The Hammer And The Screw

The recent meeting of the UN climate talks in Copenhagen appears to have been something of a disappointment. We might ask if we could have expected much more from the meeting. It was billed as our last best hope of addressing climate change before we reach a point at which we are locked into global temperatures rising to a point where we have really ruined our own habitat. This is likely to prove in time to be hyperbola – climate change and global warming are incremental issues that aren’t really given to deadlines. However, the meeting has demonstrated how far we need to go in order to reach a common agreement to tackle global warming and climate change.

As part of our recent project that looked at the issue of creating a sustainable future (see below for link to the final report), we specifically reviewed the possibility of reaching an international agreement to address climate change. Climate change is one of a number of key problems that are arising in the world where the traditional methods of solving them – a framework of international agreements - are unlikely to work. Those problems include, obviously, global warming and climate change, but also include issues such as the regulation of global trade, the globalisation of crime, the relief of global poverty, and global security. It is instructive to consider what attributes these issues have, that makes it difficult for the present arrangements to solve them.

Perhaps the issue of global security might be instructive. The infrastructure of globalisation (the Internet, global communications, the ease of global travel) have assisted the development of non-national agents of insecurity. These agents might be labelled as ‘terrorist’ (e.g. Al Qaeda) or they might be organised trans-national criminal gangs (the global networks of people smugglers spring to mind here). Either way, they present a problem that no single nation can solve on its own. Indeed, they present a problem that groups of nations in concert cannot solve. In order to resolve the problems of global security, national agents have to globalise in order to resolve them.

When national agents globalise, they pool part of their national sovereignty in return for a greater benefit. This is a process of moving from modernity to post-modernity. The architecture of modernity is the international agreement, where a group of nations commonly agree a course of action that is to their mutual benefit. The problem with this is that there is a large incentive to cheat upon the agreement if the benefits are shared by all, but the costs are borne individually. The architecture of post-modernity is something different. In this case, the parties to the agreement pool their sovereignty and commonly meet the costs of the agreement – which are detached from the potential benefits received - in order to share the benefits which are received jointly (end equally) by all.

This model explains why it has been so difficult to reach a common agreement on global trade and why the Doha Round of trade talks is likely to be stuck for some time to come. The benefits of general tariff reductions are enjoyed by all. However, in order to achieve those tariff reductions, some nations will have to sacrifice part of their key interests in reaching that agreement. This is a price that those nations are not willing to pay. And yet the EU has managed to achieve a general tariff reduction between member states. It has done so by embracing the architecture of post-modernity, where the nation states pool their sovereignty to achieve a result that is better than they could have achieved on their own.

When we apply this model to the issues of global warming and climate change, three conclusions become immediately apparent. First, the UN is using the modern architecture of the international agreement to approach the problem. Second, this is the wrong tool for the job because global warming and climate change are post-modern problems. And third, it is not surprising that those nations which are proving to be the most obstructive to the process are those which are highly nationalistic actors in the international arena (nationalism being a trait much associated with modernity).

It is no surprise that three of the most nationalistic actors – the United States (“we don’t want to pay for it!”), China (“we don’t want any limits placed upon us!”), and India (“surrendering our sovereignty is a form of neo-colonialism!”) – along with South Africa have reached an accord on carbon emissions. The rest of the world ought not to be perturbed by this because the accord is unlikely to survive the first speed bump. Like all vestiges of modernity, it is not built to last. A lasting solution would realise that national sovereignty is incompatible with finding a solution to the post-modern problems of global warming and climate change. A more lasting solution would need a post-modern agreement. To try to do otherwise is to use the wrong tool for the job, which is what happened in Copenhagen.

In Copenhagen world leaders failed by trying to use a hammer to fix some screws.

 

Creating A Sustainable Future: http://www.eufo.org/leedsfinal.pdf

© The European Futures Observatory 2009

The Southward March Of Europe

A few weeks ago, I made in passing a comment that I believed that the next phase of European expansion would be in a southerly rather than an easterly direction. One of my correspondents asked me to expand on this, so I am. If we review the development of the European Union over the last fifty years, we see a pattern of expansion that is both geographic and functional.

The original geographical heart of the EU was France, Germany, Italy and the three Benelux countries. Expansions in the 1970s and 1980s were primarily westwards to the Atlantic Ocean, to include the UK, Ireland, Spain, and Portugal (as well as Denmark and Greece). For the following two decades the EU has expanded northwards to include the Nordic countries (except Norway) and eastwards to include many of the former Warsaw Pact nations, along with a number of former Soviet Republics. In recent years the locus has been towards the south east corner of Europe to include some of the former Yugoslav Republics and to consider the question of the thorniest of all problems – the membership of Turkey.

Turkey may or may not eventually join the EU. The point is that some form of limit to the eastern expansion of the EU has been met. In many respects, this reflects a set of geopolitical circumstances today which are very different to those of the 1990s. The biggest difference is that the world is currently seeing a resurgence of Russia, which is very aggressively mapping out its interests in its ‘near abroad’. A more assertive Russia is unlikely to acquiesce quietly to Ukraine and the nations of the Caucasus joining the EU, which suggests a natural eastern boundary to the the EU. Ukraine is likely to be a key arena in the struggle for influence between the EU and Russia in the years to come.

That a natural boundary to the EU has been reached (the Atlantic Ocean in the 1980s, a resurgent Russia in the 2000s) does not necessarily mean that the EU has reached the limits to its future expansion. To understand this, we need to look at the functional expansion of Europe. The six founding members originally came together to form a coal and steel community. This purpose was then expanded to include wider trade matters. A pivotal moment came in 1991 with the Maastricht Treaty, which led to the creation of the EU as we now know it and a significant increase in the functions undertaken by the EU. This process was further accelerated by the recent adoption of the Lisbon Treaty.

As we move to a new phase in the development of Europe, the locus of attention is likely to swing away from the east and towards the south. Europe faces two structural problems at present – an ageing population and energy dependence upon Russia. To the south lies the potential solution to both of these problems. North Africa has a large and growing young population. Many of these youngsters aspire to European lifestyles and take enormous personal risks to enter the EU illegally across the Mediterranean. One natural solution to the ageing population in Europe would be to harness the youth of North Africa to enhance the productive capacity of Europe. Indeed, this process has taken its first steps with the ‘Blue Card’ system within Europe.

North Africa also has large oil and natural gas reserves, upon which Europe could draw more than it presently does. However, the key advantage of North Africa is not its fossil fuel reserves but its potential for photovoltaic electricity generation. The technology that is currently being developed in the south of Europe could be used to harness far greater sunlight resources in North Africa, to be relayed into Europe in a future that is looking energy poor.

This suggests a future relationship between Europe and North Africa that has the potential to be of great benefit to both parties. This is not to play down the immense difficulties of the legacy of colonialism between the North African countries and their former European colonists, but it does suggest that, if the focus is on the future rather than the past, then there is no reason why Europe and North Africa could not become more closely integrated. If that were to happen, it would follow a ‘European’ path where joint economic development eventually gave way to joint political development.

If that were to happen, then Europe would truly have marched southwards.

© The European Futures Observatory 2009

The Probable –vs- The Possible

Our recent post on climate change and poverty reduction (see post) stimulated a great deal of comment and debate. One of our private correspondents asked an interesting question, one that is worth dwelling on. I was asked if futurists ought to be concerned with probable futures rather than a range of possible futures. Instinctively, I reached for the dogma that says that, as we are uncertain of which of the many alternative future states might come into being, we ought to focus on the range of possible futures rather than concentrate upon a single future, irrespective of how probable that future might be. And yet, as I reached for the party line, a nagging doubt entered into my mind: what do we know about the probable future?

Probability is a funny thing. It looks objective and scientific, it crunches a large volume of numbers, but in reality it is quite fuzzy and subjective. If we look closely at a scientific forecast, then usually an honest one will establish two things – a forecast range and the degree of certainty that is expressed within that range. For example, the Bank of England publishes its economic forecasts that inform the decisions about setting the levels of interest rates. These are quite instructive because they have a range of predictive possibility (the Bank of England calls it a ‘fan’ because it looks like a fan graphically) and a probability of outcome.

