“I have ever deemed it fundamental for the United States never to take part in the quarrels of Europe.  Their political interests are entirely distinct from ours.  Their mutual jealousies, their balance of power, their complicated alliances, their forms and principles of government, are all foreign to us.  They are nations of eternal war.  All their energies are expended in the destruction of the labor, property, and lives of their people.”

 –Thomas Jefferson, letter to James Monroe, 1823


Geopolitical strategist Peter Zeihan, formerly an executive with the venerable StratFor firm, has advanced the controversial thesis that the free trade-oriented world economic system launched at Bretton Woods has reached the point of sociopolitical obsolescence.  Zeihan argues that its replacement will be a skeptical system of “globalization in reverse,” and the proper initial context from which to begin macro analysis involves differentiating between nations poised to do relatively well under increasing isolationism/trade nationalism, and nations poised to do relatively poorly under such conditions.

Zeihan believes that America will thrive under the new international economic order, but the export-driven economies of Europe and Asia may shift into a long period of crisis and decline.


(Peter Zeihan)


Bretton Woods Was About Security, Not Free Trade

Peter Zeihan predicts the breaking down of globalization — even its reversal in some areas — as America, the former champion of free trade, withdraws from international affairs and focuses more and more on domestic priorities.  His follow on calculation concerns the countries best and worst equipped to deal with an isolationist world:  Zeihan concludes that the United States is actually positioned to do relatively well in a new, less-interdependent macro landscape.

Zeihan begins by describing the underlying, security-centric reality of America’s modern support of free trade and globalization.  In 1944, at Bretton Woods, the Allies designed a new world trade system based on a U.S. dollar that would be convertible into gold (at a fixed price of $35 an ounce — this of course lasted for about 27 years until Nixon terminated the dollar-gold exchange standard).  The dollar would provide the world’s reserve currency — the common exchange unit for lubricating a globally integrated economy.   Surrounding the reserve currency would be an interlocking series of foreign currencies, all pegged to the dollar.

At times, countries that had run long-term trade deficits might find themselves unable to defend their currencies (a nation suffering a run on its currency could use its foreign reserves to defend the peg), so the IMF was formed to provide emergency funding lines to any country that began to fall outside of the terms and conditions of the system.  Bailout terms from the IMF would impose structural reform disciplines – austerity — on those nations that required intervention.  A sister institution, the World Bank, was established to expand the network of countries able to join the new world trade system.

Zeihan then argues that, despite appearances, Bretton Woods was never really about the promotion of free trade.  On the contrary, it was a comprehensive bribe with which the United States sought to contain the Soviet Union and, later, secure access to forward-deployed military bases and petroleum reserves.  For Zeihan, the logic of Bretton Woods required that the U.S. gain more from strategic containment of Soviet expansion and, subsequently, access to light, sweet Saudi crude than America lost in terms of loss of diversified manufacturing jobs to Asian and European export powerhouses.


“(At the end of WWII) what the Americans needed were not just allies to help carry the defense burden, but allies who were so eager that they would be willing to stand up against the awesome force of the Red Army, a Red Army that was still roused by the fact that it had single-handedly decimated the Nazi Wermacht at Stalingrad.  That requires a special kind of motivation. 

“Specifically it requires a hell of a bribe.  And what the Americans came up with was one of the greatest strategic gambits in history.  They assembled a plan, and then assembled their wartime allies on July 1, 1944, for a conference in New Hampshire to lay out their vision for the new world.  Which returns us to Bretton Woods.” 


(The Bretton Woods Mountain Resort)

Zeihan notes that the Americans’ Bretton Woods plan had three major pillars:

  1. Those who signed up received virtually unfettered access to the American market. This was a massive strategic advantage for allied countries:  not only was the American domestic market the largest in the world (and the only major economy that would emerge from WWII relatively unscathed), but the concession meant that the U.S. government would voluntarily concede typical protectionist policies and import controls.


