The Futurist

Light At The End Of The Tunnel

2012-01-31T16:37:00.001Z

2012 has started with some of the gloomiest economic forecasts for years. Let us not diminish the seriousness of the situation. There is a reasonable chance of a severe deterioration in the world economy this year. However, as a futurist I starting to wonder what it might mean if our fears were to be unfounded. Whilst currently we can only see problems ahead, might we also be looking at grounds for optimism at the same time?

There are three key assumptions to our thinking. First, the Eurozone continues to find a way of muddling through the crisis that it faces. There is a danger that, in wanting a quick and effective solution, we might also lay down a structure that we later come to regret. But just suppose that there are no major problems with the debt retirement programme, there are no major increases in sovereign borrowing costs, no countries are forced to leave the Euro, and that the Euro continues to soften against the US Dollar, then we can hope that the signs of growth will return to the Eurozone by the end of 2013.

Our second major assumption is that the fear of a fiscal implosion in the US does not materialise. What this means is that the prospect of the Presidential Election in November acts as a restraint upon the lunatic fringe in US politics (e.g. America does not return to the Gold Standard, that the US remains plugged into the global economy, and so on), that America initiates only a mild fiscal contraction, and that the Fed. is prepared to undertake monetary expansion to more than compensate for the fiscal contraction. In this case, there are grounds to believe that the US economy will continue to motor along as one of the higher performers in the OECD.

Our third assumption is that China manages to achieve a soft landing. This would imply that growth in GDP just comes off the boil rather than there being a dramatic decline in GDP, that the change of leadership in China can be managed without resulting in a high degree of social unrest, and that the housing market – and the financial system that underpins it – softens rather than crashes. If this happens, then the process of re-balancing the Chinese economy away from exports and towards consumption can continue during 2012.

If these three conditions occur, then we can be cautiously optimistic about where we shall be at the end of the year. The key is the weakening of the Euro against the US Dollar. This will assist the Eurozone in exporting to America, and those economies whose currencies are tied to the US Dollar – mainly the Middle East, Latin America, and the Far East. The recessionary pressure experienced at the start of 2012 is likely to soften commodity prices even further. This could result in the happy coincidence of rising incomes (from export led growth) in conjunction with softening prices leading to rising disposable incomes at the end of the year. If this happens, it will ease the fiscal pressure within the Eurozone by restoring part of the tax base and reducing the welfare bill.

If Europe heads into recovery, then the rest of the world will benefit from this. It has the potential to kick start the global economy, not in a dramatic way, but sufficient enough to cause a change of direction in where the economy is heading. What would help even further is if, as the fiscal position improves, the benefits were to be spent more upon fiscal stimuli, such as infrastructure projects, than upon debt repayment. It is unlikely that 2012 will see the point at which debt repayment makes more sense than a fiscal expansion. This is, of course, a question of balance, and some fiscal expansion will occur naturally, whilst debt is continually being repaid.

If these three assumptions hold, and if there are no major shocks to the system that would blow things off course, then we may well see some light at the end of the tunnel by the end of the year. Although economics is the ‘dismal science’, the economic outlook is never wholly good or bad, and it is up to us to find the upside when everything seems down.

© The European Futures Observatory 2012

Does Austerity Work?

2012-01-03T11:34:00.001Z

In 2011, the case for austerity was made across Europe and North America. Austerity was seen as the way in which nations could put their houses in order. Restraint was to be the order of the day as a prelude to paying down the mountains of debt that nations had accumulated in bailing out the financial system at the start of the present financial crisis. Some countries, such as Ireland, embraced the austerity agenda at an early stage. Others, such as Greece and Spain, have had it thrust upon them by a combination of events, bullying by other nations, and as a condition of financial support imposed by international bodies, especially the IMF. The purpose of this piece is to consider whether austerity will work in the longer term.

Perhaps it is worth starting by stating what we mean by austerity. There is no doubt that austerity means fiscal contraction, either by reducing public expenditures, increasing taxes, or a combination of both. However, in the light of this, we ought not to exclude monetary policy and exchange rate policy. Whilst many nations have been subject to fiscal contraction in 2011, there has also been a corresponding monetary expansion at the same time. By keeping interest rates at an historically low level, and by pumping domestic money supply through QE, the monetary stance of most European and North American governments has been expansionary. Exchange rates have also been used as an adjustment mechanism to accommodate fiscal contraction, although in less a deliberate way. Taken together, the typical path to austerity in 2011 would often be a sharp fiscal contraction, accompanied by a monetary expansion, along with a softening of the exchange rate.

This policy has been used in differently over 2011. The most expansionary economy of the group – that of the United States – has seen a combination of fiscal expansion, monetary expansion, and a reasonably static exchange rate over 2011. This has resulted in US GDP growth of about 1.8% in 2011. The least expansionary of the group – that of the Eurozone – has seen a combination of fiscal contraction, initially a tight monetary contraction followed by a little loosening of monetary policy, and an exchange rate that has fallen in Dollar terms. This has resulted in Eurozone GDP growth of 1.6% in 2011. The UK occupies a middle stance, with a fiscal contraction, a monetary expansion, and an exchange rate that is competitive in both Dollar and Euro terms. Even so, the UK should manage GDP growth of about 0.9% for 2011. This variety of approaches to austerity gives us some initial readings to indicate the usefulness of the policy.

The argument against austerity is that it chokes growth. This has two unhelpful consequences. The first is that it makes the deficit worse than originally planned as the cost of social benefits rises and the tax take falls. These are the ‘automatic stabilisers’. The UK, Ireland and Spain appear to be suffering from this problem as the tax bases of these countries – which were heavily dependent upon a property boom – have melted away. The second consequence is more technical. As GDP falls and the deficit fails to keep pace, the Deficit-to-GDP ratio will rise, making more severe austerity needed in following years. It is likely that Greece has reached that position now. It would appear that Spain, which will miss it’s deficit reduction targets because of the automatic stabilisers, is likely to head into this position in 2012. From the perspective of the Eurozone, it is difficult to see from where any growth may come in 2012. Even Germany, the powerhouse of the Eurozone, could be heading towards a period of sluggish growth. This would suggest that austerity has choked growth in 2011.

And yet, is there an alternative? We are often told that a nation cannot borrow its way out of a recession. I’m afraid that we beg to differ. The US in 2011 has borrowed it way out of recession, and it would appear that the UK is about to do so for 2012. In a surprising change of direction, the UK chancellor announced late in 2011 that a programme of public infrastructure works would be initiated in 2012. This is exactly the type of fiscal expansion that we believe is needed in the UK, if not throughout Europe and North America. What is also interesting is that the UK works are to be part funded by the public sector, but the majority are to be funded by the idle balances within the UK financial sector. The policy of putting unproductive balances in the money economy to work on productive assets in the real economy has to be commended. We shall see if this has an impact in 2012 by the UK having an easier recession that the rest of our trading partners.

It is a shame that the US has abandoned the stance held in 2011 and appears to be embracing austerity for 2012 with both a fiscal contraction and a potential monetary contraction. The US seems plagued by populist politicians who don’t appear to understand the basic fundamentals of monetary policy. In a Presidential Election year, this simplistic approach is likely to just cause more problems for the American economy. If our model is right, and if the populists were to gain the upper hand, then the outlook for the US could be quite gloomy. However, we can all hope that common sense will prevail and that, even if there is a mild fiscal tightening, the Fed will continue the policy of monetary expansion.

To return to our original question, does austerity work? It does in that it helps to calm the financial markets and it gives the speculators a different target for their attention, such as gold. However, it also chokes growth and, by doing so, also reduces its long term effectiveness. Fortunately for those of us in the UK, austerity has been abandoned for 2012. If the US and the Eurozone embraces that agenda whilst the UK doesn’t, then we should continue to have quite a good recession.

© The European Futures Observatory 2012

The Entrepreneurial Community

2011-12-20T10:12:00.000Z

It is commonly heldthat the main generator of jobs and prosperity is the small business sector.One of the problems that we face in the UK is that ‘small’ is defined in such away that it covers 99% of all UK businesses. A much better definition wouldfocus on the life stage of the SME rather than its turnover and its asset size.When viewed this way, SMEs fall into two distinct categories – those whose purposeis to grow into a substantial business (and thus create jobs) and those whosepurpose is to provide a stable and comfortable income to the owners (our SMEsurvey found this to be the larger category of SME). Public policy has recentlyencouraged both categories of SME, whereas it might be focussed on the former ratherthan the latter category in future years.

The EntrepreneurialCommunity takes responsibility for bringing to market the ideas of the CreativeCommunity. The two appear to go together in tandem, and that a healthy CreativeCommunity is a pre-requisite for a healthy Entrepreneurial Community. However,this is a necessary but not sufficient condition. We need to consider what elseis needed to turn a healthy Creative Community into a healthy EntrepreneurialCommunity. Our survey of SMEs suggested that most SMEs are set up in Suffolkbecause it is a nice place to live, and that their greatest handicap is thelack of a mature business community. It was seen that this is the one factorthat needs to change if Suffolk is to develop a thriving SME sector.

Given the anticipatedonset of peak oil, climate change, and resource scarcity, we need to be mindfulof the steps that the Entrepreneurial Community can undertake in order to giveitself a degree of resilience to these anticipated problems. Indeed, we canreframe the issues to consider them as future opportunities yet to beexploited. As always, it is a case of what action can be taken today in orderto help us face the future.

A key to resilience wouldbe the encouragement of SMEs that were located in the Support Economy – thepart of the Service Sector that focuses upon the provision of services that aretailored to the higher needs of the individual. This could be done through aseries of initiatives, including the development of high speed ITinterconnectivity links, the encouragement of off-line business networking, thedevelopment of a working culture that celebrates diversity, creativity andinnovation, and the establishment of a series of creative hubs that connect thecreative hotspots within Suffolk.

The absence of a welldeveloped business community within Suffolk may not necessarily prove to be ahandicap in the next two decades. Part of the charm of Suffolk is that theIndustrial Revolution passed it by. However, if it is to retain that charm, itmust ensure that the Sixth Wave – the technology to address scarcity - doesnot.

© The European Futures Observatory 2011

A Happy New Year? Not Likely!

2011-12-15T15:48:00.001Z

This is the time of year when pundits pull out their reviews of the year past and their appraisals of the year to come. Normally I find that sort of exercise uninteresting. 2012, however is something of an exception. Many of us are aware that an old Mayan Calendar seemed to indicate the end of the world in 2012. We have very little truck with this, but we are aware of a number of fundamental changes that are likely to come to a head in 2012. As always, the story about the future has its roots in the recent past.

Many observers have failed to notice that a new Credit Crunch - CC2.0, if you like – has started. It originated in Europe in July 2011, and has been progressively worsening over the course of the autumn. The cost of inter-bank lending has quintupled between July and December 2011, and has reached a point where European banks are starting to cease lending to each other. The main impact, so far, has been felt at the more peripheral edges of the EU. Whereas, for example, five years ago it was common for Hungarian households to take out a Euro denominated mortgage from an Austrian bank, nowadays that avenue of finance has dried up. Whilst this creates a precarious position, given a high degree of skill on the part of the monetary authorities, it ought not to have tragic consequences.

What would really start things moving would be a run on a bank. Looking at the fragility of the global banking system, a number of weak spots do stand out. For example, the Cypriot banking system is in an exceptionally precarious position. Between 2008 and 2011, Cypriot banks took deposits from the Black Sea Basin that are over five times the Cypriot GDP. This money was then, by and large, invested in Greek Sovereign Debt (Cyprus has an exposure to Greek Sovereign Debt amounting to 160% of GDP). If we take a probabilistic view of the CDS market, then we can arrive at the conclusion that the markets are factoring in a 100% chance of a Greek default within the next five years. Should those depositors from the Black Sea Basin take fright at that prospect and withdraw their funds from Cyprus, it is hard to see how the Cypriot financial system would survive. This, or a number of similar situations, would then provide a test of credibility for the European Central Bank.

To date, the ECB has struggled in its role. We are of the opinion that tightening monetary policy early in 2011, and then having to loosen it again later in the year, was ill considered. The problem is that the political constraints placed upon the ECB prevent it from acting as a central bank. It isn’t able to act as a lender of the last resort and it doesn’t have the capacity to raise adequate funds in the currency that it is supposed to govern. In all fairness, this is partly a consequence of a lack of fiscal cohesion within the Eurozone rather than an inherent fault with the ECB. Nonetheless, it means that, should pressure be placed upon liquidity within the Eurozone, it does not have the capacity to adequately deal with the problem. If the ECB were to seek to deal with a liquidity crisis through a bout of Quantitative Easing (which, constitutionally it has ruled out), we calculate that it would now need access to about €1.5 trillion to €2.0 trillion. The funds that it currently has (about €0.5 trillion) are not sufficient to do the job.

It is easy in the UK to adopt a certain Schadenfreude about the situation in Europe, but a few moments contemplation of the second and third order effects of a European liquidity crisis soon takes the smile off our face. The UK banks have collectively lent German and French banks €1 trillion, who have then lent that money forward to the peripheral sovereigns – mainly Italy and Greece. A similar situation applies to the US banking sector (although American banks have been pulling back from Europe late in 2011), who in turn have received much of their liquidity from the Far East. The world is still as interconnected as it was in 2008 and the transmission of pain will be equally as quick.

Our opening position for 2012 is not a good one at all. It is entirely possible that a miracle will occur – that governments which have recently been acting in a self-centred and narrow minded way will suddenly see the case for co-operation and generosity as a way out of the current mess – but we will assume that the national interests will still prevail and that co-operation will remain limited. That acts to draw up a bleak picture for 2012. We have an extremely fragile monetary system, most fiscal systems are over-stretched, and growth is virtually absent within the world economy. Some may point to the Far East – particularly China – as a source of vitality, but we are of a different opinion. The prospect for growth in China is likely to fall below the threshold needed to maintain internal order, and, with a change in government scheduled for 2012, this may top the Chinese agenda for much of the year. To make matters worse, there are early signs that the Chinese property bubble is bursting. If that were to be the case in any significant way, then Europe would not be the only source of monetary contagion in the global monetary system in 2012.

It would be foolhardy for us to suggest exactly how things are likely to turn out in 2012 because there are so many variable factors that could have a large impact on the year. We could almost characterise 2012 as the year of the ‘Wild Cards’ (low probability, high impact events which result in systemic chaos). However, we can point to some of the issues that may dominate. One such issue is the number of elections that are due for the year. Elections are scheduled in Germany, France, and the US, which does not auger well for economic growth. We ought not to expect bold and courageous policy initiatives this year, even in the face of an acute need for them. If we are very lucky, then we will see the continued burning down of the long fuse that is the debt overhang in the developed world. This provides something of a boundary for what we can expect in 2012. If we are really lucky, and barring any truly silly policy mistakes, then a good result for 2012 will be to continue to bump along the bottom.

There is also a reasonable chance of the anticipated recession developing into a full blown recession. One of the great policy achievements in 2008-09 was the co-ordinated and timely intervention of the G20 nations to prevent recession turning into depression. These factors are absent in 2012. The ability of governments to use the lever of fiscal expansion is far more constrained now than it was then, both politically and financially. The G20 has been captured by the austerity agenda, and it would be a very brave politician to run against this conventional wisdom at the moment. Of course, courage in the face of impending elections is rarely seen. However, the longer term consequences of the austerity agenda have yet to be played out, and may start to become evident in 2012. We have already seen disruption on the streets of European and North American cities. This may well become more violent as time goes on.

We have already seen the suspension of democratic institutions in Europe. How this works out in terms of legitimacy and sovereignty have yet to be seen, but we may well see the start of this process in 2012. For example, the Greek austerity plan is not the product of the Greek democratic process, it is an agenda forced upon the Greek people by their German and French banking creditors. When the Greek Prime Minister suggested that the people be given a voice in the austerity plans, he was forced out of office and replaced by a technocrat with no democratic mandate at all. This has weakened the legitimacy of the Greek government. Our correspondents in Greece suggest that the country is starting to become ungovernable. For example, the absence of a democratic legitimacy means that it is now viewed as acceptable in Greece if citizens don’t pay their taxes. After all, these are taxes imposed by German banks. 2012 has the potential for being a year where civil defiance tops the political agenda.

And this is if things go well! At the other end of our expectations, there is a reasonable possibility of a financial implosion, the consequences of which could be catastrophic. Of the four weak spots in the global financial system (the Eurozone, the US Federal deficit, the US States deficits, and the Chinese banking system), two are showing signs of rapid movement to a critical position. If the Chinese banking system were to suffer acute stress, then it is reasonable to expect the repatriation of part of the Chinese trade surpluses that are currently parked in US Treasury Bonds. This is definitely dark scenario territory. In some of the darker scenarios that we have been working on this year – particularly those based upon the break up of the Eurozone – the immediate loss of output is somewhere between 8% to 10% of global GDP. This quite rapidly becomes a world of deflation and social disorder. As we have mentioned before, in November 2008 as it happens, NICEY (Non-Inflationary Continuously Expanding Years) has become NASTY (Non-Accelerating Socially Turbulent Years), and the prospect of a financial implosion is very nasty indeed.

2012 is likely to be a very dangerous year. But what of beyond that? Assuming that the Mayans were wrong, and that 2013 follows on from 2012, what hope can we have for the future? We are quite pessimistic about this decade. The debt overhang, sluggish growth, and institutional reform are all going to take a number of years to unwind. In 2009, we thought that the UK debt overhang could be resolved by 2018. We are a bit more bearish now – owing to the fiscal policy mistakes that are currently being made – and we can argue quite well that the debt overhang may be with us some time longer. We are of the view that we are currently in a phase of what Schumpeter called ‘creative destruction’ and what the followers of Kondratiev would refer to as the ‘long winter’. As sure as night follow day, so does spring follow winter.

We are starting to see the commencement of the Sixth Wave of technological advance. This doesn’t have shape or form at the moment, but we take the view that it is likely to coalesce around the technologies of scarcity. At some point further down the line in this decade, the results of the monetary loosening that we are currently experiencing will transform itself into rising prices. Prices of what? We are of the view that the prices of base resources – Food, Energy, and Water - are likely to rise. We have already seen some evidence of this during the period 2006-2009. This is the stimulus that is needed to trigger the Sixth Wave. We are of the view that, just as the great wage inflation of the 1970s provided the trigger for the labour saving technologies of the Fifth Wave (the ICT revolution), so a great resource inflation around 2020 will stimulate investment in resource conservation technologies during the next decade. This investment boom is likely to be the source of the economic growth that is needed to fully address the debt overhang and to provide the new jobs that will soak up the unemployed pool of labour.

