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TBI: STRATFOR'S TOP PREDICTIONS FOR THE NEXT DECADE: China Collapse, Global Labor Shortages, New American Dominance

Lawrence Delevingne | Jan. 22, 2010, 9:07 AM |

What will the next decade bring for the world?

STRATFOR has the answers. In a Decade Forecast released yesterday, the global intelligence company predicts Chinese economic collapse, game-changing global labor shortages, and continued American dominance because of a gradual retreat from international engagement. Welcome to 2010.

We spoke with Peter Zeihan, Vice President of Strategic Intelligence, about STRATFOR's predictions, of which he was an author. Below are edited excerpts from our conversation.

TBI: What are the broad trends that Stratfor sees shaping the world in the next decade?

Zeihan: Probably one of the biggest breaks that Stratfor has with conventional wisdom is that most of the world is convinced that the United States is a power in terminal decline. In fact we see the United States withdrawing from its two wars, regardless of whether or not they've ended, and returning to a more balanced attention span in dealing with the rest of the world.

Most of the rest of the world will view that as an American retreat from prominence and a sign that the U.S. is in decline once again. But really when you're a naval power and a merchant power, being out of the Middle East is increasing greatly your power to act and you willingness to act. So we see it as a very American-centric decade moving forward.

Which predictions are most surprising?

Aside from the United States not going anywhere, I would say we expect the economic collapse of China in this coming decade. We've been talking for awhile about how the economic system there is remarkably unstable and we think that they're going to reach a break point as all of the internal inconsistencies come to light and shatter. By the end of the decade, it'll be pretty obvious to everybody that the China miracle is over. As we enter the decade, people are finally, finally starting to talk about China bubbles. If only their problem was that simple!

With the Europeans, the new European treaty actually matters. The Lisbon Treaty is the first of dozens of treaties that the EU has done, but it's the first one that actually does away with most of the single member vetoes; and so you've got Germany actually able to force its will upon a lot of states. Germany is going to be ascendant in a manner that it has not been since the late 1930s! Doesn't mean it's going to be rolling tanks into Poland or anything like that, but they are going to be using their institutional power to push everybody around.

That is going to cause a remarkable degree of discord and unpredictability in Europe, and that is something that the Russians are going to take advantage of every chance that they get. The Russians realize that they're in a race against the clock before their demographics kill them as a country, and so they want to make sure that they've got as wide of a buffer as possible. As long as Europe is at each others throats, even if its just with bureaucratic paper, the Russians are going to take advantage of that to strengthen their western perimeter and push the frontier into Europe as far as they can. They know in 20 or 30 years they're not going to be able to do much, so they want to buy as much time and space as possible.

What does the American business community need to pay closest attention to?

The business community is probably going to get its shirt handed to it over China. Now American investment into China is not nearly as robust as most people think. It's actually only five or six billion dollars every year, very, very small in the grand scheme of things, even by Chinese standards. But the ability of China to continue to supply cheap exports to the United States might come into danger. Not on the whole, because all of the Chinese regional cities will still have an interest in doing that, even once the Chinese system cracks. But you're going to have to pay very close attention to your supply chain there as the politics of China become unglued.

Japan -- also a major investor in a lot of places, also a major supplier of a lot technology and a lot of capital -- Japan's demographics are the worst in the world. In the next decade, they're going to have to find some way to rectify the fact that they just don't have sufficient number of workers to supply what they need.

They could turn to their traditional surplus labor source, which is Korea and China, in which case we could have some sort of East Asian conflict, perhaps even military in nature. You have the world's second or third largest economies starting to duke it out in some manner, and businessmen in America are going to take notice. Or at least they'd better.

In a broader demographic issue, all of the countries in the developed world and most of them in the developing world are aging. We're going to be seeing a lot of countries maybe not start to have their populations decline but certainly have them age and no longer grow. The core economic platform that has driven the human condition for the last millennia is that populations will continue to get larger, markets will continue to get larger, there will be more capital available. In this next decade that starts to invert. The cost of capital is going to go up, the availability of markets are going to go up, and that's ultimately a deflationary environment. It'll get worse in future decades, but this next decade is when the rules of the game start to change.

China: doomed

"China’s economy, like the economies of Japan and other East Asian states before it, will reduce its rate of growth dramatically in order to calibrate growth with the rate of return on capital and to bring its financial system into balance. To do this, it will have to deal with the resulting social and political tensions," says STRATFOR's Decade Forecast.

It explains: "First, China’s current economic model is not sustainable. That model favors employment over all other concerns, and can only be maintained by running on thin margins."

"Second, the Chinese model is only possible so long as Western populations continue to consume Chinese goods in increasing volumes. European demographics alone will make that impossible in the next decade."

"Third, the Chinese model requires cheap labor as well as cheap capital to produce cheap goods. The bottom has fallen out of the Chinese birthrate; by 2020 the average Chinese will be nearly as old as the average American, but will have achieved nowhere near the level of education to add as much value. The result will be a labor shortage in both qualitative and quantitative terms."

"Finally, internal tensions will break the current system. More than 1 billion Chinese live in households whose income is below $2,000 a year (with 600 million below $1,000 a year). The government knows this and is trying to shift resources to the vast interior comprising the bulk of China. But this region is so populous and so poor — and so vulnerable to minor shifts in China’s economic fortunes — that China simply lacks the resources to cope."

Europe: heightened native-immigrant tension

"A deep tension will emerge in Europe between the elite — who will see foreign pools of labor in terms of the value they bring to the economy, and whose daily contact with the immigrants will be minimal — and the broader population. The general citizenry will experience the cultural tensions with the immigrants and see the large pool of labor flowing into the country suppressing wages. This dynamic will be particularly sharp in the core states of France, Germany and Italy," says STRATFOR's Decade Forecast.

It adds: "The elites that have crafted the European Union will find themselves under increasing pressure from the broader population. The tension between economic interests and cultural stability will define Europe. Consequently, inter-European relations will be increasingly unpredictable and unstable."

SEE ALL OF STRATFOR'S 2020 CALLS HERE>>>
http://www.businessinsider.com/stratfor-predictions-for-the-next-decade-2010-1#turkey-rising-3