Tuesday, 30 December 2008
Monday, 29 December 2008
Saturday, 20 December 2008
As the real economy moves into recession, we can now see how governments around the world are responding to the crisis. In general, there has been a bail out of the banking sector around the world. This has been coupled to a loosening of monetary policy as interest rates have been aggressively reduced, along with the announcements of relatively large fiscal stimuli. We have yet to see whether this action alone will be enough to mitigate the worst effects of the incipient recession. While we wait for the unfolding of events, we might be usefully engaged in giving some consideration to the longer term impact of these policy changes.
Most attention in the UK has been directed at the size of the fiscal stimulus. Two factors dominate the conversation – the amount that needs to be borrowed and how will it be paid back. Indeed, there is currently a very public row between the UK and German governments about the wisdom of such large borrowings, which, in turn, is feeding into the domestic political agenda. The more critical reviews of policy estimate borrowing to be in the region of £1 trillion (see article). This is highly unlikely to happen and represents more of a political calculation rather than a financial one.
We ran some scenarios based upon the recent Pre-Budget Report, and we estimate borrowing to be in the region of £355 billion over the next 8 years. Interestingly enough, Barclays Capital estimates total borrowing at about £370n billion over the next 7 years. This suggests a more reasonable order of magnitude. Of course, all estimates are, at the present, quite speculative. The duration and severity of the incipient recession will have a greater role to pay on the actual outcome, and, at present, this factor is a critical unknown.
The estimates presume that the economy will continue into recession until the middle of 2009, with unemployment peaking at about 2.25 million. If the recovery is delayed until 2010, or if unemployment rises appreciably beyond the forecast levels, then the automatic stabilisers (lower tax receipts and higher unemployment benefit payments) will push the borrowing requirement beyond the current projections. Of course, if the base assumptions turn out to be unduly pessimistic, then the opposite will occur. At present, the pressure valve to the economy is the Sterling exchange rate, which has been allowed to fall with something of a public outcry, but without too great a policy response. This gives rise to hopes for exports playing a role in the recovery.
Irrespective of whether the estimate for PSBR is higher or lower in the coming years, the point remains that the government will undertake record levels of borrowing, which will have to be repaid. This raises the question of where the money will come from to repay the debt. We feel that the situation is not as bad as has been painted. The government has bailed out the banking sector to the tune of £37 billion (with borrowed money). The bailout has been implemented by taking 12% preference shares in the UK banks. We like the horizon of 8 years because, in that horizon, at 12% return, the £37 billion will have been repaid in the form of a preference dividend. You should note that these figures are averages – a holding that averages at 8 years in duration and which pays an average of 12%. However, on this reckoning, the original loan taken out by the government more or less can be repaid from income, leaving the Treasury holding 12% preference shares that cost £37 billion.
How much are these preference shares likely to be worth in 2017? Supposing that Base Rate normalises in 8 years at an average of around 4%, then the CAPM valuation model would suggest that the capital value of UK Financial Investments Ltd (the vehicle through which the Treasury owns the preference shares) would be in the region of £110 billion to £120 billion. This was the basis of our view that UK Financial Investments Ltd should become a Sovereign Wealth Fund (see note). However, as this sum represents about a third of the additional PSBR, one can see that the Kid’s Inheritance could well be spent upon repaying the new borrowing.
Furthermore, in a previous post (see post) we speculated that the New Normal would lead to greater supervision of the banking sector. One way in which this supervision will manifest itself is through tighter capital adequacy rules and tighter liquidity requirements. As a consequence of this, the banking sector will be required to hold a greater percentage of their asset base in gilts. The Financial Times estimates the additional gilt requirement for the UK banking sector to be in the region of £90 billion to £350 billion (see article), which raises the oddity of the Government lending the banks the money which they banks use to lend to the Government. Either way, this represents a further chunk of the additional PSBR being covered.
Finally, as equity markets fall across the world and as the global economy heads into recession, pension fund managers will be worrying about their long term commitments to pay a steady stream of income. One technique to allay those fears is to switch from the volatile income stream associated with equities into the more certain income stream associated with gilts. Of course, this gives rise to the perverse situation of pension funds selling equities at the bottom of the market and purchasing gilts as they become relatively dear. However, in terms of PSBR, this will put further demand into the gilts market. We are currently unable to estimate the extent of this demand – it depends upon how bad the equity markets become – but we could expect the figure to be in tens of billions of pounds.
Already we can start to see how the additional PSBR will be funded. Most of it will be funded by the banking sector as a consequence of greater state supervision and involvement in the sector. Politically, this is a good message that can be given to voters. The banks – who many hold responsible for causing the economic turndown – will have to pay to clean up their own mess.