  1. The U.S. offered, through its Superpower Navy, protection for global shipping.


  1. Mutual defense pacts. The United States would promise to protect all members of this new global free trade/co-prosperity network from the Soviets.  Most notably during the Cold War that followed WWII, this meant Western European access to the strategic detent capability of American nuclear weapons.

The Bretton Woods “super-bribe” worked, with some hiccups and glitches, for about sixty years.  Germany and Japan, losers of WWII who had their economies literally bombed into rubble, ultimately emerged — thanks in part to American industrialization, security, and favorable trade terms — as some of the wealthiest countries in the world.


“If America’s Western allies thought that the deal was a boon, the Germans and Japanese perceived it as too good to be true.  The primary reason Germany and Japan had launched World War II in the first place was to gain greater access to resources and markets.  Germany wanted the agricultural output of Poland, the capital of the low countries, the coal of Central Europe, and the markets of France.  Japan coveted the manpower and markets of China and the resources of Southeast Asia.  Now that they had been thoroughly defeated, the Americans were offering them economic access far beyond their wildest prewar longings:  risk-free access to ample resources and bottomless markets half a world away.  And ‘all’ it would cost them was accepting a security guarantee that was better than anything they could ever have achieved by themselves.”

 Zeihan’s central argument is that this system of interlocking bribes has now become too expensive a liability for the United States to maintain.  He feels that the pro-free trade/pro-globalization rhetoric was always secondary to core American national security concerns; as those concerns have changed, so has enthusiasm for the globalized economy.

The Bretton Woods system ultimately rested on an evangelical American belief in the virtues of free trade and globalization as means to establish national security objectives abroad.  The fall of the Soviet Union put the first stake into the heart of this proposition — in one sense, free trade worked itself out of a job:  capitalist encirclement of the USSR was successful.

However, the Bretton Woods system survived the fall of Soviet Communism because the energy imperative temporarily took its place.  Zeihan logically argues that while the end of the Cold War sent Bretton Woods reeling, it is the hydraulic fracturing – fracking — technological revolution in U.S. energy production that is delivering the knockout punch.  The downgrading of these chief geopolitical threats — the menace of Soviet totalitarian expansion and imperiled access to low-cost, high-quality Saudi crude oil — has made continued underwriting of globalization far more difficult a domestic sell for politicians seeking election in a climate of increasing economic hardship for middle-class Americans (a significant number of whom blame the global economy for the loss of many skilled U.S. jobs).

In fact, a formidable coterie of economists that includes among them Peter Navarro (now a senior economic adviser in the Trump Administration), Ian Fletcher, and Erik Reinert has been articulating a globalization-skeptical platform, and advancing the theory that a nation’s diversified manufacturing capacity is synonymous with its ability to develop and maintain a healthy, vibrant middle class.  Seen in this light, the political ascendancy of Donald Trump and the recent BREXIT outcome both reflect a predictable, populist pivot away from globalization and towards the privileging of domestic markets and protectionist nationalism.

The calculus behind America’s support for free trade could be expressed simplistically as follows:

Support for Free Trade = Threat of Global Communist Revolution + Need to Secure Access to Low-Cost Energy Supplies – Negative Impact of Free Trade on Politically Active, Vulnerable Working Class Americans.


(1) The Red Menace has become a lower-level threat;


(2) The U.S. is rapidly becoming de facto energy independent;


(3) Asia has become the world’s “factory floor,” resulting in the near-collapse of diversified manufacturing industry in the United       States (an outcome which, as discussed in the February 2017 report, has caused the domestic Political Stress Index to rise to the highest level seen in the United States since the eve of the Civil War).


America’s appetite for militarily, politically, and economically underwriting the post-Bretton Woods global trade system has been greatly diminished.

In essence, the America of the immediate post-war era had the gold, the military might, the industrial capacity, the trade surpluses, and the moral authority to support a free trade system that, one way or another, shared U.S. economic power in exchange for continued U.S. military dominance.  With Western Europe a smoking, bombed-out ruin, China a Third World country, and Japan soon to be the target of atomic weapons, America was in the historically unique position of having a blank canvas on which to write the new rules.  We were a wartime nation and our chief strategic concern was Stalin and the Soviet Army; containment of that threat dominated foreign policy discussion.


