Wednesday, 26 November 2008

Bush IV -vs- Clinton III

In the recent US Presidential Election, it was said by the Democrats that a vote for John McCain would be a vote for another term for Bush. More precisely, it would be a vote for a fourth term for the Bush Agenda. Barak Obama campaigned on the theme of change – change in Washington, change to the political elite in the US, a new broom sweeping clean. Strangely enough, this was a theme that we picked up in our 2007 scenario ‘A Future Worth Building 2005-2025’ (see scenario), which is starting to look like a road map for the immediate future.

In the scenario, we picked up the desire of the US Electorate for a change from the tired policies of the Bush and Clinton eras. It is a desire for something that is truly new. In our scenario, we felt that mainstream US Politics would be unable to generate such a President, so we wrote in an outsider. Our President was a Congressman from Iowa rather than a Senator from Illinois, but this is beside the point. The main forces affecting the US in the scenario are broadly similar to those affecting the US today.

Reviewing the piece, we have been proven right about the precarious nature of the US economy, but we have been completely wrong in the effects of it. We had hoped for a soft landing, whereas the hard landing that we feared has come to pass. The US is still finding it difficult to engage its NATO allies in the War in Afghanistan, and the critical issues over the fate of Guantanamo Bay and the International Criminal Court have yet to be resolved. It is worth remembering that our scenarios are not forecasts of the future, but sets of future states that the world may play into. This particular scenario was an attempt at examining how the US could achieve a ‘good’ outcome in the world by 2025. It has, inadvertently, also become a standard by which the actual new administration could be judged.

Two factors have become apparent so far. The first is that a Presidential Candidate who is an outsider also lacks the key policy infrastructure to form an effective government. For this reason, the newly forming Obama Administration is becoming packed with Clintonistas. The appointments made so far (see updates) contain a sufficient number of personnel who served in the Clinton administrations for this to be considered a Clinton third term. And this is before we know whether or not Hillary Clinton is to be the new Secretary of State.

The second factor that is becoming evident is that President Elect Obama could hardly be called a ‘man of action’. Setting aside his delay in naming his Administration, his impact on the G20 meeting was minimal at a time when the world economy is in need of decisive action. To put off meeting to discuss international collaboration for five months is not really an effective policy response. It almost appears to indicate that President Elect Obama wasn’t really prepared for actually winning the election.

The world is accustomed to President Bush going AWOL on the job – his excuse is that he isn’t that good at it – but a great deal more is expected around the world from President Elect Obama. For example, in The Africa Report (see web site) Prime Minister Odinga of Kenya is reported as wanting “Africa to receive more attention as a place for investment than as a humanitarian case”. One hopes that this weight of expectation, both inside the US and more generally around the world, is not to be disappointed.

It does, however, create an immediate problem. If the US is unwilling to address the international dimensions of the global economic crisis, who is? Interestingly enough, Europe has stepped forward to fill the policy void. An unlikely combination of Brown (the thinker), Sarkozy (the doer), and Merkel (the sense of proportion) has arisen to find a way out of our current economic difficulties. The danger for America is that, by the time the G20 meets again in April, the initiative will have been lost to the EU nations for effective economic policy formation. This hardly sounds like restoring America’s place in the world.

And that brings us to the heart of the matter. Does it make a difference who won the US Presidential Election? The US economy is heavily influenced by overseas factors – particularly overseas investment flows. US foreign policy is bounded by what the key allies of America will or will not do to advance the Washington Agenda. Neither the Clinton nor the Bush Administrations did a great deal to reverse these long term trends. Both Administrations have held onto a paradigm that is out of step with the reality of global affairs.

If Obama is serious about change, then one has to ask why so many of yesterday’s tired and failed policies are being revived. It could be that the newly forming Administration knows nothing else. The appointment of Robert Gates to the Obama Cabinet suggests that there has been no choice at all in the recent election – we have both a Bush fourth term and a Clinton third term at the same time.

So much for change!

© The European Futures Observatory 2008
We are organising a roundtable meeting in March 2009 to examine how ‘The New Normal’ might be structured in the years to come. The meeting will be in London and aims to develop and publish ‘A manifesto for the G20’ ahead of the meeting of the G20 in London in April 2009 in an attempt to introduce some futures thinking to the policy debate. If you would like to be involved in the roundtable, or if you would like to be informed of developments, please let me know and I will keep you in touch.

