Will China Defeat the US?

This week, a Ukrainian missile fell in Poland killing two people and sparking concerns about WWIII. Last week, Chinese President Xi Jinping ordered his military to prepare for war. With increasing global tension, it raises an important question. Will China defeat the US in a global conflict? We will answer that question this week on Wolves And Finance.

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Biden’s comments at G20 Summit: https://www.youtube.com/watch?v=d-jzTT440Tc

Semiconductor chips: https://www.voanews.com/a/race-for-semiconductors-influences-taiwan-conflict-/6696432.html

Fall of the Roman Empire: https://mises.org/library/inflation-and-fall-roman-empire


This week, President Biden met with Xi Jinping during the G20 Summit in Bali. Biden’s comments after their meeting was, “I absolutely believe need not be a new Cold War. I do not think there’s any imminent attempt on the part of China to invade Taiwan.” But Biden’s words stand in sharp contrast to what Xi has been saying. He has been explicitly calling for taking control of Taiwan.

Some people do not understand how important Taiwan is. Taiwan makes 65% of the world’s semiconductors and almost 90% of the advanced chips. Most of the things we use everyday use computer chips. China wants the chips, and they will do whatever it takes to get them. If China takes over Taiwan, or destroys Taiwan, the global economy will stop. People think Taiwan is just some small country on the other side of the world. But if China invades Taiwan, the US will have to fight back. Just from an economic standpoint, we will have no choice.

For such a strategic location to be at the center of opposing views by the world’s two largest super powers, we need to ask the question, “What would happen if the US and China went to war? Would China defeat the US?” The short answer is no, China is unlikely to beat the US, and I say that for a very specific reason. A lot of people try to compare military force to determine who would win. I don’t think that is very helpful in this case, because both the US and China have nuclear weapons. We both have the military force necessary to wipe the other country out. I believe there is something more important than military force to the outcome of these conflicts, and it has to do with business history.

Every nation is made up of different stakeholder groups. You have Workers, Entrepreneurs, Politicians, Government employees, and the Military. All of these groups play an important role in keeping society functioning. The Workers and the Entrepreneurs create the value in the society. Politicians tax the Workers and Entrepreneurs and use the money to pay Government employees to create roads, fund schools, deliver the mail, and keep society running. Politicians also pay the military to provide national security. In a healthy society, all these different groups are balanced.

When an advanced nation falls apart, what typically happens is these groups of stakeholders become unbalanced. Inflation is usually a part of that. For instance, politicians discover that they can print more money to give more payments to the government. This creates inflation. Inflation is a tax on Workers and Entrepreneurs. If this continues, people will lose their homes and have to sell their businesses in order to pay the inflated taxes. This creates social unrest and society falls apart.

We see this pattern in the fall of the Roman Empire. When you think about how big and powerful and successful the Roman Empire was, it is surprising to think how such a powerful nation could fall. But it was the same process. It started with inflation to pay for a growing government and military. People lost their homes, and businesses failed. When people’s lives get so bad, they normally start moving to other countries. But Rome cracked down and started taking away people’s freedoms. They passed laws tying the workers to the land, so they could not move. They passed laws requiring business owners to continue to operate their business, and for their children to continue to the business after they died. Not only were Roman citizens now poor, they were no longer free.

At this point, German mercenaries attacked from the north. They looted Rome a number of times, and eventually the Roman empire collapsed.

Back to the conflict between the US and China. When you are evaluating geopolitics, it is helpful to consider if either of the nations are reaching a tipping point. When you look at the fall of the Roman Empire, there was a tipping point. The tipping point is when the lives of a large portion of the population would be better off under the invading country. In the case of Rome, the Workers and Entrepreneurs were better off under the rule of German mercenaries. At least they would have freedom again.

When you look at the US, there is no other nation in the world that has as much freedom. We saw this during the pandemic. There were at least pockets in the US, where people retained the freedom to decide their own medical care. Whether you agree with their decision or not, you have to acknowledge that they had freedom. And there is no other developed nation in the world where we saw that, with the exception of Sweden.

Now with the US, it is true that there are disturbing trends towards social collapse. For instance, we do see inflation. We see growing government spending, like hiring 87,000 IRS agents. We see corruption in government agencies like the FBI. We see attacks on freedom like lockdowns and censorship. All these things create an imbalance where we take money from the Workers and Entrepreneurs who are creating the wealth, and give it to the government. However, we do see positive things as well. Chairman of the Fed Jerome Powell has been aggressively raising interest rates to fight inflation. Treasury Secretary Janet Yellen talks about how the current levels of US debt to GDP is unsustainable and we need to reduce government spending. So, the US at least has an opportunity to correct course.

When we consider the US versus China, no one in the United States thinks their lives would be better off living under the control of the Chinese Communist Party. You would have much less freedom, and no one wants that. So, the idea that China would invade the US and take over is pretty unbelievable. However, the opposite is true. There is a large amount of Chinese people who would be a lot happier living under US control. They would have freedom, and opportunity, and the ability to vote for their leaders. Imagine if the Chinese people had the freedom the US enjoys. The explosion of economic growth for the entire world would be incredible. I think that a lot of Chinese people would welcome it. Remember, that a lot of Chinese people alive today all remember Tiananmen Square in 1989 where their own government killed Chinese citizens while they were protesting for the right to vote. I think they would welcome the United States giving them that right. So, in a conflict between the US and China, the US has a significant advantage.

I need to address one other point. There is a theory I have seen floating around YouTube lately, that one way the US would collapse is by the BRIC nations forming a currency that would compete against the US dollar. The theory goes that once nations have an alternative, they will dump US dollars, causing the dollar to collapse. While it is true that the BRIC nations will try to form a new currency, it will not replace the US dollar. Here is why:

  1. People use the US dollar as reserve currency because it is the most stable currency in the world. The idea that Brazil, Russia, India, and China have a more stable currency is silly. There is a huge difference in volatility between these currencies. Stability is what matters, which is why people will continue to use the US dollar in banking. Keep in mind, this is the same thing people said when they created the Euro, but the Euro did not replace the US dollar either.
  2. People will not stop using the US dollar to purchase oil. This is what is known as the petrodollar. The idea that oil producers will start wanting to accept Chinese yuan instead of the US dollar is also silly. People want dollars, because they can spend dollars anywhere. You cannot do that with Chinese yuan.
  3. There are also geopolitical reasons for this. The petrodollar was created by an agreement between the US and Saudi Arabia in 1945. Since then, we have been partners in the Middle East. We provide a lot of military support, specifically in providing protection against one of Saudi Arabia’s greatest enemies, Iran. China does a lot of business with Iran. So, the idea that Saudi Arabia is going to dump US dollars in order to do business with the friend of their greatest enemy, is never going to happen.

In summary, in a conflict between the US and China, the US is most likely to win. The reason is because the US dollar is strong, and US society is strong. However, China is reaching a tipping point, just like what happened when the Roman Empire collapsed. There are a lot of Chinese people who would be better off with the freedom provided by the United States.

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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.