Digest 6: what Vietnam can teach us about Ukraine; most misguided policy of the 2020s; why do we keep using sanctions (when they don’t seem to work)?

Edwin Reischauer

Here’s a very interesting clip on how JFK’s ambassador to Japan thought about escalation/de-escalation in Vietnam in the 60s.

For six minutes, with great overlap to Ukraine today…

Reischauer appears to have been a commendably great statesman, aiding U.S.-Japanese understanding post WWII. I’m going to put a bit more about him in the comments section below for anyone interested.

Understanding the impact of the US’s new semiconductor restrictions

‘The likeliest outcome of the chip war is the creation of a separate Chinese semiconductor industry.’

All global, non-Chinese (Taiwan/South Korea/Netherlands...) firms, prior to this ban, have used vast amounts of their revenues from selling to China to plough back into capital expenditure and R&D, to get continually better chips.

‘Semiconductor sales in 2021 were roughly $600 billion, and the industry planned $200 billion—an eye-popping one-third of total sales—in capital spending.’

And:

‘China last year bought slightly more than half of the world’s computer chips’

Take revenue from sales to China off the table, and non-Chinese companies aren’t going to have funds to invest in further innovation.

So, the U.S. is seemingly knee-capping all Chinese firms, as well as non-Chinese ones, and by definition forcing China to come up with its own domestic production. What will the long-run (7–10-year) consequence of this be?

‘China’s subsidies to its nascent chip industry are four times the Biden administration’s proposed support for American manufacturers... China will use its vast semiconductor subsidies to flood the world market with cheaper products and put Western companies out of business.’

Niall Ferguson, further writing on this:

‘Cutting China off from high-end chips today seems a lot like cutting Japan off from oil in 1941 [pre Pearl Harbor]. And it is an especially hazardous move when more than 90% of the production of those chips takes place in Taiwan.’

Why do we keep using sanctions (when they don’t seem to work)?

Who better to turn to for answers than Richard Haass and Foreign Affairs editor Dan Kurtz-Phelan?

I’ve been in meetings like the ones Haass mentions. The ‘don’t just stand there, do something’ dynamic is real!

Larry Summers on inflation

This is corroborated by the latest update from Bridgewater’s chief investment officers:

A near-term economic downturn, an extended period of above-target inflation, and a second round of tightening are not discounted in the markets at all. What the markets are now discounting is that the first round of tightening is nearly over, that growth will not slow much and yet inflation will quickly fall to desired levels and that this will allow a cut in interest rates in 2023 and 2024 that restores a normal risk premium in bonds. There is a lot of room for markets to be blindsided by what we see as the normal sequence of events which typically follows the conditions that exist today.

…Which means difficult pay negotiations between workers and employers / governments, and our money generally melting, could continue for some time.

Ray Dalio himself has made a notable update in his assessment to holding cash (having been preaching ‘cash is trash’ for years):

This same point is colourfully put in an excellent piece by Lionel Shriver:

‘With American inflation stubbornly over 8 per cent, the dollar is still rotting, even if you can stick it in a whopping 3.5 per cent interest certificate of deposit – something like storing your meat in a beer cooler, but not in a proper fridge.’

(The beer might however turn warm in the next six–12 months when the Fed likely breaks from tightening…)

Cultural breakdowns of negotiation

This is an excellent five minutes with 1960s Harvard professor J.K. Fairbank:

This simultaneously seems obvious and rare.

How many people – including in high echelons of administrations – are really looking at Russia right now through a lens of cultural understanding?

For a country that lost 27 million people during WWII and called it ‘victory’, might Putin have a way of looking at the world that differs from ours, and are we really factoring this into our decision-making?

Jeff Wilke on how increased inventory turns could help humanity

$3 trillion = slightly more than the entire GDP of the UK.

I think fair to say Wilke (as former CEO of Amazon Worldwide Consumer) might know more about supply chains than anyone alive, and as someone who recently became Founding Chairman of a company dedicated to rejuvenating American manufacturing, I trust this capital can be unlocked without making global supply chains more vulnerable.

(For anyone intrigued by this/wanting a promotion in a retail company, I recommend this chapter by Eliyahu M. Goldratt.)

Undersea cable cut

In my last update, a source I quoted suggested European undersea internet cables were newly vulnerable to attack. Last week there appears to have been an attack on the outskirts of the UK.

The Shetland Islands lost phone and internet connections after the cable that links the islands to the mainland was severed. The Boris Petrov, a Russian ‘scientific research vessel’ designed to survey the sea floor and gather intelligence, was in the area at the time.

Evidence here is by no means conclusive, but we do think this is just a coincidence?

Our new PM wrote a policy paper about the risk of undersea cable attacks in 2017, so he’s well aware of the threat.

While government gets further resilience plans in place, time to look into residential Starlink?

Xi on energy

President Xi Jinping on energy security and climate change:

‘Based on China’s energy and resource endowments, we will advance initiatives to reach peak carbon emissions in a well-planned and phased way, in line with the principle of getting the new before discarding the old.’

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