Good policy can bring forward this vision just as much as poor policy can defer it. We are of the view that authorities can now, even in an era of austerity, start to prepare for this future by building the infrastructure for it. This need not be physical infrastructure and it need not cost a great deal of money. It could be fostering connections within a community, it could be inspiring the aspirations within a community, or it could be raising the intellectual base of a community through educational and social initiatives. The physical infrastructure is likely to be built in response to the creation of a social infrastructure, using whatever resources that are to hand. After all, it only takes an internet connection to organise a Tweetup. It is our hope for 2012 that we shall see many more of these low cost, high impact initiatives.

2012 is unlikely to be a prosperous year. However, the Law of Undulation has not been abolished, and from our present lows we should aspire for future highs. It is in our hands to sow the seeds of our future prosperity in 2012, and we invite everyone reading this to join us in doing so.

© The European Futures Observatory 2011

The Creative Community

2011-11-15T15:55:00.001Z

It is our belief thatif a community wants to foster local, organic, economic growth, then it needsto establish a local creative community within it. The thinking behind this isthat economic growth in a knowledge based economy is generated through theprocess of creative capital accumulation. This happens when the creativeprocesses add to our stock of knowledge. This is enhanced if creative peoplelive near to each other and are able to work and network with each otherthrough the formation of a creative cluster.

The role of the policy makers is to encourage the formation of a creativecluster. This can be done by developing a community that is diverse, tolerant,and open. A community that lacks vision, which finds itself trapped in thepast, and where vested interests thwart change is unlikely to developsufficient a creative presence to achieve lift-off. A core of about 10% of theworkforce needs to be engaged in creative occupations in order to achieve the criticalmass whereby creative agents coalesce into larger economic entities.

It would seem that it is important for policy makers to develop an areaas a great place to live. Creative agents tend to be very demanding for arts,cultural, and recreational facilities. There also needs to be a ‘bootstrap’-possibly a university or a science park - to enhance the creation of intellectualproperty. The bootstrap acts as a source of technology, talent, and socialtolerance. Finally, policy makers need to focus on creating the right ‘peopleclimate’ – policies that are people centred.

Suffolk has a mixed record in these areas. It is a great place to live.It has a number of world class facilities, such as Newmarket (billed as thehome of horse racing), which has spun out a number of world class businesses(Tattersalls of Newmarket is considered as one of the leading bloodstock agenciesin the world). However, Suffolk does lack a bootstrap. The establishment of UCSis a promising start, but UCS does not confer its own degrees and lacks asignificant research centre. Other attempts to establish research led businessparks have not met with any degree of success. In many ways, that reflects thecomposition of the county. Suffolk is dominated by conservative and suburbanlifestyles and lacks a Bohemian population of any significance.

In many respects, this bounds what needs to be done over the next twentyyears. Within that time frame, it is possible that a significantly creativepopulation could be encouraged, perhaps through the establishment of a seriesof intellectual and cultural events. These new residents could be persuaded towork in newly established creative clusters, which have been nurtured by thelocal authority.

This is the key uncertainty that the creative community faces. Is therescope to encourage sufficient members of the creative class to locate inSuffolk? If they can be enticed, then regeneration will follow. If they can’t,then Suffolk will continue to perform below par.

© The European Futures Observatory 2011

A Right Royal Jelly

2011-11-10T16:33:00.001Z

I had the good fortune to be invited to the first ‘Suffolk Jelly’ this week. It was organised by Suffolk Digital and hosted at the Eastern Enterprise Hub. I wasn’t quite sure what it was about, so I thought that I would go along to find out. I am very glad that I did because I found it to be a very worthwhile event. In trying to describe the event, I think that it was set in two halves. In one half was an office space which those attending could use for the day. I think that was the idea covered in the report in the local press. However, for me, I didn’t find that format at all helpful – I have a number of offices already.

My interest was aroused and inspired by the second half of the offering – the soap box section. This was a room dedicated to the attendees who were encouraged to present on any subject they liked. Most presentations were made by people telling the audience what they did. It was a bit hit and miss as to whether the subject was of interest, but it was important for allowing the presenters a bit of live practice at making a pitch. Some presentations were a bit more speculative, told the audience what the presenter hoped to do and asked for comment and feedback. This worked really well and provided the sort of feedback that one rarely obtains. My offering for the day was a short piece on why futures matter (or, more correctly, why ‘business as usual’ is not an option). The Q&A turned into a conversation about business model flexibility and adaptability. The whole ethos of the day felt a bit like those ‘Skunk Works’ sessions that some of us attended in previous lives.

What I found most interesting about the day was the opportunity that it afforded to build creative capacity within Suffolk. There are currently a large number of creative agents based in the county, but without a node around which to coalesce. The Jelly format seems ideal for delivering this. For example, I saw presentations by Jamie Riddell (basically a trend spotter/ cool hunter), Andrew Walker (whose line is data analytics), and Steve Butterworth (whose cause of citizen journalism is all about picking the story out of masses of raw data). To my mind, there is scope for these three individual agents to work collaboratively to bring to market a combined offering that would be larger than what they could achieve on their own.

And that is the challenge of building a creative community. There is more to it than simply joining the creative hotspots. Those connections need to amount to something larger than the individual parts. The first Suffolk Jelly may not have achieved that because there remains a great deal to be done. However, it was a very valuable first step in the right direction.

Click Here for details of the Jelly.

Click Here for press coverage of the event.

© The European Futures Observatory 2011

The Many and the FEW

2011-11-05T12:24:00.001Z

The whole premise of our ‘Communities of the Future’ project is based upon two assumptions. The first is that, by 2025, global population will have increased from its 2000 level of 6 billion to a new level of 8 billion. These are ‘the Many’. This is a mid-range estimate, and there is a likelihood that population could be higher or lower than that figure. However, for the purposes of the project we shall assume that the mid-range figure will be more or less correct.

One of the implications of this rapid population growth is that we shall need to grow more food. In doing so, we shall use more energy and we shall use far more water. The second assumption is that the supply of these resources is either fixed or growing at a rate that is slower than the growth in demand for these resources. For our purposes, we shall assume that the growth in demand far outstrips the growth in the supply of resources, giving rise to a period of acute scarcity. These scarcities are likely to be further exacerbated by the impact of climate change and peak oil.

In the period to 2030, we do not envisage a substantial change away from the reliance upon the price mechanism as a means of allocating scarce resources. There is a case for a more formal rationing system for key resources – such as electricity – towards the end of the period, but we do not feel that a consideration of a fundamental change in the current distributional system is warranted.

In which case, the era - as we see it - will be one of high prices for basic commodities. This is likely to cause a certain degree of social stress, as we see the incidence of fuel poverty rising and we see the possibility dietary standards declining. However, it does create an incentive for the construction of social technologies to counter this. We feel that people are likely to become more communal and sharing in their lifestyles, as a means of coping with the problems that they face. The challenge to social enterprises will be to create the institutional structures to deliver a more sharing way of living.

Initially, high prices for basic commodities will act as a brake upon commerce (this is the ‘income effect’). The high cost of inputs is likely to reduce the levels of economic activity for the first part of the period under review. However, this will also create a commercial opportunity for those creative enough to find it. The initial shock of rising prices is likely to stimulate ways of using resources more effectively (the ‘substitution effect’), and those entrepreneurs who unlock the substitution effect are set to do very well.

Ultimately, the relative high price and scarcity of resources will stimulate investment in resource saving technologies. We see these as starting to have an effect towards 2030. This investment is likely to act as a stimulus to economic growth – ‘green’ economic growth!

© The European Futures Observatory 2011

Click Here for more information about the ‘Communities of the Future’ project.

Click Here for more information about the session ‘The Many and the FEW’.

China To The Rescue?

2011-10-03T17:20:00.001+01:00

There are those who take the view that the emerging Asian economies – especially that of China - might prove to be the salvation of Europe and America. This view rather neglects the unfortunate fact that the Asian economies – especially that of China – have problems of their own and it may not be entirely convenient for them to act as a rescuer to western economies. China, in particular, is suffering from an economy that is in danger of overheating. Inflation is rising and an awkward looking property bubble is forming on mainland China. Asking the government of China to add to that inflation seems to be unrealistic at best.

The size of trade deficits between China and both the Eurozone and the US has allowed the exchange rate to be used as a vehicle of monetary tightening. There has, in recent months, been a slow appreciation of the Chinese currency against the US Dollar and, to a lesser extent, the Euro. The main motive for this appreciation has been to act as a check upon domestic inflation within China rather than to act as a device to stimulate demand for American and European goods. However, the degree of appreciation has been nowhere near the levels needed to provide a stimulus for the sluggish Western economies. The Chinese government continues to manage the exchange rate in a way that minimises the possibility of internal unrest, which means that all changes are slow and deliberate. This is not set to change.

Monetary conditions within China now require a tightening. However, this policy also requires a great degree of finesse. The exact quantity of non-performing loans in the Chinese monetary system is unknown, but is thought to be much higher than in Europe, the US, and even Japan. Some estimates suggest that the degree of non-performing loans could be as high as a third of the assets on the balance sheets of Chinese banks. If the monetary authorities tighten too hard, this could expose the volume of these non-performing loans at exactly the wrong time, triggering a Chinese banking crisis. If the monetary authorities are lax in their tightening, then they might not deal effectively with the inflation that is weakening the Chinese banking system to begin with. In either case, a wobble in the Chinese banking system would have major global consequences.

It is worth considering how and why such a wobble might take place. In recent years, Chinese local authorities have been forming large numbers of joint ventures with the private sector bodies. A principal objective of the joint ventures has been to buy and develop property, especially throughout the eastern seaboard of China. The joint ventures have received preferential access to banking funds – often controlled or heavily influenced by the local authorities – to finance the investments. The allocation of capital has not always been on the strictest of commercial considerations. Not all of the loans made are fully performing. It would appear that, over this summer, the number of defaults in the Chinese banking system have started to rise.

We can expect this process to continue. As the Yuan continues to appreciate, as interest rates continue to rise, and as banking reserve ratios continue to creep up, the availability of new finance in China will diminish. This will have the effect of reducing demand in the property sector, which will lead to property prices softening. If panic sets in, as happened in 2009, prices could fall quite sharply to expose the weakness of many property funding arrangements. In itself, this will not readily transmit into the monetary system. One possible response by the Chinese central bank could be to ease credit in the face of a property bust. However, a consequence of that policy would be to rekindle the inflationary forces that are currently being dampened down. If, as is more likely, the monetary tightening were to continue, even in the face of a weakening property sector, the problem could easily transmit from the property sector into the financial sector.

If the property sector were to crash, it is likely that many property investors would also liquidate their stock holdings to cover their property losses, as far as they could. We could almost say that this is happening already. Since 2009, the Chinese economy has grown by over 9% per annum, whilst the stock exchange is trading at broadly comparable levels in nominal terms. If we factor inflation into the picture, then it is true to say that the stock exchange has witnessed negative real growth between 2009 and 2011. This partly reflects the flight of capital from China to the relative safe haven of the US (the Dow Jones Index is up by 20% over the same period, even allowing for a bad summer in 2011), but it also reflects the liquidation of stock holdings to cover losses in the property market.

At present, the effects of all of this have been fairly mild. There is a reasonable risk that such an event could become substantial. In April 2011, Fitch warned that it was changing its stance on Chinese local currency denominated debt from ‘Stable’ to ‘Negative’. The debt currently has an AA- rating, but could well be downgraded in the near future. If it were to happen, then the repercussions would be felt well beyond China. A run on the Chinese banking system could be accommodated by the Bank of China, but not without recourse to the repatriation of holdings of overseas debt that it owns. It is not unreasonable to conceive of a run on Chinese banks leading to a run on the American banking system in fairly short order. Beyond that, the contagion would spread to the global banking system quite rapidly.

At the moment, few observers have factored into their calculations the possibility of a renewed financial crisis originating in Asia. We feel that they ought to. There is a reasonable chance of financial instability emanating from the region, and we feel that the current view that Asia will rescue the European and North American economies is nothing more than fanciful.

© The European Futures Observatory 2011

Time For QE2?

2011-09-26T17:35:00.000+01:00

Despite Project Merlin, it would appear that there is a problem with the UK banks lending to UK non-financial corporations. The graph indicates that, since 2009, lending has been negative in absolute terms. If we factor in an inflation rate in the region of 5%, then lending in real terms has been negative since about 2008.

The policy of quantitative easing, where the Bank of England injected £200 bn into the monetary system, lowered interest rates to an effective nominal rate of about -2.5% in nominal terms and stimulated GDP by about 1.5% to 2%. This was a great success. It meant that we suffered a recession instead of an economic slump. However, it was also something of a blunt instrument in that much of the injection did not make it to the real economy. The policy also diverted cash from one idle pool of money (the gilts market) into another (the stock market). It is no accident that the FTSE 100 share index rose by 50% during the period in which the Bank of England made its purchases.

That, of course, does not mean that the policy would continue to work if it were to be repeated. For the policy to work, there needs to be a more direct link between bond purchases and bank lending. The proposal for QE2 to but bank bonds rather than gilts might go some way to address that problem. It would be a way to give Project Merlin some teeth. There is the possibility of some capital loss on the part of the Bank of England, but given the levels of profit made during the onset of the credit crunch, these do not need to be substantial.

If monetary policy is to be the chosen route - and I have to say that a fiscal stimulus aimed at low income families would be more preferable - then a monetary easing directed at small business is unlikely to do much harm. It may even help to boost growth a bit.

© The European Futures Observatory 2011

Tackling the slump: Money for something | The Economist

Not Quite The Whole Truth

2011-09-25T10:34:00.002+01:00

This is a curious example of a story not quite telling the whole truth. We are told that "Britain's banks, moreover, are not among the most exposed to Greek debt. " That part is true. But it is not the whole truth. French and German banks hold about two thirds of the Greek sovereign debt. Any action to prop up Greece, is also action to prop up the French and German banking systems - a point missed by many French and German voters.

However, from where did the French and German banks get the money to buy Greek sovereign debt? It is the case that British banks lent the French and German banking system over €1 trn. Any pain felt by French and German banks will be quickly transmitted to the UK banking system. From this, we ought to deduce two conclusions. First, nobody can afford to be smug about the pain of others. We are all in this together. Second, any politician who claims that the cost to their constituency of a Greek failure would be minimal either knows the truth and is not telling it, or doesn't know the truth and really ought to.

© The European Futures Observatory 2011

£1.75 trillion deal to save the euro - Telegraph

Who Will Look After Little Brother?

2011-09-21T17:02:00.001+01:00

One potential debt crisis that has escaped our attention so far this year is that of the US States. An interesting feature of the American political system is that the political sub-units – the US States – enjoy a greater deal of fiscal freedom than many political sub-units elsewhere in the developed world. Whilst US State governments follow a more integrated monetary policy, which tends to reflect a national agenda, they also have the ability to pursue a more independent fiscal policy.

To this extent, the US system is comparable to the Eurozone. We must not follow the analogy too far because the American States are different to the Eurozone nations in that they have more of a common heritage, a common language, and a tradition of openness within a broader economy than the EU has yet to develop. And yet, we cannot but help to think in terms of California having a GDP similar to Italy, or Wisconsin the size of Ireland, and so on. It is instructive to do so when considering the issue of potential monetary instability.

The average fiscal deficit to GDP ratio in the Eurozone is about 4.2%. This average hides a wide dispersion of results, from a Greek deficit of about 10.0% of GDP to a German deficit of about 1.7% of GDP. The situation in America is slightly different. The estimate for US Federal debt is about 9.0%, which is in the ball park in comparison with some of the Eurozone nations. However, the average State debt is about 16.5% of State GDP, which is a figure that makes Greece appear to be fiscally prudent. There is some debate about the accuracy of these figures (State GDP is very hard to measure in a fluid and open economy such as the US), and we have to remember that there is also a political agenda to their estimation. Additionally, there is also a greater deal of dispersion around this mean, from Wyoming (with a deficit of about 6% of State GDP) to Massachusetts (with a deficit of about 25% of State GDP).

If we believe that the US State deficits and the US Federal deficit are additive, that would imply total public debt in the US of about 25%. This seems rather large to us, and suggests that an element of double counting has crept into the estimations. Nonetheless, we are comfortable with the conclusion that US States deficits are worse than those of the Eurozone nations, and that there is a greater variation of experience with the deficits of the US States. All of this remains hidden by the US Dollar being the world reserve currency. Just as the weaker Eurozone nations have hidden behind the collective strength of the Euro, so the US States have hidden behind the US Dollar being the world reserve currency. This has kept down the cost of borrowing for US States and has made funds more readily available than the fiscal environment would otherwise have offered without this feature.

Looking into the future, one wonders how long this will last. If the US credit rating suffers further deterioration, then there may well come a point where the position of the US States is re-evaluated in the bond markets. Just as the more vulnerable Eurozone nations have suffered the scrutiny of the bond markets, so could the weaker US States, such as Michigan or California. If that were to happen, then rather unfortunate consequences could result. In thinking about what could happen next, we have found the case of the near bankruptcy of New York City in the 1970s to be instructive.

The relative fiscal independence of the US States means just that – they are responsible for themselves. If their finances were to come under pressure, then there is no automatic mechanism whereby the Federal government would have to bail them out. If the Federal government took a position of moral hazard – that those who made the mess have to clear it up – then it is quite likely that the State governments would respond by increasing revenues (charges as well as taxes) wherever possible, along with the more likely policy of cutting back expenditure very hard. Even today, it is not entirely unknown for the staff in some States to be paid in IOUs, which are redeemed for cash by a credit union or bank. We could well see a lot more of this. It is at this point that one of the great strengths of the US economy becomes one of its weaknesses.

Although there is some migration between nations in the EU, by and large, European populations are having to bear fiscal austerity. The tax base is relatively stable and the pain of spending cuts is simply endured. This is not so in the US. Given the open nature of the US economy, given the fluidity of its labour market, and given the relative homogeneity of the population, it is far easier to move house. Often to a different State. It is relatively easy to move from fiscally imprudent New York to fiscally prudent Connecticut – you would simply be moving further up the commuter line. This feature creates an instability to the State finances. It is generally the case that the tax base is highly mobile (and will pack up and leave if taxes are seen as too high), whilst the spending base tends to be immobile. The tax base moves out, whilst the spending base stays put. For a State under pressure, this will make the situation worse.

In this future, if it came to pass, the Federal government would have to bail out the State, much as it eventually had to with New York City in the 1970s. Not because it has to, but because it is in its interest to do so. The cost of such bail outs would be truly staggering, and we can see why the Federal government is reluctant to contemplate it. This completes the circle, because a failure to contemplate the downside of the finances of the US States may well lead to a further downgrading of the US by the ratings agencies.