Chart 1 of the current economic overview (November 2009 – see review) highlights a forecast for UK GDP growth out to 2012. It is interesting to note that there is a 10% chance that UK GDP will be growing at about 3.0% to 3.5% by 2012. No doubt this has informed the Chancellor in his predictions of GDP growth in the Pre-Budget Report this week. It is also interesting to note that there is a 10% chance that UK GDP growth in 2012 will be in excess of 5%. This is a growth level that the UK has rarely achieved – a once in a century event. There is also a 10% chance that the UK economy will not have come out of recession by 2012, which gives some comfort to the habitual pessimists and opponents of the government.

The same data set, the same ‘scientific evidence’, supports estimates that the UK will experience unprecedented GDP growth rates of over 5%, 'the restoration of ‘normal’ GDP growth rates of 3.0% to 3.5 %, and continued recession, where the GDP growth rate continues to be negative. There is an equal likelihood of each probable outcome. As a futurist, I would counsel to prepare for each possible future because they are all equally as probable. The ‘scientific evidence’ has given rise to three contradictory and mutually exclusive futures that could come into being. What we don’t know is which one will actually prevail.

This uncertainty opens the door to the manipulation of the forecasts. I have already alluded to it in that the core forecast of GDP growth that was contained in the Pre-Budget Report this week was at the upper end of the central forecast. What this means is that the Chancellor has been unduly optimistic in his calculations. But then, he would wouldn’t he? The Chancellor is a politician rather than a technocrat and politics is all about presentation. We shouldn’t be surprised that he has used the best credible figure that supports his case. His opponents would argue differently – some to the point that the UK may stay in recession until 2012. As we head for the General Election next year, the issue will boil down to which politician appears the most trustworthy. Which ‘scenario’ we find the more compelling. It is no accident that the art of story-telling is central to the construction of scenarios, the stock in trade of futurists.

Which brings us back to the original question. It is worth pointing out that the ‘scientific evidence’ establishes three mutually exclusive and equally probable future states. And that is only looking out for 2 years. The science of climate change is far less trustworthy. It is looking out about a century, with all of the hazards that long term forecasting has, it is using less well established models, it is using a restricted data set, and it has all sorts of political interpretations to the evidence. It is no wonder that so many possible future states have been ‘predicted’ by climate science.

For example, global warming could lead to colder winters in the UK, as the melting Arctic ice cap leads to the de-salination of the North Atlantic, thus switching off the Atlantic Conveyor that keeps UK winters unduly warm. Or it could mean that UK winters actually become warmer, wetter, and a lot more stormy as global warming heats the Caribbean in the winter, thus intensifying the Atlantic Conveyor. Both future end states are plausible, both are supported by credible climate models, and both are supported by the data. However, each has a very different policy implication. This is why futurists focus on possibility rather than probability. Probability, when we drill into it, is just not precise enough for policy formulation.

After all this is how we earn our keep - by being useful!

 

© The European Futures Observatory 2009

A World Without Bananas

One of the recurring issues within the discussion about achieving a low carbon sustainable economy is the question of ‘Food Miles’. It is generally taken as self-evident that the shipment of food commodities, such as apples, half way around the world from, say, South Africa is evidence that ours is a high carbon and unsustainable economy. Indeed, the Transition Movement (http://transitiontowns.org/) have as a key metric of sustainability the percentage of apples sold within a community that are sourced locally.

This is an approach that has started to enter into the mainstream of futurist thinking. For example, at the European Futurists Conference in Lucerne this year, Professor Stuart Walker from Lancaster University repeated the view that food miles are unlikely to be sustainable in the next few decades (click here to access the slides and a video of the presentation), and treated as axiomatic that a sustainable solution was one of local production. As I was watching the presentation, I was wondering why it was that I was finding it unconvincing. I think that the lack of conviction comes from my love of bananas.

We could grow bananas in Ipswich, but we don’t. Why we don’t is worth a bit of reflection because it says a lot about the sustainability agenda. To grow bananas in Ipswich, we would need to create an artificial climate that would allow bananas to grow. Ipswich lacks the warmth and sunlight to grow the crop naturally, but this could be overcome with sufficient heating and lighting. A banana grown in Ipswich would have a huge carbon footprint – much larger than one grown in the Caribbean and shipped to Ipswich.

Drilling further into this story, why is that so? It’s all to do with comparative advantage – an economic theory developed at the dawn of the Industrial Revolution by David Ricardo. This theory states that when an area does what it does best and imports those things which are best produced elsewhere, the welfare of all areas is increased globally. This is quite a significant statement when taken in the context of the sustainability debate. It implies that a move towards more local production is likely to lead to a sub-optimal global solution (that’s economist speak for everyone being worse off).

What does that mean in practice? In the context of bananas, it means one of two things. First, it could simply mean that I am no longer able to eat bananas, in which case my quality of life will be reduced because of my reduced choice and the reduced access to something that I like to have. Second, it could mean that bananas are grown locally in Ipswich, in which case their monetary and carbon cost would be much higher than if they were imported into the UK. Again, I would suffer a welfare loss as I would be compelled to pay more than I otherwise would have to pay for my bananas.

Without knowing why, people appear to have grasped this concept intuitively. According to Gallup, about 40% of the population believe that the environment should be protected, even at the cost of a reduced living standard. However, just over 50% believe that economic growth should be a priority, even if it entailed a degree of environmental damage. As we prepare for the meeting of the IPCC in Copenhagen, it is worth dwelling on these thoughts. Even if man-made climate change were to occur in the future (as futurists we have to accept the possibility that the climate-sceptics might be right), even in those changes were to be catastrophic (there is only scientific speculation here), even if the need for action is immediate (we might have more or less time than we think – we don’t know), then it still does not follow that we should do something about it.

The cost of climate action will fall upon present generations disproportionately, and upon the poorer nations disproportionately. If we value the present to the future, then it would be inconsistent to act now for future benefits that we are unlikely to see. If we act now, then we have to accept the consequence that the poorer nations will be kept poorer for longer than they otherwise would have been because they would be denied the access to trade that has been such a powerful force in poverty reduction over the last couple of decades. When it comes to a choice between prosperity and the environment, prosperity has always won the argument, which is one of the reasons why I am not hopeful for Copenhagen.

And it’s all my fault for liking bananas!

 

© The European Futures Observatory 2009

The Practical Men And The Defunct Economist

One of the more interesting features if the futurist community is that some members have very long memories. In an article that is now famous within the futurist community on the future of futurology in The Economist (see article), the whole art of crystal ball gazing was held up for ridicule and opprobrium. I had to chuckle to myself when I saw the cover of this weeks edition, which speaks directly to the futurist agenda.

The Economist is one of those global magazines that has a different cover for different audiences. The North American edition leads with an article on dealing with America’s fiscal hole, whilst the UK and Europe editions lead with the problem of feeding the world over the first half of this century. The contents behind each cover are identical – apart from a bit more UK content for UK readers – and the leaders link to content within the structure of the magazine.

The story about America’s fiscal hole has a leader (see leader) that outlines the opinion of the magazine, which then ties to a story of greater depth that outlines what has happened, and what may happen in the near future (see story). The same structure is followed for the story about feeding the world. A leader sets out the position of the magazine (see leader) which then ties into a more factual piece about the situation (see story).

I found these articles of interest because they speak directly to a futures agenda that we are presently following. In our view, the global economy is currently transitioning from one equilibrium (the old paradigm) to another - which we are calling the ‘New Normal’ (see previous post) – that has been caused by the financial meltdown of the past couple of years. The dominant feature of the New Normal, a period that is set to dominate between 2007 and 2020, is the high levels of public sector debt throughout the OECD nations. However, this impact of the PSBR on the global economy is likely to be set against a background of growing scarcity, in terms of Food, Energy, and Water, as we head towards ‘Peak Just-About –Everything’. Needless to say, we are calling this the ‘Age Of Scarcity’.

I found it ironic that The Economist, which had derided futurists in 2007, is now falling into a blatantly futurist agenda. It may be the case that we don’t use flying cars, and we don’t have jet packs to transport us about. We do, however, consider issues that will impact all of us in the future, and, as a serious magazine, The Economist has to address that futurist agenda. As we have been warned:

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." (John Maynard Keynes)

The issues covered in this post are dealt with at greater length in our forthcoming book “The Age Of Scarcity 2010-50”.