The UK case has wider significance for two reasons. First, the UK government feels that it has been something of a thought leader in the G8 on how to respond to the current turmoil. There is something to this claim. The US, who ordinarily would take the lead, has been unable to do so because of the political paralysis caused by a change of President. In many respects, President Elect Obama, when he assumes office in January, will be playing catch up to the rest of the world. If the forecasts of the recovery starting in mid-2009 are correct, then the US is unlikely to gain the initiative in combating the recession. The resulting institutional structures could well have a distinct European feel about them. Perhaps Mark Leonard is right? (See Reference).
The second point to note is that we are discussing the response to the recession unwinding over the next decade or so. We are now only coming to realise that the immediate planning future has changed, and that a New Normal is emerging for the coming decade. This has yet to permeate into corporate planning structures, and when it does we might see a different approach to business emerging.
The impact of the credit crunch is likely to be with us for some years to come. Let us hope that, in dealing with it, we do not have to spend the Kid’s Inheritance.
© The European Futures Observatory 2008
We are organising a roundtable meeting in March 2009 to examine how ‘The New Normal’ might be structured in the years to come. The meeting will be in London and aims to develop and publish ‘A manifesto for the G20’ ahead of the meeting of the G20 in London in April 2009 in an attempt to introduce some futures thinking to the policy debate. If you would like to be involved in the roundtable, or if you would like to be informed of developments, please let me know and I will keep you in touch.
Thursday, 18 December 2008
edexcel, 190 High Holborn, London
STEPHEN AGUILAR-MILLAN, The European Futures Observatory
ADAM GORDON, The Future Studio
Dr TRUDY BARBER, University of Portsmouth
FRANCESCA BIRKS, Arup Group
Wednesday, 26 November 2008
In the recent US Presidential Election, it was said by the Democrats that a vote for John McCain would be a vote for another term for Bush. More precisely, it would be a vote for a fourth term for the Bush Agenda. Barak Obama campaigned on the theme of change – change in Washington, change to the political elite in the US, a new broom sweeping clean. Strangely enough, this was a theme that we picked up in our 2007 scenario ‘A Future Worth Building 2005-2025’ (see scenario), which is starting to look like a road map for the immediate future.
In the scenario, we picked up the desire of the US Electorate for a change from the tired policies of the Bush and Clinton eras. It is a desire for something that is truly new. In our scenario, we felt that mainstream US Politics would be unable to generate such a President, so we wrote in an outsider. Our President was a Congressman from Iowa rather than a Senator from Illinois, but this is beside the point. The main forces affecting the US in the scenario are broadly similar to those affecting the US today.
Reviewing the piece, we have been proven right about the precarious nature of the US economy, but we have been completely wrong in the effects of it. We had hoped for a soft landing, whereas the hard landing that we feared has come to pass. The US is still finding it difficult to engage its NATO allies in the War in Afghanistan, and the critical issues over the fate of Guantanamo Bay and the International Criminal Court have yet to be resolved. It is worth remembering that our scenarios are not forecasts of the future, but sets of future states that the world may play into. This particular scenario was an attempt at examining how the US could achieve a ‘good’ outcome in the world by 2025. It has, inadvertently, also become a standard by which the actual new administration could be judged.
Two factors have become apparent so far. The first is that a Presidential Candidate who is an outsider also lacks the key policy infrastructure to form an effective government. For this reason, the newly forming Obama Administration is becoming packed with Clintonistas. The appointments made so far (see updates) contain a sufficient number of personnel who served in the Clinton administrations for this to be considered a Clinton third term. And this is before we know whether or not Hillary Clinton is to be the new Secretary of State.
The second factor that is becoming evident is that President Elect Obama could hardly be called a ‘man of action’. Setting aside his delay in naming his Administration, his impact on the G20 meeting was minimal at a time when the world economy is in need of decisive action. To put off meeting to discuss international collaboration for five months is not really an effective policy response. It almost appears to indicate that President Elect Obama wasn’t really prepared for actually winning the election.
The world is accustomed to President Bush going AWOL on the job – his excuse is that he isn’t that good at it – but a great deal more is expected around the world from President Elect Obama. For example, in The Africa Report (see web site) Prime Minister Odinga of Kenya is reported as wanting “Africa to receive more attention as a place for investment than as a humanitarian case”. One hopes that this weight of expectation, both inside the US and more generally around the world, is not to be disappointed.
It does, however, create an immediate problem. If the US is unwilling to address the international dimensions of the global economic crisis, who is? Interestingly enough, Europe has stepped forward to fill the policy void. An unlikely combination of Brown (the thinker), Sarkozy (the doer), and Merkel (the sense of proportion) has arisen to find a way out of our current economic difficulties. The danger for America is that, by the time the G20 meets again in April, the initiative will have been lost to the EU nations for effective economic policy formation. This hardly sounds like restoring America’s place in the world.
