
The great thing about working for the Hong Kong boutique is that it was Chinese owned. It was founded by a Hong Kong tycoon named Johnson Koh, who had very good contacts in the mainland.
I did some IPOs with Chinese tech companies. And as a result of that, I got to see a side of China, which many Westerners do not see. So I had a privileged view. My knowledge of China is not that of a scholar. It's more like Forrest Gump. I happen to turn up in the right place at the right time and meet the right people.
Steve Hsu: You know, David, because you're so insightful writing about culture and, and broad themes, before I opened up your bio, I had assumed that your banking positions were on the equity side. I had assumed you were kind of a global macro strategist. And fixed income guys, at least the ones I know, are pretty mathematical and quite a bit more boring, usually, than the guys who deal in equities.
David Goldman: We are, we are intentionally boring. Fixed income is inherently boring. It's supposed to be when it gets exciting, it means something has gone terribly wrong. Actually, the contribution I made to fixed income research, which was most successful, was in quantitative modeling of corporate bonds using the option based approach that Robert Merton had pioneered in the 1970s. At Credit Suisse and Bank of America, we produced the first models of corporate default risk based on equity option pricing following the Merton approach.
I'm not much of a quant, but I know enough, I know enough math to supervise quants. So, what I did was, actually, extremely boring and extremely quantitative, and I'm glad not to be doing it anymore. Though, you know, it has its uses. It was not. It worked reasonably well, and I think it added some value and I don't apologize for it.
Steve Hsu: When you look at, when you look back at that era in finance, does it seem like a lost era that things are totally different today than then? Or, or do you feel that there's a strong sense of continuity between what you're doing then and what people do today?
David Goldman: Yeah. There are enormous differences. For one thing, the degree of controls on leverage in the banking system prior to 2008 was effectively zero. Federal Reserve. Ben Bernanke, who I think is highly overrated, basically let the lunatics take over the asylum, and allowed the Wall Street to create structured product, which was essentially a phony AAA and then apply incredible amounts of leverage to these phony AAAs, which is what got the banking system into near insolvency when that market came undone in 2008, particularly with home equity loans. That's all been shut down. Another very basic change is that corporate bonds were a wild west market. Nobody knew what prices really were because you didn't have to report the prices at which they traded. Now, old, corporate bond transactions have to be reported to Nasdaq, to the trace system within 15 minutes, which means it's much more liquid. So a great deal of activity is being taken over by electronic trading platforms. The old, trading and sales combination that made so much money for us in the two thousands, has been probably appropriately, laid to rest forever.
But the same kind of problems apply. Actually, the one area where this kind of approach may have purchase would be emerging. Market debt, emerging market corporate bond markets are still pretty wild west, opaque, badly regulated, illiquid. So I've been involved in some attempts to revive this approach for emerging market corporate bonds. But yes, Wall Street is certainly very different.
Steve Hsu: I get the sense that you were kind of an intellectual among financiers. Did you think of yourself that way?
David Goldman: I was doing a job. You know, I didn't discuss, I didn't talk to them about the relative merits of Schumann's and Schubert's settings of Heimlich kind of poetry, if that's what you mean. But we talked about how to make money and how to outperform benchmarks. That is, that's not a particularly challenging or interesting exercise, and I was glad to be done with it. But I did that for a living. I didn't see it as a vacation.
Steve Hsu: Now, you started writing the Spengler column. Is it correct in Wikipedia that it was January 1, 2000 when you started writing the column?
David Goldman: That's correct. My first column asked the question, are internet stocks really a bubble? And I argued, I should have taken my own advice on this, I argued that they were in a bubble, that they portended a cultural change so profound that vast cash flow would be directed towards companies that could provide electronic entertainment online.
I didn't envision social media and so forth in those days. Back then it was downloading music and pornography and a few other things like that. But, if you look at how the Internet and handheld devices and continuous online presence has transformed the culture, transformed the personalities of a generation. It does in fact explain. Why the large, internet monopolies are producing, you know, spectacular and regular, returns.
So, I argue that you have to look at the changes in valuation of these companies as a cultural phenomenon. The fact that they're there transforms the culture, makes people behave differently, and that behavior was going to produce consistently high valuations over the long term.
Steve Hsu: Yeah, I think the prediction that there would be some winner taking all quasi monopolies created, I think, turned out to be completely correct. And, I guess in 2000, we didn't really anticipate smartphones, but obviously that was the other thing that changed people's daily lives.
David Goldman: Sure. I mean, the amazing thing about the smartphone, the genius of Apple, I still like the old BlackBerries better than Apple. I won't own an Apple. I can't stand them because Apple modifies your behavior. The whole point of an Apple is that once you get into the habit of using Apple products, it's very difficult to break it.
And they try to lock you into their ecosystem of entertainment, including music, movies, news, and everything else. They've been extremely successful, brilliant at doing that, given the kind of rebel and misfit that I've always been. I hate being shepherded that way, so I've always had an animus towards Apple.
But an absolutely brilliant company. The BlackBerry was a much better piece of technology. It made better phone calls, more robust, and didn't break when you dropped it. But Apple found a way of integrating computation and entertainment in a comprehensive way that basically addicted people. They are the crack pushers of the electronic age and brilliant at it.
Steve Hsu: I actually was an iPhone user for a long time and actually switched to Android, at some point, so I think I, I, I, went against the conditioning.
David Goldman: You're one of the few who escaped. You're a lucky man.
Steve Hsu: Yeah, I'm actually fairly happy in the Android ecosystem, but anyway, we should have digressed into that. But, I wanted to ask you, when did you move to Asia?
David Goldman: That was 2013.