© The European Futures Observatory 2009

Touching The Bottom?

The October UK unemployment figures were released recently (see report). The encouraging news is that the rate of growth in unemployment has slowed dramatically this month – an increase of only 12,900 in October, against an increase of 20,800 in September – to bring the total unemployed to 2.46 million. Of course, each one of those people who are unemployed represents a tragedy in itself, but, compared to the doom and gloom earlier in the year, this is quite a good recession.

For the benefit of those who have joined this list over the summer, perhaps we should give some background? At the start of the year, the conventional wisdom held that UK unemployment would hit 3 million by the end of this year. This sounded like an exaggeration to us – a case of dystopian forecasting mixed with a bit of political Schadenfreude (see original post). By the beginning of this year, we were comfortable with the view that unemployment would hit about 2.5 million by the end of this year, placing us quite at variance with the conventional wisdom.

Why does this matter? We originally came to this subject when we were calculating the size of the post-credit crunch PSBR and when we started to estimate the length of time that it would take for the UK Government to unwind its position. In our original calculations, we felt that the PSBR could be unwound by 2017 (see post). However, that view was based on the assumption of a relatively mild recession with unemployment peaking at 2.25 million. As it became evident that the recession would be anything but mild, we revised our assumption about unemployment to 2.5 million by the end of 2009, peaking a little higher in the first half of 2010.

One of the curious features of the present recession is that there has been very little impact on the unemployment figures. In the UK, GDP has fallen by about 5.9% (subject to revision), but unemployment has only increased by about 30%. In the US, a similar GDP fall has led to the doubling of unemployment. There is evidence to suggest that UK companies are hoarding labour – it will cost a great deal to re-skill a newly employed workforce on the upturn, so companies are working short-time in order to conserve their skill base. We also have to acknowledge the impact of government schemes to protect employment have also slowed the rate at which jobs have been lost.

This will have a great bearing upon the future. To start with, the recovery is likely to be relatively jobless as companies simply meet increasing demand for their goods and services by using their existing workforce more efficiently. However, the more significant impact will be upon the PSBR. As fewer workers have been laid off, unemployment payments have not risen as much as it was feared that they might and tax revenues have not fallen quite as far as they otherwise would. In terms of our previous estimates, it is still likely that the UK government will be able to unbundle its position by the end of the next decade.

If so, then this would imply that the proposed downgrading of UK sovereign debt by Fitch might be a little bit premature (see story). It is quite clear that the Pound is being allowed to fall because the inflationary pressures are quite muted and UK companies are enjoying the benefits of easy sales in foreign markets – particularly those tied to the US Dollar (North America and the Far East) and the Euro (Euroland and Eastern Europe).

At present, we are quite upbeat about the UK prospects for the next decade, and it is this context that the good news about the October unemployment figures are served.

The issues covered in this post are dealt with at greater length in our forthcoming book “The Age Of Scarcity 2010-50”.

A New Monetary Order

The international pattern of settlements is hardly an issue that is likely to cause a great deal of excitement. And yet we may well become excited by it’s impact. In a thoughtful piece by Buttonwood in The Economist (see article), our attention is drawn to how the international pattern of settlements is changing, and how this will invariably alter the balance of economic and financial power in to world. Buttonwood reminds us that:

“Creditor nations tend to set the rules and the new global monetary system will be unable to operate without the approval of China, a creditor country that has capital controls and a managed currency. It has been assumed that China will have to move towards the Western model. But why not the other way round? Western countries adopted free capital markets, as the British adopted free trade in the 19th century, because it suited them. Will China now be able to call the shots? Uncomfortable as it might be for the West, the next monetary order is more likely to be made in Beijing than in New Hampshire.”

This is moderately discomforting. And yet a study of history would remind us that it is almost like a natural cycle of events. Professor Saul, in Chapters 3 and 4 of his work "Studies in British Overseas Trade 1870-1914" outlines the way in which Britain went from being a creditor nation to being a debtor nation between 1870 and 1914. The impact of the First World War saw the loss of London’s pre-eminence as a financial centre to New York, instigating the long decline of the British Empire. Reflective Americans would take note of this and draw a direct parallel with the British experience.

As a futurist, the decline of the US Dollar has been in my mind for some time. However, it has never been sufficiently pressing for me to do something about it. Perhaps now is the time to start to give some consideration to how a New Monetary Order might play out. The stock in trade view is that the Chinese Yuan will replace the US Dollar as the dominant currency. This contention needs to be given a serious review because there are a number of arguments against it that have not been stated.

If the Yuan doesn’t replace the Dollar, what will? This is another area that needs to be given some thought. In many respects, this could be the key question over the next couple of decades. A new monetary order is likely to reflect a new geopolitical order, and a view of the one without a view of the other is likely to be inconsistent. There are a number of candidates, such as the Euro, but that line of thought seems to be out of step with a lot of current thinking about our geopolitical futures.

Over the coming months, we shall be thinking aloud about how the new monetary order might develop. We shall be publishing these thoughts throughout our networks, and we welcome feedback and comment.

Buttonwood: Birth pains | The Economist

Second Bailout Repaid

In October 2008 the Qatari Sovereign Wealth Fund took an equity stake in Barclays as part of a more general bailout package. Barclays looked to private overseas funding rather than seeking funds from the UK monetary authorities. This was questioned at the time, but it has meant that Barclays’ response to the financial crisis has been purely commercial, and that the strategies followed by the bank lack the political tinge that is now colouring the UK banks that did take public funds.

And now the issue of payback arises. The Qatari stake was acquired when Barclays was trading at under £2.00 per share. In recent weeks, Barclays has been trading in the range of £3.60 to £3.80 per share. The share have fallen back to about £3.60 on the news of the Qatari sale. However, if the BBC is right that 379 million shares are to be sold, if the stake was acquired at around £2.00 per share, and if the striking price is in the region of £3.60 per share, then the Qatari fund is likely to make a profit (i.e. net gain, not just sale proceeds) of £600 million.

This need not exercise us too much. The important question is – if the Qatari fund can make this much money out of a relatively small bailout (they only put in three quarters of a billion to begin with), then how much can UK Financial Investments Ltd make with the UK bailout of £37 billion? Very little futures work concerning the future PSBR is adequately factoring in the extent of the possible proceeds from asset sales. By 2018, when things become a bit more acute, there is still a very real prospect of assets sales being used to size down the National Debt.

On a separate note, this is the second bailout repayment that we have come across (click here for details of the first). Both stories have a happy ending for the institutions providing the bailout funds, and both bode well for the future of the UK debt.

BBC NEWS Business Qatar sale hits Barclays shares

Beware Of Greeks Bearing Gifts

If one phrase captures the essence of modern American diplomacy, it is, as President Teddy Roosevelt advocated, to “walk softly and carry a big stick”. If a similar phrase were to be applied to European diplomacy, it is likely that it would be “timeo danaos et dona ferentes”. At the gates of Troy, the Trojans were warned to “beware of Greeks bearing gifts”. As it turned out, this was quite a good piece of advice. The Greeks gave the Trojans a horse, through which they were able to capture Troy. This cautionary tale came to mind when I learned of President Obama being awarded the 2009 Nobel Peace Prize (see article). Why would these modern “danaos” give this award at this moment in time?

Much has been made of whether or not President Obama deserves the prize. There is, however, a much more subtle process that has been lost in all of the vituperation. In explaining the award, the Nobel Committee cited the President’s willingness to act within a multi-lateral international framework that is characterised by the rule of law rather than brute force, which uses exhortation over threat, that encourages rather than rebukes. In many respects, this is the basis for the comment that President Obama has been given the award for being everything that President Bush wasn’t. And that is the clue to the subtle process.

Few would argue that President Bush wasn't a man who carried a big stick – and who wasn’t afraid to use it too. In his short time in office, President Obama has acted as a team player in building a consensus for international action. This is essentially a European approach to foreign policy. In this regard, Obama is starting to turn out to be something of a ‘European President’. However, this world-view is not shared in Congress – particularly in the Senate, which is important to US foreign policy and which may well return to the Republican party in November 2010.

