Sir Niall Ferguson decodes Trump, China, and the new world order

The Chinese are adding to their naval, submarine, air, missile, and space capabilities at a much faster rate than the US is modernizing its military. The balance of military power in the Indo-Pacific is inexorably tipping in China's favor. Additionally, 'Ferguson's law' states that if a great power is spending more on interest payments than on defense, it won't be great for much longer. The US crossed this threshold last year.

“the Chinese are adding to their own naval, submarine, air, missile, and space capabilities at a much faster rate than we are modernizing ours. And so I've just been reading an excellent forthcoming book about this by my Hoover colleague Ike Fryman and uh his co-author Harry Halm. And the balance of military power in the Indo Pacific is inexraably tipping China's way. So that's the kind of military naval dimension. It it's going to get worse. And remember Ferguson's law. Ferguson's law states that if a great power is spending more on interest payments than on defense, it won't be great for much longer. The US crossed the threshold last year.”

There is a pathway to getting the Chinese economy to grow in a more balanced way without requiring it to flood the world with cheap manufacturing exports, as described by Michael Pettis, which involves helping Chinese households consume like they're in a normal society rather than having their incomes effectively repressed. However, Ferguson does not see this happening and does not think Xi Jinping will ever fully believe it's healthy to have a consumption-led Chinese economy.

“There is a way of getting the Chinese economy to grow in a more balanced way that doesn't require it to flood the world with cheap manufacturing exports. Michael Pettis has been writing about it for as long as I can remember. And it's about helping Chinese households to consume like they're in a normal society rather than to have their incomes effectively repressed. And and I just don't see it happening. I just don't think Cining will ever fully believe that it's healthy to have a Chinese economy led by consumption.”

China's population is falling faster than expected, with the base case being that it will halve between now and the end of the century, which represents a structural headwind to growth.

“The population is falling and it is falling faster than people expected. So that it base case halves between now and the end of the century.”

Europe has ignored every warning from successive American administrations over 30 years about looking after its own security, and this represents a fundamental failure to rise to the challenge.

“for 30 years the Europeans have ignored every warning that's come out of successive American administrations about looking after their own security.”

The Chinese are adding to their own naval, submarine, air, missile, and space capabilities at a much faster rate than the US is modernizing its capabilities, meaning the balance of military power in the Indopacific is inexorably tipping China's way.

“the Chinese are adding to their own naval, submarine, air, missile, and space capabilities at a much faster rate than we are modernizing ours. And so I've just been reading an excellent forthcoming book about this by my Hoover colleague Ike Fryman and uh his co-author Harry Halm. And the balance of military power in the Indo Pacific is inexraably tipping China's way.”

Despite technology success, China faces a deflationary macro problem because consumption suffered severely from zero-COVID and the property crisis, household balance sheets (predominantly middle-class savers through apartment acquisition) have been damaged, and it is very hard for the CCP to turn this around.

“But the second point which I don't think is getting enough attention is that it is really hard to turn the macro around in China because consumption took such a hit between co zero co going on and on and on and the crisis in the property sector households which predominantly middle-ass households save by acquiring apartments have been rinsed. Their balance sheets are a disaster and it is really hard for the Chinese government to turn that around.”

BYD has just passed $100 billion in revenue and is selling vehicles that are cheaper than Tesla's but are also high-quality. BYD has a strong and growing market in the global south, particularly in Ethiopia, and has become a substantial company in terms of scale and vehicle quality, though it has virtually no presence in the US.

“it's just passed hundred billion dollars in in revenue. Obviously, the cars are cheaper than Teslas, but they are selling a lot of vehicles. Uh I've just seen the first BYDs in North London in the last 6 months. Uh and BYD has got a strong and growing market in the global south. I mean in Ethiopia for example uh it's growing very very strongly. So this is a company that is not really present at all in the US but is really substantial both in terms of its scale number of cars sold but also how good those vehicles actually are.”

The number of breakthrough drugs in development coming through the funnel from China is now approximately 20-25% of the global total, which is remarkable and points to broader Chinese success in multiple technology domains beyond AI and EVs.

“the number of breakthrough drugs that are in in development and coming through the the funnel from China is now I believe about 20 20% or so or 25% of the global total. That's pretty remarkable.”

On balance, doing the arithmetic, economists at Goldman Sachs and Morgan Stanley agree there will clearly be a significant decline in growth this year, possibly recession, though recession is not the base case.

“I think I'm in agreement with the economists at Goldman and Morgan Stanley. If you do the arithmetic, it's clearly going to be a significant decline in growth this year, possibly recession, though I think that's not the base case.”

The CCP under Xi has clearly signaled that bringing Taiwan under Beijing's control is the capstone achievement of Xi's career; the PLA and Navy have been conducting increasingly aggressive operations around Taiwan waters, suggesting preparations for some form of action.

“And if you watch what's going on in the waters of Taiwan, looking back over the last couple of years, with every passing month, the PLA and the Navy do more and more aggressive things that worry the people running the Indepacific Command for the United States.”

Russia's political and military system under Putin may be more fragile than appears and could collapse or severely degrade if forced to accept a ceasefire, and wars often end when one side unexpectedly breaks or proves weaker than assumed, suggesting Russia could become weaker than anticipated.

