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

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