Wednesday, 19 November 2008

The Millennials and the New Normal

I have been giving some thought to the interplay between society and the economy over the past week. A pre-publication review copy of Don Tapscott’s new book “Grown Up Digital” has fallen into my lap. I am about half way through the book, which presents an impressive body of research on the ‘NetGen’ cohort (also known as ‘Gen Y’ and ‘the Millennials’), and is likely to dominate our conversation about this generation for some time to come. It tells of how the Internet has affected the way in which this generation interacts with each other and the world. As I was reading the book, it occurred to me that the current economic crisis will also become a formative experience for this generation.

Whilst we tend to focus on high level, exciting aspects of generational interplay, such as careers and jobs and sexy technology, it is the more mundane aspects of life that prove to be more important. I was reminded how such a routine subject such as housing has changed within a couple of generations. When I was a young man, it was common for young people in their late teens and their twenties to ‘save up’ for a deposit on a house. We all aspired to home ownership and it was within the reach of most of us in terms of the affordability of a mortgage and the affordability of the price of housing.

What wasn’t freely available was the finance to purchase the housing. It was quite common to join a queue for a mortgage whilst saving for a deposit to buy the house. Mortgage finance was reasonably limited and offered on conservative terms. It was not uncommon for a deposit of 10% to 20% of the purchase price to be required, and the maximum loan multiple would be 2.5 times annual salary.

The Thatcher Revolution changed all of this. With the sale of council housing to tenants, the number of house owners increased dramatically in a short space of time. The whole housing market became larger. The de-regulation of the financial markets in the mid-1980s also made finance much more freely available than it had been previously. The result of this was a general increase in Loan To Value (LTV) rates as the deposits required for purchase fell along with a general increase in the salary multiple as it became easier to raise loan finance. With so much liquidity entering the housing market (and a relatively fixed supply of housing in the very short term), the inevitable happened – house prices rose, despite a setback in the housing market in the early 1990s.

This had a profound effect on the behaviour of young people. As they no longer needed to save for a deposit on a house because of rising LTV rates, they didn’t. As many of them became priced out of the housing market as first time buyers, they stayed at home longer than their parents had at their age. Strong growth in the economy kept earnings buoyant, which resulted in a significant increase in the discretionary disposable income of this age group. One aspect of this is what some observers call the drunken mayhem in British town centres at the weekend. The ‘Binge Drinking Culture’ is as much a result of loose monetary policy as anything else!

And now that has changed. The disruption in the financial markets has caused the property market to grind to a halt. The reduced number of property transactions is causing acute financial hardship for those who make a living from handling property (estate agents, solicitors, mortgage brokers, etc). This has a knock on effect for those trades ancillary to the property market (furniture makers, builders, curtain makers, etc), and is now leaching into the wider real economy. As this happens, households traditionally shore up their balance sheets (borrow less, save more), which is already being felt in sectors such as pubs and restaurants.

However, there is an upside to this, particularly for the NetGeners. The falling price of property has made housing more affordable for them. As long as they remain in work, current conditions represent one of the best opportunities for years to purchase property. However, credit conditions are such that mortgage finance is not as readily available. LTV ratios are falling along with salary multiples. If these monetary conditions remain for an appreciable period, we may see saving become a ‘cool’ activity as the NetGeners look to raise a deposit for a property.

To a certain extent, this might mark the end of the Thatcher Revolution, which was based upon cheap money and freely available credit. If the New Normal turns out to have much more restricted credit terms - and fewer ‘funny money’ financial instruments – then we could see a return to ‘save and wait’ as a way of purchasing property, which is a reminder of my youth.

I always told my children that, one day, they would end up like me!

© The European Futures Observatory 2008

Saturday, 15 November 2008

A sign of the times?

Originally uploaded by EUFO Views

This notice struck me as interesting. Mobile phone has replaced cash. And yet, the presumption is that we all have a mobile for which payment is enabled. I'm not sure what happens if you don't have a mobile phone.

As an ironic twist, I took this photo with my mobile phone!

Sunday, 9 November 2008


Let us suppose that the current economic downturn represents something of a paradigm shift. If so, then it would be useful to have an idea of the world that we have left behind and of the world that we are moving into. We can characterise the world left behind as the world of NICEY (Non-Inflationary Continuously Expanding Years). By way of contrast, there is a distinct possibility that we are moving into a NASTY world – the Non-Accelerating Socially Turbulent Years. This represents a basic asymmetry to the economic cycle. On the way up, economics dominates politics. On the way down, society dominates politics. During both upswings and downswings, economics and society are a basic reflection of each other.