Steve Hsu: I see, so it was post, financial
David Goldman: Yes, well, I, I did a lot of traveling in Asia before that because I had the teams in my research group that worked for me in Asia and of course, we called regularly on Asian customers. During the 2000s, Bank of America's biggest fixed income business was using its branch network to issue nonconforming mortgages, that is, mortgages that were not guaranteed by federal agencies, packaging them into securities and selling those securities to, uh, the rest of the world who wanted a place to park their savings. And Asians, of course, think that things like houses are extremely safe.
And we did our best to perpetuate that delusion and sell them all of the fixed income products we could. So I spent a lot of time. Asia peddled this toxic waste to Asian clients until I got disgusted and quit.
Steve Hsu: And how did those products do in the crisis, better or worse than the AAA conforming mortgage backed securities.
David Goldman: Oh, they did much worse. The private label stuff did much worse. The best thing you can say about the banks is that the triple A portions of most of the product ultimately did pay off. There were very few actual defaults. That's why the banking system didn't come down in 2008. The Federal Reserve and the FDIC exercised regulatory forbearance. On paper, the banks were bankrupt because they'd levered up massive amounts of these phony AAAs backed by home equity mortgages, home equity loans, and various other things. And the value of this stuff went from a hundred cents on the dollar to sometimes thirty cents on the dollar, so you level that up a zillion times, you know, that wipes out your capital if you market to market.
However, because there was enough credit protection built into those structures. The defaults were absorbed by lower parts of the capital structure. There were very few real interruptions of payment to the AAA. So the banks were earning enough on a current basis from the portfolios of this toxic waste to pay their depositors, which meant they were solvent on a cash basis. Although on a market to market basis, they were bankrupt. So all you had to do was say, well, you know, we'll give you some extra capital, we'll give you time to work it out. And the banks eventually clawed themselves back from it. So it was never quite as bad as it might have looked.
Steve Hsu: Did you ever try to track how the Treasury and the Fed did on all the distressed mortgage backed debt that they bought up during the crisis?
David Goldman: They made money. But they didn't buy a lot of the distressed mortgage bank debt. They weren't buying, they were buying mortgages, but they weren't buying the toxic waste trenches. In other words, what Bank of America was doing at the time. So they have a bunch of mortgages. And at that point, remember 2008, came after a decade in which housing prices, well, up to 2007, were rising at 10% a year.
So if you can get a 5% down mortgage, let's say you buy a house worth a hundred thousand dollars and you put down 5, 000. And the next year, the price is 110, 000. Well, your investment, your cash investment is only 5, 000. Your profit is 10, 000. That means you doubled your money in a year. So, all of America could become house flippers, speculators, liars, and felons because if you fill out a mortgage application, and lie about your income, which vast numbers of people did, you're committing a felony. So we criminalized the American homeowner.
And then the banks would take these loans and repackage them and sell them to unsuspecting buyers and S&P and Moody's would obligingly say, well, the top tranche is worth is, is a triple A rating. In other words, it'll never possibly default. The idea being that the top tranche had 60% of the principal and the first 40% of the faults would be absorbed by people who bought lower rated bonds.
There were cases where Bank of America took portfolios of loans and issued them saying that there were prime loan, put them into securities and the internal risk managers of Bank of America said, wait a minute, not only is this portfolio not a prime portfolio, there's not a single mortgage in the portfolio that would be considered prime. And the banker said, oh no, it's prime, and they sold the stuff. Bank of America was fined billions of dollars for that kind of fraud.
I find it astonishing and distressing that nobody, not one person, went to jail or got convicted of a felony for fraudulent representation of collateral insecurities. And there were thousands of people who were implicated in this. I guess the reason is if you put one person in jail, the jails would be full of bankers. So they decided not to do it.
Instead, they fined the banks, which means they found the stockholders who had no role in this. The stockholders are completely innocent. The bankers kept their bonuses, went off to other jobs, retired. and the stockholders lost. That, in my view, is a travesty of justice.
Steve Hsu: Do you, do you think there was a room in which some powerful people said, yeah, let's not have any prosecutions? How, how do you think we arrived at that particular system of justice after the crisis?
David Goldman: Well, if you look at who ran this, it was basically investment banking guys who ran the treasury. Hank Paulson from Goldman Sachs, Bob Rubin, people who got together were the people who created the bubble, and they managed to refloat the bubble. That's what everyone wanted them to do. Nobody wanted to have a real reckoning where you marked everything to, what it could be sold at and liquidated things. That would have been very disruptive. So I think, yes, in a sense, the people who arranged the crisis did make a decision that they would not engage in criminal prosecutions because what they want to do is calm nerves, restore confidence, and refloat the bubble. and make the problem go away as fast as possible. There's a rationale for it, but I don't think there's a good one. I don't think it's an adequate rationale.
Steve Hsu: So turning back to Asia, you had a front seat, to witness the rise of the Chinese economy. And I guess it's been said that post 2008, the Chinese felt very confident because the, you know, the financiers that they had admired so much in the West had blown things up and actually, I guess the Chinese helped bail out the Western economies.
maybe you can tell us just, obviously it's difficult to summarize an entire decade of experience, but tell us a little bit about what you learned from that experience.
David Goldman: Well, the first thing that Reorient Group asked me to do before they hired me was to produce a study of the Chinese economy. And I noticed two things immediately. One is that there was a, then a massive effort to build up human and physical capital in the high tech space. We didn't yet have the full dimensions of this 5G plus artificial intelligence combine, which is doing so much to transform economic life under the rubric of the fourth industrial revolution. But you can see the outlines already.
