#447 — The Unraveling of American Power

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• Peter Zeihan attributes Donald Trump's unexpected 2024 election victory to a decisive shift in the 10% of split-voting independents, despite polls suggesting otherwise.  Copied to clipboard!
• The current administration's flat tariff policy is causing a deindustrialization of high-skilled manufacturing jobs by incentivizing companies to move complex supply chain steps outside the tariff zone, leading to economic contraction.  Copied to clipboard!
• The focus on building semiconductor FABS is misplaced for national security, as the downstream steps of testing, packaging, and logistics are more critical vulnerabilities in a deglobalizing world.  Copied to clipboard!

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Podcast Introduction and Guest Role

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(00:00:06)

• Key Takeaway: Peter Zeihan’s expertise lies in using demography and geopolitics to forecast future economic and business realities.
• Summary: The introduction confirms the listener is hearing a preview and must subscribe to access the full Making Sense podcast episode. Peter Zeihan defines his job as using demography and geopolitics to paint a picture of the future for clients in finance, manufacturing, and agriculture. He aims to help them navigate upcoming global instability.

Trump Election Prediction Failure

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(00:01:12)

• Key Takeaway: Trump won the 2024 election because the small segment of independent voters who decide elections shifted decisively toward him, contrary to Zeihan’s initial expectation.
• Summary: Zeihan admits his prior prediction that Trump would lose was incorrect, noting that every state and demographic shifted substantially toward Trump except Washington State. He initially believed the small percentage of split-voting independents would decide the election against Trump. The resulting margin of victory was achieved through these unexpected shifts.

Assessing Trump’s Second Term

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(00:02:09)

• Key Takeaway: The second term is failing to meet stated goals like reshoring manufacturing, and the current national power unraveling scale is unprecedented since the Soviet collapse.
• Summary: Second terms are expected to show learning, but this term has not gone well, moving in the opposite direction of stated aims like increasing defense posture. Zeihan rates the term poorly, observing an unraveling of national power comparable only to the Soviet breakdown. He characterizes the economic policy mix as a combination of Zimbabwean, Argentine, and French statist elements.

Tariff Impact on Manufacturing

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(00:03:47)

• Key Takeaway: Flat tariffs cause deindustrialization in complex manufacturing (automotive, electronics) because taxing thousands of intermediate steps forces production outside the tariff wall.
• Summary: Simple products with few supply chain steps can see domestic build-out under tariffs, but complex products suffer because paying tariffs on hundreds of intermediate components makes the final product too expensive. Manufacturers move these steps outside the tariff zone to pay the tax only once. This results in a steady deindustrialization of high-skilled, labor-intensive jobs, replaced by lower-value-added production.

Economic Outlook and Inflation

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(00:05:28)

• Key Takeaway: Industrial construction spending has been negative since ‘Tariff Day,’ indicating a halt in new industrial projects, which, combined with necessary industrial buildout, points toward a choice between high inflation or high inflation plus goods shortages.
• Summary: Inflation was already expected due to the necessary industrial expansion required for the end of globalization and the fall of the Chinese system. The current deindustrialization exacerbates this, meaning the US will lose foreign goods while simultaneously failing to produce enough domestically. The choice is between high inflation with productivity or high inflation accompanied by severe goods shortages.

AI Bubble and GPU Dependence

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(00:06:36)

• Key Takeaway: The current AI buildout, while a market bright spot, is a bubble dependent on GPUs, which cannot be manufactured without the globalized system that is currently breaking down.
• Summary: The investment in data centers for AI is a bubble, though AI itself may be the future, as technology does not advance linearly. LLMs require GPUs, the most advanced chips, which rely entirely on a globalized supply chain. Any GPU capacity installed now is all that will be available if globalization ends, making the current buildout a finite resource.

Semiconductor Onshoring Misconception

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(00:08:10)

• Key Takeaway: The obsession with building FABS (fabrication facilities) ignores that testing, packaging, and logistics—downstream steps—are more critical to national security than the capital-intensive FAB step itself.
• Summary: Onshoring dependence on Taiwan for high-end semiconductors is not happening because FABS are only one of many critical steps, with thousands of others required. Testing and packaging, which the US does little of, are arguably more important than the FAB facility itself. Focusing only on FABS prioritizes a lower-value-added, capital-intensive step over those closer to the end consumer.

Administration Chaos and Policy

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(00:09:26)

• Key Takeaway: The administration’s lack of technical experience in its cabinet and reliance on presidential ‘feelings’ for major policy shifts creates ambient chaos that halts business investment.
• Summary: Trump has not fully staffed the government, surrounding himself with ideologues lacking real-world technical experience, leading to poor advice. Major policy changes on tariffs, Israel, and Ukraine are being made based on the President’s feelings, resulting in no straight lines for businesses. This uncertainty is why industrial construction spending is falling, as companies put major investments on hold.

Venezuela Hostilities and Legality

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(00:10:44)

• Key Takeaway: The administration’s aggressive posture toward Venezuela, including alleged extrajudicial killings, is proceeding without Congressional authorization, challenging the War Powers Act.
• Summary: Venezuela is a weak state where security services focus on crushing dissent, allowing some drug flows, though most still go through Mexico. The administration has not briefed Congress on intelligence regarding alleged cartel activity, and recent actions suggest potential war crimes by targeting disarmed individuals. Unless Congress acts, these actions remain technically legal because the War Powers Act’s 30-day threshold challenge has not been adjudicated.

Mexico Cartel Dynamics

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(00:15:58)

• Key Takeaway: The successful dismantling of the Sinaloa cartel has inadvertently empowered the far more violent Jalisco New Generation Cartel, increasing the murder rate in Mexico.
• Summary: The crackdown on the Sinaloa cartel, which operated like a business, fractured it into smaller, competing groups after the arrest of El Chapo. The second largest group, Jalisco, is an order of magnitude more violent, using terror tactics like killing mayors and police chiefs to establish control. This shift has increased overall violence, and the core problem remains American drug demand.

Drug Smuggling and Border Policy

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(00:18:43)

• Key Takeaway: The shift from cocaine to fentanyl is driven by fentanyl’s ease of production and smuggling, and increased border enforcement has ironically made drug shipping via containers easier.
• Summary: Cocaine requires extensive labor and a complex international supply chain, whereas fentanyl can be made in a garage in a week with minimal labor. Taking out kingpins does not affect this product shift. Furthermore, stopping the flow of migrants has made it easier for drug smugglers to ship narcotics through containers at the border.