“What if the Russians just overdo it? What if the whole system that Putin's built is actually very fragile and can't withstand a ceasefire? That's often the way about wars.”

There's also the ramification of losing control of Taiwan's semiconductor industry and handing it to China, which is an economically important asset.

“I'd also say there's another a second ramification which is essentially around the control of this enormously important economic asset which is the Taiwanese uh semiconductor industry right and of losing control of that or or rather handing control of that to China.”

The world is in a very different place now than it was 50 years ago when Kissinger went to China—the US was 45-50% of global GDP then while China was a couple of percentage points; now the US is about 25% and China is approaching 19-20%.

“the US was 45 50% of the global economy. China was a couple of percentage points and here we are America at about 25%, China approaching uh 19 or 20%.”

It's very hard for Ferguson to see anything the Trump administration can do, including reducing spending (DOGE), that will fix the debt dynamics, because the debt dynamics are unhealthy for the US over the next 3-4 years but especially over the next 40 years.

“it's very hard for me to see anything that the Trump administration can do, including DOE, that is going to fix that because the debt dynamics are really quite unhealthy for the US over the next, not just the next three or four years, but over the next 40 years.”

There is a way for the Chinese economy to grow in a more balanced fashion that doesn't require flooding the world with cheap manufacturing exports—it requires helping Chinese households consume like they're in a normal society rather than repressing their incomes—but Ferguson doesn't see it happening and doubts Xi Jinping will ever fully believe it's healthy.

“There is a way of getting the Chinese economy to grow in a more balanced way that doesn't require it to flood the world with cheap manufacturing exports. Michael Pettis has been writing about it for as long as I can remember. And it's about helping Chinese households to consume like they're in a normal society rather than to have their incomes effectively repressed. And and I just don't see it happening. I just don't think Cining will ever fully believe that it's healthy to have a Chinese economy led by consumption.”

Public intellectuals are paid more when they make pessimistic predictions about the future, creating an incentive structure that biases professional commentary toward doom rather than balanced assessment.

“public intellectuals get paid more when they say things are going to hell”

It's always a mistake to be too negative about the United States because it has innate advantages over everybody else: it attracts all the talent, gives them money, and they do amazing things. Elon is only one of many examples of this American capability.

“It's always a mistake to be too negative about the United States. One always has to remember its innate advantages over everybody else. Like absolutely you get to attract all the talent, give it money, it does amazing things. Elon is only one of many.”

The phrase 'liberal international order' is misleading, similar to Voltaire's critique of the 'Holy Roman Empire': it wasn't really very liberal, wasn't very international, and wasn't very orderly. However, there was a system that essentially relied on US predominance, which Ferguson discussed in his book 'Colossus.'

“I don't like any more than the Holy Roman Empire was like the Holy Roman Empire and which Voltater said was neither Holy nor Roman nor an empire. The liberal international order wasn't really very liberal, wasn't very international, and wasn't very orderly. But anyway, there was a system that essentially relied on US predominance. The best way of writing about it, I did a book called Colossus on this was it's just an American empire, an all but name.”

George Orwell's vision was of a world divided into three, not two, nuclear superpowers. It has taken until now for China to become a nuclear superpower (which is different from merely being a nuclear power). A nuclear superpower has tons and tons of nuclear weapons, while a nuclear power just has a couple.

“Well, I think read George Orwell. Don't overthink this. We end up in a world where there are three, not two, but three nuclear superpowers. Remember that's Orwell's vision. He saw this very early on. But it's taken until now for China to be a nuclear superpower. And that's different from being a nuclear power. Nuclear power is you got a couple of nuclear weapons. Big deal. Nuclear superpower is you got an absolute ton. You've got tons and tons of nuclear weapons. And China's getting there and it soon will be there.”

Opposition to Trump policies will become louder if economic conditions worsen significantly, and the 'dread word midterm' will be heard as Republicans face the prospect of losing at least one chamber of Congress; American politics remains structured by electoral incentives despite the appearance of chaos.

“They'll get louder if things look like they're going badly wrong economically and at some point the dread word midterm will be heard and people will start pointing out that if this thing doesn't turn around in time, then Republicans will lose at least one of chambers of Congress.”

China's fundamental macroeconomic problem is deflationary; consumption took a major hit from COVID lockdowns and the ongoing property sector crisis; middle-class households whose primary wealth vehicle is apartment ownership have seen their balance sheets devastated and cannot drive consumption recovery.

“it is really hard to turn the macro around in China because consumption took such a hit between co zero co going on and on and on and the crisis in the property sector households which predominantly middle-ass households save by acquiring apartments have been rinsed. Their balance sheets are a disaster”

The most precarious issue and most contentious flash point in the world is not Ukraine nor Israel, it's Taiwan because a Taiwan crisis would destabilize the Indopacific security system and also the world economy (Taiwan exports GPUs, not cigars).

“the most precarious issue, the most contentious flash point in the world is not Ukraine, nor is it Israel, it's Taiwan. Because a Taiwan crisis would simultaneously be enormously destabilizing to the security system of the Indepacific, but it would also be destabilizing to the world economy because this would be a Cuban missile crisis except that the island in question this time is off the coast of China, not the United States, and they export GPUs, not cigars.”