Most visions of the financial future do not account for adequately the inherent instability that the US State finances could contribute to the global monetary system. We feel that this is a mistake. We fear that the realisation of this weakness could lead to a sudden correction in valuations that itself could become a destabilising factor. Then we will all be wondering who will look after the little brother.

© The European Futures Observatory 2011

Has The Giant Stumbled?

2011-09-12T14:54:00.001+01:00

The US has had a poor year to date. The American recovery started to run out of steam in the spring, the second round of Quantitative Easing ended in the first half of the year, and the question of Federal debt has come under the spotlight. The key debt issue was the raising of the Federal debt limit. Eventually, a temporary compromise solution was found, but the process of reaching this compromise has demonstrated the polarised nature of American politics and has weakened considerably the position of President Obama. It was for this reason that the US credit rating was downgraded from AAA to AA+.

The long term consequences of this downgrade have yet to emerge, but there are three factors to be aware of as we move into the future. First, could we take this as the opening move in the US Dollar losing its status as the global reserve currency? It is not quite a ‘Suez Moment’, but has the potential to start the process by which one emerges. How America would respond to these events is uncertain, but the world needs certainty right now, not more uncertainty. Second, the cost of borrowing in America is likely to rise in the long term, thus muting the economic recovery – which is already weak. It means that the world can no longer rely upon the American consumer to generate a recovery. Exactly where we should look for this engine of growth has yet to become clear. Thirdly, the political intransigence in America makes effective US Federal debt reduction appear even more remote. One political grouping will veto all tax rises. Another group will veto reductions in defence spending. And a further grouping will veto spending reductions on healthcare and welfare spending. It is not helpful for America to have a polarised and intransigent political system, but that is exactly what it has.

The political classes in the US are rather hoping that growth in the economy will move them out of the difficulties which they now face. With growth, overall tax revenues will rise, leaving the spending commitments much more affordable than they presently are. The question then is whether or not a presumption of growth is reasonable. In assessing this question we need to consider the point at which we are starting. The US has been hit hard by the recession. According to the US Bureau of Economic Analysis, GDP (which it measures in 2005 constant dollars, a practice which we shall continue) fell by about 6% between 2007 and 2009. During this time, US unemployment roughly doubled from abut 5% to about 10%. A recovery has been under way, but the level of GDP is still below the 2007 level and unemployment remains about the 9% level. The growth there has been is well below trend.

More worryingly, this growth has been achieved with the benefits of a $1.2 trn fiscal stimulus and two bouts of quantitative easing to the tune of $2.3 trn. The prop of quantitative easing has now been removed for the moment. Some of the temporary fiscal stimuli are also now coming to the end of their mandate. On top of this, the agreement to raise the debt ceiling institutionalised further cuts in federal spending of between $2.1 trn and $2.4 trn, depending upon whether a consensus is reached about where spending cuts and tax increases are to be incurred. Either way, the public sector support for the US economy is likely to become much reduced this year. It is for this reason that a softening of the US economy looks likely, and a double dip recession is not exactly off the agenda.

In the longer term, US politicians are relying upon the private sector to generate the growth needed to jump start the economy. This is unlikely to come through US exports – the overseas customers of US firms are likely to be facing the pinch just as much as US consumers. A weakening dollar may provide some relief to US exporters, but not at the levels needed to revitalise the economy. Both the private household sector and the private corporate sector are currently looking to repair their balance sheets, which has led to some poor consumption and investment figures. As households retrench, so will the corporate sector, as the prospects for future profits become even more limited. If there ever was a case for a fiscal intervention, now would be it.

Which brings us back to the political malaise in Washington. One of the interesting things about the American Constitution is that it is the product of conscious design. It hasn’t evolved and fallen together as the British Constitution has, but was actually designed in a way that checks and balances would prevent too great an accumulation of power. It was, however, based on a presumption of a willingness to compromise, and that willingness has been lacking in recent months. To an outsider, it seems as if the political system has been hijacked by extremists who would willingly destroy their country rather than reach an accommodation with those who do not share their view. If the extremists fare well in the elections next year, then we can expect the US economy to show sluggish growth for the rest of this decade. A modicum of common sense is a necessary, but not sufficient, condition for an American recovery.

It is possible to design a fiscal stimulus that does not increase the US federal deficit. For example, renewing the mandate to extend unemployment cover, to be paid for by a tax on the idle balances of the rich or a levy on tax-payer funded banking profits is not beyond the scope of most governments. By definition, the taxes would be levied on dead money and given to those who are most likely to spend them. If the idea of giving money away sounds too socialistic, then the unemployed could be asked to work for their benefits on a myriad of socially useful, but commercially unattractive, projects. Surprisingly, this is exactly what the financial community is looking for – a credible deficit reduction plan that enhances growth.

There is the possibility that if America does not find this way internally, then it may be enforced by an external authority. The Chinese Government – a principal creditor of the US – has already expressed its displeasure at recent events in Washington. There is evidence to suggest that China has fallen out of love with US T-Bills and is currently diversifying into other currencies. If this were to become a more clearly defined trend, then the prospect of rising interest rates in the US would be a very unwelcome turn of affairs. It is within the gift of China to force the issue through the bond markets and it is important for the political classes in America not to have the issue forced. Again, Washington needs a credible deficit reduction plan that enhances growth. We fear that if this is not achieved, the the AAA status may not be regained, and the US may even be downgraded further.

This is not to say that the future for the US economy is all bleak. It is entirely possible for the US to enter into a virtuous circle by resuming a growth path. However, to do so will require very skilled political leadership, and that is what we are looking for when we review American economic prospects in the medium term.

© The European Futures Observatory 2011

How Deep Are A Gnome’s Pockets?

2011-09-07T15:41:00.001+01:00

Harold Wilson once famously railed against Swiss bankers – who he dubbed the ‘Gnomes of Zurich’ – when he felt that they were unfairly driving down the value of the Pound. How things have changed. Bankers other than the Swiss variety have recently been depositing their funds in Swiss Francs as a result of the uncertainty over the Euro and the US Dollar. The Swiss Franc has been seen as a ‘safe haven’ currency, which attracts large volumes of liquid funds when the financial environment seems excessively risky. The result of this has been to drive up the value of the Swiss Franc, causing the Swiss Central Bank to worry about the deflationary and recessionary consequences of a general deflation.

What to do? The traditional response would be to reduce interest rates, to make the Swiss Franc less attractive to overseas investors. The problem is that Swiss interest rates are, like those elsewhere, virtually at rock bottom. If the Swiss authorities could persuade others to raise their interest rates, then Swiss rates could fall in relative terms. The problem is that there is no great appetite for to help Switzerland in the international community. Other nations feel that they have who have too many problems of their own to co-operate with Switzerland.

That leaves managing the external rate of the Franc as the only option open to the Swiss authorities. The only tool that they have are open market interventions. If Switzerland had a regime of strict exchange controls, then managing the external rate would be much easier. It would also destroy the Swiss banking industry, which relies upon funds freely flowing into their coffers. Market intervention is a costly business. It is reported that the Swiss National Bank (SNB) has lost SwFr 10 bn already this year on defending the currency. Now that the markets sense a vulnerability – one that is possibly unsustainable – there is an incentive to bet against the Swiss Franc until the SNB runs out of money.

It is at this point that we shall see exactly how deep are the pockets of a gnome.

© The European Futures Observatory 2011

Switzerland abandons floating exchange rate in dramatic 'currency war' twist

Swiss move to make its safe-haven less attractive

Swiss gloves come off in battle over value of franc

A Sick Old Man?

2011-09-05T14:59:00.001+01:00

The economic case against Europe is well rehearsed. The longer term case against Europe is one of demographics. The population of Europe is ageing, and, if nothing changes to the contrary, the dependency ratio of workers to non-workers is likely to fall to the point where a severe shortfall of workers (and their tax receipts) occurs. So far, the discussion has focused upon reducing the fiscal impact of an ageing population, without considering other remedial measures that could be taken.

In the short term, the Eurozone has become a monetary union without an effective mechanism to deliver fiscal co-ordination. As a result, the weaker economies of Portugal, Ireland, Greece, and Spain have been allowed to borrow way beyond a prudent level with very little adverse consequences. Equally, the Euro provided a vehicle whereby the stronger Eurozone economies – particularly those of Germany and the Benelux nations – could power ahead faster than they otherwise would have done. An imbalance was created between the stronger and weaker Eurozone economies that has now become unsustainable.

The present situation in Europe needs greater fiscal discipline on the part of the weaker Eurozone economies and a greater fiscal transfer system on the part of the stronger Eurozone economies. Over the course of the summer, we have been inching towards this solution. We can hope that the process will continue, but perhaps with greater speed than we have seen to date. Interestingly, this could have two important long term consequences. First, we could see an inner core to the EU that has a high degree of monetary and fiscal integration – the ‘two speed Europe’. Second, that inner core could emerge as quite a strong economic force in the global economy, particularly when compared to America. After all, the Eurozone as an economic unit has a GDP to rival that of the US, the Eurozone is more of a trading force in the world economy, and, despite all of the adverse comment in the press, the Eurozone as a whole has a lower debt to GDP ratio than the US. A more integrated European economy would be a welcome result from the present malaise.

For this to happen, a number of institutional innovations need to be devised. Presently, Europe is relying upon the ECB to purchase the sovereign bonds of the Eurozone nations – a form of European wide quantitative easing. It is difficult to see how this could go on into the long term without the re-capitalisation of the ECB (the ECB has reserves of about €0.5 trn, whilst some commentators suggest that €1.5 trn to €2.0 trn might be needed to effectively stabilise the Euro). There is a case for such restructuring to be accompanied by the issuance of Euro-Bonds. In effect, this would create a fiscal union to parallel the monetary union within the Eurozone. It could, if constructed properly, actually force the weaker Eurozone nations to adopt greater levels of fiscal discipline. For example, if the issuance of Euro-Bonds were to be limited to the Stability and Growth Pact limit of 60% of GDP – an idea first floated by the Bruegel Institute – with the excess being raised under the present conditions, then it would allow nations such as Greece to have about half the sovereign debt guaranteed by the collective Eurozone nations, with about a further half to be raised under the credit-worthiness of Greece as a sovereign nation. As things currently stand, this is a move expected by the bond markets but resisted by the national politicians of the stronger Eurozone nations at the behest of their voters.

This disparity between market expectations and the willingness of politicians to act is nudging events along the course outlined above. The last final step – the issuance of Euro-Bonds – is looking ever more likely if the Euro is to remain as a currency. If the threshold of Euro-Bond issuance is not crossed, then it is difficult to see how the Euro would remain as a currency. If Euro-Bonds were to be issued, then the Eurozone would be free to concentrate upon the fiscal impact of ageing European populations. Much of this discussion has been the result of straight line thinking. It has been concerned with the shrinking of the tax base and the expansion of the welfare base. This approach, however, might be a bit premature.

Across Europe, governments have been taking steps to make their future pensioned populations less of a fiscal burden. Retirement ages have been increased, contributions to retirement schemes have been increased, and less generous entitlements have been devised. All of which act to lessen the impact of future pension spending upon the public purse. The argument about the dependency ratio is also unlikely to ring true. When faced with labour scarcities, Europe has traditionally imported labour, rather than relying upon the natural growth rate of the population. This helps to maintain the tax base. It can be achieved in one of two ways – the first is to increase the number of young people in the EU through the accession of nations with relatively young demographic profiles. The case of Turkey is one to watch in this area. The second way of increasing the number of young workers is to attract them as ‘guest workers’ through schemes such as the ‘Blue Card Scheme’. This may well inform EU policy towards North Africa in the near future. Together, the redefining of retirement combined with an influx of young workers are likely to reduce the fiscal impact of an ageing population.

In all of this discussion we must remember that it is entirely possible that the Euro could still collapse. Equally, we must not under-estimate the political will to keep it afloat. That political desire to keep the Euro afloat is nudging the Eurozone towards a closer fiscal union to match the current monetary union. As a result, Europe of the future could become much stronger commercially than it is today. At that point, those EU nations that are outside the Eurozone, such as the UK and Denmark, may come to regret the decision to stay out.

© The European Futures Observatory 2011

An Unholy Trinity

2011-08-30T16:56:00.001+01:00

Few would disagree with the view that the economies of the world are in turmoil. The news this summer has been dominated by the twin sovereign debt crises of the Eurozone and the US. The case of Europe is well rehearsed. The Eurozone has become a monetary union without an effective mechanism to deliver fiscal co-ordination. As a result, the weaker economies have been allowed to borrow beyond a prudent level with very little adverse consequences. Equally, the Euro provided a vehicle whereby the stronger Eurozone economies could power ahead faster than they otherwise would have done. An imbalance was created between the stronger and weaker Eurozone economies that has now become unsustainable.

Equally, the US has had a poor year to date. The American recovery started to run out of steam in the spring, the second round of Quantitative Easing ended in the first half of the year, and the question of fiscal stimulus and Federal debt has come under the spotlight. The key fiscal issue was the raising of the Federal debt limit. Eventually, a temporary compromise solution was found, but the process of reaching this compromise has demonstrated the polarised nature of American politics and has weakened considerably the position of President Obama. It was for this reason that the US credit rating was downgraded from AAA to AA+.

It could be argued that both of these crises have been exacerbated by weak political systems, and that political reform needs to underpin any effective recovery strategy. This is what we know about already. It has our attention. As a futurist, however, I am intrigued and concerned by what I don’t know. What are the factors that we are overlooking and which may appear important in the future? There are two other major issues that have attracted far less attention – mainly because they are a lot less pressing at the moment – the financial position of the US States and the fragility of the Asian banking system.

Our focus in North America this year has been with the US Federal debt. Another sovereign debt crisis currently developing concerns the finances of the US States. The position of the States reflects the Federal position in that effective deficit reduction is blocked by special interest groups, who obstruct both spending reductions and tax increases. As a result, the levels of State debt have risen considerably in recent years. This is fine, as long as lenders are willing to finance the deficit spending. If the reserve currency status of the US Dollar is weakened, then an immediate impact for the US States is likely to be an increase in the cost of borrowing and a greater unwillingness to lend to them. If the weaker US States were to experience probing by the markets at the levels that the weaker Eurozone nations have experienced this year, then it is likely that the consequences would result in a significant disruption to the US financial system. This vulnerability and the risk of the downside has not been factored into many current economic forecasts. It is possible that US Federal debt could be downgraded even further because of the parlous condition of State finances.

There are those who take the view that the emerging Asian economies – especially that of China - might prove to be the salvation of Europe and America. The size of trade deficits between China and both the Eurozone and the US rather argues against this case. Hopes for an export led recovery in Europe and the US both require an appreciation of the Chinese currency. This has happened to a certain extent – mainly as a device for the Chinese government to keep inflation in check – but nowhere near the degree needed to do the job effectively. The Chinese government continues to manage the exchange rate in a way that minimises the possibility of internal unrest rather than to alleviate recessionary conditions in Europe and North America. This is not set to change.

Monetary conditions within China now require a tightening. Effective action will take a great degree of finesse. The exact quantity of non-performing loans in the Chinese monetary system is unknown, but is thought to be much higher than in Europe, the US, and even Japan. Some estimates suggest that the degree of non-performing loans could be as high as a third of the assets on the balance sheets of Chinese banks. If the monetary authorities tighten too hard, this could expose the volume of these non-performing loans at exactly the wrong time, triggering a Chinese banking crisis. If the monetary authorities are lax in their tightening, then they might not deal effectively with the inflation that is weakening the Chinese banking system in any case. In either situation, a wobble in the Chinese banking system would have major global consequences. The risk of an event of this type has not been factored into many economic forecasts, which assumes ‘business as usual’ in China.

We are of the view that there are three systemic weaknesses in the global monetary system at present – in the Eurozone there is the possibility of disintegration, in the US there is the risk of ineffective debt reduction programmes at both the State and Federal level, and in Asia there is the risk of financial implosion caused by non-performing loans within the financial system. Together, they provide an ‘Unholy Trinity’ of problems facing the world economy. Their resolution requires a degree of political leadership that doesn’t appear evident at the moment, and a degree of consensus building at both the national and international level. To date, that co-operation has been lacking as the various parties have been unwilling to lay aside their narrow interests for a greater common good. For that reason, we are of the opinion that the current economic outlook is likely to be a lot rougher than it otherwise needs to be.

© The European Futures Observatory 2011

The Output Gap In Pictures

2011-08-27T12:00:00.001+01:00

This is a really useful chart because it shows a comparative estimate of the output gaps of various countries. In a previous post, we calculated the US Output Gap to be about 10%. Interestingly enough, this is a figure that The Economist has independently arrived at. What is of concern is the UK Output Gap, which is estimated at about 13%. We feel that this is a bit high, not because economic activity is greater than estimated, but because we feel that economic potential has been severely eroded by the recession.

To be frank, what we mean is that there are now youngsters who will never work because they haven’t developed the habit of working in their formative years. This is the human cost of recession – blighted lives. It is a legacy that far too many politicians forget about until social turbulence moves from being an abstract concept to being disorder on the streets.

© The European Futures Observatory 2011

http://eufo.blogspot.com/2011/08/risk-of-inflation.html

http://www.economist.com/node/21526392

The Risk Of Inflation

2011-08-17T16:40:00.001+01:00

How close are we to seeing a bout of prolonged inflation in the US? This might seem an idle question, but it is one that has quite important consequences for the US economy in the medium term. The Federal Reserve has, over the past couple of years, undertaken a major monetary expansion to support the US financial sector. It has done so though a policy of historically low interest rates - which it has signalled will continue to 2013 - and a policy of quantitative easing - which has injected about $2.3 trn into the economy. To those of the monetarist persuasion, a roaring inflation is just around the corner.

This might not be the case. A monetary expansion might be a necessary condition for an inflation, but it is not a sufficient condition on its own. A monetary expansion also has to work with a combination of the right supply and demand conditions to produce an inflation. For us, the key question is whether or not those conditions prevail at the moment. There is no doubt that prices are rising on the supply side. In particular, food prices, heating costs, and transportation costs are pushing up prices on the supply side. And yet this cost push is not igniting the flames of an inflation on the demand side. Rather than seek higher wage settlements, consumers are accepting a reduction in their living standards instead. This is because a sluggish economy has had the effect of dampening down demand for goods and services. Companies are absorbing rising input costs for fear that end user price rises would drive away their customers.