This week we have seen a glimpse of the future – the New Normal. The UK Treasury leaned on the Bank of England to cut the Base Rate by a third (4.5% to 3%) - so much for Central Bank independence. The Treasury then bullied the UK retail banks into passing on the whole of that reduction to their small business and mortgage customers. Of course, with the Treasury owning two retail mortgage banks outright, 60% of one retail bank, about a third of another; it would be inconsistent for the banks not to implement their owner’s wishes. Politics rather than finance are driving the banking system at the moment, and it seems to be working as the Labour Party sees an electoral revival (they won a by-election this week that they were otherwise set to lose).

It is this political input into the economy that gives rise to the possibility of social turbulence. With any given policy, the world of politics throws up those who will gain from the policy and those who will lose from it. For example, this week the Treasury – presumably at the behest of their political masters – decided to give borrowers an advantage over savers by insisting upon a reduction in interest rates. Borrowers were seen to be more important, for all sorts of reasons, than savers. If the forecasters are wrong about inflation (currently over 5%) and it does not fall appreciably, then savers would be hit by both falling interest rates and depreciating money – a recipe that has, historically, given rise to periods of acute social instability (Weimar Germany springs to mind).

Of course, in the post-industrial world this social turbulence manifests itself in a change of Government. We have seen that this week in the US. In other parts of the world, however, social turbulence has a more sinister dimension. In a recent article in The Economist (see article), the plight of the middle class in China was considered. In the absence of a welfare safety net, many of the newly enriched middle class in China have prudently saved for hard times and their old age. Much of their savings have been channelled into the stock markets and property. The stock markets are down by two thirds in local currency terms this year and property prices are falling at an increasing rate. The middle class are starting to become angry because they have only ever known rising markets (a bit like the Millennials in the post-industrial world) and they had thought that the government would guarantee their savings. The loss of savings – and the welfare safety net it provides – is fuelling the political anger that is now rising in China.

We can now see the political model in China starting to unwind. In order to maintain social harmony, the government of China needs to deliver growing prosperity. It is thought that GDP growth at about 8% per annum is the economic threshold for political stability. Chinese growth has come off the boil this year – down to a forecast 9.8% in 2008 and 8.5% in 2009. As the economy continues to come off the boil, we should expect a bit more disharmony to manifest itself in China. And there lies the real danger for the rest of us.

Historically, the reaction of autocratic governments, when faced with growing internal unrest, has been to whip up a nationalist fervour at home – behind the government, of course – through an external intervention. We saw this earlier this year in the ‘spontaneous’ reaction of people in China to the perceived criticism of China expressed in foreign cities, by foreigners, over the passage of the Olympic Torch. We are unable to say how spontaneous or orchestrated this reaction was. However, either way, it has proven to be a significant tool for the Communist Party of China to use.

If China were to seek foreign adventure, where is it likely to start? We gave a paper on East Asian Hotspots at the World Future Society Conference in Washington this year (see slides). Our view is that the Paracel Islands (Slide 12) would be a good candidate. They ring the right bells for resources, they are probably within China’s current military capability, they are not of that great importance to Taiwan, and it is unlikely that a US that is tired of war would be too assertive over the Taiwanese claims to these islands. We will be watching for news in this area in coming months.

It is interesting that recent events have thrown up a revival of the works of John Maynard Keynes. Keynes was at his best at the end of the 1920s and 1930s. As economic failure gave rise to social turbulence then, I wonder if we are likely to see a re-run of history in the near future?

© The European Futures Observatory 2008

Friday, 7 November 2008

Future Savvy

Adam Gordon

ISBN 978-0-8144-0912-1

We live in an age of numbers. It is often heard of management that ‘if we can’t measure it, we can’t control it’, and so we attempt to measure everything. Whilst this is appropriate for events that have happened in the past, it presents something of a problem for events that have yet to happen – future events. We do, however, wish to control our future, which means that parallel to the age of numbers is an age of forecasts and predictions. The promise of the book is that it will help us in “identifying trends to make better decisions, manage uncertainty, and profit from change”.