Despite the optimistic mood music coming from Beijing, China still has a deflationary problem, the property sector is very hard for them to fix, and while the government may target 5% growth, Ferguson does not believe they will achieve it (though they can report it as 5% through accounting techniques).

“the harsh reality is that despite the mood music coming out of Beijing, they still have a problem that is deflationary, that the property sector is very hard for them to fix. And where they they may say they're going to have a 5% growth target, I just don't think they're going to do it. I think they'll have to cook the books to get to Well, they can report it as 5%. Neil, we know there's a technique for that.”

The positive factors for the economy include deregulation, which is happening, and extension of the 2017 tax cuts beyond their expiration; the negative factors (tariffs, border closure, federal layoffs) outweigh the positive, leading most economists (Goldman Sachs, Morgan Stanley) to forecast significant growth decline and possible recession in 2025.

“On the other side, deregulation coming for sure. No taxes going back up. The tax cuts from 2017 are going to be extended. So it's not all negative, but I think I'm in agreement with the economists at Goldman and Morgan Stanley. If you do the arithmetic, it's clearly going to be a significant decline in growth this year, possibly recession, though I think that's not the base case.”

Public intellectuals are paid more and gain attention when they say things will go to hell, creating a bias toward pessimism in intellectual discourse that may not reflect actual probability of outcomes, so the scenario where outcomes are better than expected because others underestimated may actually be likely.

“and public intellectuals get paid more when they say things are going to hell”

Beijing is treating Hong Kong relatively gently economically but very firmly politically, using this to signal that 'one country, two systems' is okay for business and for most people in Hong Kong. This is an advertisement to Taiwan ahead of what will be pretty subtle but meaningful pressure from Beijing, demonstrating what Taiwan could expect under Chinese control.

“the way that the Chinese the way that Beijing is treating Hong Kong right now, which is uh relatively gently economically though very firmly politically is to signal that one country, two systems is okay for business and it's okay for most people in Hong Kong. That's that's an ad to Taiwan uh ahead of what will be a pretty subtle but meaningful pressure from Beijing.”

Trump's pattern from his first presidency shows he can course-correct; he likes to open strongly using negotiating tactics ('art of the deal'), see how the other side responds, and if things don't progress, he can declare victory or claim a win and retreat without losing face.

“The one thing you know about Trump from his first presidency is that he can course correct. He likes to open really strongly. That's all in the arts of the deal. See what the other side does. And if it doesn't really go anywhere, he's perfectly capable of declaring victory or claiming a win and retreating.”

We have lived for the last 30 years since the Cold War collapse with a particular security architecture and economic rules of freedom of navigation, reduced tariffs, trade everywhere, lowest-cost production, and this order is now clearly over.

“We have lived in a world of the last 30 years since the collapse of the Soviet Union with a particular security architecture uh and a particular set of economic rules. They were freedom of navigation, reduce tariffs, trade everywhere, move things to the lowest cost uh production... It's clear that that is now over.”

The United States has innate advantages that should not be underestimated: ability to attract all the talent and give it money to do amazing things (Elon being one of many), while the other side (Russia, China) is not that strong.

“It's always a mistake to be too negative about the United States. One always has to remember its innate advantages over everybody else. Like absolutely you get to attract all the talent, give it money, it does amazing things. Elon is only one of many. And then the other side is like not that strong.”

Unraveling the liberal international order doesn't produce self-equilibrating systems; in the 20th century, rival power blocks and empires ended up in massive conflagrations, and there's a danger of similar outcomes in the emerging order.

“Well, I'm not sure you necessarily do get an equilibrium under these circumstances. After all, what happened in the 20th century was that rival power blocks or empires uh ended up in two massive conflrations, right? Was not a self-equiliberating system, was it? And the danger of of unraveling the what we call the liberal international order”

Following Orwell's vision, the post-liberal international order will consist of three (not two) nuclear superpowers—US, China, Russia—each with dominant spheres of influence where they exercise effective control, similar to Orwell's 1984.

“We end up in a world where there are three, not two, but three nuclear superpowers. Remember that's Orwell's vision. He saw this very early on. But it's taken until now for China to be a nuclear superpower. And that's different from being a nuclear power. Nuclear power is you got a couple of nuclear weapons. Big deal. Nuclear superpower is you got an absolute ton. You've got tons and tons of nuclear weapons.”

Trump has a debt to Nixon that doesn't get nearly enough recognition—Nixon encouraged Trump to think of politics in the 1980s, and Trump's current strategy mirrors Nixon's 1971 playbook of shocking allies by threatening withdrawal, demanding defense burden-sharing, and threatening dollar manipulation.

“And part of what we see here is what Nixon did in 71, which is shock the allies... That was all part of Nixon's playbook. And I I do think Trump has a debt to Nixon that doesn't get nearly enough recognition. They had a relationship back in the 80s and it was Nixon who encouraged Trump to think of politics.”

Federal government cuts will impact the economy as unemployed people tend not to spend more money, and the closure of the southern border eliminates the positive labor supply shock of 8 million illegal immigrants that prevented recession in 2023, creating a significant headwind to growth.