In Chinese universities that have been burned to the waterline during the cultural revolution, we're now reviving. And there was a generation getting tertiary education at a high level on a scale that no one in the world had ever done before.
The second thing was the belt and road initiative. In 2008, if I recall correctly, exports to the United States amounted to about 9% of China's GDP that 2007 and exports overall were more than a third of China's GDP. By last year, exports to the U. S. were around 2% of China's GDP, and exports total were about 17% of GDP. So exports as a portion of GDP, the export dependency to the Chinese economy dropped by half, and the export dependency to the U.S. dropped by, three quarters or more.
That was an enormous shift, and the, the great Chinese idea, in the early two thousand tens was to use China's experience in creating robust supply lines and employing very large numbers of semi skilled workers in ways that raise their income substantially and export that model to the rest of it to the rest of developing Asia and parts of the world, the global south, otherwise parts of Africa and Latin America.
I wrote a book about this in 2022, entitled-- silly title-- "You Will Be Assimilated: China's Plan to Sino form the World."
And what I mean by sino forming is simply repeating to some extent the great urbanization and industrialization that China had undertaken so successfully under Deng Xiaoping. And apply it to many other countries and integrate them into a sino centric economic sphere. It's not exactly Japan's, you know, greater co prosperity sphere. It's an invidious comparison because it's quite different. But China is now busily transforming many of the economies of the global south and creating almost a parallel world system, competing with the old American centric economic zone.
And you can see that beginning to happen in 2013. And after looking at the picture we had 10 years ago, I became convinced that this was the biggest transformational act that would happen in the world economy in my lifetime. And I wanted to find out more about it. So I joined Reorient and spent a lot of time learning about this.
I got to know people at Huawei quite well. Huawei is if there's a single iconic company of the fourth industrial revolution, a truly Huawei, just as, for example, Ford Motor might have been the, iconic company of the second industrial revolution.
Steve Hsu: Yeah, I, I think, didn't we just see a statistics where, a statistic where, the Chinese exports to, I, I forgot whether it was to BRICS countries or to BRI countries, now exceeds China exports to, EU, Japan, and the United States.
David Goldman: Uh, well, China in March of this year, for the first time China's exports the global south as a whole. That includes Russia, Saudi Arabia. It's a broad definition. Central Asia, everybody but the developed markets, China's exports to the Global South exceed their combined exports to the United States, Europe, and Japan, to the developed markets. And exports to the Global South are roughly four times China's exports to the United States. That's been an incredibly fast ramp up. That's a doubling. In just three years.
And it reflects, not just lots of people buying Chinese toasters or motor scooters. A great deal of that is led by infrastructure, both physical and digital. China is wiring up the global south through broadband. And that has knock on effects because it allows people to do things they couldn't do before. And makes possible, important increases in productivity. That, by the way, is now the conventional wisdom. The International Monetary Fund and the World Bank have written a great deal about the central role of digital technology in raising productivity in global south countries.
I think everyone would agree that, this is an, this is a critical feature of, of economic development. What is really stunning is how fast this is now occurring. You can see it in the numbers, and you can see it on a very granular basis, looking at what's happening, country by country.
I covered, for Asia Times, the Mobile World Congress in Barcelona in February, which was a real eye opener.
Huawei had nearly half the floor space. It was clearly the star of the show. This is after several years in which the United States did its best to shut Huawei down. It only succeeded in effectively shutting down its handset division, but didn't do very much in terms of infrastructure, 5G to business, and, and other divisions.
There was a large area in the Huawei pavilion occupied by partner companies, mainly telecom companies from countries ranging from Thailand to Turkey to Ghana, Brazil, discussing what they were doing with 5G and artificial intelligence. And it's really quite remarkable that this applies to government administration, healthcare, manufacturing, quality control, and Huawei has been very inventive in terms of finding ways to make 5G fit into the existing needs of relatively poor economies. I'll give you an example.
There's a company in Bangladesh, which is the main food processing entity for chili peppers. They basically take chili peppers, dry them, and put them into bags, and sell them. Doesn't seem to be very sophisticated, but they've got a significant spoilage problem, because if you put one rotten pepper into a bag, it'll spoil the entire bag.
And your spoilage might be 15%, which is substantial. So, they installed high speed cameras on the conveyor belt and used an artificial intelligence algorithm to examine the images and identify a rotten pepper. AI is very good at things like quality control. You can train an AI system to look at images and distinguish a healthy pepper from a rotten pepper.
So they were able to reduce their spoilage to nearly zero. This is an application of fairly sophisticated technology, high speed camera, cloud computing, 5G communications, and artificial intelligence to do something very simple like food processing, but in a country like Bangladesh, where the food processing industry is one of these steps up the ladder towards industrialization, it's extremely important.
Steve Hsu: Yeah, that's a good example. And you know, I think one of the things that Westerners fail to appreciate is that not only is the AI capability of a company like Huawei really first rate. It's as good or better than, you know, any Western company that the costs are extremely low. Like, I think Westerners just can't believe how cheaply Huawei can roll out things like 5G access and even access to these more advanced AI applications.
David Goldman: Huawei has a huge advantage over Ericsson, Nokia, Samsung, and other competitors. It's the lead player in a market of 1. 4 billion people, so it has vast economies of scale. And a huge number of examples to work on. So they can very quickly work, go, go off the learning curve and figure out how to do things. And once they get it down right, they then produce it, they can then reproduce that result, very cheaply.
Not just Huawei. I mean, one of the most stunning things I think that's happened to the world economy recently, is Chinese auto companies producing 10, 000 electric vehicles. BYD just introduced one for 11, 000, the Seagull, which can go from, you know, zero to 50 miles an hour in five, in five seconds. Like a 250 kilometer radius and it costs $11,000. Wuling, in partnership with GM, is going to produce a somewhat smaller car for $9,000.