Why America Can Go It Alone: 4 Pillars

 Starting with the assumption that free trade is now entering a falling-tide phase, Zeihan concludes that the new regime will be favorable to America as well.  His confidence that the United States has the ability to do quite well under falling net-globalization conditions rests on a few pillars:

  1. A unique geographical advantage — the Mississippi River Basin and the Midwest farm belt.
  2. Well-developed coastal population centers on both the Atlantic and Pacific Oceans and the ability to defend those great oceanic ‘moats’ against foreign aggression with the world’s most powerful Navy.
  3. Internal demographic conditions that are troubling, but still far better than those found in Europe and Asia.
  4. The Fracking Revolution and energy independence.

Water transport is far and away the most efficient means of transporting bulk good.  The majority of Americans may not realize the geopolitical significance of the Mississippi River Basin and its tributary system and connection with the Gulf and East Coast barrier islands (which created sheltered harbors) and Intracoastal Waterway.  Zeihan certain does:

“There is another factor in play that all but dictates the United States’ global dominance:  its waterway network. 

 “The Mississippi is the world’s longest navigable river, some 2,100 miles long from its mouth at the Gulf of Mexico to it head of navigation at the Twin Cities in Minnesota.  …Collectively, all of America’s temperate zone rivers are 14,650 miles long.  China and Germany each have about 2,000 miles, France about 1,000.  The entirety of the Arab world has but 120. 

“…The most compelling feature of the American maritime system, however, is also nearly unique among the world’s waterways — the American system is indeed a network…all told, this Mississippi and Intracoastal system accounts for 15,500 of the United States’ 17,600 miles of internal waterways.  Even leaving out the United States’ (and North America’s) other waterways, this is still a greater length of internal waterways than the rest of the planet combined.  The result is that the United States has the greatest volume and concentration of capital-generation opportunities in the world by an absolutely massive margin, and that opportunity is very heavily concentrated in a single unified system.” 


Asset #2:  Maritime Dominance

America Is Geographically Built for Strategic Isolationism

 The United States is separated from major military threats by the planet’s two great oceans.  While the nations of Western Europe, Russia, and China must remain historically vigilant against the imperial designs of their neighbors, American isolation is empowered by geographic moats.  Similar, natural defensive advantages have been enjoyed by economic and military powers from Venice to Great Britain, but the sheer scale of U.S. maritime dominance is unique in human history.

America’s platform represents an important break from the land-based strategic paradigm and continental powers of classical geopolitics.  Classical Great Powers analysis was Euro-centric and centered on Mackinder’s “Heartland Theory,” a proposition which has been held responsible for imperial designs starting with Alexander the Great and running in a long, bloody line through the Roman Empire, the Mongols, the Napoleonic Wars, and both World Wars.

The Heartland Theory proposes that the civilization that controls the heart of the Eurasian continent — today the nations of Eastern Europe and Central Asia — will control the “World-Island” (Eurasia being the largest continental landmass on Earth), and control of the World-Island will allow for control of the planet.   This endless and bloody jockeying for domination of Eurasian heartland was a source of Jefferson’s observation that the nations of Europe were locked in “eternal war.”

Export-Driven Economies Depend on the U.S. Navy

Geopolitics changed with the rise of the United States as the world’s apex military and economic power. The unique strategic location of the United States — heavily populated trade and population centers on both the Atlantic and Pacific oceans — enabled a shift in foreign policy priorities toward grand strategic theories of Maritime Dominance.  Under this newer, trade-focused paradigm, superpower dominance partially rests on the ability to control the world’s key maritime chokepoints.