And that brings us to the heart of the matter. Does it make a difference who won the US Presidential Election? The US economy is heavily influenced by overseas factors – particularly overseas investment flows. US foreign policy is bounded by what the key allies of America will or will not do to advance the Washington Agenda. Neither the Clinton nor the Bush Administrations did a great deal to reverse these long term trends. Both Administrations have held onto a paradigm that is out of step with the reality of global affairs.
If Obama is serious about change, then one has to ask why so many of yesterday’s tired and failed policies are being revived. It could be that the newly forming Administration knows nothing else. The appointment of Robert Gates to the Obama Cabinet suggests that there has been no choice at all in the recent election – we have both a Bush fourth term and a Clinton third term at the same time.
So much for change!
© The European Futures Observatory 2008
Wednesday, 19 November 2008
I have been giving some thought to the interplay between society and the economy over the past week. A pre-publication review copy of Don Tapscott’s new book “Grown Up Digital” has fallen into my lap. I am about half way through the book, which presents an impressive body of research on the ‘NetGen’ cohort (also known as ‘Gen Y’ and ‘the Millennials’), and is likely to dominate our conversation about this generation for some time to come. It tells of how the Internet has affected the way in which this generation interacts with each other and the world. As I was reading the book, it occurred to me that the current economic crisis will also become a formative experience for this generation.
Whilst we tend to focus on high level, exciting aspects of generational interplay, such as careers and jobs and sexy technology, it is the more mundane aspects of life that prove to be more important. I was reminded how such a routine subject such as housing has changed within a couple of generations. When I was a young man, it was common for young people in their late teens and their twenties to ‘save up’ for a deposit on a house. We all aspired to home ownership and it was within the reach of most of us in terms of the affordability of a mortgage and the affordability of the price of housing.
What wasn’t freely available was the finance to purchase the housing. It was quite common to join a queue for a mortgage whilst saving for a deposit to buy the house. Mortgage finance was reasonably limited and offered on conservative terms. It was not uncommon for a deposit of 10% to 20% of the purchase price to be required, and the maximum loan multiple would be 2.5 times annual salary.
The Thatcher Revolution changed all of this. With the sale of council housing to tenants, the number of house owners increased dramatically in a short space of time. The whole housing market became larger. The de-regulation of the financial markets in the mid-1980s also made finance much more freely available than it had been previously. The result of this was a general increase in Loan To Value (LTV) rates as the deposits required for purchase fell along with a general increase in the salary multiple as it became easier to raise loan finance. With so much liquidity entering the housing market (and a relatively fixed supply of housing in the very short term), the inevitable happened – house prices rose, despite a setback in the housing market in the early 1990s.
This had a profound effect on the behaviour of young people. As they no longer needed to save for a deposit on a house because of rising LTV rates, they didn’t. As many of them became priced out of the housing market as first time buyers, they stayed at home longer than their parents had at their age. Strong growth in the economy kept earnings buoyant, which resulted in a significant increase in the discretionary disposable income of this age group. One aspect of this is what some observers call the drunken mayhem in British town centres at the weekend. The ‘Binge Drinking Culture’ is as much a result of loose monetary policy as anything else!
And now that has changed. The disruption in the financial markets has caused the property market to grind to a halt. The reduced number of property transactions is causing acute financial hardship for those who make a living from handling property (estate agents, solicitors, mortgage brokers, etc). This has a knock on effect for those trades ancillary to the property market (furniture makers, builders, curtain makers, etc), and is now leaching into the wider real economy. As this happens, households traditionally shore up their balance sheets (borrow less, save more), which is already being felt in sectors such as pubs and restaurants.
However, there is an upside to this, particularly for the NetGeners. The falling price of property has made housing more affordable for them. As long as they remain in work, current conditions represent one of the best opportunities for years to purchase property. However, credit conditions are such that mortgage finance is not as readily available. LTV ratios are falling along with salary multiples. If these monetary conditions remain for an appreciable period, we may see saving become a ‘cool’ activity as the NetGeners look to raise a deposit for a property.
To a certain extent, this might mark the end of the Thatcher Revolution, which was based upon cheap money and freely available credit. If the New Normal turns out to have much more restricted credit terms - and fewer ‘funny money’ financial instruments – then we could see a return to ‘save and wait’ as a way of purchasing property, which is a reminder of my youth.
I always told my children that, one day, they would end up like me!
© The European Futures Observatory 2008
Saturday, 15 November 2008
Originally uploaded by EUFO Views
This notice struck me as interesting. Mobile phone has replaced cash. And yet, the presumption is that we all have a mobile for which payment is enabled. I'm not sure what happens if you don't have a mobile phone.
As an ironic twist, I took this photo with my mobile phone!