This is like the Henry Ford Model T of the 21st century. Henry Ford had a really simple idea. Produce a quality car at a price equal to roughly per capita GDP. Price of a new car. In 1908, if the new Model T was roughly the per capita US GDP, which meant that a very large number of working people could afford it, the Chinese GDP is now $12,500 per capita. So the seagull is within that range.
How do they do that? Well, you have an enormous amount of robotics, artificial intelligence applications, and other forms of automation on a very large scale, which reduces per unit costs. It's the Ford Model T principle in the age of AI.
So Huawei has done some remarkable things. And many Chinese manufacturers do remarkable things too. And I see these examples popping up faster and faster. And I look at the American industry with alarm. I've only been able to count three or four private 5G slash AI networks in American manufacturing. Now, GM is using it, John Deere is installing a system, but there's very little else except experimental facilities.
So China's edge in manufacturing, which started at the low end of the scale and then moved up to the middle of the scale, may very well make China the dominant player in the world's largest manufacturing industry, which is automotive, with a three trillion dollar, annual sales, and that would make China's manufacturing, really insuperable. We wouldn't be able to compete with them. And I think that would be very damaging, very bad for the United States. and I've devoted a lot of effort to trying to convince politicians and bureaucracies and whoever has some influence over this to do something about it. Because the last thing I would like to see is the United States left behind by China.
Steve Hsu: You know, the story of the last five to seven years, which, which you, you mentioned there is that. Huawei and, also ZTE, pretty much took over 5G telecoms worldwide. Anywhere where the US government is not able to force the locals not to do business with Huawei, they are buying the equipment, which is cheaper and better, from Chinese suppliers.
And now overnight, you have people realizing that the Chinese EV industry is fully competitive with Tesla and actually surpassed other Western EV makers. I think this shock was, in particular, very discontinuous because of the pandemic. People sort of lost track of what they were doing in
David Goldman: People also forget that to a great extent Tesla is a Chinese company.
Steve Hsu: Absolutely. Yeah. The Gigafactories in Shanghai.
David Goldman: The Tesla's, China is now the world's largest exporter of automobiles that surpassed Japan, I believe in, in March or April, I forget which month. And there were, the two single largest contributors to that margin of growth were the fact that China took over the Russian market because the Europeans abandoned it because of the war. But most of all Tesla, which is one of the biggest, I think the biggest exporter of cars from China.
Steve Hsu: Yeah. So, yeah, I think they, the recent, at the recent Shanghai auto show, people were shocked. So, that was a post-pandemic. It was open to the world. I think VW flew, I think, all its directors to the show so they could see what was happening. And I think the Western automakers were really shocked at the price and quality of the Chinese EVs.
David Goldman: Well, the most productive plant that VW has is not in Germany, but in China. That's actually been true for several years. and the Chinese will give VW, as well as Tesla, a run for their money.
From the standpoint of the Germans, they really have no choice for several reasons, but to become all the more integrated into China's economy, that's due to several factors. One is of course the fact that China dominates the battery market. The second is that the Chinese internal market is critical to them and also because they simply cannot get enough skilled labor at home, and there is a perpetual labor shortage to compete on a grand scale. So, Germans have absolutely no intention of decoupling from China or de-risking.
They're coupling all the more.
Steve Hsu: So can you make a prediction for how successful the United States will be in trying to get European countries like Germany to decouple from China?
David Goldman: It depends on the industry. I think in terms of their core industries, like auto, they will be not successful at all because it would be a matter, it would be economic suicide for them to do anything else. And some people will commit suicide for the United States, but very few of them speak German or French.
Steve Hsu: Well, well, they may have, they may have just committed suicide vis a vis energy costs, right? Under the direction of the United States.
David Goldman: All the more reason for them to move capacity to China. Because if higher energy costs begin to price some of their plants in Germany out of the market, that motivates them even more strongly to expand capacity in China.
So you don't, you don't think the U. S. will succeed in getting Germany to decouple? No, absolutely not. If you look at German politics in detail, which we do at Asia Times, there is a, if you will, a sinophilic surge of opinion, particularly coming from the SPD. From the old sort of working class wing of the SPD. A paper came out from an entity called the Zaheimer Kreis, the Zaheimer Circle, which is considered sort of SPD left calling for a quote, multi dimensional policy towards China, which means we don't follow the U. S. view. The very anti Chinese view in Germany is associated with the Green Party, which is the yuppie, hip with it, you know, very pro American party. But, they've gotten absolutely crushed in the polls recently. I don't think they're going to be calling the shots.
So, no, on the contrary, I see a strong, uh, more pro-Chinese direction coming out of German politics recently than the opposite.
And then you, of course, you have countries like Hungary. If I remember correctly, Huawei Supply chain management is based in Budapest and they've got a number of exemplary projects in Budapest, sort of interesting because Orban is the hero of many American conservatives. I won't go into whether that's a good idea or a bad idea. I met the man once and think he's extremely talented and clever as a leader. But he's been very close to the Chinese. So I don't think that, you'll see,strong cooperation in general. However, ASML will probably go along with some of the restrictions on lithography machines that the United States has demanded. It's not quite clear where they're going to draw the limit, but the United States probably has enough influence from the Dutch government to make that happen. And the Dutch have enough markets, outside of China.
So it'll be a mixed picture, but in general, no, the United States will not succeed in isolating China. From Europe.
Japan's a different story. The Japanese seem quite eager to join the United States in suppressing China, which may be understandable given historical enmity between those countries. Japan, I have to say, I have very little insight into Japanese thinking.