(six of the world’s most important strategic chokepoints)

The United States has weaponized its unique access to the Atlantic and Pacific, building a navy that is several orders of magnitude more formidable than that of any other country.   The U.S. Navy allows mobile, forward-deployable power projection on a unique scale, and it has also served as the de facto maritime police force that has kept the strategic chokepoints open and global trade flowing.

The U.S. Navy’s policing, followed closely by the American invention of the “TFEU” and “FFEU” (twenty-foot equivalent unit and forty-foot equivalent unit shipping containers), has dropped international cargo transport costs to a small fraction of wholesale and retail prices, and thus allowed the Asian Tigers to successfully out-compete many American-based manufacturers for shares of the U.S. domestic market.

Unfortunately for the export economies, American isolationism potentially poses an existential threat:  should America withdraw from the free trade, interdependent-global-economy structure that it was uniquely equipped to manage, there is no country waiting in the wings that is similarly blessed and incentivized to keep anything like Bretton Woods alive.  Russia’s key strategic interest, as always, is expanding and controlling the buffer zone between itself and the West.  China has regional designs on the South China Sea, and is building a naval capability specifically around “A2D2” (“anti-acess/area denial”) capabilities off its coast.

(a carrier strike group of the United States Navy)

An America that is no longer quite as interested in supporting free international trade could use its Navy in more protectionist ways.  A single CSG (carrier strike group — formerly called a carrier battle group) has greater force-projection capability than the rest of the world’s navies combined, and America currently has 11 of them.   Rather than serving as a force for unifying production and consumption zones around the world, the U.S. Navy could be employed for self-interested “gunboat diplomacy.”

For countries that have grown dependent on export-driven economic growth, free trade, and largely unfettered access to huge, affluent consumer markets overseas, a reversal of global trade trends and a deterioration of U.S. willingness to employ its Navy in a chokepoint policeman role could mean a return to border skirmishes and a classical, continental model of geopolitical strategy.


Asset #3:  Demographics:  U.S. Is At Risk, but Europe and Asia Are Doomed

 In previous commentaries, we have discussed the coming U.S. entitlements crisis posed by the numerical mismatch of Baby Boomer and Gen X demographic cohorts.  Simply stated, Gen X is too small to support the entitlement programs promised to the retiring Boomers.  The off-balance sheet liabilities of these promised entitlements have been variously estimated at $50-$150 trillion.

Zeihan readily acknowledges the problem:

“As the numerically massive Boomers retire, the government will stagger under ever higher pension and health care costs.  Yet as the tiny Xers become the primary taxpayers, the ability of the population to support the current tax load will shrink.  There are only two ways to go:  sharply higher taxes or sharply lower benefits.  Xers will certainly have a strong preference on this decision, but Xers will not have the political voice to get their way.  United in their retirement, the Boomers will be the largest voting bloc this country has ever known.  And they can probably count on at least some political support from their kids — aka Gen Y — who probably don’t want Mom and Dad living with them.  The Boomer/Gen Y solution will probably be simple:  bleed Gen X dry.”

The alternative to austerity — a significant increase in GDP growth rates in the United States allowing us to grow our way out of the predicament — will require a massive experiment in economic stimulus.  As we have reported in the past, many of Donald Trump’s economic policy advisers believe that the time for a desperate Hail Mary pass is now — within 4-8 years, the demographic/fiscal crisis will be unsolvable and intergenerational political warfare will determine American public policy for the next 15-20 years.

However serious our generational problems, Zeihan sees a far bleaker landscape in the rest of the developed world.  The U.S. will undergo 20 years of pain before the Gen Y/Millennial cohort — far larger than Gen X — enters the prime of their taxpaying lives and can restore the demographic pyramid to a more normal shape.

“The United States is the only developed country to boast a widening generation like Gen Y.  Throughout the rest of the developed world the Boomer equivalents simply didn’t have many kids — not even enough to replace their own numbers.  So while the American financial world will be past its period of maximum stress by 2030, for the rest of the world 2030 will simply be another year of an ever-deepening imbalance between retirees and taxpayers, with smaller and smaller generations coming up the ranks generating less and less growth.  For the developed world beyond the United States — and even large portions of the developing world — chronic capital poverty and permanent recession will be the new normal from which there is no return.”