Sunday, 9 November 2008
This week we have seen a glimpse of the future – the New Normal. The UK Treasury leaned on the Bank of England to cut the Base Rate by a third (4.5% to 3%) - so much for Central Bank independence. The Treasury then bullied the UK retail banks into passing on the whole of that reduction to their small business and mortgage customers. Of course, with the Treasury owning two retail mortgage banks outright, 60% of one retail bank, about a third of another; it would be inconsistent for the banks not to implement their owner’s wishes. Politics rather than finance are driving the banking system at the moment, and it seems to be working as the Labour Party sees an electoral revival (they won a by-election this week that they were otherwise set to lose).
It is this political input into the economy that gives rise to the possibility of social turbulence. With any given policy, the world of politics throws up those who will gain from the policy and those who will lose from it. For example, this week the Treasury – presumably at the behest of their political masters – decided to give borrowers an advantage over savers by insisting upon a reduction in interest rates. Borrowers were seen to be more important, for all sorts of reasons, than savers. If the forecasters are wrong about inflation (currently over 5%) and it does not fall appreciably, then savers would be hit by both falling interest rates and depreciating money – a recipe that has, historically, given rise to periods of acute social instability (Weimar Germany springs to mind).
Of course, in the post-industrial world this social turbulence manifests itself in a change of Government. We have seen that this week in the US. In other parts of the world, however, social turbulence has a more sinister dimension. In a recent article in The Economist (see article), the plight of the middle class in China was considered. In the absence of a welfare safety net, many of the newly enriched middle class in China have prudently saved for hard times and their old age. Much of their savings have been channelled into the stock markets and property. The stock markets are down by two thirds in local currency terms this year and property prices are falling at an increasing rate. The middle class are starting to become angry because they have only ever known rising markets (a bit like the Millennials in the post-industrial world) and they had thought that the government would guarantee their savings. The loss of savings – and the welfare safety net it provides – is fuelling the political anger that is now rising in China.
We can now see the political model in China starting to unwind. In order to maintain social harmony, the government of China needs to deliver growing prosperity. It is thought that GDP growth at about 8% per annum is the economic threshold for political stability. Chinese growth has come off the boil this year – down to a forecast 9.8% in 2008 and 8.5% in 2009. As the economy continues to come off the boil, we should expect a bit more disharmony to manifest itself in China. And there lies the real danger for the rest of us.
Historically, the reaction of autocratic governments, when faced with growing internal unrest, has been to whip up a nationalist fervour at home – behind the government, of course – through an external intervention. We saw this earlier this year in the ‘spontaneous’ reaction of people in China to the perceived criticism of China expressed in foreign cities, by foreigners, over the passage of the Olympic Torch. We are unable to say how spontaneous or orchestrated this reaction was. However, either way, it has proven to be a significant tool for the Communist Party of China to use.
If China were to seek foreign adventure, where is it likely to start? We gave a paper on East Asian Hotspots at the World Future Society Conference in Washington this year (see slides). Our view is that the Paracel Islands (Slide 12) would be a good candidate. They ring the right bells for resources, they are probably within China’s current military capability, they are not of that great importance to Taiwan, and it is unlikely that a US that is tired of war would be too assertive over the Taiwanese claims to these islands. We will be watching for news in this area in coming months.
It is interesting that recent events have thrown up a revival of the works of John Maynard Keynes. Keynes was at his best at the end of the 1920s and 1930s. As economic failure gave rise to social turbulence then, I wonder if we are likely to see a re-run of history in the near future?
© The European Futures Observatory 2008
Friday, 7 November 2008
On the whole, I enjoyed reading the book. It was a straightforward read that meant that I could cover the issues without too much difficulty and the material was presented in a way that made it readily absorbable. The book covers an important area that is often neglected, and it is for this reason that I would recommend it.
Wednesday, 5 November 2008
Sunday, 2 November 2008
Apparently, “Following a recent review of our interest rates, we are writing to let you know that from 3rd November 2008, we’re decreasing our … interest rates by 0.5%.” In plain language, they have passed on the full benefit of the recent half percent reduction in Base Rate. This is in sharp contrast to a previous letter, where it was said “Following a recent review of our interest rates, we are writing to let you know that from 7th July 2008, we’re increasing our … interest rates by 0.25%. This change reflects current market conditions.” In April whilst Base Rate fell by 0.25%, retail rates rose (in June) by 0.25%. It was at this point that we felt that monetary policy was not working.
What has happened to make monetary policy start to work again? There is a great deal more liquidity in the banking system at present, but our view is that the key difference between our mortgage provider now and how it was in April is that The Treasury (the UK Finance Ministry) now owns 60% of our mortgage provider, and that passing on the rate cut was more of a political decision than a financial one. The view that monetary policy is becoming subject to political pressure was further strengthened by a speech by the UK Chancellor (the Finance Minister) this week. In it, he stated an expectation that Base Rate would be cut again when the Bank of England Monetary Policy Committee meets next week (see report). If rates are cut, then the independence of the Bank of England could be called into question, as some are doing already.