I'm simply watching it from the outside.
Steve Hsu: Yeah, it's a similar situation. I, in, in, in, slightly less leading edge semiconductor manufacturing, a lot of the tools are Japanese. So for deep ultraviolet, but not extreme ultraviolet, a lot of the tools come from Japan. And it's, it's, that's something to keep an eye on to what extent the Japanese are going to stop selling.
David Goldman: You know, the Japanese and the Germans have a very different relationship to China. Japanese cars were never particularly popular in China. They never had a big market. A lot of that is due to, you know, historical... poor relations between the two countries because of the horrible events of the Second World War.
So, unlike the Germans, who really bet the farm on the Chinese market early on, particularly Volkswagen more than anyone else, the Japanese automakers never really had that kind of commitment to the Chinese market. So it's not quite the same thing for them.
The Japanese also, you know, certainly have to be worried about the Chinese auto industry. The Japanese took market share away from American automakers for more than a generation by making inexpensive and reliable small cars, which knocked American competitors out of the market. Then the Koreans, to some extent, did that to the Japanese. And the Chinese are now doing it to the Koreans. So Toyota has to be worried about. One of the mysteries to me is why Toyota, Hondas, and Honda Stock have done so well in the last few months because, they very much, they're very much behind on electric vehicles.
And an electric vehicle costs less than half as much to run as a gasoline vehicle. That's gotta hurt them, particularly in markets where they hope to have growth.
Steve Hsu: Yeah, I agree with you. I don't understand the Toyota Honda stock prices, given that they're quite exposed to the China market and to the future of EVs. So. I mean, some analysts I've seen are speculating that Toyota and Honda are really in trouble in the coming decade.
David Goldman: Yes, I'm not an automotive, uh, automotive analyst, but I've heard, I've seen that argument and, you know, certainly the Chinese have done some stunning things in the last year, which ought to make the Japanese automakers very worried.
Steve Hsu: Yeah, I think the Honda, the Toyota chairman or CEO made some public comments to that fact actually, or maybe it was the Honda CEO, after the Shanghai Auto Show.
David Goldman: Yes.
Steve Hsu: It's something, something to keep your eye on. I
David Goldman: So, the, the, the picture that I saw, going back to your question, Steve, in 2013, is coming together faster than I anticipated. And in a way which should really provoke reflection and worry on the part of the United States. We've been running a chronic trade deficit in manufacturing for more than 30 years. We've accumulated nearly 20 trillion dollars of debt in effect. We've sold nearly 20 trillion dollars of assets to foreigners over that time to finance this enormous manufacturer's deficit. We have let our manufacturing deteriorate to the point that when the Ukrainians started running short on 105, 155 millimeter artillery shells, which is not a high tech item, that's a commodity item, we were unable to find the capacity to produce them.
And I understand that we're not going to be able to ramp up production until 2027.
It appears that the black powder that's required for the primer on the shelves was produced by a single factory in Louisiana, which blew up in an accident. So we've got a chronic shortage of primer powder. The degree to which American manufacturing capacity has atrophied in the past generation is certainly a pressing national security issue. And in the long term, maybe not so long term, It's an impossible situation because you can't keep selling your assets forever. We have the great luck that the world believed in the American tech story and put enormous valuations in American tech assets, so people bought tech stocks. But if those valuations start to fade, or we simply cannot produce the asset valuations we have in the past.
At some point, there's got to be an adjustment that could cause a very sharp decline in the value of the dollar, for example, which means Americans are poor. And at the same time because we've diverted so much talent into the finance industry in the 2000s and the tech industry in the 2010s, we lack the skills to ramp up manufacturing quickly.
Only 5% of American undergraduates major in engineering at five or 6%. The only country comparable to that is England, which has long since been de-industrialized. In China, it's 33% in Russia. 33% of Russia produces more engineers and absolute numbers than the United States with less than half the population.
Steve Hsu: Think the number for China is somewhere between 6 and 10 times the U. S. engineering production per year, engineer per year.
David Goldman: Yeah, something like the text times. And from everything I can tell,uh, the Chinese universities have really come up to world standards. You know, 15 years ago, even 10 years ago, you could look at somebody with a degree from a mediocre Chinese university as a diploma mill reject. But that's not true anymore.
The Chinese I know, I know, well, I should say, I know Chinese tech companies that won't hire a Chinese citizen who's just gotten a BA from an American university because they assume that if he or she went to an American university, it's because, there was a lousy grade in the Galco, they couldn't get a decent spot at a Chinese University, and their rich parents sent them to the U. S. instead.
Steve Hsu: Yeah, there is a little bit of adverse selection. So, when a kid comes, when a Chinese kid comes to the U. S. for college, there's some questions as to why that kid came.
David Goldman: You know, good kid, rich parents.
Steve Hsu: Yep, it could be. Not always, but it
David Goldman: No, I, I, I, I don't mean that. Look, I, I, I'm currently living in Great Neck, just outside Manhattan, where, you know, I'm a long standing Manhattanite, but I grew up in Great Neck. Right now, 40% are Chinese, a lot of Chinese nationals who live here, their kids go to high school here. And, one of the high schools, the mainly Chinese high school, has the highest test scores in the states.
They're certainly not dumb. A lot of people, a lot of Chinese, happen to want to live in the United States. God bless them. The more the better. Nothing wrong with the United States that 20 million Chinese immigrants wouldn't fix real fast.
Steve Hsu: The other day I was talking to a very senior executive in tech in China who had held also senior roles in the United States before going back and he told me his interpretation was that the third world war has actually already started, but it's being conducted purely by financial and economic means for the moment.