In terms of economics, we are seeing a muted demand response to the monetary expansion owing to the size of the ‘output gap’. The output gap is the difference between what GDP currently is and what GDP could have been if the recession had not occurred. Using US Bureau of Economic Analysis figures (which are expressed in 2005 constant dollars), we estimate the output gap to be in the region of $1.5 trn. This is probably an overstatement of the gap because the recession is likely to have forced a number of economic participants out of the jobs market completely. Put another way, it implies that the US economy could grow up to about 10% this year before experiencing a profound number of inflationary pressures.

Of course, the risk of inflation might be low now, but it does remain in the medium term. Should the US economy return to anything like the trend growth path, then prices will harden and wage settlements are likely to start to creep up. We expect that the US politicians will allow inflation to take hold for a while. After all, the two ways to reduce the impact of the US Federal debt pile are economic growth and inflation. If the two are combined at the same time, then so much the better. However, it is easier to start a prairie fire than to put it out, and the prospect of an inflation being created deliberately for a short term gain may well come to be seen as politically irresponsible. For the moment, though, the risk of inflation seems to be quite low.

© The European Futures Observatory 2011

Joining The Dots

2011-08-16T16:59:00.001+01:00

Sometimes, a bit of foresight is not what is wanted. As I was watching the riots in London, I was reminded of a piece that I wrote in 2008 about society moving from NICEY (the Non-Inflationary Continuously Expanding Years) to NASTY (the Non-Accelerating Socially Turbulent Years). The point is a simple one. When the economy is doing well, most improvements trickle down into most parts of society, and economics comes to dominate politics. When things are not going well in the economy, the pain is rarely shared equally, and politics become dominated by the social impacts of where the pain is felt. There was an element of this in the recent rioting in the UK.

The recent disorder in the UK, however, is not a game changer. We are currently about a week on from the disorder. The streets have been cleaned up, many businesses affected are operating again, and many of the offenders have been identified, arrested, and have made an appearance in court. In 2008, we were more concerned about the potential for unrest in China, which we felt would be a game changer. That is probably why it hasn’t happened. There are still bouts of unrest in the western provinces of Xinjian and Tibet, but nothing so far has threatened the stability and authority of the Chinese government. For this we are grateful.

Looking to the future, the risk of disorder remains, right across the world. We still rather imperiously divide the disorder into that we like, such as that in Libya, and that which we dislike, such as that in Bahrain. The root causes of the discontent – poverty, lack of opportunities, and sheer boredom – still remain. Until the world economy starts to grow again, this risk of disorder is unlikely to abate.

Those of us watching the future need to be mindful of this in our work.

© The European Futures Observatory 2011

http://eufo.blogspot.com/2008/11/from-nicey-to-nasty.html

Another Chain Of Events In Africa

2011-07-14T20:01:00.001+01:00

This map shows a tragedy in the making – a point where the future is about to crash into the present. The causal chain is quite simple, but the implications are very complicated. If we accept the case of climate change and the desertification of the Horn of Africa, then we can expect to see an increase in the years in which the rains fail. It is likely to induce a negative feedback loop – less rain means crop failures, which induce greater soil erosion, which act to lower crop yields per acre, which serve to reduce familial incomes in the Horn of Africa. We have the prospect of hunger today and hunger tomorrow as well. However, from the safety of the West, we need to consider the geopolitical implications of this.

The drought is being experienced in two very fragile states – Somalia and Ethiopia – and one state that, though not fragile, could well become fragile if it experiences too much economic stress – namely Kenya. This, perhaps, is the more worrying development. Kenya is a viable state. However, it does suffer from the legacy by being a political entity that stitches together a complex patchwork of tribal relationships. In periods of fragility, those relationships can boil over into inter-tribal violence. If that happens, then we could possibly see the de-stabilisation of East Africa.

This ought to be concern to us for two reasons. The first is that those likely to benefit from this de-stabilisation are likely to be hostile to Western interests. The second is that the area occupies an important point in the global supply chain upon which the West relies. The impact of piracy and disorder emanating from Somalia is currently interrupting trade flows from the Indian Ocean through the Suez Canal. A potential ds-stabilisation of East Africa would give the pirates a greater operational area in the Indian Ocean, which could disrupt global trade flows even further. It would certainly increase the cost of the naval policing of these waters at a time when budgetary constraints are limiting the abilities of Western navies to respond to this challenge.

This is why the alleviation of global poverty ought to be fairly high on our list of things to do. Strangely enough, spending public money on overseas aid and poverty relief may actually save us a greater sum of money not to be spent in dealing with the disorder coming from failing states.

http://www.economist.com/node/18929467?story_id=18929467

© The European Futures Observatory 2011

An American Default?

2011-06-28T11:07:00.001+01:00

Whilst most eyes are fixed upon the possibility of a Greek default at the moment, the possibility of a far more serious default is looming. The Federal government in America is scheduled to hit its borrowing limit – the maximum that Congress allows the government to borrow – this summer. It is possible that Congress will allow the limit to be raised, but the political strings attached seem to be causing political gridlock in Washington at the moment. Congress has tied the increase in the borrowing limit to a deficit reduction plan. There is no real consensus at to whether tax increases or spending cuts should form the prime feature of the deficit reduction plan, and lines are drawn broadly on party lines.

The interesting question is what happens if America defaults? It should be noted that in terms of sovereign debt, a default occurs when an interest payment is one day late. It appears that a major interest payment is due on August 15th and the CDS markets are pricing in a default. Volumes of CDS trades have increased dramatically over the past couple of weeks and the one year CDS spread is now priced in similar terms to the five year spread. This does not augur well.

Evidence suggests that if the US does default, then US Treasuries could be subject to an additional risk premium of about 60 basis Points (i.e. of 0.6% per annum). This doesn’t sound much, but it is an additional cost of $86 billion a year to the Federal exchequer. To put this into perspective, it’s roughly the size of the Federal spend on pre-primary to secondary education in 2011. The cost of gridlock in Washington roughly equates to the Federal education budget.

I find it hard to believe that an advanced society will allow such political brinkmanship. If there ever was a case for the institutions of a New Enlightenment, then this is it!

http://www.economist.com/node/18866851

© The European Futures Observatory 2011

Is The Well Running Dry?

2011-06-27T15:54:00.001+01:00

This little graph tells us quite a large story, not only covering the past sixteen years, but also for the rest of this decade and possibly beyond. It shows two distinct phases in the recent economic history of the US. The first was between 1998 and 2001, a period where the actual output of the US economy was appreciably greater than the potential output. This shows the unsustainable boom of that period, leading to the inevitable bust at the beginning of this century. The second phase is from 2007 to the present, and possibly beyond. The credit crunch, financial bust, and the resultant recession have resulted in actual GDP falling appreciably short of potential GDP. In ball park terms, the US economy could expand by about three quarters of a trillion dollars just by fully using the unemployed and under-employed resources within the economy.

This is a cause for concern. The growth in the US economy over the past two years have been the result of a major fiscal stimulus (about $1.2 trillion) and an unprecedented monetary expansion through a double bout of quantitative easing (about $2.3 trillion). The monetary expansion ends this week. Whilst it is not suggested that a monetary contraction will take place, it is also highly unlikely that a third round of quantitative easing (QE) will take place. The removal of the monetary life support is likely to have something of a contractionary impact this winter (it takes about nine months for the impact to be felt). It may be the case that US unemployment starts to nudge back up towards 10% this year.

One of the areas in which the impact will be felt is in American fiscal policy. A good part of the two rounds of QE has been used in buying US Federal bonds. If this buyer of bonds is no longer in the market, then we can expect to start to see the yields on US Federal debt start to rise, which could start to place a strain on the US Federal deficit. At some point, the US President – if not the current one, then certainly the next one – will have to tackle this issue. It is not too difficult to foresee a period of fiscal austerity in the US, akin to the austerity measures now being enacted across Europe, in the later part of this decade.

This has a number of implications. Firstly, it means that the US will no longer be able to afford expensive overseas military engagements. Whilst this may be something of a shock to Americans, it will be a greater shock in East Asia where nations such as Japan, South Korea, and Taiwan still rely upon the US military guarantee. It will also have an impact in Europe, where the European members of NATO have been free riders on American military spending for decades. Second, it means that America will no longer be able to afford its poor. American welfare (including healthcare) is not exactly generous by OECD standards. Should that be pared back significantly, then we may see a degree of social unrest within the US that we haven’t quite seen before. Thirdly, it means that US seniors will have to rely upon their own provision for the future. In an economy where the costs of eldercare (including medication) are rising significantly faster than incomes in retirement, those retiring Boomers who haven’t laid much in reserve will face quite a constrained future. They could well become part of the poor that America can no longer afford.

And all of this presumes that US Sovereign Debt is not significantly downgraded from AAA. If it is, then all of the vicious cycle described above, becomes even more vicious and on a faster timescale. The key to avoiding this future is the generation of a political consensus in Washington that is prepared to take hard decisions about raising taxes and reducing spending commitments. It requires the sort of political courage that we can’t quite see in Washington at the moment. What we do see is a lot of partisan bickering that is putting self-interest ahead of the national interest. There isn’t even a consensus that America is facing a problem, let alone finding a solution.

But then, perhaps this merely reflects a social preference? American society seems to prefer immediate consumption over future security, in the belief that the good times will go on forever. This is not a preference that I share, but then, who am I to criticise the choices of others?

http://www.economist.com/node/18834323?story_id=18834323

© The European Futures Observatory 2011

The Cost Of PV Generation 1990-2040

2011-06-14T07:31:00.001+01:00

This is an interesting little graph. If the assumptions are correct, it indicates that, sometime over this decade, the cost of PV generation will become comparable to that of peak power fossil fuel based generation systems. Sometime over the next decade, the cost will become competitive with the bulk production of electricity from fossil fuels. Should that happen, in reasonable quantities, then we will have started to make serious progress towards finding renewable alternatives to fossil fuels.

When that happens, we can expect the demand for PV systems to soar. Initially, soaring demand will give rise to a very profitable installation sector. One could argue that we are in that territory now. However, if the market is allowed to respond, new suppliers will enter the arena, attracted by the profits to be made. This injection of competition will serve to start lowering the long term installation cost as supply grows to meet that demand. This is exactly what happened for the supply of Satellite Dishes, and there is no reason why it could not happen for PV installations.

In the meantime, the role of technology is to move the curves one way or another. For example, a breakthrough in PV technology could have the effect of lowering the generation cost so that Solar becomes competitive with fossil fuels sooner rather than later. As the market grows both in size and competitiveness, the way to achieve a profitable future will be to innovate newer technologies to generate more kWh per £ spent on installation. Like this, we enter a virtuous in which innovation lowers installation cost, which makes the technology more attractive compared to other methods of power generation, which then creates an innovation premium.

This is one possible way out of our reliance upon fossil fuels.

http://www.nitolsolar.com/encompetitiveness/

© The European Futures Observatory 2011

The Green House

2011-06-10T17:28:00.001+01:00

I like the idea that the way to combat Greenhouse Emissions is to start living in a Green House! We are currently looking at a green retro fit at home, which is how we came across this outfit.

At present, the installation cost is fairly high, which has slowed the uptake of the technology. However, this is changing - gradually at first, but it will gather pace in time. As it does so, the uptake will increase in volume. I wonder if this is a good case for a public subsidy to prime the pump and to give the technologies involved a helping hand. It could be paid for by increasing taxes on conventional energy production (e.g. VAT on domestic fuel bills at the full rate of 20% instead of the soft rate of 5%).

I see this as a technology to be exposed to over this decade, and possibly the next. It certainly addresses the issues of which technologies are likely to fit the scarcity agenda.

http://www.eastgreenenergy.co.uk/

© The European Futures Observatory 2011

Global Population 2010-2100

2011-06-02T11:52:00.001+01:00

This table originates from the UN global population forecasts. For the first time, it extends to the year 2100 so that we can see what the shape of demographics could be for this century. As always, the figures used are the mid-point figures, around which there is a cone of uncertainty. This cone (of varying degrees of statistical confidence) can be very wide in some areas, and very narrow in others.

The short story is that this century may well belong to Africa rather than Asia. It is interesting to note that not one European country is in the top 10 for 2100. However, 90 years is a long way to go, and there are many factors that may cause these projections to run off course. One of these factors may be that the political units that we have today may change into something radically different by the year 2100.

For example, the current forecasts presume that we have seen the high water mark of European integration. Some question this. They also presume the current territorial integrity of China (i.e. no shrinkage and no expansion). Some question this. As always with long term futures forecasts, the devil lies in the details of the assumptions made. And yet, some assumptions do have to be made in order to derive these very interesting results. That does not invalidate the results, it merely defines the degree of caution that we should exercise when using them.

Source Article in The Economist

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Are We Serious About Climate Change?

2011-03-17T14:59:00.001Z

Every spring the UK Chancellor (Finance Minister) sets out his plans to match income to expenditure for the year ahead in the annual Budget. As the Budget is primarily about revenue raising (the expenditures are set out each autumn) all sorts of lobbying occurs prior to the Budget as various special interest groups vie to seek tax concessions. This year, the motoring lobbies have been some of the loudest in asking for special treatment.

The plight of the UK motorist has been hit hard in the past year. Oil prices have been rising and have been passed on to the motorist. The Pound remains relatively low against the US Dollar, making the cost in Sterling of a commodity priced in Dollars that much more expensive. VAT – an ad valorem expenditure tax imposed upon petrol – has risen from 17.5% to 20% in January. To top it all, the UK Fuel Price Escalator – a hydrocarbon tax – is now set to increase by 1p per litre of fuel from 1st April 2011. No wonder that motorists are feeling the pinch!

And yet, this gives us an opportunity to pause and think about what is going on here. The complaint of many motorists is that they are being priced out of their cars. Whilst this has many implications in terms of equity, from the perspective of climate mitigation, this is exactly what is meant to happen. As a nation, we have rejected central planning as a way of allocating resources. We could easily devise schemes to ration petrol usage but we have foregone this approach for a market based solution. The way the market works is for those with the least income, and for those who have a lesser desire for a product, to become unable to afford that product or unwilling to buy it. These are the people for whom the Fuel Price Escalator was designed to price out of motoring.

If we are to achieve our Kyoto commitment of reducing our carbon emissions by 80% between 1990 and 2050, then there has to be much less petrol based motoring undertaken as we move into the Twenty First Century. Looking at it another way, only one in five motorists, on current consumption patterns, would retain their cars by 2050. This has to imply that four out of five motorists are forced off the road. They could be forced off the road by regulatory fiat, but this is not our way of doing things. Our way of doing things is to price them off the road.

And that is the central point. If we do care about passing on a sustainable world to our grandchildren, then we do need to tackle the issue of carbon emissions. If we want to address that issue, then we need to restrict private car usage, and an effective way of doing so is to raise the cost of motoring. If we are serious about addressing climate change, then we need to welcome the Fuel Price Escalator. Rather than face a rising cost of motoring in the long term, I sold my car two years ago. I suspect that many more will follow suit in the years to come, either by choice or by financial necessity.

© The European Futures Observatory 2011

British Banks–The Gift That Keeps On Giving

2011-02-08T15:50:00.001Z

The news that Mr Osborne intends to make the bank levy more stringent than originally planned. Needless to say, the apologists from the financial economy are crying ‘foul’ and warning of a mass exodus from these shores. The trouble is that they did exactly the same last year – with the introduction of the one off tax on bank bonuses – and here they are again, still trading in London.

Two aspects of the proposals need highlighting. First, there is a view prevalent in the country at the moment that whilst the banks caused the mess that all of the taxpayers are having to clear up, the banks are not enduring a fair share of the pain. At a time when libraries are closing, essential social services are being cut back, and education spending is being reduced, we are also seeing the prospect of record profits in the banking sector and a return to stellar bank bonuses. The banks will gain little sympathy beyond the circle of sycophants over these proposals. Many will feel that they may not go far enough.

Second, there is the question of how the economy should be balanced in the future. Many question the wisdom of returning to an economy that is top heavy in the financial economy. A reduction in the reliance upon the banking sector would actually make the economy a bit more resilient to the shocks within the global economy. Those of that view point to Germany as an example of a balanced economy that has weathered the recession quite well. This addresses the issue of bank exile. If the risky, toxic, bank operations were to be driven away from the UK – say to New York or Hong Kong – would it be such a bad thing?

To me, this seems like something of a turning point. Until now, Mr Osborne had appeared to have been a captive of the banking fraternity and the financial economy. Only recently did he say that the ‘Banker Bashing’ had gone too far. Now he is bashing banks himself. Does this represent a major change in policy? Does he realise that for his gamble to pay off, he needs to rebalance the economy away from financial services and towards manufacturing exports? Let’s hope so!

© The European Futures Observatory 2011

Increased bank tax to raise £2.5bn - UK Politics, UK - The Independent

George Osborne levy attacked by banks and Ed Balls - Telegraph

North African Dominoes

2011-02-07T18:15:00.001Z

First Tunisia, then Egypt, and on to Jordan and Yemen. Ought we to have been surprised by recent events in North Africa and the Middle East? No! Despite the timing of the revolutions now under way, I don’t think that we ought to be surprised at all. Some futurists have been pointing to the fragile nature of this region for some years. In his book “High Noon: 20 Global Problems, 20 Years To Solve Them” (published in 2003), J F Rischard warned us of the potentially volatile and toxic mix of a growing cohort of young men in North Africa and the Middle East, who are impoverished (yet live on the fringe of unimaginable wealth), unemployed (who see their corrupt elders lining their own pockets), and bored.

At a seminar at the World Future Society conference in Chicago in 2009, as a demonstration of the International Futures computer simulation model, Professor Jay Gary and Dr Tom Ferleman showed us that a combination of economic and demographic trends, in conjunction with a number of social and political trends, were leading to the possibility of a significant event in North Africa and the Middle East in this decade. For a reasonably sustained period, the warning bells have been ringing and those investors and businesses that have been tuned into this potential hotspot are now able to deploy their contingency plans.

It is easy, one might object, to be wise after the event. The important factor now is to consider what might happen next – to look to the future rather than to the past. To my mind, the most significant future factor is that the ‘youth bulge’ in North Africa and the Middle East has yet to peak. Over the course of this decade, even more unemployed, impoverished, and bored young men will reach the age when they might be pre-disposed to action in changing their world. If this cohort can be fulfilled, then the prospect of the future (growth, employment, and prosperity) is very bright. If, on the other hand, nothing changes, then the prospect is quite dim.