Of course, the backdrop for this is a more interventionist Fiscal Policy. The ‘Golden Rule’ of Fiscal Policy (a balanced budget for current spending over the economic cycle) is set to be broken, and politics has returned over the advisability of spending increases compared with tax cuts to provide a fiscal stimulus (see report). In some quarters, recent events have been interpreted as the triumph of Keynesianism over a cruder form of Monetarism. In the new normal, not only will there be more political control exercised over the monetary system, but also there is likely to be a greater propensity for the State to take a more interventionist approach to fiscal policy.
The stage is now set for some sort of recovery in the financial markets. The prospect of a deep recession has restrained share prices in recent weeks, but that may well change soon. The US votes for a new President next week. Many independent pundits point to Senator Obama to become President. More interestingly, this choice would resonate around the world. The Economist has held a mock on-line election with a global constituency (see results), which shows that Senator Obama is the choice of the world (only Algeria, Iraq, and Congo plump for Senator McCain).
One of our colleagues has undertaken research into the degree to which global stock markets ‘bounce’ after a US Presidential Election. It would appear that we could see a substantial gain next week if Senator Obama wins the election, to be followed by a period of prolonged advance. The conditions are right for this to resound around the world in a short space of time. As we stated previously (see post), there are bargains to be had in the market, the most unpopular President in living memory is about to leave office, and a degree of normality has returned to the financial markets.
The conditions could not be better for Barak Obama to appear in a messianic role next week.
Tuesday, 28 October 2008
Friday, 24 October 2008
The focus on the BRIC economies is a welcome reminder that there is a world outside of OECD. However, to focus solely upon the BRIC economies is to miss an important point. That point is what Fareed Zakaria calls the ‘Rise Of The Rest’. As an exercise if we were to make the entry criteria more stringent (growth in GDP of at least three times that of OECD), who would currently qualify for BRIC status? Conveniently, as members of OECD, Mexico, Turkey, and South Korea can be discounted. If they weren’t members of OECD, they would be BRICs. However, in addition to the four original BRICs, we might like to add Indonesia, Malaysia, Pakistan (at a push), Argentina, Venezuela, and Egypt. It would appear that there is more to the ‘BRIC Effect’ than is being experienced by the BRIC economies alone as the group of emerging nations has widened since 2001.
The development of the BRIC economies has coincided with an especially benign period of growth in the world economy. As we move into a period of weaker economic growth in the near future, the question arises of the resilience of the BRIC economies to a global downturn. The downturn is already evident in the financial markets. This year, the US stock market is down by 20.9% in dollar terms, the UK by 31.7%, the Euro area by 34.1%, and Japan by 21.4% (we like these comparative figures to be in dollar terms rather than local currency terms to capture the ‘flight to quality’). The equivalent figures for the BRIC nations are Brazil down by 28.3%, Russia down by 48.1%, India down by 45.6%, and China down by 63.7%. The BRIC financial systems have been hit harder than the OECD financial systems and one can only speculate whether, as the financial turbulence seeps into the real economy, the real economies of the BRIC nations will be affected disproportionately harder than the OECD economies.
If the BRIC economies are affected by a global economic downturn harder than the OECD economies, then the inherent flaws in each of the BRIC nations may well become more apparent. Brazil has a potential weakness in its currency. The Real now looks quite vulnerable – it fell by a fifth against the US Dollar last week. Russia is a petroeconomy that is one dimensional (energy) and vulnerable to falls in the price of energy. The Gini Coefficient in India actually rose during the years of globalisation induced rising prosperity. If that process is halted by recession, so will be the development of an Indian Middle Class. China, seemingly monolithic, may prove to be the least stable of all the BRIC nations. If growth falters in China, who will the Middle Class blame for the deterioration in their incomes and the loss of their savings? All of the BRIC nations contain elements of instability that call into question their future risk ratings.
And where does that leave us? We have a group of nations who have developed fast during a period of benign growth in the world economy. Our ‘trend blindness’ tempts us to believe that this can continue indefinitely, irrespective of global factors and the internal demographics of the BRIC nations. It has also led us to ignore ‘the rest’, who are also rising as the result of an increasing pace of globalisation. There are also a group of high income countries, such as Qatar, Saudi Arabia, Singapore, and Taiwan, who are not part of OECD, who do not have high GDP growth rates, but who do have a higher GDP per capita than the BRIC nations. We have also tended to lay aside the case against the BRIC nations in our pursuit of the case for them. As we move into a global downturn, that downside risk is likely to become more prominent. The BRIC nations have risen very high, very fast. They also have the potential to fall very far and very hard.