David Goldman: I, I, yes, I think China, the mood in China is very much that the United States will do anything possible to prevent China from rising. I know of almost no one in China who is optimistic about the future of U. S. Chinese relations, at least for the next couple of years. The fact that the United States has tried to stop China from developing, designing and fabricating semiconductors, the gate widths of less than, say, I think the threshold of 17 nanometers is really a remarkable thing.
I don't think we've ever done anything like that. It's like the British trying to prevent the United States from getting textile equipment in the early part of the 19th century. That will not work, just as it didn't work between the United States and the British back then. But I think there's a very grim mood in China, very much a fortress China approach. I think that explains a good deal of the economic policy of the Chinese government. Xi is running a more of a command economy approach, channeling resources to critical national industries, in order to compensate for this. I very much hope we won't have a shooting war, because if we do, it would be an absolute catastrophe. It might be the worst thing that ever happened to the human race.
I wrote in Claremont Review of Books last year that the single most important task of our lifetime is to prevent war between the United States and China.
Steve Hsu: You know that you mentioned that in a way Xi is kind of moving them toward a kind of war footing, maybe an economic war footing, if not a military war footing, and, for example, pushing huge resources into building their own semiconductor supply chain. The other day I was interacting on Twitter with a journalist named Virginia Postral who had written a very nice article about TSMC in Taiwan.
David Goldman: That's a very, very bright journalist.
Steve Hsu: Yeah, I mean it was a good article, very good article, I recommend it, but one of the mistakes that was made, maybe not her fault, was that she said that the chips that, the cutting edge, say, 3 nanometer or 5 nanometer process chips made by TSMC were going into weapon systems, which was totally wrong, they're going into iPhones.
David Goldman: That's quite right. You and I have discussed this. There is a RAND Corporation report published last year, which goes through in great detail what kind of chips are used for what weapon systems. And the last thing you want to do for a weapons system is use a three nanometer chip. It's very easy to disrupt because it's so delicate.
You want to use older and much more robust chips that can be hardened. And there is an argument, and it comes from technotopians like Eric Schmidt, who's not a technologist, he's a Silicon Valley mocker, that we need to dominate the super fast processing chips because the future of warfare is going to be artificial intelligence.
In other words, my computer is going to set up drone swarms to play video games with your computer, which is, I think from a military standpoint, nonsense. So, they're concerned that China will not get the most advanced chips for the most advanced processing because somehow they think the most advanced processors are going to win.
For anything that might affect warfare at a 10 year horizon, all that stuff is nonsense. For guidance systems on missiles, sensors, any of these things, 90 nanometers is about the smallest gateway you're going to find.
Steve Hsu: Right so, the rationale which is given, which you know I forgive Virginia for writing that because she was probably just told that by some Pentagon flack, that, you know, the chip war was all about chips that go into advanced weapon systems and she just wrote it. But the fact that that's not true exposes that this really is an economic war, right? I mean, they're trying to suppress Chinese technological progress in general, not just the impact of it on the military.
David Goldman: Yes, that's correct. I spoke not long ago with one of the founding fathers of the American chip industry. One of the people that made important breakthroughs going back to the 70s. His comment was that the United States government is run by idiots who have no idea how the industry works. And it's not the speed of your chips which is decisive in the real world. It's the overall architecture of your system, the quality of your software. So, although it's certainly true that lack of access to faster chips has been a pain in the neck for many applications. In terms of the things that really make a difference for economic life, there's nothing that China can't do with 14 nanometer and older chips.
Steve Hsu: Yeah, that's correct. Having, though, interacted with a lot of strategists and think tankers at Brookings or Rand or, you know, even in the White House, I think very few of them really understand. technology and they, they could, they could actually believe that, these three nanometer process chips are finding their ways, finding their way into missiles and radar systems, in military aircraft. I think they're just actually legitimately confused about some of these things.
David Goldman: In general, the degree of ignorance about the technological changes which are now happening at an incredibly fast pace in China stuns me. I feel like I'm writing science fiction. I see people's eyes glaze over. But I try to explain to them what's happening. For example, just take the simplest thing in the world, loading and unloading a container ship. The Port of Los Angeles, is the largest port in the United States, and it's number 300, close to the bottom on the World Bank's ranking of port productivity. Uh, The major Chinese ports are all in the top 10. And the Tianjin port, which Huawei chose as its showcase for 5G slash AI technology, has, uh, reduced the amount of time for unloading a large container ship from eight hours to 45 minutes.
Steve Hsu: I, I think I've seen video of this zone in the Tianjin port where no humans are allowed because it's only robots, working
David Goldman: It goes at an incredible space, the pace, and you take a, an autonomous crane picks a container up off a ship, reads its barcode, or gets a signal from an embedded ship, puts it in an autonomous truck, which zips it to a warehouse where robots unload it. Yeah, this is really amazing stuff.
And they're fully automated factories where there's no one on the shop floor at all, just have a technician occasionally look at the stuff. And AI does the quality control AI does they prevent the maintenance on your machines? And I can in fact already alter the production process. You can have robots talk to each other and come up with improvements in the production process, which is pretty remarkable.
So, the changes that are happening are spectacular. They're on the level of the previous industrial revolutions. They're not an exaggeration. This is not a drill. This is the real thing. And very little of it is happening in the United States and the auto industry certainly because the auto industry is completely global. General Motors, it sells more cars in China now than it does in the United States, and it produces more cars in China than the U.S. So it is a Chinese auto company in that respect, doing joint ventures with SAIC.
So yes, there are some American companies which are involved. And as I mentioned, John Deere appears to be getting up to speed. But it's a tiny portion of American manufacturing.
