He who controls the Heartland controls the world

Sunday, September 18th, 2022

Laramie, Wyoming

On Friday, after I’d already published my weekly research note to paying subscribers, I received a short note from a colleague following events in Central Europe. ‘The next action could be kinetic,’ he wrote.

He was referring to the news that the German government had seized and taken control of three oil refineries on German soil owned by the Russian company Rosneft. Germany had already seized energy assets owned by Russia’s Gazprom in April. My colleague is suggesting that Germany’s action could escalate the chances of armed conflict between Russia and NATO.

German Chancellor Olaf Scholsz said ‘We have known for a long time that Russia isn’t a reliable energy provider any more. That’s why it’s important to do everything we can now to safeguard Germany’s energy supply.’ It might be a little late for that.

Our founder, Bill Bonner, has been warning about Europe’s ‘Winter Nightmare’ since late last year. And earlier this year, we made old fashioned oil and gas the core of our Trade of the Decade. We believe Europe has badly miscalculated its energy policy. They are paying for it now with an energy crisis that raises costs and lowers the quality of life for ordinary people.

The same could soon be true in the US, where political leaders are ‘all in’ on a transition to an electric/renewable economy. Our Investment Director, Tom Dyson, is exploring shorter term trading opportunities related to oil and gas (and what may drive prices higher this winter.) Stay tuned for more on that.

In the meantime, for investors, none of what’s happening in Europe right now—and what may happen in America this winter—can be understood without the use of geopolitics. Below you’ll find a short piece of analysis I published in late March to paying subscribers. We decided to 'unlock’ it today because it’s especially relevant, given Germany’s actions on Friday.

Enjoy!

Dan

PS Joel Bowman will be back next week with your regularly scheduled Sunday Session. He also has a big announcement to make. For new readers, Sundays are a day for us to step away from the price action in the markets and look at some of the broader trends and forces in the economy and politics.

If that kind of analysis and research isn’t for you, no worries. Give it a miss. But as always, we’re trying to connect the dots and get a sense of ‘the big picture.’ The note below is a little more big picture than we tend to get in our research for paid subscribers. But sometimes you have to take a deeper dive into a subject to really understand it and then find the investment opportunity.

Send us an email at bonnerprivateresearch@gmail.com to let us know if you’d like to see more or less of this type of content.

PPS Germany IS the Heartland on Mackinder’s map. That’s why it finds itself at the center of affairs with Russia right now. Control and ownership of real assets, located in real places, may determine who wields both geopolitical and financial power in the coming decades. Investors must understand this to profit from it.

The Geographical Pivot of History

How money and power are influenced by geography, and what it means for investors (and the US dollar) in 2022

By Dan Denning

If China succeeds in linking its rising industries to the vast natural resources of the Eurasian heartland, then quite possibly, as Sir Halford Mackinder predicted on that cold London night back in 1904, ’the empire of the world would be in sight.’

—Alfred McCoy, In the Shadows of the American Century

In his 1904 paper called The Geographical Pivot of History, British strategist Halford Mackinder argued that geopolitics is the best way to understand global affairs. He argued that there was a natural “World Island” that would serve as a seat of global power. The Eurasian and African land masses control roughly 50% of the world’s resources. Any power able to control this centralized land mass would have an effective stranglehold on the world’s natural resources.

At the center of this World Island was “the Heartland.” This includes the great swaths of Eastern Europe and the Steppe previously controlled by the Russian (and later Soviet) Empire. The centralized position of the Heartland makes it essential for control of the World Island. The memorable quotation from Mackinder’s 1904 paper is that ‘whoever rules East Europe commands the Heartland; whoever rules the Heartland commands the World-Island; whoever rules the World-Island commands the World.’

A War for the Heartland

Source: www.thegeopolity.com

Why have so many empires risen and fallen in this part of the world? The biggest empire in the history of the world, the Mongol Empire, stretched from China all the way to eastern Austria. The Mongols had swept through modern day Russia and into Poland and Hungary in 1242. Only when the Great Khan died, forcing a recall of all the Mongol generals to their capital in Karakorum, did the tide of their invasion recede.

Also, the further west they rode, the more rivers and mountains the Mongols encountered. This would have made it difficult for them, with their ponies, to find sufficient food and grazing space. You can ride a horse across the Steppe. And you can even ride an elephant over the Alps. But getting a Great Horde through Switzerland would not have been possible.

Geopolitics and History

Geography shapes history. When we talk about geopolitics, we’re talking about the influence of geography on the evolution and power of regions, Nations, and States. American readers will know this if you’ve read The Significance of the Frontier in American History, by Frederick Jackson Turner. Australian readers familiar with The Fatal Shore by Robert Hughes will recognize the observation as well. Napoleon himself once said that, ‘To know a nation’s geography is to know its foreign policy.’