The question with which we should be concerned is how we move from the default setting (unemployed, impoverished, and angry young men) to a better setting – both for the young men and for us. It seems obvious that such a transition is unlikely to occur without a great deal of external assistance. A consideration of the origins of that assistance is quite instructive. Let us first consider the two Asian superpower wannabes – China and India. North Africa and the Middle East is important to both China and India, not only as a source area for oil and gas, but also as part of a key trade route between their home markets and Europe. This importance to China is underlined by the region seeing the only area of naval deployment outside of the Pacific Ocean (combatting Somali pirates on the trade route). India also sees the western Indian Ocean as part of its vital national interest and has deployed its navy accordingly. The Arab world is important to both China and India, and yet both are unable to influence events there. This suggests that if this is the ‘Asian Century’, then it still has a very long way to go before it becomes apparent.

Russia remains a significant force in the world, but, once again, seems unable to influence events in North Africa and the Middle East. Perhaps this reflects a scaling back of Russian geopolitical ambition? Perhaps it reflects an inability to project influence in the Middle East? Either way, Russia now seems less of the force that it once was during the Cold War. This naturally leads on to a consideration of the other contestant in the Cold War – the United States. America is still suffering from the legacy of the Bush years (perceived as anti-Muslim, pro-Israel). The current President has done little to allay that view and may come to rue his disregard of the Middle East. Whilst the US may have sufficient hardware to guarantee the peace of the Middle East, it does not really have the trust of many in the Arab world. It will continue to suffer from this lack of trust until its support of Israel is less uncritical.

We could almost stylise the situation as America having the hardware to guarantee a solution, but not the software to do so. The vital software could be provided by the European Union. There are key post-colonial cultural links between North Africa and some of the EU member states. Europe has started to spread its influence southwards in recent years and may be tempted to accelerate the pace of this trend. North Africa has a ready source of young people that Europe needs, whilst Europe has an abundance of opportunities that would go some way to absorb the energies of the young people in North Africa. There is the potential for a very agreeable relationship here. Indeed, one could argue that if European jobs don’t go to North Africa, then North African workers – either legally or illegally – will come to Europe.

For this to happen, prosperity and the chance of self-actualisation that democracy promises needs to spread across the Mediterranean. There is an opportunity for the UK and France (the two primary former colonial powers) to take the lead here, followed by Spain and Italy (two secondary former colonial powers). Backed by the EU, underwritten by the US, the Youth Bulge could become quite a positive feature. If not, then we open ourselves to the spread of fundamentalism and radicalism that would be harmful to western interests.

By happy coincidence, France is now due to chair the G20. Let us hope that their tenure is used wisely!

© The European Futures Observatory 2011

Manufacturing To The Rescue

2011-02-03T12:17:00.001Z

Signs that Mr Osborne's Gamble is paying off. This seems to be down to the weakened exchange rate. Now that Sterling is strengthening again, I wonder if the gamble will continue to pay off?

Of course, there is a threat to this rosy picture. As factory gate prices are rising, so are the calls (mainly from the financial economy) for interest rate rises to stave off the inflationary threat. Not to actually reduce inflation, but to show that we are serious about inflation. This is a bit like cutting off your nose to demonstrate a capacity to bleed. Anyway, if interest rates were to rise, we would expect Sterling to strengthen as well. That would damage UK manufacturing as UK goods became more expensive overseas. It would also reduce the prospect of Mr Osborne’s Gamble paying off.

I wonder if the Bank of England does want to choke the recovery, weak as it is?

© The European Futures Observatory 2011

BBC News - UK manufacturing growth at fastest since records began

Can Interest Rates Control Inflation?

2011-02-02T17:19:00.001Z

As the titanic struggle between the real economy and the financial economy intensifies, the question has arisen about using interest rates as a tool to reduce the current bout of inflation. We have argued that they would be rather a bunt instrument simply because they would address the symptom and not the cause of the disease. The current bout of inflation is the result of the rising world price of commodities. This has mainly been caused by the recovery of the Icarus Economies in Asia, it is a demand led inflation.

Raising interest rates work by dampening demand to such a point that, as sales fall, companies respond by cutting their prices (or, at least, not raising them as fast). Demand is reduced by taking money out of the economy. That money doesn’t disappear though. Instead, it acts as a wealth transfer out of the real economy and into the financial economy. No wonder that it is the banks and financial institutions who are leading the charge for higher interest rates.

Which leads us back to the politics of the current situation. For Mr Osborne’s Gamble to pay off he needs the real economy to deliver growth through investment and exports. These are not helped by higher interest rates. Which creates a dilemma. In order to collect from his gamble, Mr Osborne has to turn his back on his natural constituency in the City.

We live in interesting times!

© The European Futures Observatory 2011

FT.com / Comment / Letters - Raising interest rates is a poor tool to fight inflation

Timeo Danaos (Again).

2011-01-21T16:32:00.001Z

The future has caught up with the present quicker than we might have thought. Just as we were writing about the rise of the ‘China Price’, the markets caught hold of a bout of Sino-scepticism. An overheating Chinese economy is bad for China. It is also not too healthy for us either. We seem to be in danger of finding ourselves in a situation where economic performance is quite volatile – we rapidly go from boom to bust, and back to boom again. I wonder if this is a pattern that we shall have to endure for a few years?

Interestingly enough, the government of China has decided to act upon the domestic inflationary pressures. It has taken steps to provide financial assistance to Chinese farmers in the form of subsidies to cover the cost of diesel, fertilisers, and pesticides. Whilst this may have some impact in the short run, it is not a long term solution. In the long term, food prices are being forced up through growing prosperity in China. A long term solution needs to address the demand for food, not its supply.

Although Chinese inflation may abate, it is only likely to be temporary. And there still remains the issue of the asset bubble that is developing.

© The European Futures Observatory 2011

China's overheating economy stokes fears for global inflation - Business News, Business - The Independent

BBC News - China offers financial help to drought-hit farmers

Timeo Danaos … And All That

2011-01-20T17:03:00.002Z

China has started the year with a charm offensive across Europe and the US. In Europe, the Chinese were placing orders with exporters and their central bank was mopping up Euro-bonds in the Portuguese and Spanish bond auctions. This has led to speculation that China will be the engine that draws Europe out of recession whilst it props up the Euro with its bond purchases. Time will tell if this is right.

In the US the story is slightly different. China has placed itself as an engine of growth, China still likes to buy US bonds to help lower US interest rates, but it also seeks to reassure Washington that its rise should not be seen as threatening in the west Pacific. There are parts of this story where the rhetoric is different to the actions that the Chinese government has undertaken. A key issue that is looming is to find a permanent settlement for the Korean peninsula.

Many futurists take the continued rise of China as axiomatic. We are a little bit more sceptical of the conventional wisdom. This week, three pieces of the jig-saw fell into place. It appears that, in 2010, China attracted record levels of inward investment. Much of that investment was originated in funds seeking returns higher than those prevailing in Europe and the US. Of these inflows, one fifth were destined for the Chinese property market.

Cue the next piece of the jig-saw. It appears that Chinese property prices continue to rise. This looks very much like a dangerous property bubble taking form. The Chinese government has reacted by raising interest rates and by raising the reserve requirements of its banks, but with the flow of hot money flooding in, can it really stem the flow without adjusting the exchange rate? The government has ruled out an important policy tool at just the wrong time.

And this leads to the final piece – China is still inflating at too rapid a rate. Although the headline inflation rate is slowing, the core drivers of inflation – mainly food prices, fuel prices, and commodity prices – continue to rise. Once again, the Chinese government has refrained from dealing with this problem through an exchange rate adjustment. And this is where we get excited from a futures perspective – is this the beginning of the end of the Chinese titan?

Will the mighty China be humbled by a runaway inflation exacerbated by a bursting property bubble? It is certainly a scenario worth exploring.

© The European Futures Observatory 2011
BBC News - China attracts record foreign investment in 2010
BBC News - China's property prices still increasing
BBC News - Chinese consumer price inflation 'down to 4.6%'

The Pace Quickens

2011-01-17T17:55:00.002Z

We are all starting to feel the impact of China on our daily lives. For example, the ‘China Price’ is rising, which means that we are feeling its effect in falling disposable incomes (through higher inflation). It does not mean, however, that all is lost. One beneficial effect of the China effect is that the government of China can now look to Europe for investments and purchases. Purchases help European exports, but, more significantly, Chinese investments are providing a prop to the Euro at just the time that it is needed.

Of course, good news for Europe is bad news for the US. As Euro denominated bonds become the choice of Chinese investors, so they are moving away from investments denominated in US Dollars. This will give the fed a refinancing headache in the near future. As it does so, the geopolitical decline of the US will be shown in a more stark light, counterbalanced by the stark rise of China.

To this extent, the pace of change will appear to quicken.

© The European Futures Observatory 2011
BBC News - China's Hu Jintao: Currency system is 'product of past'
Charlemagne: Mr China goes shopping | The Economist

Business As Usual?

2011-01-16T14:27:00.001Z

One of our contentions is that the financial economy and the real economy each run to a different rhythm. At times when both of the economies are synchronised, tremendous gains are made. When they are out of step, then problems arise. Our current economic difficulties originated in a hic-cup in the financial economy. There was an edifice of credit given too easily to people who were patently unable to repay the loans (what Will Hutton calls the ‘Ponzi Economy’), regulators who were unwilling to regulate this lending, and a financial sector driven by greed and personal enrichment to expand this lending beyond safe limits. All of this came tumbling down when the financial economy hit a speed bump.

It was by no means certain that the contagion in the financial economy would need to spread into the real economy. After all, the bursting of the ‘Dot.com Bubble’ only had mildly recessional implications. However, a combination of a poor and tardy policy response – particularly in the US – allowed the contagion to bleed from the financial economy into the real economy. And here we are, where we are – the worst recession since the 1930s.

The financial economy and the real economy are still out of step. Across the OECD, unemployment remains high, there is still a relatively large debt overhang in the public and household sectors, and the output gap remains higher than previously experienced. All of this suggests that the real economy needs further fiscal and monetary stimulation. The financial economy, on the other hand, has largely recovered from where it was during the credit crunch. Credit is flowing again - albeit at much reduced trading volumes - the financial system has been shored up, bank profits have returned, and even large bonuses are back on the agenda of bankers. The danger, as the financiers see it, is the nascent inflation that could result from the recent monetary expansion. The financial economy needs interest rates to be increased as part of a monetary contraction.

In many respects, this reflects a desire to return to ‘business as usual’. Of course, if I were an investment banker, I would see the logic behind returning to stellar salaries as quickly as possible. However, the policy of ‘business as usual’ implies that we continue to make the mistakes that put us into recession to begin with. This suggests that the financial economy has yet to come to terms with the paradigm shift that the recession has caused.

For example, the conventional wisdom that proved to be unwise in 2008 states that if inflation is building, then interest rates should be increased and monetary policy should be contracted. If the MPC were to follow the suggestion of Andrew Sentance to increase interest rates, would it work? We think not. The main inflationary pressures that we are currently experiencing are structural in nature caused by rising food, energy, and commodity prices. Raising interest rates may cause Sterling to appreciate a little (or it may not), taking the pressure off those food, energy, and commodity prices denominated in US Dollars, but the impact on global food, energy, and commodity prices is likely to be negligible. UK interest rates would have to rise very far in order to have an impact on global commodity prices.

Instead, such a policy is likely to do severe damage the real economy. Low inflation rates and a low value of Sterling, which fell by between 20% to 25% in the period 2007-10, have stimulated the UK manufacturing sector that exports to Europe, the US, the Middle East, and the Far East – i.e. those economies based around the Euro and the US Dollar. Whilst the cost of imported materials have risen, this is unlikely to lead to a domestic inflationary spiral because of the sheer size of the output gap. There is too much slack in the economy, particularly with the public sector redundancies starting later this year, for inflation to get out of hand.

And this is the point at which we arrive. If it is UK policy to nurture the exporting manufacturing sector, then interest rates need to be held low for some time to come, despite the occurrence of structural inflation. If, on the other hand, interest rates are raised, then it signals a surrender to the financial economy and a return to ‘business as usual’.

If this occurs, the we ought not to complain too much about bankers bonuses. After all, that is part and parcel of our economic policy.

© The European Futures Observatory 2011

BBC News - UK interest rates remain at 0.5%

The Economist | The outlook for exports: Trade winds

A Chinese Endgame.

2011-01-12T15:53:00.002Z

The rise of China over the past couple of decades has been quite relentless. Year after year the Chinese economy has grown, year after year Chinese commercial influence has expanded. Sino-sceptics point to the apparently rigged exchange rate between the Yuan and the US Dollar as the source of China’s financial might – the origins of the huge currency reserves – which has un-balanced the world economy.

The US would like China to allow the appreciation of the Yuan faster than it is currently appreciating. The Chinese government is reluctant to do so, fearing the political consequences of a slowing in the growth machine. However, this does create another problem in its wake. A high Yuan may help Chinese employment, but it also hinders the attempts of the Chinese government to keep a lid on domestic inflation.

China imports many of its raw materials. The weight of Chinese purchases in global markets has given rise to demand led price inflation for those resources – from food to metals to oil. This is starting to push an inflationary spiral in China. Normally, governments would counter an inflationary spiral by raising interest rates and allowing the exchange rate of the currency to appreciate. This policy has effectively been discarded.

The policy is to do nothing. Normally this is not a bad option, but in this case it might not be. If inflation takes root, then it could become as equally destabilising as rising unemployment. The prospect of an impoverished middle class is just as unattractive as the prospect of an unemployed middle class. However, this fuse is burning slowly. We are unlikely to see great change in the near term, but in the longer term this is a problem that will have to be dealt with.

In the meantime, we should note that the “China Price” is rising.

© The European Futures Observatory 2011
Price rises in China: Inflated fears | The Economist

Happy New Year

2011-01-07T12:28:00.002Z

It’s about this time when many forward looking pundits outline their views on how the year ahead will shape up. These forecasts are not always very accurate – the example of the forecasts of UK unemployment at 3 million at the start of 2009 come to mind – because they turn out to be an expression of hopes and fears rather than a serious examination of the forces and trends that will dominate the year ahead. I try to avoid making predictions because it is too easy to be wrong. Flying cars and robot house servants come to mind of examples where the speculations of futurists have been wrongly taken for predictions of the future. Instead, I try to consider what the forces are that will shape an emergent future – to look at possible futures rather than predicted futures. We are currently working on a project that examines the forces that are likely to shape the coming decade. As this is the forward looking time of year, we thought that we would share these observations.

We have identified five key trends that we think will shape the coming decade. These are quite broad trends – almost mega-trends, if you like – and are likely to have a substantial impact upon how we live through the coming decade. The five trends are:

1. The Great Re-Balancing Act: There is much of the global economy that is unbalanced – Asian savings, North American and European debt, the levels of household indebtedness, the imbalance between the public and private sectors, productivity differentials, and so on. These imbalances are unsustainable in the long term. The re-balancing of the global economy is likely to dominate the next decade in various shapes and forms.

2. The Reform Of Big Brother: The public sector in Europe and North America has grown substantially over the past couple of decades. It is set to grow even further as the Boomers move into retirement, through the expansion of spending on retirement benefits and age related healthcare costs. At the same time, the prospect of muted recovery will act as a constraining factor to the tax base. As public finances are squeezed, reform will become inevitable and is likely to feature as a trend in the next decade.

3. The New Enlightenment: Our public infrastructure reflects a set of institutions that arose out of The Enlightenment. There are those who believe that this institutional infrastructure is inadequate for modern society. Some look to reform the existing infrastructure, whilst others look to establish new institutions. This is given a sharper edge by the need to reform the public sector, and is likely to be a feature of the coming decade.

4. The New Nationalism: Over the next decade, the best part of a billion souls will be added to the population of the world. This will place acute stress upon all sorts of resources that could result in their prices rising considerably. The traditional response of nations to such stress is to retreat into a nationalist cocoon, a feature likely to be made worse by a muted recovery in the global economy. If so, then the process of globalisation may stutter in the coming decade, with all sorts of consequences.

5. The Icarus Effect: Prior to the global recession, a number of economies were growing and developing at a rapid pace. As recession hit, the growth trajectory of all economies dipped. Some economies have bounced back from that dip (e.g. China), whilst other economies have simply hit the ground (e.g. Ireland). As this trend unfolds further, it is likely to be affected by the re-balancing of the global economy, which could call into question whether this is really the ‘Asian Century’.

None of these trends is set in stone. Events may occur that lead to sharp discontinuities in the trends – we only have to look back 10 years to see what a discontinuity 9-11 was. However, they do provide a useful device by which we can examine current events from a long term perspective. In doing so, we need to be sceptical about our work. Whilst the trends seem to be evident now, they may become less evident as time goes by, as new trends emerge. We see the trend identification as a road map looking into the future, a map that should help us to see where we are going.

Of course, we also need to remember that all maps become out of date over time.

© The European Futures Observatory 2011

Spooking The Horses

2010-12-13T17:31:00.002Z

There are times when a well intended policy can actually make matters worse. It seems to me that the European Stability Mechanism may be just one such policy. It is designed to ensure that the financial markets are operated in an orderly fashion in the face of one member of the Euro coming under pressure, but they may serve to de-stabilise the markets by being open to undue political pressure.

In future crises, the EU will require the crisis stricken member of the Euro to force losses on the existing bondholders before a bail out package would be approved. In the future, in the face of the certainty of a loss, what will those bondholders do? My guess is that they will dump the crisis stricken bonds at exactly the time when the Euro member state would want them bought. What will prospective buyers do? Sit on their hands until the price of the debt stops falling. As bond prices are the inverse to interest rates, of course rates are likely to rise.

However, as greater risk has been introduced to the system, it is quite likely that the system will become more volatile. Just as we want to quiet the horses, there go the politicians spooking them again. At least this will give rise to some good shorting opportunities in the medium term!

© The European Futures Observatory 2010
BBC News - EU to target private lenders in future bail-outs

The Geopolitics Of Scarcity

2010-12-11T13:09:00.002Z

As we start to look at the onset of scarcity, all sorts of second and third order consequences start to emerge. One such consequence is how the impact of food scarcity could undermine the authority of the Chinese Government.

The model is quite simple. A combination of globalisation and a fixed exchange rate have allowed China to develop into a manufacturing powerhouse on a global scale. This has raised millions of Chinese families out of poverty (60 million families a year – that’s a huge number). As incomes have risen, so have dietary expectations. Chinese families expect to eat more regularly, with more food, and with a higher protein content than they have in the past. All of this puts pressure on global food markets.

However, China is also a poor nation, a feature of which being that expenditure on food is a high percentage of household disposable income. As food prices rise, they have a more immediate effect on households than they would, say, in ‘Western’ economies. This is the basis for discontent, which may lead to unrest. The last time food prices rose quickly, there were outbreaks of unrest in Tibet and Xin-Jiang provinces, as the rising cost of food exacerbated an existing set of grievances.