“the cuts that are happening in the federal government are going to have at least some impact on the economy unemployed people uh tend not to spend more money. Um and then you missed something out which is really important and that is the closing of the southern border. Why did we not have a recession in 2023?... Well, one reason it didn't happen was 6% of GDP deficit all the way. And the other reason is that 8 million people were added to the labor supply through illegal immigrants. And that that's over. I mean the southern bord is essentially closed. And so the the the positive labor supply shock is gone. That will be a headwind to growth for sure.”

Export controls and diffusion controls on chips and advanced technology that were supposed to constrain China didn't work and instead probably triggered innovation and invention in China, which has now started to happen.

“one of the things I thought would happen a few years ago was that the export controls and the diffusion controls that were going to as they became around uh chips and advanced technology probably wouldn't work. They would probably trigger innovation and invention in China. I think we've started to see that happen.”

The Biden administration was poor at deterrence because it was staffed by law school-educated people who believed that anything bad should be met with de-escalation, which is the functional opposite of deterrence.

“I think this is perfectly reasonable in the sense that the Biden administration was very bad at deterrence. It was really a group of law school educated people advising the president that if anything bad happened, you should deescalate. Above all else, deescalate. And deescalation turns out to be the functional opposite of deterrence.”

There is a new story emerging about Chinese technology and the semiconductor supply chain that challenges the old narrative where American economic power was betting on the NASDAQ and the assumption that big US tech companies would win AI globally. This new story is sufficiently plausible that the old story should now be regarded with more skepticism by investors.

“Is that something that you recognize? Yeah, I think it's a new story. I'm not sure whether it's true but it's certainly plausible enough at this point for the old story to be regarded with more skepticism by investors.”

Chinese technology companies and investors were pessimistic and downbeat 12 months ago, with many considering emigrating to Singapore or leaving China because 'the big guy doesn't love us and the big guy doesn't get the economy.' In the present, the conversation has shifted to recognition that Xi Jinping understands the message and is implementing sensible macro policy and recognizing entrepreneurs as 'rock stars,' as evidenced by the rehabilitation of Jack Ma.

“12 months ago, you know, Chinese investors, Chinese tech companies were still pretty down in the mouth and there was a general feeling that the big guy doesn't love us and the big guy doesn't get the economy and we're all going to move to Singapore or we're all going to get out. So this was the kind of conversation 12 months ago. Now the conversation is well he seems to get the message now so we're actually getting some sensible policy advice out of the two sessions out of the kind of policy discussion in Beijing and he loves Jack Mah again and the rehabilitation of Jack Mah as well as the fating of Chinese entrepreneurs including the deepseek founders to send a signal to the Chinese private sector the big guy i.e eiinping gets the message. We're course correcting at the macro level and we are also recognizing that you guys are indeed the rock stars of the Chinese economy.”

Hellscape relies on the availability of many thousands of drones, which right now probably exist on procurement spreadsheets rather than in actual US naval material stores or on ships. There is also additional challenge in that the notion of remote control defense by robot of Taiwan remains fictional and will remain fictional for a few years.

“There's an issue with Hellscape of course which is that it it relies on the availability of many thousands of drones uh which right now I believe probably exist in a procurement spreadsheet rather than in uh you know the US US naval material stores on their ships. So there's there's also that additional challenge right which is that that that notion of a remote control defense by robot of Taiwan remains fictional and will remain fictional for a few years.”

Ferguson doesn't expect a D-Day Taiwan Strait invasion or even a blockade, but rather at some point China will declare that anything going in and out of Taiwanese ports must clear PRC customs, which is a big problem for the US because it's ambiguous whether the world would perceive it as aggression.

“I don't think that there's going to be an invasion kind of D-Day Taiwan Strait edition. I'm not even expecting a blockade. But I think what happens is that at some point on Trump's watch, the Chinese say, uh, just to let you know, anything going in and out of Taiwanese ports has to clear PRC customs and our Coast Guard will be going to, uh, to collect those, that's a big problem for the United States because it's not clear that the world would perceive that as aggression by China”

The Trump administration is preparing to allow Israel to strike Iranian nuclear facilities with US knowledge and limited participation to ensure success, with B2 bombers currently positioned at Diego Garcia as evidence of imminent military action against Iran.

“the Iranians are going to say at some point, 'No, we won't just give up our nuclear weapons program as you, President Trump, want us to.' And at that point, the Trump administration will say to the Israelis, 'Okay, go ahead and do what you can do to the Iranian nuclear facilities, and we'll kind of not participate, but kind of will participate to make sure that you get the job done.' And I And is that sorry, is that why we've got all these B2 Spirits sitting in Diego Garcia right now?”

PLA Navy and Air Force activities around Taiwan have increased dramatically in scale and frequency, which is tracked by prediction markets that have surprisingly not reflected increased probability of conflict, suggesting markets may be missing the question or misunderstanding the type of conflict risk.

“I have noticed that the odds on a Chinese attack on Taiwan haven't really increased over the last few weeks. I wonder whether you think that's just a blind spot of uh the people playing in that market or whether you think that the the odds are increasing.”

If the Trump administration fails to deter Iran from its nuclear weapons program, it will likely authorize Israel to strike Iranian nuclear facilities while providing tacit or explicit support to ensure success, with B2 Spirits currently positioned at Diego Garcia for this purpose.