The award of the Nobel Peace Prize to President Obama for the promise of a more inclusive American foreign policy creates something of a dilemma on Capitol Hill. If Obama actually develops to fulfil his promise, he will have done so on an essentially European agenda. He will have acted through international consensus, using international institutions, and will have started to restore the image of the US in the international arena. If, on the other hand, he fails to fulfil his promise, he will be able to point to his opponents in the Senate for frustrating this promise, thus weakening the image of US at a time when collective international action is needed over a variety of issues. A handy argument to have in the run up to the 2012 Presidential Election!

Perhaps a practical example might highlight the dilemma. In December, President Obama will go to Copenhagen to look for a consensus, through the IPCC, on climate change. He goes representing the chief refusnik on the Kyoto Agreement. We hold that America is now a decade behind the rest of the developed world on this issue. There is an expectation that Obama will look for an agreement on climate change, but, in doing so, will have to compromise American interests as part of the cost of catching up. He will return to the US with a deal that may look pretty poor on its own, but which may have to be accepted in order to make progress elsewhere (such as Iran and North Korea). Will the Senate endorse the lesser evil in order to obtain the greater good?

Possibly not – a poor climate deal will have a real impact on American jobs, in a recession, and just before an election season. There are costs associated with a climate clean up. Europe has, effectively spread these costs over the past decade whilst the US hasn’t. As an example, if the US government were to use a Pigovian Tax to bring American car usage to the Kyoto norms via the price mechanism alone, we calculated that, in 2008, the federal tax would need to be between $18 and $19 per gallon of gas. This is a huge cost to absorb in one single hit. The size of the action needed underpins our view that the Senate will not ratify a climate agreement.

And this is where the Nobel Peace Prize is something of a mixed blessing. It has tied Obama to a European agenda in foreign policy and has given the role of spoiler to the Senate. The Senate undertook this role willingly in the 1990s, but we are in a different world today. In the 1990s, the US had fiscal surpluses. It now has deficits. This means that what the world thinks about America matters more today than it did in the 1990s. If the Senate becomes too unilateralist, it may find itself explaining why it is that foreigners are not so willing to buy US Treasuries.

Either way, President Obama can find a satisfactory outcome. He will be able to claim all of the benefits if things go well. And if they go badly, he can blame the Senate. I now find myself thinking that the cause of re-election for Obama in 2012 has been strengthened somewhat. I am also reminded of the Europeans who bought Manhatten for a bag of glass beads. To have subborned the US President for a mere bauble has to be one of the best buys of the century.

As an aside, in 2005, as part of our ‘America 2025’ project, we published a scenario looking at the future of US foreign policy to 2025 in which there is an uncanny parallel between events as we saw them possibly unfolding and as they are currently unfolding. Click here to access the scenario.

The Paradox Of Saving

 

 

The savings ratio interests me enormously. The Keynesians point to the paradox of thrift. At an individual level, thrift is a pretty good idea. It is living within our means, it is ensuring that we do not take on more responsibility than we can afford, and so on. However, if we all were thrifty, then consumption – a key drive to our economic prosperity – would be much less than it otherwise would have been. The paradox is that, at the individual level, thrift enriches us, whilst at the collective level it impoverishes us.

If NIESR are right, and the ratio goes to 6.1% this year and 8.9% next year, then there is - in the words of the Chartists - a trend reversal. This is an important aspect of the 'New Normal' adjustment over the next ten years or so - the repairing of household balance sheets. In recent years we have become accustomed to inflation boosting our household balance sheets through house price inflation and through the rises in the stock markets. That has now come to an end, and looks to be at an end for some time to come.  If asset price inflation isn't going to bail out households, they will simply save more as a means to repair their balance sheets. It means that the recovery in the UK will have to be export led.

It’s just as well that the Bank of England has allowed Sterling to devalue, isn't it?

The return of thrift: The feel-bad factor | The Economist

Has Icarus Landed?

Those who have been following the tale of the Icarus Economies (see previous post) will be familiar with the view that the economies that have risen the highest and the fastest in recent years have been subject to some of the largest falls. The latest chart from The Economist (see article) suggests that Icarus has stopped falling and finally has landed. The question now is the degree to which Icarus has experienced a hard landing.

Looking at the chart, it would appear that the growth in industrial production in the three Baltic Economies has fallen from a band of 5%-10% pa to falls of 20%-30%. This is a large fall and suggests that Icarus has taken a hard landing. hat does that mean?

The significance of these falls will be felt in Europe. The Baltic economies are pegged to the Euro and supported by European institutions. In order to recover from this fall, reform is needed in the Baltic Economies. And yet, economic reform is politically unpalatable. If reform is not undertaken, then the Baltic Economies have the capacity to deteriorate further (Icarus keeps falling). If reform is undertaken, then there is the risk of the political destabilisation of the Baltic.

This would matter because the Baltic States are members of the EU (perhaps their entry in 2004 was a bit premature?), members of NATO (was this a sound expansion policy?) and have borders with Russia. This is where the problem might come in the future. An expansionist Russia looking to restore its sphere of influence in Eastern Europe would see the Baltic States as a prime object. The only way to counter this is to keep up the flow of Euros supporting the Baltic Economies. Is there the political will in the EU to do this?

Recession, What Recession?

We seem to be receiving conflicting messages about the recession at the moment. On the one hand, the number of unemployed rose by 24,400 in August (see BBC report). This represents a slight improvement in performance over July (an increase of 24,900), but is worse than a simple trend might suggest (an increase of 13,000). However, both July and August do contain the impact of school and university leavers, so perhaps they might be expected to yield results that are worse than trend.

On a different note, anecdotal evidence suggests to me that retail sales are rising and that people are spending money again. As a reward for good behaviour, I decided to award myself a new i-Pod 160 Gig ahead of a trip to Switzerland in October. I tried the shops in Ipswich town centre last Tuesday, but established that they can’t be found for love or money. On Friday I tried the out of town stores around Ipswich. Once again – you couldn’t buy one for love nor money. I was told at Currys Digital (part of the DSG group) that they were flying out of the store as soon as the stock came in. It was the same story at Comet. At £189 a unit ($US 264 or €208), people are prepared to buy large ticket electrical items.

This in itself is not enough to question the recession. After all, the i-Pod 160 Gig is a fashion item. Something that the fashionistas drool over. The shortage could be one of cool rather than anything else. It was the response that I received in HMV that made me question whether or not the recession continues. In HMV, I was served – or not as the case may be – by the rudest shop assistant I have encountered for a long time. No, they didn’t have any i-Pods. No, she didn’t know when the next delivery would be. No, she couldn’t care whether I bought one or not. No, she didn’t care if I took my money out of the store, never to return. No, she didn’t care if I told everyone I know how awful their ‘service’ is.

That led me to conclude that the recession is coming to an end. When a shop assistant isn’t fussed about making a sale and can’t be bothered to do anything about it suggests that either the store is about to go bust (I can’t see this happening) or the store doesn’t need my money (the recession is over). I think that it is the latter rather than the former.

Looking Forward To Pay Day

A couple of days ago, we commented upon the fact that the Swiss Government had been able to exit from the bailout that it had injected into the bank UBS (see report). This set me to wondering how much the UK taxpayer might expect to receive once the UK bailouts have unwound. We decided to focus upon RBS (the Royal Bank of Scotland) for a couple of reasons. First, it is the largest independent recipient of taxpayer funding, which rather puts it in the spotlight at the moment. Second, there appear to have been some major issues concerning risk management during the months leading up to the credit crunch that need to be resolved. And finally, the former CEO, Sir Fred Goodwin, has come to symbolise greed and excess in the UK.

Over 2008 and 2009, the UK taxpayer acquired an equity stake in RBS in the region of 68%, and at a cost of £20 billion. The stake was acquired at a variety of prices, but the average is held to be 50.5p per share. On Friday, the shares closed at 57.65p per share, which has an implicit valuation of £22.83 billion – a latent gain of about 14%. Of course, the government is unable to realise that gain at the moment. RBS is too weak to do without taxpayer support, which means that public involvement will continue for some time to come.