One way in which the Chinese government could reduce the impact of rising food prices could be to allow the Yuan to rise faster than it is currently rising against other currencies. However, this policy has the risk of slowing China’s export growth, which has been the basis for prosperity so far. It would also mark a shift in China’s commercial policy away from export-led growth and towards domestic consumption-led growth, a potentially destabilising feature within the Chinese economy.

That none of this has happened suggests that the growth of Chinese exports will remain strong, that inflation will continue to be an issue, that the global financial imbalances will continue to grow, and that food prices will continue to rise. There will come a point where all of this reaches a climax and profound and sudden change will come. We are still of the view that such changes will originate in western China, and it is to there that we are looking for clues.

© The European Futures Observatory 2010
BBC News - China sees inflation jump to 5.1%, a 28-month high
BBC News - Chinese exports jump unexpectedly amid inflation fears

Finding An Alternative

2010-11-20T12:36:00.002Z

The Senkaku Islands, as they are known in Japan – in China they are known as the Diaoyu Islands, are a group of unproductive volcanic rocks lying in the East China Sea. They are only remarkable because both China and Japan – and Taiwan too, for that matter – claim ownership of the rocks. If there weren’t deposits of oil shale in the island chain, then it is quite likely that their ownership would not be disputed.

At present, Japan controls the islands and recently asserted its control by seizing a Chinese trawler, allegedly fishing illegally in the disputed waters. China responded by cutting off the supply of Rare Earth Elements to Japan. The price of REEs has risen considerably in recent weeks as Japan seeks alternative sources (China controls 97% of the global production of REEs). This is very much a scarcity story.

What is interesting is the Japanese response to scarcity. The rising price of REEs has led to greater economy in their use. There has been a boost to the technologies of resource economies so that less REEs are used per unit of output (an increase in ‘resource productivity’). There has also been a race to diversify supply away from China to other areas where REEs could be found. A rising price makes more marginal deposits commercially viable. There has, finally, been a boost to the mineral salvage industry to recover REEs from discarded electrical equipment.

In many ways, this is the response that we would expect to any incipient scarcity. Perhaps this is the answer to Peak Oil?

© The European Futures Observatory 2010

BBC News - Japan seeks new options on rare earths

A Prelude To Scarcity

2010-11-19T15:12:00.001Z

In recent days, there has been quite a lot of interest in the issue of long term scarcities. This is an area upon which we have been working for over a year now – longer if we include the work on the Post-Scarcity World – and it seems to be an area that is coming into fashion. The argument for scarcity is well rehearsed. In 2000 there were 6 billion souls on the planet. By 2050 the mid-estimate of the UN is that there will be 9 billion people. Balanced against this increase in potential demand for resources is the view that we are coming to the point of peak production for many resources, thus potentially restricting their supply. The result of this clash of rising demand against falling supply will be an ‘Age Of Scarcity’.

Of course, the transition to the Age Of Scarcity is not likely to be discontinuous. We are likely to drift into a position of scarcity over a number of years, with, every now and then, a prelude of what is to come. We would argue that this is what is happening with food prices. After a long period of falling food prices in real terms, from 1980 to about 2002, food prices appear to have started to rise on a long term trend. This trend, underpinned by growing demand in the emerging economies and by modest improvements in crop yields, looks set to continue for some time to come.

Every now and then, a combination of natural disasters, the impact of climate change, the impact of trade nationalism, and so on, serves to tighten the markets a bit. It happened in 2008, and is again happening in 2010. To this extent, we are witnessing over a small period of time what may well happen over a longer time frame. We are witnessing a prelude to scarcity.

© The European Futures Observatory 2010

The Economist food-price index: Malthusian mouthfuls | The Economist

How Rich Are The Poor?

2010-11-18T15:35:00.001Z

My son is currently living in Taiwan, so stories about Taiwan naturally catch my attention at the moment. There was a story in The Economist about how Taiwan is on the verge of becoming richer than Japan. The counter-intuitive nature of that comment really did catch my attention.

The Economist is quoting IMF figures when it states that the GDP per head of Taiwan is set to be $34.7K this year, against $33.8K for Japan. However, once we start to drill into the figures a different picture emerges. The Dollars used are not real Dollars but ‘PPP Dollars’ (Purchasing Power Parity Dollars). PPP Dollars are an artificial construct that attempts to weight income in terms of the cost of living across countries. The Japanese figure is discounted more heavily than the Taiwanese figure because Japan has a much higher cost of living. However, the adjusted figures do suggest that Taiwan has a better standard of living than Japan, which fits in with the impression that my son creates.

Does this matter? In a sense it doesn’t. These figures a a bit arbitrary and the PPP weightings are something of a guesstimate rather than an accurate measurement. However, there are times when it is important. According to some measures, China will move from the third largest economy in the world to overtake Japan as the second largest economy in the world this year. What we lose in this statistic is exactly how poor China is. The ranking of number two is a volume effect (well over a billion Chinese citizens) rather than an income effect. According to the IMF again, but for 2009 instead of 2010, China ranks 99th for GDPO per head in PPP Dollars (Taiwan ranks 37th and Japan ranks 17th).

Which is the rich country and which is the poor? China could be seen as a rich nation – the second largest economy in the world – whilst at the same time being one of the poorest - 99th in terms of GDP per capita. We haven’t quite come to grips with this dichotomy as yet, and some would say that this will be one of the future challenges that we face.

© The European Futures Observatory 2010

Taiwan and Japan: X not V | The Economist

The Luck Of The Irish

2010-11-17T12:45:00.001Z

The case of Ireland and its present difficulties does pose a few questions that have a much longer perspective. If the Euro experiment were ever to work, then there would need to be a great degree of monetary co-ordination, along with a fair amount of fiscal co-ordination. The establishment of the ECB has, by and large, achieved monetary co-ordination. It was the role of the Stability and Growth Pact to harmonise fiscal policy by limiting budget deficits to 3% of GDP and public debt to 60% of GDP. The failure of the Stability and Growth Pact, almost from inception lies at the heart of Ireland’s present difficulties.

In recent years, Ireland has based its ‘Celtic Tiger’ credentials on a policy of the competitive reduction of Corporation Tax. Businesses, particularly UK businesses, have responded by relocating in the low tax environment. That now appears to have been something of a mistake. Now that the Irish bubble has burst, the nations bailing out Ireland – the victims of competitive tax policies – have a say in the future management of the Irish economy. Just as the Greek bailout is predicated by the reduction of public spending to more sustainable levels, so an Irish bailout is likely to be predicated by the raising of taxes to more sustainable levels.

This is of tremendous significance because it would imply the loss of Irish fiscal sovereignty. The Irish government has gambled on a low tax Tiger Economy and has lost and now it has to pay the price accordingly.

© The European Futures Observatory 2010

Hamish McRae: Sovereign defaults in the eurozone are inevitable

X Marks The Spot

2010-11-05T15:39:00.001Z

When we last wrote about Mr Osborne’s Gamble (that fiscal tightening and monetary loosening will bring us out of recession), we left the issue of politics on one side. If the Gamble fails to work in an adequate time frame, we are unlikely to be able to leave politics out of the equation because this will be the arena in which the consequences of failure will be felt, as President Obama found to his cost this week. It is interesting that the political arena in the UK has experienced a significant long term change this year through the generational rebalancing of British politics.

Over the course of this year, Mr Brown has been replaced by Mr Miliband as leader of the Labour Party and Mr Clegg has moved from obscurity to Deputy Prime Minister on behalf of the Liberal Democrats. There has been no change in the leadership of the Conservative Party. The one thing that all of the current party leaders have in common is that they belong to Generation X, and that they have replaced Baby Boomers as party leaders. We have already felt some of the consequences of this, but far more are to come.

To recap on generations, the Baby Boomers in the UK represent a generational cohort that has almost been a golden generation. They grew up in the rising prosperity in the 1950s, they provided the flower power generation of the 1960s, they benefitted from the great housing inflation of the 1970s and 1980s, and they are currently starting to retire on gold plated pension schemes. They are self-absorbed, self-indulgent, and spoilt.

The children of the Boomers – Generation X – have experienced a different life pattern. They grew up in a world of strikes and three day weeks, of stagflation, of youth unemployment in the Thatcher years, and of a struggle to get onto the housing ladder. They are the original punk generation who have lived a life of low paid and insecure jobs, and who have learned to get by through making the best of a bad job. This ability to muddle through is what the Xers are bringing to the leadership roles into which they are now moving.

One of the great attributes of the Xers is their pragmatism, and this is starting to show though in politics. For example, the Liberal Democrats gave a clear promise in their manifesto not to increase VAT (a UK sales tax). Within weeks of attaining power, that undertaking had been abandoned because of expediency as part of a more general fiscal tightening. Again, each Lib-Dem MP signed a written pledge not to increase Student Tuition Fees. Again, within weeks of attaining power that pledge was abandoned in the name of fiscal pragmatism. The Boomers accuse the Xers of not keeping their word, which they haven’t. However, this does not prick the Xer conscience because the situation warranted this change of heart.

When we take this thinking to Mr Osborne’s Gamble, we can speculate that if the gamble doesn’t pay off, then the policy will be changed – in short order – to a policy that does work. The most likely candidate would be that the fiscal tightening will not be tightened as hard as originally planned. There are lots of areas in which the policy can be reversed. Many of the spending cuts will adversely affect the Boomers, who are now flowing into the ranks of the retired.

As these parts of the public sector are cut back, the Boomers will howl with rage like children who have had their toys taken from them. For example, there was an absolute furore when it was suggested that free bus passes for all retirees – irrespective of their wealth or income – be removed. The Boomer sense of entitlement was outraged at this suggestion, which was made in the cause of saving public spending. There is likely to be more of this in the near future, particularly as local government works out which areas of the public sector to retreat from. Politically, it would be tempting for an Xer Chancellor of the Exchequer to buy Boomer votes by not pruning so hard if the gamble fails to work as planned.

To our view, this gives shape to Plan B. Renewed Quantitative Easing will provide an early warning signal of the gamble not paying off. If things continue to worsen, then the pragmatic aspect of the present government is likely to come into play to allow for some fiscal easing as well, possibly by spending a bit more on the ageing Boomers.

In this respect, we are fortunate to be surrounded by pragmatic Xers because the last thing we need right now are doctrinaire politicians.

© The European Futures Observatory 2010

The Pace Of Change

2010-11-04T15:15:00.001Z

We live in a world that demands things to be done instantly. President Obama has just been punished for not taking the US economy out of the worst recession in recent history in less than two years. When I offer the opinion that the recovery could well take the rest of this decade, I am usually met with sheer disbelief. We want everything done now, and we expect that in others.

Of course, not all in the world march to that tune. The issue of political reform in China is one case in hand. There is much pressure from the west – principally the US, but also the European nations as well – for China to reform its political institutions. China replies that it is, but at a pace of gradual reform rather than at breakneck speed. Exactly how far things have moved can be seen in John Humphrys’ report for the BBC.

In a 30 year retrospective, Mr Humphrys reports on how much has been achieved in one generation. By comparison with 1980, China is a much more open, tolerant and pluralist society. By western standards there is still a long way to go, but perhaps the cause for political reform might be helped more by congratulating the Chinese government for what it has achieved rather than berating it for what it has yet to achieve?

Sometimes we should be a bit more tolerant ourselves.

© The European Futures Observatory 2010

BBC News - Humphrys: 'I was wrong about China'

Is America The New Weimar?

2010-11-03T15:55:00.002Z

I am currently reading Keynes' "Essays In Persuasion". I have read the first section, which is about the question of Germany's reparations after World War I. The victorious Allies, in the Treaty of Versailles, saddled the new German Republic with an enormous war reparation, which far exceeded the ability of the German economy to stand the repayments.

We all know the story of how that led, indirectly, to the great Weimar inflation, the destruction of middle class savings, and the rise of Hitler. What is less well known is the pattern of inter-Allied debt, and how the insistance upon strict settlement of those debts made both a German default and the rise of Hitler almost inevitable. If there ever was a case of 'penny wise and pound foolish', then this was it.

As I read about Keynes' view on this, I couldn't help but make the comparison between Weimar Germany and contemporary America. Both superpowers of their day, both suffering from an aggressive and war like foreign policy, both in hock to a set of foreign creditors. Germany had recently lost a war, and one could argue that America is currently in the process of losing one.

Following the analogy, that would imply that the US will face a crisis in servicing its debt on the near future. I believe this to be the case. One can suspect that the US will be unable to repay the debt that it is incurring. If so, then are we just around the corner from a large bout of inflation? The hyper-inflation of the 1920s wiped out most of the Weimar debt. Will the same occur for the US in this decade?

© The European Futures Observatory 2010

Essays in Persuasion

The Chinese Keynesians

2010-11-02T12:06:00.002Z

BBC News - China wealth fund urges US to spend on infrastructure

This is such an interesting story. It would appear that the China Investment Corporation wants the US Federal Government to spend $1 trillion on infrastructure investments over the next five years. The stated purpose of this spending would be job creation. What I find interesting is the implicit money-go-round: Washington hires workers, who spend their salaries on Chinese products, which provides money to the CIC, who then lend the trade surpluses to Washington to hire workers. There is a nice symmetry to this and it is a classic Keynesian case for public works.

What is also interesting is the tacit rejection of Quantitative Easing as a way to reduce the number of jobless. In many respects, this is something of a false comparison. QE is very much a Keynesian approach to monetary policy and is a necessary condition for a fiscal stimulus to work. The use of QE without further fiscal stimuli is, as yet, an untried policy, the results of which we have yet to see. This is Osborne’s Gamble.

However, I do find it interesting that a Communist body is advocating the use of a Keynesian approach to support a markect based Capitalist economy. The irony here is great.

© The European Futures Observatory 2010

Mr Bernanke’s Gamble

2010-10-31T13:34:00.001Z

Events are unfolding that could lead us interesting times. The US corollary to Mr Osborne’s gamble is a gamble by Mr Bernanke – of equal intent, but with far greater magnitude – to kick start the American economy. This is something of an untried experiment, to combine fiscal tightening with monetary easing in order to fine tune the economy, and we have yet to see how well it will go. There is a real danger of diminishing returns (QE2 will yield less stimulus per £ or $ injected) that may render the medicine unhelpful. More fiscal stimulus would do the trick, but there is little appetite for this at present.

The fears of QE2 inducing a bout of inflation still seem to be far fetched. That could be an effect, but the output gap is absolutely huge in the US. Economists might talk about the ‘output gap’ in an impersonal way, but in the US, ‘output gap’ means people living in cars, people without healthcare, people who have to give up their education. Perhaps economists, who are in no position to talk about moral hazard, ought to give some thought to the consequences of their trade a bit more?

© The European Futures Observatory 2010

America's economy: Not by monetary policy alone | The Economist

Anyone For Tea?

2010-10-29T14:49:00.001+01:00

The forthcoming mid-term elections have taken on the hue of a referendum on the popularity of President Obama. A mere two years ago, the President was billed as a new and dynamic political force in America. His rally cry was ‘Hope’, his exhortation ‘Yes, we can.’ And yet, the programme seems to have come off the boil. ‘Hope’ now turns out to be ‘Hype’ and, in an unguarded moment on a TV show recently, he now says ‘Yes, we can. But, …’ If the polls are anywhere near to being correct, the President’s party is facing a substantial defeat in the voting next week. As an outsider looking in, I am interested in why America has fallen out of love with Obama? Why is it that his opponents are so hostile towards him? What exactly is driving the extreme views of the Tea Party opponents to the President?

I guess that the single word answer is ‘recession’. America is experiencing a recession that is at the worse end of the OECD experience, and this is exposing some of the fractures within American society. However, we like to take a longer view of these fractures in seeking an explanation.

According to Edward Luce of the FT, “the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years”. This is quite an interesting statistic because it also explains so much. If income has flatlined in this period, and living standards have been increasing, then how has the American Dream been paid for? By an increase in household debt. It would appear that American consumers have been borrowing to improve their living standards. A good part of this increase in debt was underwritten by a boom in the housing market, as households used their mortgages as credit cards.

Of course, there is nothing inherently unstable about this money-go-round until the music stops. Once that occurs, then everyone wants to ditch the parcel rather than being left with a dud asset. As the credit crunch – essentially a financial phenomenon – bled into the real economy, the resulting recession has had two important consequences. First, there is an acute shortage of credit to finance further expansion of consumer expenditure (more on this later), and second, there arises unemployment at sufficient volumes that the servicing of existing debt is called into question.

This is compounded by the composition of the borrowers. Many of those who have borrowed to finance their lifestyles are of the Boomer generation, and one thing that characterises the Boomers is their deep sense of entitlement. We now have a situation where a generational cohort, who are accustomed to being treated like spoilt children, have had their toys taken away from them. They are angry. They are angry enough to form Tea Party groups. They are angry enough to call into question whether their own President is American. They are angry enough to give credence to extremists such as Glenn Beck. And they may just be angry enough to vote into office someone like Christine O’Donnell, who is manifestly unfit for office.

It could be quite easy for Europeans to become smug over the discomfort of America. However, just an element of deep thought stops this train of thought. It is the angry, white, lower middle class who are giving electoral backing to the Neo-Nazi parties in the UK. It is the respectable burghers who are giving electoral support to the anti-Islamic parties in the Netherlands. It is the middle class establishment who are behind the hounding of the Roma in France and Italy. There are angry middle class voters across the developed world at the moment.

This is likely to be a feature of our near future. If recovery is sluggish (the best case scenario) or if recession makes a re-appearance (the worst case scenario), it is unlikely that middle class household balance sheets will be repaired quickly. In the past, the world has waited for American households to start borrowing to finance their consumption, thus kick-starting the world economy. This is unlikely to happen for some time – American households are simply too maxed out. This suggests that middle class anger will remain for some time to come, which will make our politics just a little more xenophobic and our economies just a little less globalised.

We call this trend the ‘New Nationalism’.

© The European Futures Observatory 2010

FT.com / Reportage - The crisis of middle-class America

On the Way Down: The Erosion of America's Middle Class - SPIEGEL ONLINE

BBC News - Number of Americans living in poverty 'increases by 4m'

Glenn Beck Leads Religious Rally at Lincoln Memorial - NYTimes.com

BBC News - Profile: Christine O'Donnell, Delaware Senate candidate

Growing Number of Americans Say Obama is a Muslim: Pew Research Center

Ageing Europe

2010-10-28T14:56:00.002+01:00

We often hear the argument that, over the next decade or two, the European economy is likely to come off the boil owing to the ageing of the population of Europe. This is, and always has been, stuff and nonsense. The forecast only makes sense if everything stays the same. Of course, it doesn’t.