“What is coming, I think, this half of the year is that the Iranians are going to say at some point, "No, we won't just give up our nuclear weapons program as you, President Trump, want us to." And at that point, the Trump administration will say to the Israelis, "Okay, go ahead and do what you can do to the Iranian nuclear facilities, and we'll kind of not participate, but kind of will participate to make sure that you get the job done." And I And is that sorry, is that why we've got all these B2 Spirits sitting in Diego Garcia right now?”

Trump's phase one trade deal with China was really a bad second-rate deal that China didn't even honor, demonstrating that Trump's willingness to declare victory doesn't require actual substantive concessions.

“I mean, think how the trade talks went with China last time around. Was that a great big beautiful deal? No, it wasn't. It was a really bad second rate phase one trade deal, which the Chinese didn't even honor.”

Trump believes tariffs aren't just a source of revenue but will help re-industrialize America and reduce the trade deficit, which he regards as a sign of weakness—an unorthodox economic theory not held by mainstream economists.

“Trump believes that tariffs aren't just a source of revenue. though he doesn't think that they will help to re-industrialize America and to reduce the trade deficit which he regards as a sign of weakness and Trump has this very unorthodox economic theory”

In the first Trump administration, policies were economically pretty beneficial for the average American household because Trump was very much constrained on every major policy domain, but this time the MAGA gang has a plan to go full tariff man and close the southern border.

“Because of course, if you think back to the first Trump administration, it was actually economically pretty beneficial for the average American household. That's because Trump didn't go full tariff man, Trump was very much constrained in his first term on every major policy domain. But this time after four years in the wilderness, the MAGA gang have a plan. And that plan is to go full tariff man and also to close the southern border.”

Always bet against the Davos consensus because it is always wrong—the Davos consensus in January was pessimistic on Europe, so shorting US equities and going long European stocks in January would have been the correct bet.

“Always bet against the Davos consensus. I was there too and my perception was the same as yours. European business leaders wandering around saying everything is terrible... If only we could have Trump. If only we could have mus... And I said in that case I'm short US long Europe... you'd have done very well and you'd have been right. Always trust Neil.”

The obvious sources of opposition to Trump, Senate Republicans with more mainstream views on trade and national security, are very quiet now but will get louder if things look economically bad, and will invoke midterms as a warning.

“But at the moment, the obvious sources of opposition, say Senate Republicans with more mainstream views on trade and national security, they're very quiet. Very quiet indeed. They'll get louder if things look like they're going badly wrong economically and at some point the dread word midterm will be heard and people will start pointing out that if this thing doesn't turn around in time, then Republicans will lose at least one of chambers of Congress.”

Ferguson's Law states that if a great power is spending more on interest payments than on defense, it won't be great for much longer, and the US crossed this threshold last year.

“Remember Ferguson's law. Ferguson's law states that if a great power is spending more on interest payments than on defense, it won't be great for much longer. The US crossed the threshold last year.”

One key thing that needs to happen and people are waking up to it: dusting off history books because if you've been in diplomatic service or trade negotiations in the last 40 years, you've played with a completely different playbook than the one you currently have.

“I think one of the things that needs to happen and people are waking up to it is dusting out their histories because if you've been in the diplomatic service, if you've been in trade and negotiations over the last 40 years, you've played with such a different playbook to the one that you currently have.”

Trump can course correct because he likes to open really strongly (as in Art of the Deal), see what the other side does, and if negotiations don't go anywhere, he's capable of declaring victory or claiming a win and retreating.

“one thing you know about Trump from his first presidency is that he can course correct. He likes to open really strongly. That's all in the arts of the deal. See what the other side does. And if it doesn't really go anywhere, he's perfectly capable of declaring victory or claiming a win and retreating.”

After April 2nd (tariff mageddon), trade negotiations will occur and major counterparties won't give much ground, forcing the administration to declare victory to avoid severely adverse economic consequences.

“I think we should be prepared for trade negotiations after April 2nd, after liberation day, i.e. tariff mageddon. And in those negotiations, I don't think the major counterparties will give that much ground and then at some point uh the administration will have to declare victory to avoid really severely adverse economic consequences.”

There is a possibility that Trump turns out to be a 'very stable genius' and things work out better than expected. This could happen if: (1) trade war counterparties fold and accept Bob Lighthizer's 'fairer trade' deal, (2) Elon Musk's DOGE initiative actually fixes the federal government and reduces costs, (3) Interest rates come down and deliver meaningful gains to households, (4) The stock market corrects only modestly before rising again due to deregulation benefits.

“There's a scenario in which Trump turns out to be a very stable genius and it all works out much better than you or I expect. Yeah. For example, the counterparties fold in the trade war. They just all fold and we end up with Bob Lighheiser's fairer trade. There's a scenario in which we underestimated Elani actually does fix the federal government and it gets more efficient and it costs less money. There's a scenario where the interest rates come down and that actually ultimately delivers something meaningful to households and the stock market only corrects a little and then it's all the way back up because deregulation is real etc.”

There are at least three distinct foreign policy factions within the Trump administration: maximalists (National Security Council) who oppose giving adversaries any room anywhere; moderates who acknowledge the need to focus on China; and Monroe Doctrine advocates (Miller, Vance) who want to focus solely on the Western Hemisphere.