We call this the ‘Icarus Effect’, after the son of Daedalus, who escaped from Crete but fell to his death because he rose too far, too soon.
Wednesday, 22 October 2008
Sunday, 12 October 2008
Saturday, 11 October 2008
According to The Economist, in 2007 America’s GDP was $12.4 trillion whilst that of China was $2.2 trillion. This century, America’s GDP has been growing at an average rate of 4.5% per annum, whilst that of China has been growing at 12.9% per annum. If the US continues to grow at an average of 4.5% per annum, then China’s economy would have to grow by 28% per annum in order to reach parity by 2015. Equally, if China’s GDP continues to grow at 12.9% each year, then the US economy would have to shrink by 8% a year in order for parity to be reached by 2015. On this basis, we are more likely to be hit by an asteroid than China’s GDP overtaking that of the US by 2015.
This does beg the question of when, if at all, the GDP of China would overtake that of the US. It would depend upon the growth assumptions we make about the two economies. We put together a small econometric model to examine the implications of differing growth rates. For the US, we assumed growth of 0.0% pa (the zombie economy), 2.0% pa (the US achieves European growth rates), 4.5% pa (the US stays on track), and 6.0% pa (a miracle occurs). For China, we assumed growth rates of 4.5% pa (China achieves US growth rates), 8.0% pa (the expected rate after 2014 when the Chinese demographic time bomb explodes), 12.9% pa (China stays on track), and 15% pa (a miracle occurs).
Running the 16 pairs of possibilities (you could say the 16 scenarios), we obtained the following results:
The date in each of the cells is the point in time when Chinese GDP overtakes that of the US in our model. The results highlight two interesting points. First, when Goldman Sachs famously predicted that the GDP of China would overtake that of the US by 2025, their model was assuming average US growth rates of between 2.0% pa and 4.5% pa. More importantly, Chinese growth rates were assumed to average between 12.9% and 15.0% pa. This latter assumption seemed heroic at the time and seems even more so today.
The second point of interest is the amount of time that it would take for Chinese GDP to overtake that of the US if the US maintained or upped its game or if the Chinese game came off the boil. We are looking at a “not in my lifetime” series of results. This is not to say that we ought not to look at them, but it is to say that the contention of China overtaking the US does need to be treated with a high degree of scepticism. After all, who is to say that China, as a political entity, will last until 2040 or 2050?
Obviously the current downturn is going to affect the numbers that we used. There are also a number of additional flaws in the model. To start with, it is a linear model in a non-linear world. We also presumed a low degree of multi-collinearity. This is unlikely to be the case as both the US and the Chinese economies are highly interdependent. For example, this year, US GDP growth has fallen to zero (or less). As a consequence, China’s GDP growth has fallen to 10% (and falling, and subject to downward revision). However, even with a flawed model, we can see that the forecast of 2015 as the point where China’s GDP overtakes America’s GDP is nothing more than a wild dream.
If it is the case that China is unlikely to overtake America, then why do we worry about China?
Have your say. You can now have your say on this issue through the EUFO Prediction Centre. Just click on the widget below to go to the Centre. You need to be a member of Predictify to take part, but joining is free and easy to set up.
Thursday, 9 October 2008
Monday, 6 October 2008
The facts of the case are quite interesting. Mr Ions worked for Hays, a recruitment agency based in the UK. The essence of his job was to match suitably qualified candidates to situations as they fell vacant. Networking is a key skill in this area because the successful recruitment consultant has to maintain a continuous flow of good quality candidates with a flow of good quality vacancies. As part of the job, Mr Ions was encouraged by Hays to create an account on Linked-In (a public social networking site based in California) and to develop a network of contacts through the Linked-In account.
This Mr Ions did. He did so very well as it happens. So well that Mr Ions was able to leave Hays to start his own recruitment agency in direct competition to Hays. That is where the problems began. In his new business, Mr Ions used the network of contacts that he developed whilst working for Hays, using information obtained whilst working for Hays, which Hays claims to be confidential. Mr Ions counter-claimed that the information could hardly be confidential because posting it on the Linked-In site placed it in the public domain. Unfortunately, the courts found against Mr Ions (see law report).
This has two implications that speak to the future. First, we ought to note that the action, brought in an English Court for actions that wholly occurred in England resulted in an enforcement notice served and enforced in California. Whilst the web is global in scope, it is local in impact and it is important to consider the local implications of provision on the web. This is even more important now that social networking sites can be deemed to be accomplices to defamation (see law report).
