Inflationary Expectations

Just over a year ago we wrote about the possibility of a long term social backlash away from fame and celebrity (see article). A couple of events this week have caused us to revisit and update our thinking. The week started with a strike amongst drivers of fuel tankers, who take petrol from wholesale storage to the retail outlets. All in all, about 10% of the UK petrol retail outlets were affected, with a disproportionately high number of Shell service stations being affected. Just as the first wave of the strike had come to an end, the dispute was ended with a 14% settlement (see article).

At the same time, it was Royal Ascot this week. For our overseas readers, this is a bit more than a Racing Meeting – it is one of the key social events in the UK of the year. If you ever have the chance to attend the Royal Enclosure, then you will have to adhere to the strict dress code of the event (see article). In modern times, Royal Ascot has become synonymous with an excessive and ostentatious display of wealth. Indeed, some commentators see it as a parade of the “rich and pointless”. For those who would like to see what I mean, a set of photos can be followed from here.

It is interesting to put these two stories together in a future context. The justification of the fuel tanker drivers for a settlement that is four to five times the rate of inflation was that, as the price of oil has been rising, oil company profits has been rising too, along with managerial salaries and directors bonuses. They felt that they were justified in sharing that bonanza because it was ‘fair’. Equally, despite being told that the economy faces great difficulties at the moment, we also see a display of wealth at Ascot that indicates that some people aren’t short of money.

It then becomes particularly difficult to urge wage restraint when not everyone is seen to be accepting their fair share (see story). In many ways, the current situation is similar to the position we were in just before the great inflation of the 1970s. During the 1960s, middle class disposable incomes had risen sharply in England. This rising prosperity had not been shared widely, creating a view amongst the working class that they had not received their fair share of the increasing prosperity. A fairer share could be gained through collective action to secure higher wage demands.

Of course, employers, when meeting those demands, simply passed on the increased costs to their customers, who then used these rising prices as a justification for their higher wage demands, and so the wage-price inflation spiral gained momentum. This expectation of ever higher wage settlements is what we now know as inflationary expectations. The inflationary expectations of the 1970s were halted in the 1980s through the intervention of the Thatcher Government at great social and economic cost to the UK.

One might fear that if we are right that inflationary expectations are starting to rise again, a future period of social dislocation will come about. There is time to forestall this by defusing those expectations, but not by exhortation from the Governor of the Bank of England or the Chancellor of the Exchequer. What is needed is a period of leadership, particularly from the private sector. There needs to be examples of restraint on pay provided by company bosses. So far, these have not been too forthcoming.

If our leaders don’t take their own advice, then why should the ordinary people? If ordinary people don’t take this advice, how can we avoid another bout of inflation?

© The European Futures Observatory 2008

We are presenting a paper on how a futurist can add value to the work of econometricians at the Professional Members Forum of the World Future Society in Washington in July this year. Click here for more details of the event.

GM in the EU

Some time ago, we wrote about the resistance in the EU to GM food (see article). We took the view that, if Europe was to avoid permanently high food prices, this policy may need to be reviewed.

We also wrote subsequently about how 2008 was turning out to be the Year of Hunger (see article). In this piece, we took the view that the key to rapid increases in crop yields at a global level would be the development of GM technology.

In an article this week, The Independent reports that the EU is now being urged by some member states (see article) to adopt some GM foods as a way of icreasing the global food supply. This is all to the good.

What is not acknowledged is that there is generally a 15 year lag between starting a project and the impact on crop yields being felt. It would be interesting to consider how that lag will be filled while we await the technologies.

Dude, Where's My Internet?

Is it just me, or is the Internet slowing down? For some time, I have found my connection to be clunky and slow. Files wouldn't zip across as fast as they have in the recent past, it would take ages to load pictures, and so on. Mind you, our broadband access is still so much faster than the old dial-up system.

I put this down to the natural slowdown that occcurs when you have had a laptop for a while - it is now becoming stuffed full of files. However, this might not be the only reason. A recent article by the BBC does suggest that the Internet is slowing down (see article). The main cause of this is the BBC i-Player. This web based device allows us all to watch BBC programmes that we have missed up to a week after their showing. Apparently, people are arriving at work and then dowloading last nights viewing, which is slowing Internet speeds considerably. The ISPs blame the BBC (and want it to invest in network upgrades). The BBC reminds the ISPs that this is their commercial activity.

This raises the issue of who owns the Internet. At present, the cosy relationship that has existed since the 1960s has not been called into question. The matter is likely to come to a head soon if another BBC report is correct and that the Internet will run short of bandwidth in 2010 (see article). It would not be unreasonable to expect those who own the infrastructure of the Internet to pay for investing in new bandwidth. Equally, those who do pay for the investments may want more say than they currently have.

Let us hope that the question of who owns the Internet and who has to pay for the investment upgrades is resolved with as little disruption to the end user as possible. If not, the ICT backbone of globalisation may grind to a halt.

How about that as a Wild Card Scenario?

Bucking The Trend

There is an interesting article in the current issue of Foreign Policy about what the author calls the ‘Euroinvasion’ (see article). It would appear that European companies are taking advantage of the current strength of the Euro against the US Dollar and are buying US companies. The example cited is that a US company priced at $500mn would have cost €430mn in 2003. In 2008, the price tag would have fallen to €316mn for that $500mn company. Cross border mergers and acquisitions are not new, and are the inevitable consequence of the process of globalisation. However, what is significant is the strength of the trend. It might indicate something more substantial than the ebbs and flows of currency movements.