It is this practical aspect of the book that would recommend it to a wide readership. Those who specialise in areas other than a study of the future would be commended to come to grips with the template for forecast filtering and to apply it to their areas. More general students could well benefit from the text as a means to internalise a way to come to grips with future forecasts. And the text could be recommended to more seasoned futurists as a quick checklist of the questions that we ought to be asking about our work.

On the whole, I enjoyed reading the book. It was a straightforward read that meant that I could cover the issues without too much difficulty and the material was presented in a way that made it readily absorbable. The book covers an important area that is often neglected, and it is for this reason that I would recommend it.

READ the full review.

Wednesday, 5 November 2008

The New Normal 2

In a recent post (see post), we argued that part of the New Normal would be a greater control of the banking system by the governments that had bailed out the system. In a quirk of expert timing (or sheer luck), it was announced this week that the UK Government is to set up a separate body - UK Financial Investments Ltd - to oversee the governmental holdings in UK banks, and to monitor their adherence to the terms of the bailout (see report).

This just needs one more step, one further act of foresight to make it a truly "Yipee!" moment. The act of foresight would be to relinquish political control of the company - a bit like the UK Lottery - and to desginate the company as the UK Sovereign Wealth Fund.

This would be an act of foresight for which our children and grandchildren would thank Alistair Darling (the UK Finance Minister). We could even name a public holiday after him!

Sunday, 2 November 2008

The New Normal

There have been some encouraging signs recently to suggest that a semblance of normality is returning to the financial markets. The LIBOR has fallen in recent weeks to a level that is nearer normal than exceptional (for example, on October 30th – the latest date for which we have figures – LIBOR was in excess of Base Rate by six and a quarter Basis Points). Further confirmation of a return to normality came this week from our mortgage provider. It also gave us an idea of what the new normality might look like.

Apparently, “Following a recent review of our interest rates, we are writing to let you know that from 3rd November 2008, we’re decreasing our … interest rates by 0.5%.” In plain language, they have passed on the full benefit of the recent half percent reduction in Base Rate. This is in sharp contrast to a previous letter, where it was said “Following a recent review of our interest rates, we are writing to let you know that from 7th July 2008, we’re increasing our … interest rates by 0.25%. This change reflects current market conditions.” In April whilst Base Rate fell by 0.25%, retail rates rose (in June) by 0.25%. It was at this point that we felt that monetary policy was not working.

What has happened to make monetary policy start to work again? There is a great deal more liquidity in the banking system at present, but our view is that the key difference between our mortgage provider now and how it was in April is that The Treasury (the UK Finance Ministry) now owns 60% of our mortgage provider, and that passing on the rate cut was more of a political decision than a financial one. The view that monetary policy is becoming subject to political pressure was further strengthened by a speech by the UK Chancellor (the Finance Minister) this week. In it, he stated an expectation that Base Rate would be cut again when the Bank of England Monetary Policy Committee meets next week (see report). If rates are cut, then the independence of the Bank of England could be called into question, as some are doing already.

Of course, the backdrop for this is a more interventionist Fiscal Policy. The ‘Golden Rule’ of Fiscal Policy (a balanced budget for current spending over the economic cycle) is set to be broken, and politics has returned over the advisability of spending increases compared with tax cuts to provide a fiscal stimulus (see report). In some quarters, recent events have been interpreted as the triumph of Keynesianism over a cruder form of Monetarism. In the new normal, not only will there be more political control exercised over the monetary system, but also there is likely to be a greater propensity for the State to take a more interventionist approach to fiscal policy.

The stage is now set for some sort of recovery in the financial markets. The prospect of a deep recession has restrained share prices in recent weeks, but that may well change soon. The US votes for a new President next week. Many independent pundits point to Senator Obama to become President. More interestingly, this choice would resonate around the world. The Economist has held a mock on-line election with a global constituency (see results), which shows that Senator Obama is the choice of the world (only Algeria, Iraq, and Congo plump for Senator McCain).

One of our colleagues has undertaken research into the degree to which global stock markets ‘bounce’ after a US Presidential Election. It would appear that we could see a substantial gain next week if Senator Obama wins the election, to be followed by a period of prolonged advance. The conditions are right for this to resound around the world in a short space of time. As we stated previously (see post), there are bargains to be had in the market, the most unpopular President in living memory is about to leave office, and a degree of normality has returned to the financial markets.

The conditions could not be better for Barak Obama to appear in a messianic role next week.

© The European Futures Observatory 2008