Steve Hsu: So you, earlier you mentioned that there's a faction in the SPD in Germany that wants to take a more balanced direction in German relations with China. Can you see any hope for a political movement in the United States that actually moves in that direction?
David Goldman: Well, it's... You have a number of people... in American politics who have said publicly, we don't really care what China does. We care about what affects American working people. Let's do the best for them. And if China does well, that doesn't hurt us. And we don't particularly see why the United States should get into a nuclear war over Taiwan.
Some of those people hang around with the Claremont Institute, where I'm a fellow. I'm a fellow of the Washington branch. You have a number of conservative publications like Compact Magazine, which is edited by my friends, Sourabh Akhmari and Matthew Schmitz. American Conservative. So there are certainly people in the United States who are much more concerned about, conditions of life for Americans than, great power competition with China.
I mean, I'm all for great power competition with China, as long as it benefits us. But I don't think sandbagging China will do any good trying to stay ahead of them. That was a different story. So yes, I, I, I think there is a minority in the United States, which wants to back off from this full tilt, you know, stop the China approach.
And of course you have the old, no Wall Street and commercial interests are deeply embedded in China companies like Apple, who do not want to get into a scrap with China because that's where their bread is buttered. Those guys have been kind of quiet lately because nobody wants to be accused of being soft on China in American politics.
But yes, I could see that turning around at some point in the future. But surely not in the next couple of years and not in the presidential election season.
Steve Hsu: Would you say that, of the major candidates, Trump is maybe the most likely to actually adopt a more reasonable position vis-á-vis China?
David Goldman: This is very hard to say. Trump is a volatile character, but his record is that he wants to gain an advantage and cut a deal he does not want to destroy. So, when ZTE was caught red handed violating the Iran sanctions, Trump worked out a fine as opposed to an absolute ban on American chips going to ZTE smartphones, which kept ZTE in business.
In fact, Trump had vetoed a milder version of the bans on chip technology going to China, which had been proposed in late 2018, late 2019. And in fact, he gave a speech saying America's open for business. We're not in the business of bans. What changed that was COVID 19. Trump personally blamed the Chinese for the COVID 19 outbreak, whether it was justified or not, is a much longer discussion. But because of COVID 19, he switched positions.
So, Trump certainly is capable of being, of being a dealer as opposed to a destroyer. On the other hand, you know, we haven't heard from Governor DeSantis on this. All DeSantis has talked about is limiting Chinese asset acquisition in Florida.
So I don't think we should speak for DeSantis, we'll have to see what he asks, how, how he views this issue.
On the Democratic side, I think we know what Biden is doing, so consider that a given, the one good thing we can say, or from my standpoint, a good thing is that, uh,given how poorly the Biden administration has done in many areas, the polls suggest that the next administration is more likely to be Republican than not.
So, a change of administration certainly brings with it the opportunity for, I hate to use the word, a reset in China's American relations.
Steve Hsu: Yeah, it's interesting because certainly though, among the Republicans are some of the most hawkish anti China politicians, so it's a little bit unpredictable, I think, what you'll actually get in a new Republican administration.
David Goldman: You know, I mean, I consider myself a hawk of the old Reagan variety. I'd like to be spending money on missile defense, protecting the American homeland, even a great deal of money. But by the same token, I see no reason why sticking to the one China policy shouldn't prevent a war.
Steve Hsu: Yes. Do you have any, do you have any predictions on, uh, what will happen in vis-á-vis Taiwan?
David Goldman: Well, the one thing we know for certain about Taiwan is that its demographics are next to Korea, the worst of any industrialized country in the world. And that its adult workforce over the next 50 years is going to fall from 9 or 10 million to 3 or 4 million. At that point, it'll cease to be an important factor.
My guess is that Taiwan is going to be very cautious about provoking a scrap of China, which would entail any significant move towards independence. I mean, you know, we've discussed this in the past and I've, I've written this many times, but I think Americans fail to understand that for China, for any Chinese government, the territorial integrity of China is an existential question. It's a raison d'etat. China is not a country. China is an empire which still has six major language groups and 200 dialects. It's centralized by a common infrastructure, common bureaucracy, common tax authority, an army, and a common written language. But most Chinese speak dialect at home. Most can understand Mandarin, but it's still a multilingual country. So if one province secedes, other provinces can succeed and secede. And China's tragic history has almost always entailed an alliance between invaders and renegade provinces trying to split. So the sensitivity of any Chinese government to this issue is extreme.
And that's why I think China will go to war rather than allow Taiwanese secession. However, maintaining the status quo should not be particularly difficult. I think Beijing is very happy to maintain the status quo, but if the United States makes clear that the status quo is what will be there indefinitely.
There's no reason to fight.
Steve Hsu: Yeah, I, I think it's pretty clear that both sides of the strait want the status quo to continue, and I think the real actor that could cause a war is the United States changing its position.
David Goldman: Well, you certainly have an independence movement in Taiwan. You have some people who are deeply committed to that. But they're certainly a minority. And if the United States were to throw its weight behind that minority and promote independence, then we very well can have a disaster. One reads all these articles about China's ready to invade Taiwan in a minute, or they'll be ready by 2027 or some other arbitrary date.
This has absolutely no basis in fact of any kind. It simply attributes to the Chinese Communist Party, a malicious intent to conquer everyone in the region just because they're bad guys. No Chinese government has ever fought for something that it could get without fighting. It, it, it really makes no sense at all.
Steve Hsu: It's inflammatory and it's wrong. Yeah, I agree with you. I would say even the pro-independence Greens in Taiwan are very careful about what they say about independence and especially doubly so after seeing the example of what's happened in Ukraine. So, these elections, upcoming elections in Taiwan where the KMT seems to have had a little bit of a resurgence, will be very interesting.
