No Mercy / No Malice: Freedom of Navigation

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1:11This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed-sponsored jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate C. According to Indeed data, sponsored jobs have four times more applicants than non-sponsored jobs. So go build your dream team today with Indeed. Get a$75 sponsored job credit at Indeed.com slash podcast. Terms and conditions apply. I'm Scott Galloway, and this is No Mercy, No Malice. Global commerce depends on the freedom to move goods across oceans without paying tribute or risking attack.

1:54Freedom of Navigation, as read by George Hahn.

2:23George Hahn:The world makes much less sense than you think, Kahneman wrote in Thinking Fast and Slow. The coherence comes mostly from the way your mind works. Our brains have two thinking systems, fast, intuitive, emotional, and slow, logical, calculated. Fast thinking blames America for killing an estimated 250 ,000 civilians with atomic bombs. Slow thinking notes Japan's military killed 3 million to 10 million civilians during World War II. We're moved by the cinematic power of mushroom clouds, not the death toll, because 95 % of our thoughts are the product of fast thinking. As Joseph Stalin supposedly said, A single death is a tragedy.

3:15George Hahn:A million deaths is a statistic. The statistical tragedies resulting from the closure of the Strait of Hormuz are invisible to the fast-thinking mind, which is fixated on energy prices, markets, and shitposts cosplaying as statesmanship. So let's slow down and think about the second-order effects stemming from a world without freedom of navigation. America's earliest conflicts were fought to further the principle of freedom of navigation, i.e. the right to move goods across oceans without the threat of violence or the bribe of tribute. In 1798, we fought an undeclared war against France to stop it from seizing our merchant ships.

4:06George Hahn:A decade later, we took on the British Empire to stop it from kidnapping American citizens and forcing them to serve aboard its ships. Between those two wars, we fought two campaigns against the Barbary States in North Africa, ultimately ending the need for American merchants to pay bribes for safe passage. These conflicts are largely forgotten, save for two familiar artifacts, that Shores of Tripoli line from the Marines hymn and the Mamaluk sword, which remains part of the Marine dress uniform to this day. Those 18th century American sailors and marines laid the foundation for today's global prosperity.

4:51George Hahn:Over the next 200 years, freedom of navigation evolved from an idea, available only to nations with the maritime firepower to enforce it, into a system of laws and norms that benefit everyone. Today, 85 % of goods by volume and 55 % by value are moved by sea. Already, the U.S.-Israel war on Iran has caused an unevenly distributed energy shock. In its second rapid assessment of the Hormuz crisis, the United Nations Conference on Trade and Development noted that increases in energy prices are spilling over into supply chains, raising the cost of producing and moving goods across the world. This week marks the war's two-month anniversary.

5:44George Hahn:The strait has been closed most of that time, but markets, while volatile, have hit record highs. Explaining the cognitive dissonance between bad news and market optimism, European Central Bank President Christine Lagarde said, this is a crisis where we're learning bit by bit, day by day, what the consequences will be. Because tankers and cargo ships move about as fast as bicycles, we're only now beginning to transition from the fuck-around phase to the find-out phase. Some things we're finding out. Carex, which makes a fifth of the world's condoms said it would raise prices by 30 percent, increasing the cost of safer sex and probably leading to unwanted pregnancies.

6:34George Hahn:Dow said it plans to double a previously announced 15 cent a pound price hike for polyethylene, which is used to make bottles, bags, tubing, and textiles. The price increase follows a 10 cent boost in March. The U.S. Postal Service announced a temporary 8 percent surcharge on packages, meaning everything you buy online just got more expensive. Helium is abundant in the universe, but rare on Earth. Between the closure of the strait and damage to Qatar's production facilities, 30 % of the global helium supply has been disrupted. Spot prices for the gas have doubled since the start of the war. But even if the conflict ends soon, experts say it could take years for Qatar to repair its damaged production capacity.

7:29George Hahn:Meanwhile, U.S. helium suppliers have begun notifying customers that they won't be able to fulfill orders. This is the big one that we always feared would happen. It's the Black Swan event, Cliff Kane, an executive at the helium exploration company Pulsar, told the Wall Street Journal. It is just going to be a building crescendo of who's going to be able to get their molecules and who is not. Helium molecules are embedded throughout the supply chain, and in many cases there's no good substitute. Affected sectors include semiconductors, aerospace, and fiber optics. The AI build-out is especially vulnerable, as helium is used to produce chips and cool data centers.