When the time comes to sell the holding, how much might the taxpayer expect for the holding. If we assume that the dividend is restored to the 2006 level of 30.2p per share, and if we assume that UK base rates are 5%, then the implicit value of the share using the CAPM model is 604.0p. If that is the case, then the UK holding in RBS would be valued at £239.2 billion. Of course, RBS may not pay a dividend as high as 30.2 per share, or base rates may be higher or lower than 5%, all of which will affect the final valuation of the UK stake in the bank. However, that is not the point. The point is that the potential for capital gains from the UK bailout of RBS is huge.

Now that’s a pay day that we can all look towards!

The Poodle And The Butcher

Following on from our recent post about relations between Britain and the US (see post), it seems that matters are about to come to a head. It is speculated that a Pentagon report will shortly circulated that suggests that the current US military strategy is ‘not working’ (see report). It is also speculated that the answer, according to the US military, is to send a further 20,000 NATO troops to Afghanistan (see report). This, of course, raises the vexed question of exactly who is to send these additional troops.

America is the first port of call. As the US presence in Iraq is wound down, the Pentagon may have the capacity to increase its presence in Afghanistan. The problem is that the US public is falling out of love with the Afghan adventure. A recent survey in The Economist (see survey) reports that 42% of Americans believe that the US is not winning the war in Afghanistan (as opposed to just 18% who believe that the US is winning the war), 41% oppose increasing the number of troops in Afghanistan (as opposed to 32% who are in favour of doing so), and 65% believe that the US will eventually withdraw from Afghanistan without winning the war (as opposed to 35% who believe that the US will win the war).

This creates a dilemma for President Obama. He is locked into the policy of increasing the number of troops in country because, at present, he cannot contemplate an American withdrawal from Afghanistan. Sadly, he is backing a set of Afghan allies – irrespective of who wins the recent election - who are not currently up to the job of providing their own security. This implies that America will be the first port of call for reinforcements for some time to come. Unless he can engage the rest of the world community in accepting the mission, which is where NATO comes into the picture.

Contrary to popular belief, the current mission in Afghanistan is not an American mission, it is a NATO mission. The US currently supplies 46% of the troops in country (see data). The second largest national contributor is the UK, with 14% of the troops. The total contribution from the EU nations (including the UK) is 43%, marginally less than that of the US. This suggests that the second port of call for reinforcements is Europe. Of the five largest European contributors, Germany (6% of the force total), France (5% of the force total), Italy (4% of the force total), and Poland (3% of the force total) are all likely to cite their own problems in deploying more troops.

Of the top five European contributors, only the UK has the capacity and willingness to increase their deployment. The recent increase in the numbers of British troops in Afghanistan highlighted the tensions over further deployments. The Foreign Office wanted to commit a further 2,000 troops. The Treasury stated that we could only afford 750. The military felt that 750 troops adequately resourced would be better than 2,000 troops inadequately resourced and sided with the Treasury. Against this conversation, the public didn’t really have too much of a view.

And this is the point where the issues of the NHS and the Lockerbie Bomber assume importance. The war in Afghanistan is starting to become unpopular in the UK. For example, in Helmand Province, 10 British soldiers died to allow a population of 80,000 Afghans have the opportunity to vote in the recent election. That only 150 Afghans actually voted is seen in the UK as not good enough (see report). This is not a good time for Gordon Brown to commit more troops to that operation – particularly in the face of an oncoming General Election – to what is seen as an American folly because the US is politically unpopular in the UK at the moment.

If President Obama has any political savvy, he will not ask for more troops from the UK for fear of being rejected. However, that may create problems for him at home. Perhaps our previous Obamascepticism was well placed?

The Tide Turns

Two recent events have given us an important glimpse of how the future of the global economy may unfold over the next decade or so. First, the Swiss bank UBS has come to an arrangement with the US tax authorities over the disclosure of the account details of US Citizens who, it is alleged by the IRS, are secreting away their assets as part of a move to avoid – or even evade – US tax. The final agreement is something of a compromise, as the US authorities will request the details of the accounts, which will then be subject to review by a Swiss banking panel. Either way, this represents a major step forward in the process of globalisation and the establishment of a transparent banking system that a fully functioning global financial system would require.

The agreement between UBS and the US authorities removed a major source of uncertainty that had previously prevented the Swiss government from disposing its bailout stake within the bank. UBS had been highly exposed to the sub-prime lending crisis, which had led the Swiss government to purchase ChFr 6.1 billion of convertible loan notes. One day after the tax agreement, the Swiss government converted the loan notes and sold the shares into the market immediately for ChFr 5.5 billion. In addition to this, UBS will pay the Swiss government ChFr 1.8 billion to compensate for lost interest on the loan notes, which leaves a surplus of ChFr 1.2 billion for the Swiss taxpayer. This provides an annualised rate of return of 30%.

The long term importance of these events is quite significant. It shows that the public involvement in the banking system need not be permanent. Whilst the press has focussed on the cost of the banking bailout, they have conveniently ignored the nature of the transactions. Although the cost can be stated in billions – or even trillions – of Dollars, Euros, and Pounds, this cost is not an expense – it is an investment.

On the other side of the balance sheet lay the assets that have been purchased. Eventually, these assets will be sold, either through private placement or into the market. As the assets were purchased under distressed circumstances, it is not unreasonable to expect that they will be sold at a surplus (what might otherwise be called a profit). These capital inflows will, undoubtedly, be used to repay the public debt that has been incurred to purchase the banking assets. When we factor this into the equation, then it would seem that the levels of public debt arising across the OECD nations is not as bad as it might first appear.

This is an important point when considering how the rebalancing of the economy might occur. Over the first half of the next decade, there is a real chance that public sector borrowing may crowd out private sector borrowing. The real policy challenge will be to ensure that the effect is felt upon household borrowing for consumer purchases – i.e. credit card debt and household mortgage debt. This seems to be a trend at the moment, as households work to reduce credit card debt and as mortgage lending remains subdued. It is important in this phase to ensure that credit lines to business remain open. If they don’t, then the recovery will take that much longer to achieve.

There will come a point, however, where recovery reaches a point where the restoration of tax revenues and the decline in social assistance allow for public borrowing to become public repayment of debt. Once this point has been reached, private sector borrowing can be safely allowed to crowd out public sector borrowing. The proceeds of public sector asset sales will hasten this process. This effect will also be greater and faster in those economies - such as France and Germany – that rely more upon ‘automatic stabilisers’ than those economies – such as the US – which rely more upon ‘discretionary stimuli’. Our calculations suggest that, for the UK, the turning point is likely to be somewhere around 2017 or 2018.

Of course, such suggestions are subject to all sorts of unpredictable factors (e.g. exactly how generous are the pensions that will be paid to the Boomers who are now entering retirement in mass). And yet, the case of UBS does establish two things. First, the public involvement in the banking sector need not be permanent. And second, the withdrawal of the public sector from the banking sector could actually yield a surplus to public funds. In this respect, the tide has turned.

Poodle Snaps At Owner

In a recent post we wrote about how the British poodle was starting to bite at it’s American owner (see post). In the post, we touched upon the case of Mr Megrahi – the Lockerbie bomber and his imminent release from prison on compassionate grounds. It was announced today that Mr Megrahi would be released and allowed to return to Libya to die with his family (see story). There is so much in here that it is worth unbundling the story in order to take stock.

In recent days, there has been a great deal of diplomatic pressure from the US not to take this decision. The White House had called for Mr Megrahi to serve his sentence, until death, in a Scottish prison. The statement was reinforced by a personal appeal from Hillary Clinton for Mr Megrahi to stay in Scotland. That the Scottish Justice Secretary decided to pay no regard to these appeals suggest that – whilst there may be no intention of a snub to the US – the Scottish politicians are not perturbed by the discomfort of the American politicians. As such, it signifies a major change of attitude towards the US.

It will be interesting to see how the US government responds to this decision. Regret has already been expressed, but will it go beyond that? It would not be in the interest of America to take matters too much further for two reasons. First, things are not going well for the US military in Iraq and Afghanistan. There has been an uptick in violence in Iraq, which always has the attendant risk of spiralling out of control. Will the US troops have to come out of their barracks again? Will the withdrawal from Iraq have to be delayed? These are two issues on President Obama’s agenda at present.