David Goldman: Yeah, Lindsey Graham, notoriously said about the Ukraine war, This is great. They'll, they'll fight to the last Ukrainian. And if the Ukrainians want to be that kind of American ally, of which Henry Kissinger said that it's dangerous to be America's enemy, but fatal to be our ally, if that's what they want, well, then we know what's going to happen to Ukraine. There won't be much left of it. With the dust settled, however, mass suicide has never been a phenomenon in Chinese history to my knowledge.
Steve Hsu: Yeah, I, I don't think the Taiwanese want to fight to the last person, and nor do they want Taiwanese industry to be wrecked the way that the Ukrainian economy has been wrecked.
David Goldman: Yeah, so, it is not really in principle difficult to avoid a war. It just requires really profound stupidity to get into it. This isn't 1914, where Germany occupied Alsace and France wanted it back. And it's not 1939, where, Hitler wanted to get all the ethnic Germans back into the Reich and Poland had closed the Danzig Corridor or something like that.
You don't have a casus belli of the same kind because the Chinese on both sides of the strait. can work out a modus vivendi, which is perfectly acceptable. So, the idea that, you know, we have the same conditions as World War I, or the same conditions as the Peloponnesian War, as Graham Allison indicated, I think you're exaggerated.
Allison's book, called Thucydides Trap: Destined for War, is a very useful and important book. I reviewed it favorably in the Claremont Review of Books. But I simply don't see the underlying necessity of war as we had in some of the great tragedies of the past.
Steve Hsu: Yeah, I agree with you. I mean, the dynamic of a rising number two and a number one, maybe that wants to force the war before number two becomes too powerful to contain, that dynamic is certainly present here. The thing I would worry most about is a very hawkish group in the U. S. government that believes in that, that they have to basically force a war between the United States and China before it's too late. And they use Taiwan as the trigger.
David Goldman: That is a worry. I believe that worry is mitigated by the fact that everyone in the professional military thinks it's too late to successfully fight such a war, at least anywhere near China's borders. That's certainly the view at the Pentagon. If you read closely the November 29th, 2022 assessment of the Chinese military published by the Department of Defense, they're well aware that China has a massive advantage, a home court advantage, with a very large number of highly accurate satellite guided ballistic missiles, a point that you specialized in.
They're not idiots. They know that very well. For a long time, the Navy and other people who want more surface ships tried to dismiss that. But the consensus Pentagon view is this is a really serious problem. So I don't think the professional military, at any level, is advising any part of the government that the United States is likely to win a military game with China.
Steve Hsu: Yeah, I hope you're right. I mean, I would worry about some careerist military officers who paint a rosier picture of our prospects in
David Goldman: Yeah. Sure, the Navy is a bunch, you know, the Navy is playing a really rotten role in this for a simple reason. Every captain who wants to be an admiral wants to skip an aircraft carrier. To skip an aircraft carrier, you have to pretend that aircraft carriers aren't sitting ducks for missiles, which of course they are.
So, a great deal of careerist obfuscation goes into estimates. When my old friend, Eldridge Colby, writes about, you know, just stocking up on 115 millimeter howitzer shells in Taiwan, you know, Eldrige is looking for a big job at the Pentagon. He won't get it without support from the Navy. So he doesn't want to say that what the Navy is saying is insane.
A lot of ass covering and careerism goes into this, but I think the consensus down the professional military is that. This one will be missed.
Steve Hsu: I'm glad to hear that. I think you actually did some work for the Office of Net Assessment. Do you think there are still very competent professionals in the Pentagon, who are listened to by the political leadership?
David Goldman: We also have that assessment really centered on the personality of the late and great Andy Marshall, whom I had the enormous privilege to work for sporadically. So I had a sporadic privilege to work for him. Andy was a great man. He was put in there by Kissinger. He was one of the movers and shakers and the Reagan administration, military buildup in the strategic defense initiative, and he was respected by everybody.
When Andy retired and shortly afterwards died, he was 96 years old, ONA became a much less prominent entity. So, you know, I think that the Pentagon is not as well advised as it used to be. However, the evidence is so obvious in terms of Chinese missiles, submarines, electronic warfare and other capabilities that you simply can't suppress it. And the evidence for that is that last November, the Pentagon produced what I thought was a reasonably competent assessment and reading that no one would want to start a war with China.
Steve Hsu: That's reassuring.
David Goldman: Well, I hope I'm right. I mean, there are always nut bowls out there. The consensus view of the Pentagon, I think, is reasonably sensible.
Steve Hsu: Great. Well, we're coming up on an hour and a half, and I don't want to take up too much of your time, but I've really enjoyed our conversation so far. Are there any last? Oh, thank you. Are there any last remarks you want to make to my audience? Any predictions or insights you want to share?
David Goldman: I think China needs a strong United States. Chinese governments' governance is highly problematic. The kind of imperial system, which worked well when the principal task of China was to build large riparian works to control floods and irrigate crops is much less conducive to a technology, a technologically advanced and innovative kind of framework.
China needs more democracy. Needs more freedom of expression. It needs the United States as an example of that kind of political system. I'm not proposing that China throw out its thousands of years of political traditions and instantaneously adopt the principles of James Madison. That's not going to happen. But I think it would be good for China for the United States to be strong and very bad for the world to have any unipolar power arrangement, whether it's American or Chinese.
Steve Hsu: Great. My guest today has been David Goldman. David, thank you very much.
David Goldman: Great pleasure to talk to you. Thank you so much for the invitation.