The effect of this on the Bretton Woods logic will be similarly devastating:

“The demographic inversion will have one additional impact on the international order:  that of disconnecting the Americans.  Economically, global trade is predicated on the ability to sell into growing markets…within a decade it isn’t so much that the American market will be the largest one in the world, but that aging demographics will have capped — and in most cases reversed — consumer market growth in Japan, Germany, the United Kingdom, China, Italy, Canada, Spain, Russia, Korea, the Netherlands, Switzerland, Belgium, South Africa, Austria, Greece, Norway, Denmark, Portugal, and Finland.  That’s not simply over half of the world’s thirty largest economies, but it also includes most of the countries that the Americans created Bretton Woods for in the first place. 

“…as early as 2030 the United States will emerge as the only country that is capital-rich, the only country with a growing economy, and the only country with a growing market.” 


Asset #4:  Fracking

Fracking in the United States has undergone two techno-economic revolutions in recent years.  The first and most widely covered was the initial combination of slant drilling with hydraulic fracturing; this constitutes the major advancement on which the entire industry was ultimately built.  Less well-analyzed is the second revolution, which has been taking place in response to the oil price crash that caused prices to drop from $114 to $70 a barrel in 2014.

At one point, it appeared that the fracking industry was headed for disaster:  most of the Gulf Arab states have full-cycle petroleum production costs of about $30 per barrel, with the Saudis full-cycle cost structure coming in at about $25/barrel.   With fracking cycle costs estimated at $60/barrel, it appeared that an OPEC price war assault on a highly-leveraged, price-sensitive, vulnerable U.S. fracking industry could only end with apocalypse (in fact, currency wars expert, James Rickards, expressed concern that a Saudi-orchestrated oil price crash that took out the fracking industry could cause over $1 trillion in debt impairments, possibly triggering an international banking crisis).

Fortunately for U.S. energy independence, a series of CAPEX efficiency gains — walking rigs, pad drilling, micro-seismic acoustic sensors, multilateral drilling technology, industry consolidation — are systematically lowering the fracking industry’s cycle costs.  It remains to be seen how low these can go, but it is noteworthy that U.S. refineries are heavily (and expensively) investing in processing infrastructure to accommodate the light, sweet crude produced by domestic fracking.  This is particularly bad news for Venezuela — Venezuela traditionally shipped its heavy, sour product to U.S. Gulf Coast refineries, and the conversion of U.S. refineries to lower-sulfur petroleum will probably mean economic collapse for an economy that is 95 percent based in oil production.


“Geology is just one factor in determining the viability of success of shale — and to be fair, North America has some of the largest and most favorable shale reserves in the world.  But only the United States has the magic blend of geology, legal and regulatory environment, available capital, and above all the experience and know-how to make shale work on a massive scale. 

“Will shale techs leak out from the United States to the wider world.  Of course they will.  But they will not generate echo revolutions anywhere.  From a geopolitical standpoint, the shale revolution is a purely American development.  Which means that the economic boom, reindustrialization, and energy independence it generates also will be purely American developments.

“The question no longer is whether shale will be at the heart of American energy (it already is) but what the world will look like when the United States no longer is tied to global energy markets…the American shale revolution does more than sever the largest of the remaining ties that bind America’s fate to the wider world.  It re-industrializes the United States, accelerates the global order’s breakdown, and triggers a series of wide-ranging military conflicts that will shape the next two decades.  The common theme?  Just as the global economy tips into chaos, just as global energy becomes dangerous, just as the world really needs the Americans to be engaged, the United States will be…absent.”


The views and opinions expressed herein are those of the author and do not reflect the views of BASTIAT CAPITAL, LLC, its affiliates, or its employees and should not be regarded as an offer to sell or a solicitation of an offer to buy any financial product.  Bastiat Think Tank does not provide information on any of the Bastiat investment programs.