In the 20th century, the point was most memorably made – and has been guiding US and British policy toward Russia ever since – when Mackinder gave a speech to the Royal Geographical Society on January 25, 1904. The speech was called The Geographical Pivot of History.

The speech gave birth to the modern science of geopolitics. Mackinder was one of the first historians to provide a coherent theory on the relationship between geography and power. He argued that geography shapes the destiny of peoples, nations, and empires. The natural seat of power, he claimed, lay in a vast “World Island.”

That World Island is the Eurasian landmass. If you manipulate the map of the world by turning it 90 degrees to the left, as Mackinder did, the World Island comes into focus. It stretches from China at the top, through Siberia, the Steppe, and Russia. Mackinder described the edges of the World Island as the Rimland.

Conflict at the Margin

This is where he argued most of global conflict would take place, as various states and empires vied for control of the World Island. When he gave his speech, the Trans-Siberian railway was being built across Russia. Mackinder, perhaps ahead of his time, reckoned that the railroads would become the transportation backbone of the World Island. They would connect the Rimlands with the Heartland, uniting the bulk of the world's population in a large economic zone.

This zone – over 60% of the world's landmass – would be controlled by whomever controlled the Heartland in Central Europe. You could say his theory was based on land power. After all, the Mongols WERE a land power. On the vastness of the World Island, camels and horses gave you mobility. The other element of military conquest, firepower, came from bows and arrows, something that became a liability when Chinese gunpowder made it to Europe.

Mackinder's idea was contrarian for its time. Alfred Thayer Mahan published The Influence of Sea Power upon History in 1890. In that book, he argued that sea power (and seafaring powers like Britain, the United States, Spain, Portugal, the Dutch, and Japan) was the key force in shaping world politics and power. This paper was (and probably still is) one of the defining documents of modern geopolitics. Sea power kept the world's oceans and sea lanes open to trade.

Mackinder didn't exactly disagree with Mahan. But he argued that sea power was used quite deliberately, especially by the British, to encircle, contain, and police the World Island. He further argued that wars in India, Afghanistan, the Middle East, the Balkans, and Central Europe were waged to prevent a central power from emerging that could dominate the Heartland and rule the world. Preventing Russia from aligning with Germany was paramount.

It's not hard to see the relevance today. Germany spent the better part of the last decade securing access to cheap Russian gas. Germany used that energy, plus its manufacturing base, to export industrial goods to China. Any interruption to the status quo shifts the balance of power—and energy flows—in China’s direction. Europe becomes the periphery of the World Island, with the center of economic gravity moving East.

Source: Getty Images

Planes, Container Ships, Logistics

There are several convincing objections to Mackinder's theory. First, who would really want to live in the Steppe or Siberia? Hitler wanted lebensraum [territory considered necessary for national survival] for the German volk [people] and planned massive railways to penetrate central and eastern Europe. But much of the world's population today lives on or near coastal cities, not in the middle of Russia.

Second, Mackinder didn't know about airplanes. He does use the quaint phrase “winged mobility” to describe something that could change the global balance of power. But he believed that just as the mobility of horses and camels gave Asiatic races the power to harry Europeans for centuries, the mobility of trains would physically knit Europe and Asia into a global political titan, dominated from the Heartland.

Air power became more decisive than sea or land power in World War II. Once the Germans lost the Battle of Britain in the skies over London, they lost the chance to invade England and end the war. The United States used air power to pummel German cities and drop two atomic bombs on Imperial Japan.

This is not to underestimate the influence of sea power in World War II. The Japanese launched their sneak attack on Pearl Harbor by sailing across the Pacific undetected. But all the US carriers were out at sea on December 7, 1941. And Japan failed to destroy the dry dock facilities that would allow the US to repair all its damaged battleships (except the Arizona and the Oklahoma).

Six months later, US forces – after using cryptography to break the code of the Imperial Navy and learn of a plan to trap them at Midway – sank four Japanese aircraft carriers. The US lost the USS Yorktown. But Japanese sea power and its ability to project air power from its carriers was effectively lost. Then Boeing's B-29, a long-range bomber with the first pressurized cabin in the Air Force, dropped two atomic bombs on Japan and ended the war for good.

Source: Getty Images

Mackinder didn’t see this coming (who could have?). And he certainly couldn't have anticipated the advent of the container ships debuted by Malcom McLean in the 1950s. These ships all but eliminated cargo holds, hatches, and stevedores and led to a boom in global trade. When you add in automation from loading docks and cranes and then global logistics software, it's sea power and air power that have led to booming global trade and globalization itself.