In Afghanistan things are not going well. Turnout for the elections is reported as being low (see report), which suggests that the Taliban might say that they have won the election. The mission could well take far longer than expected, which puts President Obama in a position where he needs to ask for greater support from the European allies. The question that he currently faces is whether or not he would want to jeopardise this support by taking up the case of the families of the victims of the Lockerbie bomber.

The second reason why President Obama might be a bit loathe to race to action is money. Not only is he short of manpower, he is also short of cash. The Federal deficit is at record levels and rising. Interestingly enough, the UK is the third largest purchaser of US Federal Debt - behind China and Japan - with all of the economic vulnerabilities that implies. It is difficult to believe that President Obama would be prepared to risk a run on the dollar for a relatively minor incident.

In an exchange of private correspondence after my last post on this issue, one of my correspondents stated that ‘the UK needs the US more than the US needs the UK’. I wonder if that is really the case. Under the Bush administration, France suffered no great disadvantages from being hostile to the US and Britain enjoyed few favours from being America’s friend in Europe. This may not have changed in the new administration. If so, then we may be witnessing a realignment of the UK away from the US and towards the EU.

Only time will tell.

China And The WTO

In an interesting ruling last week, the WTO upheld a claim by the US that China was unfairly restricting imports of books, songs, and movies (see report). This is of interest from a number of perspectives, and how China reacts will help to shape the path of globalisation in the immediate future. For years, the EU and the US have maintained that China has been operating a globalist policy on its exports (free access to overseas markets), whilst operating a nationalist policy for its imports (protecting the home market). For example, China only allows the import of 20 foreign movies each year. The recent ruling will have an impact on that duality and gives the Chinese Government something of a dilemma.

The WTO rules have, essentially, a liberal agenda written into their DNA. Part of this agenda is the free flow of goods and ideas. Encapsulated in the books, songs, and movies that have been restricted in China is the cultural meme of the society which produced them. For example, it would be very uncommon for a movie made in the US to question the primacy of the market, respect for the individual, and the rule of law. In promoting these values, the central tenets under which the Communist Party of China rules the nation would be called into question. Which is precisely why their official distribution is limited. The influx of predominantly western culture into China might be an act that is corrosive to the rule of the Communist Party.

And yet, if China continues to block the importation of books, movies, and songs, it lends itself open to retaliatory sanctions within the WTO framework. This may be something of a boon to western – particularly European – negotiators at the IPCC in December. There is a feeling at the moment that those countries which do not sign up to the international carbon reduction agreement are effectively giving their economies a hidden carbon subsidy. China would fall into this category. One way to address this carbon subsidy would be the imposition of a carbon tariff at the point of entry into Europe. If this were to occur within the framework of the WTO, then it would provide a very attractive solution to something of a political problem within Europe.

All of this suggests that China has arrived at something of a crossroads. For the past decade it has been able to operate a globalist approach overseas whilst maintaining a nationalist approach at home. It is coming to a point where the two are incompatible. A more globalist approach at home would imply a political loosening within China – with all the attendant risks of disintegration. However, a more nationalist approach overseas would imply a more confrontational approach to foreign affairs – with the attendant risks of greater isolation.

The Chinese government may be able to buy time by appealing the WTO decision, but this is not a long term solution. In the long term, China has to decide if it wants to join the club of developed nations (and loosen up politically) or if it wants to maintain the status quo (and sacrifice some of its industrial destiny). At present, it is hard to see which view will predominate. However, it is a space to watch closely in the coming years.

Carbon Equivalence - The Currency Of Climate Change

As part of my subscription to The Economist, every now and then I am sent a copy of their glossy companion – Intelligent Life. Normally there is usually a rapid correlation between my desk and the rubbish bin because I find the magazine full of vacuous glossy rubbish. This year, something interrupted the trajectory of the magazine, and I am quite glad that it did. Buried in the articles on cars, wine, food, and fashion is a thoughtful little article about carbon equivalence (see article).

When discussing the green agenda, the conversation normally becomes bogged down in meaningless statistics. The idea of carbon equivalence is to establish an exchange rate for our activities so that we can weigh the choices that we make. For example, we have previously calculated that the amount of US corn derived bio-diesel used to fuel an SUV for a month could feed a family of four in Mexico for a year (see post). In making such comparisons, a comparator is needed. The British Physicist David MacKay proposes using the ‘Kilowatt Hours Per day (kwh/d) as the base unit of account in comparing various activities.

The article very kindly points to Professor MacKay’s book on the subject, which is available as a free download from here. This is an immense step forward. If we can establish the currency of carbon reduction, we will then be able to measure and monitor our activities. From a policy perspective, we will be able to establish a value for the taxation of activities that do not enhance the carbon profile, and we will be able to calculate the import duties to be added to the goods of those nations that provide a carbon subsidy to their economies – such as China, India, and the US – by not effectively tackling the issue of carbon reduction.

I have to admit to being surprised to find such a forward thinking article in a glossy magazine. Perhaps I ought not to be too hasty in throwing away future editions?

The Poodle Bites!

There are those in Europe who see Britain as a European puppet of the US. It is claimed that the UK likes to ape the behaviour of the US, it has adopted an economy similar to that of the US, and it follows the US lead in foreign policy, and it has been rather uncritical in it’s support for US military policy. De Gaulle is once reputed to have said – at the height of the Cold War - that the UK was an unsinkable US aircraft carrier stationed off the coast of Europe. And yet, whilst there may have been a grain of truth in this assertion in the past, the situation may now be changing.

The British cherish a number of their institutions, and, as such, are held beyond criticism. One such institution is the monarch. Even republicans in the UK have to admit that we are currently served by a particularly good monarch. It is acceptable (but unpopular) to criticise Constitutional Monarchy as an institution, but it would be unacceptable to criticise the Queen as a monarch. Even American criticism of George III doesn’t feel right to British ears.

Another revered institution in the UK is the National Health Service (the NHS). The NHS is a curious institution in that it is closer to the European model of healthcare than it is the American. Funded through taxation, the NHS provides basic care to all at which is free at the point of use. President Obama appears to be suggesting that the US healthcare system reforms itself towards a European model. Conservatives in the US have responded by attacking the NHS (see advert). They have been aided and abetted by Daniel Hannan – a Conservative British Member of the European Parliament (see clip). Britain is absolutely incensed by this.

The government has rolled out John Prescott to answer these criticisms (see video). US commentators are also being rolled out in the defence of the NHS (see video). In the face of intense tabloid scrutiny, two of those appearing in the advert have retracted their statements (see report), claiming that they have been misrepresented. Even Stephen Hawking has added that, despite a claim to the contrary in the Investors Business Daily (see here for an interesting example of ‘we got it wrong but actually we’re right’), he is both a UK citizen and has received free treatment from the NHS for over 50 years. However, these are short term issues in the middle of the ‘silly season’, when there is little ‘real news’, and will blow over in a couple of weeks. We ought to be looking at some of the long term trends that this issue highlights.

First and foremost, the most obvious fall out is that Mr Hannan’s career now hangs in the balance. He has been disowned by his party leader (see report) and there are those who argue that he is now unelectable. Indeed, Mr Cameron needs to put a great deal of distance between himself and Mr Hannan because this gives his political opponents ammunition in the forthcoming General Election. Conservatives who I have spoken to off the record are dismayed that a small incident like this could affect the chances of the party being elected.

The second point to note is that the UK is now being pushed closer to Europe and further away from the US. How long this process will last is difficult to say, but I suspect that there are those in the State Department who are wondering what would happen if the US were to lose its main voice within the EU. The UK has defended many US policies within Europe in recent years, but that resolve is weakening. In the future, when a US President comes to Europe looking for additional troops and resources for long term engagements such as Afghanistan, they may find that the political price for such support is much higher than it is today.

Thirdly, there is a growing British indifference towards the views of the US. A case in point might be that of Mr Megrahi – The Lockerbie Bomber. There is currently an application before the Scottish Justice Minister for the repatriation of Mr Megrahi to Libya on compassionate grounds (see story). By and large, the families of the UK victims are quite sanguine about Mr Megrahi’s release, whilst the families of the US victims are against the release. The Obama administration has taken up the case for the families of the American victims, but the US has run out of political goodwill in Britain at the moment. In this sense the poodle is about to bite back. It will be interesting to see if Mr Megrahi is released in the next few weeks.