8:20George Hahn:Eventually, constrained supply will meet the AI boom's increasing demand. There's no physical shortage right now at the end-user level, a helium industry consultant told Scientific American. It's like a nice sunny day on the beach, but you heard there's a tsunami out there. When the tsunami hits, it will pit AI against healthcare. In the U.S., one-third of the total helium supply is used to cool MRI machines. Healthcare systems are already talking about passing costs onto patients and rationing care. Since the start of the war, prices of urea and ammonia, the two most common nitrogen fertilizers, have risen by 65 % and 40 % respectively.

9:15George Hahn:An estimated 30 % of the world's fertilizer passes through the strait, further straining already crimped global fertilizer production. In Russia, the world's number one fertilizer exporter, plants have been targeted by Ukrainian drones. One recent attack temporarily knocked out 5 % of Russian production capacity. China, the second biggest exporter, banned exports to guard domestic supply. In the U.S., higher fertilizer prices will hurt some farmers more than others, depending on their location and whether they bought fertilizer ahead of the spring planting season. U.S. futures markets have already priced in higher fertilizer costs, but if the straight remains closed into the summer, next year's food prices will rise.

10:09George Hahn:For poor nations, the crisis is here. An estimated 500 million farmers produce 70 % of the world's food supply on farms smaller than 24 acres. Their margin for error is zero. The longer supply chains remain jammed, the worse it gets. One analytics firm estimates that a six-month disruption will spike global food prices by 12 % to 18 % above pre-war levels by the end of the year. Germany's Kiel Institute predicts food price inflation will reach 30 % in Zambia, 11 % in India, and 8 % in Venezuela within a year. By mid-year, the World Bank estimates 45 million people, mostly in developing nations, will experience acute hunger.

11:09George Hahn:According to Michael Wirtz of the Council on Foreign Relations, we're witnessing a slow-motion famine machine. Compounding the suffering, wealthy nations cut development assistance 23 % from 2024 to 2025. As a U.N. official told The Economist, the humanitarian shock absorber isn't there anymore. Famines are humanitarian crises in their own right, but they can also precipitate riots, revolution, and war. Marie Antoinette likely never said, let them eat cake, but the infamous line speaks volumes about the immediate cause of the French Revolution. The average 18th century worker spent half their daily wage on bread After grain crops failed in 1788 and 1789 Bread prices in the country spiked to 88 % of the daily wage Lighting the fuse for the violence that followed Food insecurity also set the stage for the Arab Spring As a Jordanian activist told Time in 2011 this is a hunger revolution.

12:24George Hahn:From a political stability standpoint, food insecurity is both a cause and consequence of violence, contributing to a vicious cycle UN researchers call a conflict trap. Aeschylus was correct. The first casualty of war is the truth. But in a globalized world, casualties continue to mount long after the initial conflict and supply chain disruption are resolved. Fighting a war to open a waterway that was opened before hostilities began is stupid, i.e., we're hurting others while hurting ourselves. But that's me thinking fast. Thinking slowly, the stupidity compounds and metastasizes. The strait isn't open, but it isn't entirely closed either.

13:19George Hahn:Iran has created a toll booth where previously there was free sailing. The economic consequences of a single toll booth are small. As the Brussels think tank Brugel noted, the Gulf nations would pay a toll that amounts to$1 to$2 per barrel, increasing the global price by only$0.05 to$0.40 per barrel. a hit that wouldn't register for consumers. The danger isn't the toll, but the precedent. The concept of the Blue Highway is going away, Salvatore Mercogliano, a formal naval officer and associate professor of history at Campbell University in North Carolina, told the Wall Street Journal. We won't see a return to the normalcy we had prior to this, no matter what.

14:14George Hahn:One ominous sign? Iran is collecting tolls in crypto and Chinese yuan, undermining dollar supremacy. The greater risk, however, is that toll booths will spread. If the world accepts paying for tolls for the Strait of Hormuz, then how do we handle the claim China has made that the entire South China Sea is Chinese territorial waters? Asked retired U.S. Navy Vice Admiral John Fozzie Miller, if they control the South China Sea, they essentially control the global economy. The nightmare scenario isn't worldwide toll booths or even simultaneous blockades. We can tolerate higher prices and more frequent disruptions.

15:06George Hahn:What we shouldn't tolerate is a descent into gangsterism. In the U.S., Donald Trump has undermined capitalism and the rule of law. See TikTok tariffs, deploying prosecutions to attack Fed independents and political opponents, etc. Trump's strategic incompetence in Iran is exporting gangsterism to the world. In effect, we're trading in our World Policeman badge for regional protection rackets. That's not the art of the deal, but the illusion of the steel. The question isn't whether America has the economic and military firepower to prosper in Trump's gangster paradise. But what we lose when we abandon the rules-based order we helped create.

15:59A. Everything.

16:07George Hahn:Life is so rich.

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