Coming back to the original question, the second implication is that your boss might own your friends. Of course, we might want to redefine what we mean by ‘friends’. Friends, as in people you go to the pub with, are unlikely to be of much interest to your boss, unless, that is, you live the high life outside of work. Colleagues and work acquaintances are more likely to be of interest to your boss. However, as the relationship is between your ‘friends’ and yourself, this social capital is unlikely to be capable of being unlocked by your boss. ‘Friends’, defined as those who you come into contact with through your work life and with whom you have ‘linked-up’ on a social networking site, are more likely to be of interest to your boss. Prior to Web 2.0, we called these people our ‘business contacts’.
This problem of definition is likely to remain as long as we use social networking sites for both our social lives and our working lives. It would be nice to be able to divide the two, but this is hoping for too much. As the greater part of the financial value of modern companies lies in the relationships created by the staff of the companies, it is unlikely that the system will become less restrictive. After all, Hays pursued Mr Ions because they believed that he had taken something of value from them.
Perhaps this urges caution on us all? It may be that, when we change jobs, we might leave with our boss owning our social network account, and thus our ‘friends’.
© The European Futures Observatory 2008
Sunday, 5 October 2008
Thursday, 2 October 2008
An interesting clue to the way out was placed before us last Tuesday. Circumstances forced me out of bed much earlier than could be called respectable. This gave me the chance to watch the afternoon trading in the Far East. On Monday, the US markets fell by 7%-8%. The Far East responded by falling by 4%-5% in morning trading. However, by lunch time, buyers entered the markets to leave the markets down only 2%-3% on the day. This wave of buying rolled across to Europe (FTSE 100 up 85 points on the day) and then on to America (the Dow up 485 points on the day). All in all, the losses were starting to be clawed back.
It is interesting to consider why this might be. Reports so far indicate that value investors (those who buy when good quality assets are priced at an unreasonably cheap level) were coming back to the market to snap up bargains. Indeed, Warren Buffet (the biggest value investor in the world) entered the market last week to buy $5 billion worth of equity in Goldman Sachs. As an example from the UK, the commercial bank Lloyds TSB was trading at a dividend yield of about 15% (i.e. three times the rate of retail deposit accounts) earlier in the week. If the bank’s balance sheet is as robust as it appears, if it can maintain an acceptable profitability, if it fares well in the downturn, and if it can maintain its dividend, then we can readily see why investors are considering the stock cheap and buying them.
This is all very promising. We are now seeing weak signals that indicate that the worst might be coming to an end in the financial markets. The prospects for the ‘real economy’ continue to be bleak for the next few months, and a lot of hardship has yet to be felt, but at least we can start to see a way out of the crisis. There is still scope for us to be blown off course. There is still the possibility of our political masters doing something silly, which will only prolong and deepen the downturn.
The probability of political mistakes in Europe is low and falling. Over the weekend, the UK authorities handled the collapse of Bradford and Bingley (a UK mortgage bank) and the European authorities acted decisively to shore up Fortis (a commercial bank with extensive interests in the Benelux countries and France). The monetary authorities in Europe are starting to appear to be up to the job of handling the crisis. Christine Lagarde (the French Finance Minister – France currently presides over the EU) looks particularly masterful. Even Gordon Brown has started to look as if he knows what he is doing! This appearance has substance; a model has now developed to allow the monetary authorities to manage the crisis.
The same cannot be said across the Atlantic. The House of Representatives voted against the first Bush Plan, the Senate has voted for the second Bush Plan. Perhaps this reflects that the Representatives are closer to main street USA, whilst the Senate are closer to the international partners of the US? This story still has some way to run, but one thing is clear – the credibility of the US Government as an international partner has been damaged. If the US is perceived as an unreliable partner, then it will have to pay a risk premium in future dealings. And this really brings us back to where we started – the long term impact of this crisis.
At present, the jury remains deadlocked. Events suggest that the current downturn could be of a temporary nature. It could be that the long decline over the past ten years could be reversed and the fortunes of the US improve. However, it is also possible that the US is locked in a long term decline and that the current crisis is just one more milestone on the downward path. What is becoming evident is that the weaknesses and flaws in the American system of government are increasing the likelihood of long term permanent decline. When nations across the world are seeing politicians pulling together in acts of national unity, the US still retains its partisan politics. If this hypothesis is correct, then the House of Representatives rejecting the first bail-out plan would mean that the United States had reached a central turning point in its history.
It is up to the politicians to choose whether to experience the sun rising or setting.
Monday, 29 September 2008
Every now and then something happens that brings the future clearly into focus. Perhaps it is because a variety of connections have been motoring around our sub-conscious or perhaps it is because we find that we have a bit of time and space to clear our minds from our immediate concerns. Whatever the causes, the effect is that we suddenly can see one path into the future with a great degree of clarity. This clarity of vision is what I like to call foresight.