It is possible for the Obama administration to repair the damage caused in the UK by his critics in the US. After all, he didn’t exactly endorse the adverts. However, it does mean that the US will have to be a bit more conciliatory in its dealings with Britain if it wants to strengthen its ties to Europe. A key test later this year will be how willing the US is to act in step with the rest of the world at the Copenhagen meeting of the IPCC. From a British dimension, that advert about the NHS has made President Obama’s job just that little bit harder.

One of the dangers of keeping a lap dog is that there are occasions when it might be tempted to bite the owner. Now is such a time.

The First Signs Of A Double Dip?

The July unemployment figures are something of a mixed bag. On the one hand, unemployment rose by only 24,900. This is not good for those who have been made jobless, but it does suggest that the forecasts of 3 million unemployed this year belong more and more to the realms of fantasy. On the other hand, if we accept our crude rule of thumb from last month (see post), we would have expected unemployment to rise by only 10,000 to 11,000. This deviation from trend is not insignificant, and demands our attention.

It is entirely possible that there are seasonal factors affecting this figure. In July, somewhere between 400,000 and 450,000 undergraduates would have left university to enter the jobs market. Some, if not the majority, of this increase could be explained by the increase in graduate unemployment reported elsewhere. However, there is also the possibility – one that we must take very seriously – that we are starting to see a double dip recession come into play. It is too early to say one way or the other, but this is a matter that does need to be closely monitored.

Another interesting factor coming into play is the geographical incidence of unemployment. The BBC has a really good graphic to show this (see graphic). Unemployment is now starting to become concentrated in the West Midlands, in addition to the traditional areas of high unemployment. This is not difficult to explain – the West Midlands is heavily dependent upon the automotive sector which has been hit very hard in this recession. What is interesting are the political consequences of this.

The West Midlands are a key marginal battleground politically. Margaret Thatcher won them over, to underwrite her period in office. They were won by New Labour in 1997, and have helped to keep the government in power ever since. As Gordon Brown is now seen to be the architect of the current recession, will he be able to maintain the New Labour majority in the region? I suspect that this is where the next General Election will be won – or lost.

BBC NEWS Business UK jobless total climbs to 2.4m

http://eufo.blogspot.com/2009/07/bbc-news-business-record-rise-in-uk.html

http://news.bbc.co.uk/1/hi/business/7789784.stm

The Collapse of the Baltic Tigers

In a previous post we highlighted the plight of the three Baltic States (Estonia, Latvia, and Lithuania – see post). We see the recent events in the Baltic States as the European example of the Icarus Effect – economies that have flown high and which have now hit the ground with a hard landing. As this has happened, there has been a political price to pay, and we now need to address what that price might be.

The Baltic States occupy an uncomfortable boundary between the EU and Russia. In recent years they have been suborned by membership to the EU and NATO. However, their ‘westernisation’ is relatively recent and – taking the recession into account – not that successful. Russia seems to have a ‘reconquest fantasy’ which it regularly plays out in wargames adjacent to the border.

What we also tend to forget is that each of the three Baltic Tigers has significant Russian minority as part of its population (25.6% in Estonia, 28.0% in Latvia, and 5.1% in Lithuania). This part of the population tends to look to Russia for its cultural and political lead. As time unfolds, it is not unimaginable to envisage Russian intervention in the Baltic States to support the Russian minorities. After all, this is what happened in Georgia last year.

And so, as we think about the longer future, the eastern edge of the EU might not be as stable as it appears. Global recession is placing the A8 nations under great strain, which is creating the possibility of Russian adventurism in the region.

As Icarus hits the ground, the shockwaves could reverberate far and wide!

The Collapse of the Baltic Tigers - By Edward Lucas Foreign Policy

http://eufo.blogspot.com/2009/04/icarus-in-pictures.html

Are We Anywhere Near 3 Million?

The jobless total for June was published recently (see story). It was another dismal month – unemployment rising to 2.38 million – but contains cause for hope. We remain on course to see unemployment of less than 3 million at the end of this year. If we chart the rise in unemployment for the first half of this year, the figures are:

Month	Rise In Unemployment
January	73,800
February	138,400
March	62,900
April	57,100
May	39,000
June	23,800
Monthly Average	65,834

Just suppose that unemployment continued to rise at this average rate for the remainder of the year. It would imply that the total unemployment for the year would rise to 2.77 million – higher than our original forecast of 2.50 million (see note), but lower than the projection of 3 million reported in the previous post.

Of course, this assumes that we see a double-dip recession of the severity of the one experienced last spring. We may do so with the possible onset of a debilitating swine flu pandemic. The potential GDP loss is rising as the press becomes more alarmist about the potential impact of a pandemic. Estimates vary, from between a loss of 3% of GDP (things get as bad as the first quarter of the year) and 6% of GDP (things are twice as bad as last winter). The lower estimate seems plausible whilst the upper estimate seems fanciful. However, good futuring requires us to consider what might happen if we do not experience a double-dip recession. What would happen if the ‘recovery’ continued at the present rate?

Unemployment has been growing at a slower rate in recent months. Since March (the turnaround point), the growth in unemployment has been falling by an average of 13,033 (call it 13,000) per month. If we apply this rate of slowing to our progression, then total unemployment will peak in August, and will end the year at 2.25 million. This seems to be unduly optimistic, given the mood of the country at the moment. However, given the relatively small numbers involved – 13,000 workers in a workforce of 29 million – it is not entirely unimaginable.

Where does that leave us? We currently can envisage two predominant scenarios. One in which the UK goes back into recession, in which case unemployment could rise to 2.77 million by the end of the year, and one in which the current improvement continues, in which case unemployment could stabilise at 2.25 million at the end of the year. In the coming months, we need to monitor the progress of the economy to see which possibility will actually occur.

BBC NEWS Business Record rise in UK jobless total

http://eufo.blogspot.com/2009/01/on-to-3-million.html

Is China A Threat?

Keeping with the July/ August 2009 issue of Foreign Affairs, there is an interesting article by Andrew F. Krepinevich Jr. on ‘The Pentagon’s Wasting Assets’, which is more appropriately subtitled ‘The Eroding Foundations of American Power’. In many ways, this develops the thinking touched upon in the past two posts. First, we asked the question ‘When Is China not China’ to start to think about the expansion of Chinese territorial limits (see post). We then expressed the view that, in its future dealings with the US, the US would need Chinese co-operation more than the Chinese would need US co-operation (see post). This article moves the thinking along a bit further by asking what the Chinese government would need to do in order to limit US military power in East Asia.

According to Mr Krepinevich:

The intended message to the United States and its East Asian allies and partners is clear: China has the means to put at risk the forward bases from which most U.S. strike aircraft must operate. Area-denial capabilities are aimed at restricting the U.S. Navy's freedom of action from China's coast out to "the second island chain" -- a line of islands that extends roughly from the southeastern edge of Japan to Guam…

The implications of these efforts are clear. East Asian waters are slowly but surely becoming another potential no-go zone for U.S. ships, particularly for aircraft carriers, which carry short-range strike aircraft that require them to operate well within the reach of the PLA's A2/AD systems if they want remain operationally relevant. The large air bases in the region that host the U.S. Air Force's short-range strike aircraft and support aircraft are similarly under increased threat.

Just suppose that this is true. Does it matter? It is by no means clear that an expansion of Chinese influence out to the First Island Chain would be the cause of conflict. We know that there are issues surrounding Taiwan that need a long term resolution. However, the current policy of not bringing matters to a head whilst encouraging a convergence of interests between China and Taiwan seems to be working well. Conflict will only result if one sides reads the actions of the other side in this way.

This is where I part company with Mr Krepinevich. Can we assume that U.S. taxpayers are willing and able to provide a security umbrella to East Asia for an unspecified period into the future? many think not. If that umbrella is taken away, who will guarantee peace and stability in the region? China seems to be an obvious candidate. In which case, it seems to me that a logical process of engagement would be to recruit China into the international community as a partner, recognise that China has strategic issues of its own, and use the willingness of the Chinese Government to act as a peace-keeper in the region.

