Is America The New Weimar?

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

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

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?

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

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

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

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

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

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

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

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?

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

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?

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

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

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

“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

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

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 European Futures Observatory 2010

The Rise Of The China-sceptic.

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.

 

© The European Futures Observatory 2010

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!

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:

1. 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.
2. 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.
3. 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”.

© The European Futures Observatory 2010

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

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

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

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

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

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

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

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

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

 

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

© The European Futures Observatory 2009

The Southward March Of Europe

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

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

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

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

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

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

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

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

© The European Futures Observatory 2009

The Probable –vs- The Possible

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

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

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

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

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

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

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

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

 

© The European Futures Observatory 2009

A World Without Bananas

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

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

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

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

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

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

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

And it’s all my fault for liking bananas!

 

© The European Futures Observatory 2009