“Well I think there are three groups within the Trump administration at least three different theories of this as is often the case that US administrations are complex things and there at least two if not three foreign policy theories in any given administration. There's the maximalist position which is quite well represented in the National Security Council which is we're up against an axis of authoritarians. China, Russia, Iran, North Korea, and we can't give them an inch anywhere. Not in Ukraine, not the Middle East, not in the Far East. The middle position is, yeah, that's right, but we can't possibly do all of this at once, but we'd better focus on China. And that would be, I guess, Bridge KBY and and others. Mhm. And and and then the people who think it's Monroe doctrine, let's go back to the 19th century and just do our hemisphere and just leave everything else to others that Steven Miller in the White House, I think it's JD Vance, the vice president, they are the people who really want to focus on the Western Hemisphere.”

The old story about American tech dominance (NASDAQ winning, Nvidia and TSMC holding the line with ASML's EUV machines being the insurmountable barrier) is being replaced by a new story where Deep Seek has shown inference (where economic benefits come from) doesn't require cutting-edge chips, and Huahei may have an EUV machine and ASML is setting up repair in China.

“deep seek has demonstrated you can do this on much lighter processing inference which is where the economic benefits come from doesn't necessarily require all of the best chips all the time. And in the last couple of weeks, we've seen a few things happening around this photo lithography. Some noise that maybe Huahei has an EUV machine that might be ready uh that's homegrown, might be ready at the end of this year. We've seen ASML agree to set up a repair facility for the older machines in China. And and so I I see in that aspect of that the hard technology against which in a way a lot of American economic power had been bet was being bet. was bet on the NASDAQ essentially that the big tech companies would win in AI globally”

Ferguson does not think the reverse Nixon theory will work because Russia is quite a weak player—it is weak economically, on the back foot in Ukraine, and faces a long journey to rebuild itself.

“And I think the idea here, it helps explain why they appear to be so inexplicably nice to Putin... I want to just, you know, spoiler alert. I don't think it's going to work. Yeah. I don't think that would work as well. Partly because Russia is quite a weak player in some sense. It's weak economically.”

Beijing is treating Hong Kong relatively gently economically but very firmly politically, signaling that 'one country, two systems' is okay for business and most Hong Kong residents, which serves as an advertisement to Taiwan about the terms of integration.

“the way that Beijing is treating Hong Kong right now, which is uh relatively gently economically though very firmly politically is to signal that one country, two systems is okay for business and it's okay for most people in Hong Kong. That's that's an ad to Taiwan uh ahead of what will be a pretty subtle but meaningful pressure from Beijing.”

Trump is Nixon and wants to go to Beijing and do the great big beautiful deal, and the Chinese know this; from Xi's perspective, there's never been a president who could hand him Taiwan without a fight, so if Xi is smart he should push the envelope and make his move.

“The Chinese know that Trump is not really that into Taiwan. The Chinese know that he Trump wants to do a big beautiful deal. And remember, Trump is Nixon. He wants to go to Beijing. He wants 1972 to happen. And for him to be the one who goes there and does the great big beautiful deal. If that's the case and I'm Cin Ping's advisor, I'm like, "Boss, this is your moment. Only now is there a president who could actually hand you this without a fight, but you got to push the envelope. You got to make your move."”

The US is developing a deterrent strategy called Hellscape which involves using air, sea, and undersea drones to sink Chinese vessels, implying war in which ships get sunk, planes shot down, missiles fired, and people die.

“the United States is developing a deterrent strategy for the Taiwan Strait called Hellscape. We know this because San Po talked about it to the Washington Post last summer with the very obvious intention of communicating to Beijing, "We've got a plan for you." And that plan is to use air, sea, and undersea drones to sink Chinese vessels, which is quite a big move when you come to think about it. So, Hellscape implies war. And all the war games I'm aware of, even the ones that the US comes out of ahead, are really largecale conflicts in which a lot of ships get sunk, uh, planes get shot down, missiles get fired, and people die.”

Chinese technology companies are feeling their strength in artificial intelligence (citing DeepSeek as a big win) and in electric vehicles, with the only question being which two other Chinese companies will join BYD in total global dominance of automobiles.

“the Chinese are feeling their strength in not only artificial intelligence. Deep Seek was a big win, but it's just part of a success story. And also in electric vehicles where the only question that I heard asked was, well, who will the other two Chinese companies be that share total global dominance of automobiles with BYD?”

In just two weeks, Trump and Vance completely woke the Europeans up and this amounts to making Europe great again—addressing a long-standing American grievance and benefiting Germany economically through rearmament and infrastructure investment.

“In just two weeks they completely woke the Europeans up in a way that no president has been able to do since the 1960s and in that sense he's making Europe great again. There's no question about that. And he's addressing this long-standing American grievance... the German economy is going to benefit hugely from rearmament.”

The mood at Davos in January was absolutely funeral, with European business leaders saying Europe is terrible and wishing for Trump or Musk, but six weeks later European leaders are stepping up with support and proactive steps to rearm and re-energize the continent, courtesy of the shock doctrine from Washington DC.

“When I was in Davos in January, the mood around Europe was absolutely funeral... You'd run into people in the street and they'd say the mood around Europe is terrible. It's like being at a at a wake. And we're just six weeks later and I see European leaders stepping up, giving each other support, taking really proactive steps to to rearm, rebuild, re-energize the continent. And there's a different feeling courtesy, I think, of the shock that the shock doctrine that has emerged out of Washington DC.”