If we were to do this, then China would be seen less as a peer-to-peer threat and more as a willing ally who is prepared to pull their weight when it comes to the defence burden in the region.

The Pentagon's Wasting Assets Foreign Affairs

Does China Need The US?

The current edition of Foreign Affairs contains an excellent little essay by Robert C. Altman on “Globalization in Retreat”. There is much to commend in the analysis of the argument – it gives a good overview of the recent progress of globalisation. Where I start to differ with Mr Altman is in the conclusions that he draws from this analysis.

In many respects, the conclusions drawn are highly influenced by his values. One of the values that Mr Altman appears to hold is that:

“It is increasingly clear that the U.S.-Chinese relationship will emerge as the most important bilateral one in the world. The two nations have similar geopolitical interests.”

I’m afraid that it isn’t that clear to me at all. I can see that the US will increasingly see the relationship with China as of critical importance, but it is by no means clear that China will think likewise. China is an important trading partner for the US, an important supplier of credit to the US financial system, and a key influencer over North Korea.

On the other hand, China trades about the same with the EU as it does with the US, is looking to diversify its foreign currency holdings away from the US dollar, and increasingly finds US criticism of its human rights record both inconsistent and hypocritical. If we view the world from Beijing, then there is much to argue that the important relationship for China will be that with India and Russia, particularly once the First Island Chain is secured.

Taking a long term perspective, there is much to ponder on how important the US will be to China.

Globalization in Retreat Foreign Affairs

When Is China Not China?

One of the pitfalls that many futurists and corporate planners fall into is the trap of thinking in linear terms. In the realms of geopolitical futures, this can be a mistake because it naturally excludes the possibility of change and of big surprises. When we look at works on the future of China, a surprisingly large number of works assume that the current territorial boundaries of China will remain the same into the long term future. A study of the history of China suggests that this may be a false assumption.

When I see a work on the future of China, I always ask how the analysis would differ if the territorial extent of China were to be appreciably larger, and how it would change if it were to be appreciably smaller.

In my own musings, the pressure to expand the territorial extent of China is most likely to come through the re-occupation of the First Island Chain.

This is an area that encapsulates previous Chinese territorial expansion, and, in the mind of the Chinese government, it represents what is seen as “China”. That the area includes vital sea lanes to China, oil and gas resources, and abundant fish stocks merely brings the area into a sharper focus.

We have also given some thought to what a smaller China might look like. In 2007, as part of the reporting process for our ‘America 2025’ Project, we gave a paper on future geopolitics at the WFS Conference in Minneapolis, USA, where we considered the possibility of a smaller China by 2050. This map encapsulates our thinking at the time:

In our thinking, we speculated that the dissolution of China would start in the west and head eastwards. The two western provinces – Tibet and Xinjiang – don’t really see themselves as part of China. Tibet sees itself as an autonomous nation, which, when I was a boy, it was. Xinjiang has a much closer affinity to Tajikistan, with whom it has a large number of ethnic and cultural links.

As we move through time, the forces of expansion and contraction are both in play simultaneously, and it is through this lens that we can interpret the news. The apparent uprising in Xinjiang suggests that the forces of contraction are evident in western China. However, the recent closer ties with Taiwan also suggest that the forces of expansion are also in play. The balance between the two is likely to dominate our news in the coming years.

156 dead as Muslim uprising hits China - Asia, World - The Independent

What Follows The Dollar?

The pattern of international settlements is not the sort of topic that will have you sitting on the edge of your seat. It is, however, quite important – as we have recently found out. We have recently seen the recycling of excess East Asian savings into an excess of borrowing on the part of the G8. This was not sustainable. It lowered interest rates to undue levels, which fuelled speculative bubbles in key asset markets (the Stock Market and the global property market), until we reached a point where the loans being made took on a reckless air as lenders gave credit to those who had little hope of repaying their debts. And then the bubble burst.

We first had the Credit Crunch, which spread contagion into the financial system causing it to come grinding to a halt. This provided the mechanism whereby the turmoil in the Financial Economy spread into the Real Economy leading to our present recession. As we work our way out of recession, the root causes - those financial imbalances - have not gone away. Taking a futures perspective, one wonders how this might play out.

There are long term adjustments that are currently playing out. We often hear about how the balance of geopolitics is shifting eastwards from the US, but we rarely are told how this might occur. One mechanism by which it occurs is through the shifting pattern of international settlements. As the US – both in the private sector and in the public sector – becomes dependent upon East Asian finance, so the East Asian nations will have more say in geopolitical affairs.

It is through the exercise of financial power that the balance of geopolitics will be shifted. In the near future (the next decade), we can reasonably expect China to move away from a reliance upon US Dollar assets and towards a more broad currency base. When it does, it will be laying a claim to be a dominant global power. At that point, we need to look to the Inner Island Chain for potential flashpoints between the US and China.

Buttonwood: Birth pains | The Economist

Latest figures show recession is deeper and longer than feared - Times Online

This is an interesting article because of what it doesn’t tell us rather than what it does tell us. It would appear that the GDP figures for the first quarter of 2009 have been revised downwards from –1.9% to –2.4%. We can accept that the official figures may be subject to periodic revision, and that the revisions can be quite substantial at times (the GDP figure was revised by about a quarter). However, it doesn’t really convey a great deal of information about where we are now, and, more importantly, where we are headed in the future.

In a previous post (see post) we commented upon February experiencing the peak in the growth of unemployment. Since then, unemployment has been growing at a slower rate each month, which suggests that the real economy may now have turned the corner. All the GDP figures have done is to confirm that story – that things were pretty dire in the first quarter of 2009.

Are they dire now? The evidence – mainly anecdotal at the moment – suggests that things are getting easier. Industrial production is up in the East Asian economies, the commodity markets have tightened, and banks are lending again – both to themselves and real world companies. Whilst we have not recovered the ground lost, things don’t seem to be getting worse either.

For the future, the question  is whether or not we are likely to see a ‘double-dip’ recession. If things do worsen over the autumn (possibly due to swine flu) then the recession could be longer and deeper than originally feared. However, that is a pretty dystopian scenario. All of the evidence suggests that unemployment will not reach 3 million by the end of 2009, which is what the doomsters were forecasting back in December.

For now, we will just have to sit and wait to see what does actually happen. So far, it has been nowhere as bad as had been suggested by some commentators.

Latest figures show recession is deeper and longer than feared - Times Online

Britain faces 100,000 swine flu cases a day - Times Online

If this were to happen, and it may not, then it would certainly knock the recovery off course. Oxford economics calculates the cost of a potential swine flu pandemic to be 3% of GDP. That’s quite a significant number when compared to the fall of 2.4% in GDP during the first quarter of this year.

Britain faces 100,000 swine flu cases a day - Times Online

More Green Shoots?

The UK unemployment statistics for May were published this week (see report). The bad news that they contain is that unemployment has risen to the highest level for over a decade (since November 1996). However, we are of the view that they statistics contain more good news than bad news.

Unemployment rose by 39,000 in May, the lowest monthly increase this year. This is really good news on a number of levels. First, it suggests that the recessionary pressures are easing. After a peak increase in February, the rate of increase has abated throughout the Spring. Second, it implies that the economy may have turned the corner. This is the fourth month in a row where the rate of increase has fallen. If this suggests a trend, then the UK could be over the worst of the recession. Thirdly, it now starts to suggest that the dommsters who predicted unemployment at 3 million by the end of the year are now more likely to be wrong. Fourthly, if so, then the long term impact on the PSBR is unlikely to be quite as bad as has been suggested. All in all, we ought to be pleased by these figures.

The possibility of a double-dip recession is something of a concern. we have been thinking about what could cause such an event, and the most likely suspect that presents itself is a Swine Flu Pandemic. The WHO have now classed the current outbreak as a pandemic. The flu is currently dormant in the UK (the summer is its dormant period), but is active in Australia (the flu season is during the winter). A report in The Times examined the impact of a serious outbreak on the UK schools system (see report) which, if worked up to have an impact on the economy as a whole, could have a significant impact upon UK GDP.

The current recovery, such as it is, would be significantly affected by a serious disruption to the economy. This is an area of concern that we need to be aware of in the coming months.