To start with, the enlargement of the EU has brought into Europe tens of millions of young workers from Bulgaria and Romania – they will make an appearance in the European jobs market from 2014 onwards. Then there are the tens of millions of young Turks whose hopes are pinned to Turkish accession. And then, on top of that, there are tens of millions of youngsters in North Africa, who are awaiting the spread of Europe across the Mediterranean. All of these will swell the European workforce.

Of course, there are those who do not want to see an enlarged EU. Their answer to the impending labour crisis is to enlarge the workforce organically – mainly by raising the age at which Europeans retire. It is in this context that the recent raising of the French retirement age can be viewed. France is lukewarm about Turkish accession to the EU, which implies that French workers will have to retire later as a consequence.

© The European Futures Observatory 2010
BBC News - Q&A: French strikes over pension reforms

Ever Increasing Union

2010-10-27T10:43:00.002+01:00

It is often argued that the fragmentation of the EU at the national level is one of the handicaps that is preventing Europe from achieving its full commercial destiny. The cause of integration is seen to be at the heart of the European project, which is why infrastructure projects take such prominence. During the industrial revolution, rail provided an integrating force, but at the national level. Rail is now set to provide an integrating force at the European level. The link between London and Cologne is really quite important – Cologne is the rail hub that opens Scandinavia, The Baltic, and Eastern Europe to traffic from Western Europe. I am sure that the Franco-German tiff will be resolved. They usually are. What excites me is the prospect of the pan-European service being available from 2013.

Of course, all this is saying is that I am a rail fan rather than a fan of flying. Guilty as charged!

© The European Futures Observatory 2010

A Franco-German train tiff: Ils ne passeront pas | The Economist

Bush III

2010-10-26T15:17:00.002+01:00

So much for the hope create by Obama’s election. In one way, he is behaving like the third Bush. On coming to office, there was a solemn promise to close Guantanamo Bay within a year. That deadline came and passed. He is still pursuing with the Military Tribunals – a judicial black hole where ‘normal’ trial rights are suspended, where public reporting is suspended, where evidence based upon hearsay, coercion, and torture is admissible. There are those who argue that the pursuit of the military tribunals is a war crime in itself!

We now have the case of Omar Khadr. A young man from Canada who was coerced into a confession by the threat of being gang raped to death has now entered into a plea bargain with his US prosecutors. If he pleads guilty, which he has, he will be eligible to serve any remaining time in his native Canada. It is hard to see which injustice cries the loudest.

Is it the extraction of a confession under duress? Is it a plea bargain where a guilty plea brings a much lighter sentence? Is it his complete abandonment by Canada?

I have never thought highly of Obama – to me he is just another US President of the same mould, more hype than hope, perhaps – but I did used to think highly of Canada. I’m less inclined to do so now.

© The European Futures Observatory 2010
BBC News - Canadian militant pleads guilty at Guantanamo tribunal

Productivity–vs- Competency

2010-10-25T15:46:00.002+01:00

The public sector is pulling back in the expectation that the private sector will expand to fill the gap in terms of services and social care. The reasoning behind this is that the private sector has a higher labour productivity than the public sector. Normally it does. However, nothing is without cost. Higher productivity in private sector basically means that the job is done cheaper than the public sector could do it. We tend to think in terms of public sector waste (one source of productivity loss), but we should also think in terms of private sector incompetency (one source of productivity gain). One way in which higher productivity is delivered is through cutting corners in staff costs – usually by not training staff adequately to do the job.

The case of the poor man who was left brain dead by incompetent private sector agency staff who were not trained adequately for their outsourced public sector role provides a taste of what is to come in the next few years. It would be a shame if the cost savings from the outsourced social and health services were simply absorbed into higher lawyers fees resulting from the level of incompetence (and negligence) derived from swapping productivity for competence.

© The European Futures Observatory 2010
BBC News - Tetraplegic man's life support 'turned off by mistake'

Globalisation Fast Tracked

2010-10-24T12:38:00.002+01:00

The recent meeting of G20 Finance Ministers has actually achieved something worthy and tangible. In a bid to avoid a looming trade and currency war between the surplus and the deficit nations, the G20 Finance Ministers have agreed to rebalance the voting rights at the IMF. This may sound a bit arcane, but it does have a tangible impact. If globalisation is to continue as it has in the recent past, if we are to avoid a retreat into economic nationalism, then the global economy has to be rebalanced, which includes reform of the institutions, such as the IMF, that direct the global economy.

The detail of the reforms is interesting. 6% of the voting rights will be passed from European nations and given to the emerging economies. This reflects the change in global economic power. However, the US still retains 17% of voting rights, thus giving it a de facto veto over all decisions (an 85% majority is needed for decision-making). I wonder how long that will last? I guess that the loss of the US veto would suggest that the Dollar would no longer be the global reserve currency. I can see that coming, but not just yet.

© The European Futures Observatory 2010

G-20 Leaders Pledge to Avoid Currency War - NYTimes.com

BBC News - G20 summit agrees to reform IMF

When The Well Runs Dry

2010-10-23T16:53:00.003+01:00

What is the structural weakness in the US economy? Some might point to the flight of manufacturing, some might point to duff mortgages, but I would point to the parlous finances of the various States Governments. A recent article in The Economist considers the impact of retiring Boomers (along with their sense of entitlement), State finances, and the lack of funding for State pension schemes. Apparently, 7 out of 50 States will have exhausted their pension assets by 2020, and half will have run out of money by 2027. The impact of this on the State tax revenues makes even more interesting reading. It would seem that current employees are working under an illusion that the promises made are affordable, whereas they quite possibly are not, as the following table suggests.

Of course, the bond markets will intervene well before this scenario occurs, but it does suggest that, towards the end of this decade, a crisis in State funding – along the lines of the crisis in the Eurozone – will befall the Dollar.

Ooops … it looks as if we can’t afford to retire!

© The European Futures Observatory 2010

American states' pension funds: A gold-plated burden | The Economist

Mr Osborne’s Gamble

2010-10-22T15:28:00.001+01:00

The news in the UK this week has been dominated by the Comprehensive Spending Review. This is the first attempt within the OECD to match financial planning with the rhetoric of deficit reduction. There is much that still has to come out of the review, but the broad shape of the deficit reduction can now be discerned.

To start with, there has been the decision to place a far greater reliance upon cuts in public spending than tax increases to eliminate the deficit. In measures previously announced, about £20 bn tax increases will start to have an effect in the current fiscal year. Of those, the greater proportion will be increases in taxes on consumption rather than on income and savings. A ratio of 4:1 (£4 in spending cuts for every additional £1 raised in taxes) is a bit unusual. Normally we would expect a ratio of 3:1.

The Chancellor of the Exchequer (our quaint title for our Finance Minister) announced about £80 bn in spending cuts. Whilst all departments will face some degree of financial restraint, the bulk of the spending reductions have been directed to the welfare budget (the old and the poor) and spending on local public services (social care, local education, the police, libraries, and climate resilience). Leaving on one side whether the politics of these makes sense, the objective of the cuts is to enhance our future prosperity and the more pressing question is whether or not the policy will work.

In a paper delivered to the Post Keynesian Study Group at the University of Cambridge, Victoria Chick presented evidence to suggest that for every 1% reduction of government expenditure as a percentage of GDP, there would be a corresponding rise of 0.6% in the level of public debt as a percentage of GDP. The mechanism by which this happens is quite obvious. As government expenditure falls, employment levels fall (over 80% of public expenditure is on salaries). As employment levels fall, income tax receipts fall and unemployment benefit payments increase, leading to an increase in the deficit. We can see why the government’s own Office for Budget Responsibility have warned that there is a 40% chance that more deficit reduction measures will be needed in the near future.

Of course, this begs the question of how the deficit reduction plan is supposed to work. The workings all hinge around expectations. If, it is supposed, the public were to believe that the policy would work, and that they see as credible a permanent reduction in taxes, then they would increase their consumption expenditures accordingly. The private sector – having been crowded out by the public sector – would then increase to satisfy this demand, triggering further growth. The key to this plan is an improvement in household and business confidence. Unfortunately, recent evidence points in the opposite direction. Businesses are confident that their sales will fall as public sector workers are made redundant. Households are confident that a better use of their resources is to build their precautionary balances, and so the savings rate rises.

And this is Mr Osborne’s Gamble. He has bet that the recovery in household and business confidence will trigger growth at a rate to offset the deflationary impact of public sector redundancies. The Chancellor estimated that just under half a million public employees would be displaced by 2014-15. However, there will also be a knock on effect in the private sector. The OBR estimates that a further half million private sector jobs will be lost as a direct result of the spending reductions (much of the public sector is currently delivered by the private sector). If we add to that the half million jobs lost since the onset of recession, for the plan to work, the private sector will need to create at least one and a half million jobs within four years. The Treasury calculates that the private sector has the capacity to create two million jobs in this time frame. However, having the capacity to create jobs is one thing and actually creating them is another.

We shall see how Mr Osborne’s Gamble plays out. If he is right, then we will have a muted recovery for half a decade. If he is wrong, we may well have a muted recovery for at least a decade. Either way, when I look at scenarios with a ten year horizon, I will need to look for the assumptions about Mr Osborne’s Gamble. This will take on a greater significance with an international dimension when it is recalled that the UK is the first actor in OECD to detail the cuts. As other economies in Europe follow suit, so the process will gather momentum internationally.

The position of the US is more interesting than usual. At present, the White House is disinclined towards fiscal tightening. However, if the polls are correct and the Tea Party candidates rise to prominence in the Mid-Term Elections, then deficit reduction plans will take a more central role in the US. However, that is a story best left for another week.

© The European Futures Observatory 2010

QE2?

2010-10-21T10:43:00.002+01:00

As we stand on the verge of the second round of Quantitative Easing (QE2), the twin questions of how it works and what it achieves remain to be answered. Some have attempted to answer the question in terms of orthodox economics. These answers have failed - mainly because the assumptions upon which QE is based are quite alien to orthodox economics. In orthodox economics, if you flood an economy with liquidity, then inflation will follow. That has happened to a minor extent, but nowhere near as much as has been previously suggested. Instead, we are experiencing a relatively mild recession (for now). This is explained in QE terms by the output gap - the difference between what we can produce and what we are actually producing. With an output gap in excess of 10%, monetary easing can still go quite some way before conditions in the real economy start to become inflationary.

QE is also being used to fine tune the economy. I rather suapect this to be something of a blunt instrument. The policy of fiscal tightening and monetary loosening is novel, but I do fear that the tightening might be overdone. For example, for Mr Osborne's plans to work, the private sector needs to generate something like a million jobs in the next four years in order to soak up that half million recently unemployed during the recession and the half million displaced public sector workers created in the recent spending review. This seems like a tall order at a time when GDP growth will be, at best, muted. A million jobs over the decade might be a more reasonable prospect.

Which brings us to Faisal Islam. His article for Prospect Magazine rather reflects conventional thinking. Stuck in the grip of a neo-classical base for his economics, he fails to grasp the key points of QE. In my view, this reflects the failure of economics more than anything else. Perhaps what we need is a new economics?

The Great Money Mystery – Prospect Magazine « Prospect Magazine

© The European Futures Observatory 2010

US inquiry into China rare earth shipments

2010-10-20T13:04:00.003+01:00

Is this a story about the 'Age of Scarcity', or is it a story about the locus of Geo-politics shifting eastwards, or is it a story about the New Nationalism? The truth is, that it is all of them at once. Futurists have a knack of describing trends and scenarios as if they were separate and discrete views of the future. For analysis, it is better to assume that they are. In practice though, reality is a bit more messy. Many trends and scenarios inter-act with each other and need to be disentangled. The story of Rare Earth Elements is one such case in hand.

BBC News - US inquiry into China rare earth shipments

© The European Futures Observatory 2010

Why Go To Boston?

2010-08-10T09:00:00.005+01:00

Every year I am asked why I go to the WFS Annual Conference. It’s a costly exercise. It has a huge carbon footprint. It takes days for me to recover from the jet lag. And yet, despite these costs, I still attend the meeting. There has to be something that has such a strong pull for me.

The primary benefits of attending are the content and the networking. The WFS is a broad church that contains many areas of interest, so there is usually something for me at most times. This year, I found the session on 21st Century economics interesting, along with the session on the future being regional. The quality of the sessions can vary from time to time, but what is more important is that everyone has an equal chance of being heard.

There were about 800 people attending the conference in Boston. This is one of the largest annual gatherings of futurists in the world and the opportunities for networking are immense. I have to admit that the networking attracts me more than the content. I just love the exchange of ideas, catching up with old friends, and making new ones. It is no wonder that I almost have a second residence in the bar!

Despite the high costs of attendance from Europe, the benefits to me are so strong that it would be inconceivable for me not to attend. I guess that I will see you all in Vancouver next year.

© The European Futures Observatory 2010

Plate Tectonics In The North Atlantic

2010-07-29T14:50:00.003+01:00

Is America losing Europe? Forty years ago this would have seemed a silly question. The Cold War was still raging, there was a distinct group of countries that we called ‘The West’, and the US was the acknowledged leader of that group of countries. ‘The Soviet Threat’, as it was seen in the 1970s, was the glue that held together this disparate group.

With the dissolution of the Warsaw Pact, the glue that bonded together the NATO allies of the Cold War itself dissolved. We could argue that it is not at all correct to talk of ‘The West’ nowadays. As the glue weakened, so the edifice of The West has started to crumble. To be replaced by what is an interesting question, one that could be quite important when studying the future of geopolitics.

It could be argued that The West is dividing into two blocks – North America and Europe. Increasingly, the two do not understand each other. One could argue that the war in Iraq highlighted this dissonance, but it also masks the fact that three of the large players in the EU (The UK, Spain, and Poland) were also involved in the invasion. If there were two nations that were not in one camp or the other – classic ‘Boundary States’ in the style of the ‘Clash of Civilisations’ – they would be the UK and Canada.

The UK is quite important to the US. It acts as the chief cheerleader for US policies in the EU, it provides qualified support for American policies at the UN, and the UK can usually be relied upon to provide assistance to the US. This is why the current turn of events over the Lockerbie Bomber are relatively important. The inquiry proposed by the US Senate has no legal status under Scots Law, and there is no a priori reason why Scottish politicians should co-operate with it.

The fuss created by the Senators has, however, opened a can of worms in the UK. If the US Senate is allowed to comment on the inner workings of the British justice system, then some commentators in the UK feel that it is perfectly legitimate to do the same to the US system of justice. Needless to say, from a European perspective, the US system is lacking in a number of areas – an area that highlights how Europe and the US misunderstand each other. The Economist – normally a supporter of the US – published a pretty scathing editorial about the US justice system this week. All of this serves to support the view that Europe and America are drifting apart.

In time, if this is true, and if this trend continues, then an issue will arise that is vital to the interests of Europe or America, and the other side will let that party down. My own feeling is that, some time during this decade, the US will face its very own ‘Suez Moment’. If it does, then the unipolar phase of US history will have passed as it will be evidence of the demise of the American Empire.

The Economist Editorial: http://www.economist.com/node/16640389

© The European Futures Observatory 2010

Capitalism 4.0

2010-07-24T09:59:00.003+01:00

I am one of those people who read the newspapers from the back to the front. First the sports pages, then the business section, then the editorial and comment, and finally onto the news. I don’t know why I do this – I always have. Perhaps this backwards approach best reflects my interests? I have found that I am starting to do the same with books now. I tend to look at the concluding chapters first. If I find the conclusions interesting, then I might read the introductory chapters to frame the conclusion, and then, if still interested, the bulk of the book for the supporting argument.

I was recently killing time in Logan Airport, Boston (USA - not Lincolnshire) when I came across Anatole Kaletsky’s new book ‘Capitalism 4.0’. Mr Kaletsky is one of those writers who immediately has my attention. As I had a bundle of dollars in my pocket, as they are of limited use to me in the UK, and as I had time on my hands, I bought the book. My flight was overnight, so I only read the concluding chapters. They seem to contain something useful, something sufficiently interesting for me to take the book on holiday to examine the full argument.

The main thesis of the book is that something substantial has occurred in the recent financial crisis. We call it ‘The End Of The Washington Consensus’. The timing of this event varies between commentators. Those in the US date it at the collapse of Lehman Brothers, those in the UK date it from the nationalisation of Northern Rock. Either way, from that point onwards, things would be different.

What we do not know is how they will be different, and this is the contribution of the book. Mr Kaletsky takes a much longer view of the economy and starts to speculate about what comes next, which is exactly what we, as futurists, have been doing for the past couple of years. This is why we commend the book. It is not a map of the future, but it does serve as a guide into some fairly uncharted territory. If you are of the opinion that ‘back to business as usual’ is not an option, then this book is a good starting point for you.

Book review from The Economist.

© The European Futures Observatory 2010

Advice To My Children

2010-05-24T16:51:00.002+01:00

“If you were advising your twenty-something children about investing in a pension, where would you advise them to invest?”

This is the conundrum that greeted me as I attended a Long Finance Roundtable recently (see http://www.zyen.com/long-finance.html). It is, actually, a really interesting question because it forces us to look again at many of our beliefs about the long term. I have been thinking about how to answer the question for a while now and I am not sure that I have a definitive answer. What we can do is start to examine some of the parameters.

Two key questions around this issue are: for how long will your retirement fund have to support you? And, how long do you think that you will save for your retirement? The first question gets at our attitudes towards how long we think that we will live. This is a delicate balance. One the one hand, life expectations are increasing and my daughters (both born in the 1990s) could reasonably expect to see a turn of the century twice – once at the beginning of their lives (the year 2000) and once towards the end of their lives (at the year 2100). On the other hand, there is the possibility of a long term event, such as climate change, significantly reducing life expectations later in this century. There is a great deal of uncertainty about our prospective life spans.

The second question looks at our attitudes towards work, our ideas of career, and the notion that, towards the end of our working lives, we can expect a period of rest. Our traditional view towards work and retirement stems from an industrial view of the workplace. If the knowledge economy establishes itself for our heirs, then one can question if ‘retirement’ is that desirable in the first place. The second question is not independent from the first, because, if we only partially accept the concept of retirement, then the retirement fund will have less strain placed upon it during our sunset years.

When first considering the problem, we are naturally led to start thinking of asset classes (stocks, bonds, property, and so on). However, this is a mistake. Our first focus ought to be on returns, and, from there, we should move on to asset classes. If we do this, then our first thoughts naturally go towards those investments that yield the greatest returns. I am of the opinion that we too often neglect our human capital, and that this is exactly the type of question in which it ought to be considered. Investment in our own education has to be the first port of call. Of course, our education is a wasting asset in that our knowledge will become obsolescent with time – some would say that the rate of obsolescence is increasing – so that, in order to stay current, we need to invest in life long learning.