By the end of the year, even more people than currently will be saying 'What do we vote for?' because Trump's policies will impose painful costs on households that they weren't expecting to pay when they voted for him.

“And so by the end of the year, even more people than currently will be saying, what do we vote for? This is more painful than we had been led to expect. Because of course, if you think back to the first Trump administration, it was actually economically pretty beneficial for the average American household.”

The rehabilitation of Jack Ma and the public feting of Deep Seek founders sends a signal to the Chinese private sector that Xi Jinping gets the message and recognizes that private sector entrepreneurs are the rock stars of the Chinese economy.

“the rehabilitation of Jack Mah as well as the fating of Chinese entrepreneurs including the deepseek founders to send a signal to the Chinese private sector the big guy i.e eiinping gets the message. We're course correcting at the macro level and we are also recognizing that you guys are indeed the rock stars of the Chinese economy.”

Despite claiming a 5% growth target, China likely will not achieve it and will 'cook the books' to report it as achieved.

“And where they they may say they're going to have a 5% growth target, I just don't think they're going to do it. I think they'll have to cook the books to get to Well, they can report it as 5%.”

12 months ago Chinese investors and tech companies were down in the mouth, saying 'the big guy doesn't love us' and considering moving to Singapore or leaving China, but now the conversation is 'he gets the message, we're course correcting, and he loves Jack Ma again.'

“12 months ago, you know, Chinese investors, Chinese tech companies were still pretty down in the mouth and there was a general feeling that the big guy doesn't love us and the big guy doesn't get the economy and we're all going to move to Singapore or we're all going to get out. So this was the kind of conversation 12 months ago. Now the conversation is well he seems to get the message now so we're actually getting some sensible policy advice... he loves Jack Mah again”

The mood at Davos in January 2025 was that European leaders and business figures were pessimistic about Europe's future and expressed wishes that Trump or Musk could help; six weeks later, the same leaders are stepping up, supporting each other, and taking proactive steps to rearm, rebuild, and re-energize the continent, driven by the shock doctrine emerging from Washington DC.

“When I was in Davos in January, the mood around Europe was absolutely funeral. You'd run into people in the street and they'd say the mood around Europe is terrible. It's like being at a at a wake. And we're just six weeks later and I see European leaders stepping up, giving each other support, taking really proactive steps to to rearm, rebuild, re-energize the continent. And there's a different feeling courtesy, I think, of the shock that the shock doctrine that has emerged out of Washington DC.”

China has overcome US export controls not through circumvention but through achieving GPT-4 equivalent quality on much smaller models (e.g., Deep Seek) and breakthrough developments in drug discovery (20-25% of global pipeline), fusion, and semiconductors.

“And you know we we have seen in our conversations with with Kyu Lee at the end of last year his firm was already achieving the mythical GPT4 quality capability on much smaller models and then out shows arrives deepseek the things I have seen in the last few weeks and I'm I'm sure you've come across them as well and this is quite a mix a broad picture but it all points in the same type of direction of a scientific technological and industrial confidence uh that is built as a flywheel in in China. So the number of breakthrough drugs that are in in development and coming through the the funnel from China is now I believe about 20 20% or so or 25% of the global total.”

People negotiating trade and diplomacy over the last 40 years have been operating with a different playbook (the liberal international order playbook) than the one that is currently relevant. There is a need for understanding historical precedents because the playbook has changed from one of rules-based liberal order to one of great power competition and spheres of influence.

“if you've been in the diplomatic service, if you've been in trade and negotiations over the last 40 years, you've played with such a different playbook to the one that you currently have. And so with that, I think your own Substack is a great place for people to to start. Why don't you give a nod to where people can find you on it? Well, I have a Substack which is called Time Machine where I post everything that I write.”

BYD has just passed $100 billion in revenue, sells cars cheaper than Tesla with growing market in the global south (Ethiopia), and has transformed from being seen as wild west in the pre-pandemic period to being technologically impressive.

“just passed hundred billion dollars in in revenue. Obviously, the cars are cheaper than Teslas, but they are selling a lot of vehicles. Uh I've just seen the first BYDs in North London in the last 6 months. Uh and BYD has got a strong and growing market in the global south. I mean in Ethiopia for example uh it's growing very very strongly. So this is a company that is not really present at all in the US but is really substantial both in terms of its scale number of cars sold but also how good those vehicles actually are.”

The speed with which Chinese automobile companies have gone from seeming like the wild west of the Chinese economy pre-pandemic to real threats that require tariff barriers to prevent domestic market overrun is remarkable.

“I can remember being in China not long before the pandemic when Chinese automobile companies seemed like the wild west of the Chinese economy and people didn't take it seriously in the west. Well, they're taking it seriously now because unless you erect your tariff barriers double quick, your domestic market is going to be overrun by Chinese competitively priced and pretty impressive technologically vehicles.”

Anybody who bets against Chinese engineering and Chinese STEM is likely to lose their bet over a 10-year time horizon, but the problem is also making a bet on the CCP's ability to manage Chinese economic policy and national security.

“I think anybody who bets against Chinese engineering, anybody who bets against Chinese STEM is likely to lose their bet over a 10-year time horizon. The problem is that you're also making a bet on the CCP's ability to manage Chinese economic policy and national security.”