Our attention was recently drawn to the Global Financial Centres Index (see report). In this, London rated higher than New York as the leading financial centre in the world. The report does come with a health warning – it was produced by the City of London, which is bound to highlight its strengths in the weights within the index, and part of the result can be explained by the strength of Sterling against the US Dollar. However, despite this, there is also something there. London has become a centre for the recycling of Middle Eastern and Russian petro-surpluses. It is seen as having a lower political risk than New York, and the city has developed as a residential centre for super-wealthy individuals.

These two conclusions fly in the face of the current conventional wisdom that the centre of gravity in the global economy is shifting towards Asia. Whilst it cannot be argued that Asia has come to dominate manufacturing on the global stage, it is more instructive to consider how that wealth has been stored. The key Asian economies – Japan, South Korea, and China – have tended to store their surpluses in the form of US Government debt. This provides us with an important part of the jigsaw puzzle.

How do Empires decline? In the case of the British Empire, the long term depreciation of Sterling allowed other nations – principally the US – to buy the assets of the Empire. If this model is valid (long term currency depreciation allowing the purchase of domestic assets by overseas entities), then we can see it in practice today with regards to the US. If it is true that European companies are purchasing the US corporate sector, that Asian Governments are funding the US public sector, and if European centres have displaced US financial centres as financial powerhouses, then we have a clear view of how the long term decline of the US might occur.

Of course, the future is not certain and the US could reverse this trend. However, experience to date suggests that it may not do so. A key element in reversing the trend would be to embrace open market capitalism. Sadly, the parochial pork belly politics of the US is taking it in the direction of the protectionist agenda of the neo-nationalists. It is ironic that the champion of market capitalism is unable to follow that particular ideology. In our model, this will be the eventual undoing of the US.

In our thinking, as Europe is now engaging in the sort of market capitalism advocated by the US, it is faring well compared to the US. This could be the basis for a renewal of the European economy. If it is, then we are bucking the trend of conventional wisdom by suggesting that the future may not be Asian. It may be European.

© The European Futures Observatory 2008

We are presenting a paper on how a futurist can add value to the work of econometricians at the Professional Members Forum of the World Future Society in Washington in July this year. Click here for more details of the event.

When The Lights Went Out

Last week the Internet stopped working for us. My thoughts were that I must have pressed a wrong button or that my laptop was malfunctioning. I don't know why, but whenever something technical goes wrong I just assume responsibility. How wrong I was!

The cause of the Internet not working - for us, it was working for everyone else - was a major power cut in the UK National Grid. The BBC reported the story (see story), but there is so much in there that talks to the future. Apparently, a computer malfunction in the Sizewell B nuclear reactor led to an immediate shut down of power on safety grounds. This deprived the National Grid of 3% of its power needs.

The Sizewell shutdown happened to coincide with the Longannet power station going offline and seven other power stations being closed for routine maintenance. All of this combined to result in supply falling short of demand and power cuts - unplanned and unscheduled power cuts - across London, East Anglia, Cheshire and Merseyside.

The server for our ISP happens to be located in this area. One minute the Internet (web and e-mail) was functioning normally. The next minute someone turned the switch off. There is a future lesson to be learned here. As the economy becomes more interdependent, both locally and globally, our dependence upon these communications is likely to grow. However, this chain of complexity is only as good as the weakest link - in this case the power supply.

If these forecasts are right,

we shall have to become more used to the interrupted supply of electricity, with all of the consequences for IT and our use of global networks. Our growing complexity is leading us towards a world of greater vulnerabilities.

The US Taxpayer & Afghanistan

An interesting thought occurred to me recently. The US taxpayer is funding both sides in the conflict in Afghanistan.

On the one hand, the US is providing about half of the NATO intervention force in Afghanistan, as well as underwriting the cost of the reconstruction. This involves the direct use of US Tax Dollars.

On the other hand, following on from the post on Oil (Again!) - see post - it would appear that a good percentage of the tax rebate given to the US taxpayers (US Tax Dollars, again) will be used to cover the increased cost of petrol at the pumps in the US. This revenue flows to the oil companies, who buy oil from, say, Middle Eastern sources. Part of the Middle Eastern oil revenues are used to fund Islamic education, some of which are Madrassas in Pakistan. In some of the Madrassas in Pakistan the youths are radicalised and recruited for the Taliban, who then travel to Afghanistan to fight the US troops, courtesy of the US taxpayer.

From a futures perspective, this does not seem sustainable for the long term. From a political perspective, it just seems like madness.

Oil (Again!)

As a follow up to our recent post on oil (see post), we were attracted by a leader in The Economist this week (see leader) that contained a couple of interesting facts.

1. It would appear that the commodity futures market now has $260 billion invested in it, and is 20 times the size it was in 2003. This rather supports the view that oil - and other commodities - have started to replace financial instruments and property as the places in which to store one's wealth. The article correctly states that the futures market does not deal in real commodities, but in notional commodities. However, we feel that the belief that the spot market (for real commodities) and the futures market (for nominal commodities) are decoupled is a bit naive. Investors need to resort to the spot markets in order to fulfil their notional contracts when they expire. Our information, from our oil radar contacts, is that this sentiment has been adding to the price of oil.

2. The leader alludes to how the Bush tax rebate to stimulate the economy is being spent on food and fuel. A further article (see article) suggests that as these prices have risen over the past year, more and more Americans are likely to be using the rebate to accommodate the rising cost of necessities and to use it to pay down some of the debt that they have accumulated. There is a very interesting blog that charts how the tax rebates are being spent at http://www.howispentmystimulus.com/. As a window into the lives of ordinary Americans, this is developing into a useful social comment on the times.

We are still of the view that the price of oil has further to rise. From a futures perspective, one might wonder if this is a temporary blip (as The Economist leader suggests), or if it is a harbinger of something more substantial. Are we seeing a weak signal from an emergent future?