In other words, technology and globalization seemed to have trumped geography for the better part of the 20th century. The Anglosphere—the English-speaking countries like the United Kingdom, Ireland, Canada, the United States, Australia, and New Zealand—were able to combine natural resources wealth with a rules-based global order (the US dollar as the reserve currency) and create an economic and financial system that raised standards of living and negated the ‘land power’ of the World Island.

So, was Mackinder simply wrong? Or was he early? Is China about to combine its industrial and demographic power with Russia’s energy and food resources to finally create a ‘World Island’ connected by China’s Belt and Road Initiative?

Right, Wrong, Early

World War I was a straight up duel between land powers (Germany and Austria-Hungary) versus sea powers (mostly Britain, later the US). The notable exception on the allied side was Russia, which in terms of sheer number of soldiers, was a massive land power. Japan, as a sea power, also did well out of the war, especially when Russia was hemmed in.

It's also worth noting that two of the largest US military bases in the world today are Ramstein Air Base in Germany and the naval base at Okinawa. These bases are at the bottom and the top of the World Island, respectively. You could say the US was trying to check the natural tendency of the World Island to grow in power.

As you make your way through the 20th century, the wars in East Asia (Korea and Vietnam) and the wars in Afghanistan and the Middle East start to look like wars in the Rimland to keep the Russians busy and prevent a central power (or an Axis of Powers like Russia, China, and Iran) from emerging in the Heartland.

You can tell that Mackinder influenced the US policy of “containment” authored by strategist George Kennan. Kennan argued that the best way to stop the spread of international socialism was to contain it in all the places the Soviets wanted it to grow.

His policy became the de-facto policy of every US administration from Eisenhower to Reagan. It's perfectly in sync with Mackinder's theory. Nor is it hard to see that the British, in their day, used sea power in “the Great Game” to prevent Russian domination in India and central Asia.

Should investors care?

But now a fair question: Does any of this really matter for investors today? So, what if US grand strategy is based on Mackinder's theory? It's a different world today, isn’t it? Don’t ideas matter more than geography?

For example, Apple's intellectual property comes from California. It makes its phones in China. What do Poland and Russia and Austria have to do with that?

I would argue that you can explain US global power almost entirely in terms of geography. First, the US has an ocean on either side of it – and Mexico and Canada as neighbors. America has never had to worry about getting invaded by Mongol hordes. Instead, it was able to build a giant free-trade zone with mostly friendly neighbors incapable of threatening it.

Second, deep ports and lush river valleys played a key role in the continental expansion of the US in the 18th and 19th centuries. When you went west in America (unlike Australia) you always found another river valley with trees to clear and land to farm. This was true for most of America's westward expansion (not including the Great Plains, which turned out to be one of the great grain-growing regions of the world, right at the temperate latitudes for growing enormous quantities of food or grazing livestock).

Third, after World War II, the US enjoyed complete air superiority around the world. It then added a new dimension to its geographical power: space. Instantaneous worldwide satellite communication (and surveillance, through those same English-speaking countries in the Five Eyes alliance) is the backbone of US power today.

From surveillance to communication and coordination to navigation (the Global Positioning System), US global power depends more on the skies than the seas or the land. That is also a massive Achilles heel, which we may find out the hard way if things get worse in Russia. But don't forget land power!

Source: Getty Images

China’s Move

Mackinder's theory of global power, derived from geography, is not dead. They've been reading it in Beijing. China's One Belt, One Road project aims to unite the World Island, create a common market for three billion people, and capture the world's energy and food reserves in one great unification of power. Is that what the war in Ukraine is hastening?

In that scenario, the United States’ and Britain’s sea power finally succumbs to the land power of the World Island. Perhaps this is after China sinks a US aircraft carrier or two with a hypersonic missile. Or after US satellites are shot out of the sky by Chinese lasers. Or a Russian electromagnetic pulse.

Those are risks you can’t hedge against with the right portfolio allocation. Which brings me to one last point. When Bill and I talk about the decline of the American Empire, we mean it. And when an imperial government fails, the money fails. The two are connected inseparably.  

The value of a lifetime of savings is put at risk in a currency collapse. If you've prepared for a quiet and relaxing retirement, the kind of decline we're talking about destroys all of that. You may think that's the sort of thing that could never happen in America, at least in your lifetime. And I hope you're right.

But we’ll be keeping a very close eye on developments in the gold, bond, and equity markets. The price action there will be your first sign that something big could be changing in the global balance of power.

Until next time,

Dan

PS In the 19th and 20th centuries, the US managed to transform its geographical power into financial power (the dollar). If THAT power is eclipsed, then the US will again have to rely more on its natural resources (energy, arable land, potable water) and domestic manufacturing and LESS on its financial markets, the cheap cost of global labor and energy, and the ‘exorbitant privilege’ of having the world’s reserve currency. We may have to make things people want, instead of printing dollars for other people’s real goods.