Beyond that lies the social capital that we can access. Investing in our family and friends, over the course of a life time, will pay dividends many times over. We can enhance these returns by investing in our social networks. Interestingly enough, this investment is primarily non-financial. It is temporal. We need to make time for our family and friends to develop our stock of social capital. In recent years, however, I have been involved in a number of attempts to place a financial valuation upon the social networks embodied within an organisation. I see this as an attempt, in the Knowledge Economy, to leverage the valuation of what really creates financial value – our ‘know how’.

At this point we start to get into the world of financial assets. There is a long discussion about whether financial instruments are better stores of wealth than tangible assets such as property. Much depends upon how well you understand how the different classes of assets work, which basis periods you are comparing, and what else is happening in the wider world when the comparisons are made. Personally, I take the view that a portfolio ought to be balanced with a bit of all of the main investment classes. However, I accept that many people disagree with me.

To come back to the original problem, I think that I would be inclined to advise my children to invest in their own human capital as a matter of priority. Beyond that, the next investment priority would be to invest in their social capital – building strong ties with family and friends. Finally, to start building a stash of financial assets. This last task will be that much easier if they have done the first two tasks effectively.

I am reminded of an old adage – remember your friends on the way up because you will need them on the way down!

© The European Futures Observatory 2010

A Bit Of Clarity

2010-04-28T15:50:00.002+01:00

We have received a number of requests to clarify and expand upon a point made in our last update. In it we said that “the US stock of debt has a half life of just over 4 years and a coupon of just under 6%, which suggests a very pressing issue for the 2016 US Presidential Election”. We have been asked to explain exactly what that means and what chain of events might be triggered out to 2016.

To understand this, we need to start with the nature of public sector debt. Although an individual loan instrument has a fixed term, it would be wrong to think of public sector debt as fixed in nature. Because treasuries around the world issue a number of instruments with varying maturity dates at different times, public sector debt is a lot more fluid than we might think it to be. In many cases, the debt is revolving, which means that new debt is issued to repay old debt as it falls due. This is quite normal. Public sector debt is less like a mortgage – a single loan of fixed term used to purchase a big ticket item – than it is an overdraft – a series of lending and repayment events used to smooth out cash flow fluctuations.

At any one point in time, the US Treasury will be issuing new debt instruments, of varying repayment maturities, and either spending that money on fiscal expenditures or using that money to repay old debt. The balance between debt repayment and making fiscal expenditures is largely determined by the size of the fiscal deficit – the extent to which taxes are insufficient to meet expenditure obligations. As deficits grow there is greater pressure to delay the repayment of debt and to allow the total amount owed to increase.

However, the total amount owed cannot increase without check for two reasons. First, because the total debt is a collection of loans for fixed terms, the time profile may well be very uneven. If so, then there comes a point where the total amount borrowed (i.e. the debt repayment that cannot be avoided plus the size of the fiscal deficit) exceeds the willingness of the bond markets to lend to the government. This brings in the second constraint. As we are currently witnessing for Greece, the willingness of the bond markets to lend to a government is partly determined by it’s credit rating and partly determined by the price at which the government is prepared to borrow. These two reasons are why the time profile of the debt and its coupon (i.e. price) are very important.

We measure the time profile of the debt in terms of its half life. This is the period of time in which 50% of the total amount owed falls due for recycling. A short half life combined with a large fiscal deficit implies that the government has a real problem in its immediate future, which will only be solved by drastic reductions in its fiscal deficit (this means emergency and severe spending cuts followed by steep tax increases, as in the case of Ireland) or by the cost of borrowing rising disproportionately (as has happened with Greece, along with the consequential downgrading of Greek debt by the credit ratings agencies). In both cases, the remedial action is likely to be sufficient to trigger a major political crisis.

Bearing this in mind, it is worth using this framework in the case of the USA. The USA has a very short half life for its debt. At 4 years, it is one of the shortest repayment profiles in the OECD. The American fiscal deficit (both Federal and State deficits combined, if we are to compare like with like) is relatively large (11.1% of GDP in 2010 according to the EIU) compared to other OECD nations. In the absence of a strategy to alter this state of affairs, this would suggest that a refinancing crisis could emerge somewhere towards the middle of this decade. The crisis is likely to occur after the 2012 Presidential Election, but could well become a major factor in the 2016 Presidential Election.

There are two aspects to this problem – the savings glut in the global economy and the savings shortage in the US economy. One solution would be for the US economy to save more. To date, the household sector in America has been reluctant to save. Experience elsewhere in the world suggests that if the household sector will not save, then the public sector must do it for them through higher taxation. There is every expectation that this will become a pressing issue in the 2016 Presidential Election, simply because resolving the question of the fiscal deficit is likely to become very pressing.

Of course, raising taxes is not a popular policy, particularly in America, but then, as we said before, the remedial action is likely to be sufficient to trigger a major political crisis.

© The European Futures Observatory 2010

A Tale Of A Jig-Saw

2010-03-26T11:23:00.002Z

It sometimes helps to view the future as a very large and very complex jig-saw puzzle where, in the present, we have most of the pieces to the jig-saw. The skill of the futurist is to fit those pieces together in a way that allows us to view the future usefully. This process is often made more difficult by the ambiguities of the final result – a blue jig-saw piece could be part of a sky scape, or it could be part of a sea view, or it could even be part of a more obtuse mountain scene – and the fact that the future will also make up its own pieces as we go along. However, despite these problems, sometimes a group of pieces just fall into place together at more or less the same time to reveal something quite useful about the future. Just such an event has happened recently.

As our readers will be aware, we have been tracking the course of UK unemployment for the past year. About fifteen months ago, many commentators expressed the fear that UK unemployment would rise to 3 million by the end of 2009. In the autumn of 2008, we felt that unemployment would rise to 2.25 million. As the full impact of the recession started to be felt, we revised that forecast up to 2.5 million. The difference in the forecasting can be attributed to different modelling techniques. In the event, unemployment reached 2.46 million in December. We were interested in this because the out-turn of actual unemployment is quite likely to shape the course of the UK economy for the next decade – it is one of those things that may have a small impact in the present, but with large consequences in the future.

Moving the story forward, if unemployment is not as bad as forecast (remember, the forecast error is 100% – a rise of 1 million was forecast whereas unemployment only rose by 0.5 million), then all other subsequent forecasts will be wrong as well. The impact of the automatic stabilisers (welfare benefit payments increasing and tax receipts falling as unemployment rises) will be lessened. It transpired this week that the lesser impact was to reduce PSBR by £11 billion this year, with a consequential impact of £14 billion next year. Of course, this is money that the government doesn’t have, which means that the stock of debt will be smaller by £25 billion over the next two years.

In turn, this makes the UK debt look just a bit more manageable. The half life of the UK stock of debt (the period of time by which 50% of the stock of debt needs to be repaid or recycled) is 14 years with a coupon of just over 4%. This is one of the better profiles in the OECD (by way of comparison, the US stock of debt has a half life of just over 4 years and a coupon of just under 6%, which suggests a very pressing issue for the 2016 US Presidential Election). We have already pointed to the impact of inflation in reducing the real value of the debt. If the Bank of England hits it’s 2% inflation target on average to 2024 (when the half life falls due), then £1 borrowed in 2010 will only take £0.75 to repay in real terms in 2024. Added to that, if we also factor in the possibility of inflationary drift in the taxation system, then the impact of inflation on the debt will be to reduce the debt burden even further. It is no surprise to us that the Chancellor neglected to increase the tax thresholds by the rate of inflation in the recent Budget – it is a sneaky 3.5% tax rise in real terms that took the Opposition days to recognise.

We were also told, for the first time, in the recent Budget that the Government intends to sell it’s bailout holding in the UK banking sector, when conditions allows, to repay some of the UK debt. Ignoring the question of the wisdom of this approach – the Government currently receives interest and fees of about 12% on every £1 used to bail out the banks, which explains why the banks are very keen to repay this money – the issue arises of how much they might receive. Our previous estimate of between £350 billion and £400 billion in a time frame of 2018 still looks good to us. All of this suggests that the plan to pay down the bulk of the stock of debt by the second half of the decade looks to be quite credible if about a third is covered by bailout repayments and about a third by the impact of inflation.

And yet the markets don’t quite believe it. UK sovereign debt currently trades at a premium of 120 basis points (that’s 1.2% in ordinary language), despite the Triple A rating for the UK. This isn’t sustainable. Other Triple A economies (e.g. France and Germany) trade at a premium of 50 to 60 basis points. Looking at it another way, the UK debt is trading at about the same premium as Greece despite the clear differences between the two economies. There is talk about the UK being downgraded from Triple A. If that were to happen, then we would see that as a buying opportunity because the UK would be undervalued at that point. If, as is more likely, that doesn’t happen, then we can expect the premium to fall back to Triple A levels.

In many ways, this suggests that Sterling is undervalued, in a long term sense. It may be quite deliberately kept so because the low value of the Pound against the Euro and US Dollar is quite handy for UK exporters to the Eurozone, the US, and those parts of Asia that peg their currencies to the US Dollar (read: ‘China’ here). The UK is exporting – some might say ‘dumping’ - its excess supply overseas by, as a matter of policy, keeping low the cost of British exports in overseas currency terms. A low currency does contain the danger of inflation, but this is held in check at the moment by the output gap – the difference between actual GDP and potential GDP.

The size of the output gap is difficult to measure because potential GDP is a rather speculative concept and actual GDP in the most recent past is subject to significant revision. However, despite this, we are comfortable with a view that the output gap is between 5% and 10%, which suggests that Sterling could appreciate, over the course of this decade, by a similar amount. And that really brings us back to the starting point. We are of the view that the doom and gloom in the UK is overdone. There are areas and sectors which have been very badly hit by the recession, but there are also sectors and regions that are very much untouched. It is worth remembering that the pain has not been spread evenly. However, the prospects for the next decade look quite good – a decade of slow recovery, but where the UK is more likely to fare better than our comparable partners in Europe.

Of course, there is still scope for policy blunders, both at home and abroad, which could make things worse. Let us hope that we get the political masters that we deserve!

The Rise Of The China-sceptic.

2010-01-13T10:45:00.001Z

Every now and then, a novel idea enters the public domain. At first, that idea sounds a bit off-beat – almost revolutionary. Eventually the idea is taken up by more and more people so that it manages to reach the mainstream. Beyond that, if the idea gains traction, it becomes part of a new conventional wisdom. Once there, anyone who questions the idea is seen as something of a crank. The ideas behind the rise of China fall into this path. Originally, at the turn of the century, the notion that China would be a rising super-power was seen as fanciful. The then conventional wisdom of the Washington Consensus had no place for China.

Goldman Sachs questioned that conventional wisdom when they developed the notion of the BRIC economies. Over the course of the decade, as the BRIC economies grew relative to the OECD economies, so the notion took hold. It has now reached the point where it has become the conventional wisdom. I attend a number of futurist meetings each year and at each one I am greeted by the mantra that China will have the largest economy in the world by the 2020s. Personally, I very much doubt this.

My cause for scepticism is threefold. First, there is the question of demographics. The ‘One Child Policy’ has served China well to date but, at some point in the coming decade, it will go into reverse, giving rise to a sharply growing dependency ratio (the ratio of working population to non-working population). Unless China experiences a very high level of labour productivity growth to compensate, as the size of the working population falls, so GDP growth will come off the boil. The decade may witness the reduction of GDP growth in China to the 5% to 8% band.

At this point the second cause for scepticism assumes importance. As time goes on, the law of large numbers will start to act as a constraining factor to the Chinese economy. High growth rates are easier to achieve when the economy is relatively small, but much harder for a large economy to maintain. This is why the growth rates of the BRIC economies are much higher than those of the OECD economies. For example, the raw materials that are needed to run the Chinese economy at it’s present levels have caused most markets for raw materials to tighten. At some point during the next decade or two the demand for those raw materials is likely to exceed the capacity to supply them, acting as a limiting factor to further growth.

Third, to close the feedback loop, China has a very high savings ratio – mainly in response to the absence of a welfare safety net, as most Europeans would understand it. The private sector is saving through bank deposits, which are, in turn, being lent to fuel property and stock market bubbles. Usually, the creation of such bubbles suggests a lack of productive investment opportunities and foreshadows a financial crisis as and when those bubbles burst. Any slight disruption to the Chinese economy could lead savers to ask for their money back, precipitating something of a financial crisis. Given that the Government of China has deposited its surplus funds in US Treasury Bills, there are grounds to suspect that financial contagion could spread quite quickly. If that were to happen, then the overtly nationalistic policy of the Chinese Government could well hamper a co-ordinated global monetary response to contain the contagion.

This is not to say that we are predicting the financial collapse of China. What we are saying is that the development of the Chinese economy is a lot more fragile than it appears, and that an uncritical view of the conventional wisdom does not encourage a balanced review of future prospects. It is correct for futurists to point to a trend of China becoming a greater economic force in the world. However, good futurists would also point out that for every trend, there is also a an important counter-trend that could well turn into a new conventional wisdom. Over the past few months, I have noticed the growth in the China-sceptics. More and more articles that question the conventional wisdom are being published (I have included the links to a couple below), which suggests that we might be seeing the start of a turning point.

Only time will tell if the case for China has been over-made. However, given its importance, I think that it is an issue to which we will return from time to time.

Contrarian Investor Sees Economic Crash in China (New York Times 07/01/2010)

Think Again: Asia's Rise (Foreign Policy, July 2009)

Scarcity Bites – A Decade Too Soon!

2010-01-05T16:02:00.003Z

The twin concepts of scarcity and plenty describe a complex relationship between what we have and what we need to have if we are to do everything that we want to do. In many respects, one aspect of the future that will enter into our consciousness in the very near future is that of scarcity. In simple terms, scarcity suggests that the supply of a resource is not sufficient to satisfy its demand. As the global population increases, and as that population has expectations of higher living standards, so the demand for resources will rise. However, as we start to feel the finite nature of our resource endowments, scarcities will start to emerge. This is the underpinning of much thinking on the issue of ‘Peak Oil’.

It is our contention that energy is not the only resource that will be scarce in the immediate future. We envisage scarcities of food, water, and a whole variety of minerals that are crucial to the operation of a modern economy. Our thinking so far has focussed on the 2020s as the decade in which scarcity starts to be felt (we call it ‘Scarcity Bites’), but recent events have drawn our attention to a much earlier manifestation.

A recent article in The Independent (see below for link), has drawn our attention to the case of the Rare Earth Elements (REEs), a group of 17 rare metals that are essential to the manufactures of the modern economy which are in a situation of scarcity (demand outstrips supply). The picture is further complicated by China being the main source of the REEs (it supplies over 95% of the world total of REEs) and following a policy of restricting their export. This conjures up some fascinating possibilities for the future.

The onset of scarcity is likely to lead to a large spike in the price of the scarce resource. In many respects this has already happened for REEs. The spike in price will have three important implications:

Alternative sources of the scarce resource that have been abandoned as financially unviable will be reappraised, some of which will now be viable, and will then return into production.
The high cost of the scarce resource will be sufficient to stimulate research into viable (i.e. less costly) substitutes for the scarce resource, some of which will be viable and help satisfy the demand for that resource.
The high cost of the scarce resource will encourage users of the resource to be more parsimonious in their use of the resource. This will act to assist the conservation of the resource to elongate its supply.

As the demand and supply for the resource become tempered, the price will fall back from its previous high to a new, more stable, price. This is a standard analysis using Marshallian Time Periods.

The monopoly of production in China is a complicating factor. The production of the REEs has no value to China per se. Their importance lies in being a constituent part of a number of key manufactures. In many respects it matters little outside of China if the REEs are exported in mineral form or in the form of embodied manufactures. China has enriched itself on being the global source of cheap manufactures.

This only works as long as the manufactures are cheap. However, the embodied REEs, as a small constituent cost in the manufacturing process, can increase in price substantially before they have an impact on the overall price of the manufactures. For example, suppose that we have a good that uses REEs, costs £100 to manufacture, and the REEs represent 1% of the manufacturing cost. If the REEs were to treble in price, the manufactured cost would only rise to £102, a 2% increase in the cost of the manufacture after a 300% increase in the cost of the REEs.

Economic theory would suggest that we ought not to worry too much about the scarcity of REEs starting to bite. As a small component cost in the overall manufacturing cost, the increase in their prices is unlikely to have a major inflationary impact. It is likely to stimulate production elsewhere in the world (Australia and Greenland are two contenders), thus lessening the monopoly of China. Viable alternatives to REEs will become more attractive, and the relatively high cost ought to make us conserve the stocks that we already have. However, this is a case of scarcity becoming evident a decade sooner than we thought that it might. Either way, it should be an interesting case study for the onset of more serious scarcities (Food, Energy, Water) later in the century.

It appeals to that part of me that is a small boy with a beetle in a jam jar!

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

Rare Earth Elements: http://www.independent.co.uk/news/science/precious-metals-that-could-save-the-planet-1855394.html

China and REEs: http://www.independent.co.uk/news/world/asia/concern-as-china-clamps-down-on-rare-earth-exports-1855387.html

The Hammer And The Screw

2009-12-23T14:52:00.001Z

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 Southward March Of Europe

2009-12-18T12:32:00.002Z

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 Probable –vs- The Possible

2009-12-12T11:49:00.001Z

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!

A World Without Bananas

2009-12-06T16:24:00.001Z

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 Practical Men And The Defunct Economist

2009-11-21T12:41:00.002Z

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”.

Touching The Bottom?

2009-11-19T15:18:00.004Z

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

2009-10-30T10:24:00.001Z

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

2009-10-20T15:31:00.002+01:00

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

2009-10-10T14:56:00.003+01:00

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

2009-10-03T13:01:00.001+01:00

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?

2009-09-30T12:46:00.001+01:00

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?

2009-09-21T16:55:00.001+01:00

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

2009-09-01T15:43:00.001+01:00

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

2009-08-31T12:25:00.001+01:00

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

2009-08-29T16:31:00.001+01:00

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

2009-08-20T16:24:00.001+01:00

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

2009-08-19T10:31:00.001+01:00

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

2009-08-17T18:35:00.002+01:00

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!

2009-08-14T16:35:00.002+01:00

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?

2009-08-13T17:10:00.002+01:00

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

2009-07-24T16:27:00.002+01:00

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?

2009-07-23T17:08:00.004+01:00

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