If America accepts Chinese primacy in the Pacific, the whole world reconfigures, particularly the Indopacific region, and Beijing becomes the central hub of a new order.

“they're in the situation room. and they will have to decide is America going to stay number one in the Indo-Pacific but have to fight a war to do it or is it going to accept Chinese primacy in which case the whole world reconfigures particularly in the Indepacific region and Beijing becomes the central hub.”

George Orwell foresaw a world of three nuclear superpowers, and that's now arriving with China becoming a nuclear superpower (not just nuclear power, but a superpower with tons and tons of nuclear weapons).

“Well, I think read George Orwell. Don't overthink this. We end up in a world where there are three, not two, but three nuclear superpowers. Remember that's Orwell's vision. He saw this very early on. But it's taken until now for China to be a nuclear superpower. And that's different from being a nuclear power. Nuclear power is you got a couple of nuclear weapons. Big deal. Nuclear superpower is you got an absolute ton. You've got tons and tons of nuclear weapons. And China's getting there and it soon will be there.”

The liberal international order wasn't really very liberal, wasn't very international, and wasn't very orderly—it was essentially an American empire in all but name, where the US projects military power, has complete military ascendancy, holds the reserve currency, and acts as consumer of first and last resort while financing itself through Treasury sales.

“the liberal international order, a phrase that I don't like any more than the Holy Roman Empire was like the Holy Roman Empire and which Voltater said was neither Holy nor Roman nor an empire. The liberal international order wasn't really very liberal, wasn't very international, and wasn't very orderly. But anyway, there was a system that essentially relied on US predominance. The best way of writing about it, I did a book called Colossus on this was it's just an American empire, an all but name. And the United States performs these unusual functions, but it essentially projects military power. It has complete military ascendancy. It has the reserve currency and it runs an international system where it buys it's the consumer of first and last resort and it sells claims on the US Treasury to finance it.”

The Supreme Court will fire 'the first shot across Trump's bows,' and while the administration will get some wins in court, it will also face defeats; moreover, the confirmation process is so protracted that key administration positions remain unfilled, and there will be turnover and firings during the year—all introducing uncertainty into policy execution.

“The Supreme Court has already fired the first shot across Trump's bows. They're going to get some wins, I suspect, in the courts, but they will also be handed some defeats. So, the other thing I'd add is that the administration is still taking shape. The whole process of confirming nominees is so extraordinarily protracted that there are plenty of key jobs that haven't yet been filled. There'll be some turnover. He's Trump. He's going to fire somebody at some point this year. And that too will have its consequences.”

Trump is not bothered by a 10% stock market decline, but a 20% decline might get his attention, as it did in late 2018 when he then piled pressure on the Fed and blamed the Fed chair.

“I'm not sure Trump is bothered by 10% stock market decline. I think 20% might get his attention. and it did in late 2018, but then he just piled the pressure on the Fed and said it was on J. Pal to cut rates.”

The degree to which the PLA and Air Force have been misbehaving around Taiwan has increased dramatically, and the odds in prediction markets on Chinese attack on Taiwan haven't increased over the last few weeks, suggesting either a market blind spot or that the threat is already priced in.

“I mean, I think that for the audience, the degree to which the PLN, which is Chinese Navy and the Air Force, have been misbehaving around Taiwan, has increased dramatically. I sometimes watch these these betting markets, prediction markets, uh, because they are, well, they're fun to watch. I think they're quite good rearview mirrors at times, but I have noticed that the odds on a Chinese attack on Taiwan haven't really increased over the last few weeks.”

Scott Bessent and others in the administration have said there's going to be pain from tariffs, and even a 10% stock market draw down sends Bessent and Kevin Hasset into TV studios to reassure markets that tariffs are transactional and temporary, suggesting the administration will soften implementation if markets react severely.

“We've heard it again and again from members of the administration. Scott Bessent has has said it and and others have said it that there's going to be pain... I think we've already seen the way in which even a 10% stock market draw down sends Scott and and Kevin Hasset into the TV studios to reassure markets that actually the tariffs are going to be just a transactional temporary thing.”

Azim sees certain things about the new economic and security order: more regionalized trading blocks, resurgence of Belt and Road with software exports (Deep Seek), cheap BYD cars, pressure for dual or even three-track technology ecosystems (core technology, maybe financial rails), and reshuffling of the global south's alignment.

“I I see certain things are easier to pick out in a way. The notion that we might have more regionalized trading blocks. there might be a resurgence of the belt and road which didn't do particularly uh what it set out to achieve a decade ago but it may now do so with sort of software exports through through deepseek amongst other things and the fact that you can sell cheap BYD and other cars but there also seems to be a pressure for dual or maybe even threetrack technology ecosystems which would be you know core technology but maybe it's even in some of the financial rails that might exist and a reshuffleling of the global south and where it sits and who it looks to to buddy up with”

There is a scenario in which the future turns out better than most people expect because Trump gets lucky and the other side is actually quite weak, and 'that's the future that not many people are betting on at the moment.'

“there's a scenario in which it turns out better than most people expect because Trump gets lucky and the other side is actually quite weak and that's the future that not many people are betting on at the moment.”