My wife has been in Ireland this weekend and her trip has given me a number of reference points into the future. The journey started by catching a bus from Ipswich to Stansted Airport. Normally I would have driven my wife to the airport – and again to collect her on the way back – but a new bus service has called all of that into question. The new shuttle service (a bus every 2 hours, 24 hours a day, 7 days a week) is priced to dominate this service. At £23 return ($US44, €28), the journey costs less than the petrol cost of driving to the airport. For multiple passengers, four people would travel on the bus service for less than the cost of a taxi. This says something about the future to me. In a future where the cost of resources is appreciably higher than today, I see the price mechanism forcing people to abandon resource inefficient methods (the car) and adopting more efficient collective forms of transport (the bus or the train). That the bus in this case was a low-carbon bus is something of a bonus in terms of carbon footprint.
My wife flew by Ryanair to the west coast of Ireland. The flights cost £1.98 return ($US3.50, €2.30), but with £50 ($US95, €60) added to cover taxes and luggage. One wonders how long this will last. In a world where the price of aviation fuel keeps rising, the business model of the low cost operators must be coming under considerable pressure. The latest results update shows that, for the quarter to 30th June 2008, Ryanair profits had fallen by 85% compared to the same quarter of the previous year. The impact of high oil prices ($US130 a barrel for the quarter to 30th June 2008) is obviously having an effect. The second and third order effects upon the destination areas – such as the west coast of Ireland – would make a really good subject of a scenario exercise. If the low cost airline business model were to fail, what would be the impact on regional development in Europe?
My wife, joined at the airport by her sister, boarded the plane on time, but then spent two hours on the runway. The air traffic control computer for Southern England had failed and the whole air traffic system was seriously degraded. It seems to me that we are currently in a world characterised by high levels of complexity and interdependency. When large and complex systems are designed, I wonder how much tolerance for failure is built into the system. In many of the futuristic techno-fantasies, it is taken for read that there will be sufficient power to operate the system, that its supply will be uninterrupted, and that the system will actually work. Most of us know these assumptions to be heroic. The UK faces the prospect of brown-outs from 2012 onwards (electricity demand is likely outstrip electricity supply from that year onwards) and large scale IT projects are notorious for being delivered late, over-budget, and not fully functional. I wonder how long it will be before we take a step back from complex solutions to a more simple approach to problem solving.
If that were to happen, we may well find the world to be a bit more resilient to disturbances, but then, my wife and her sister wouldn’t be able to pop over to Ireland for a weekend family visit. I guess that we can’t have our cake and eat it!
© The European Futures Observatory 2008
Monday, 22 September 2008
September 23rd this year has the dubious distinction of being Earth Over-Shoot Day. The idea of Earth Over-Shoot is a bit complicated, but one worth getting to grips with. The basic idea is that there are finite resources on the planet. Our rate of consumption is then measured against our ability to replenish those resources, to come up with a figure of how many planets we are presently consuming. At present, we are consuming 1.4 planet Earths each year. At our present consumption rates, we are currently using 140% of the resources the Earth can generate in a year, which means that our lifestyles become unsustainable on September 24th this year. What might this mean in the longer term?
We need to recognise that Earth Over-Shoot Day is getting earlier each year and at a faster rate (see web site). In 1986, Earth Over-Shoot Day was December 31st. By 1995 it had moved to November 21st; and by 2005 it had moved to October 2nd. Over-Shoot is also unevenly distributed. According to the National Footprint Accounts, the US currently consumes 5.4 Earths, the UK 3.1 Earths, Germany 2.5 Earths, and India 0.4 Earths. The big uncertainty facing the world is the sustainability of the RIPE (Rapidly Industrialising Poor Economy) nations.
For example, if India were to want to enjoy a standard of living comparable with that of, say, Argentina – which is currently consuming 1.2 Earths – then the resource footprint of India would have to increase by a factor of three. One can question whether the finite resources on the planet contain this amount of reserves. Alternatively, suppose that the middle class in China grows in numbers more or less as forecast. We calculate that, if the Chinese middle class in 2020 wants to enjoy the living standards that are currently enjoyed in Europe and North America, then we need to find nine more planets to supply the resources to provide that lifestyle.
In conjuring up this fantasy we need to keep our feet on the ground. It is only a fantasy. Well before the fantasy could take hold, mechanisms within the system of the global economy will move into action to limit the degree of the scarcity faced. We have seen an example of the mechanism at work this year in the energy markets. In an excellent lecture on Sustainable Economics at Gresham College, Professor Michael Mainelli informed us that the price of petrol (gas) in the US had risen by 32% between 2007 and 2008, and that there has been a consequent reduction in miles driven of 4.7% (see lecture). Our own research has shown that, in the same period, usage of light rail transportation in the US increased by 10.3%, commuter rail by 5.7%, long distance rail by 4.4%, and bus usage by 2.2%. People have been getting out of the car and onto the train.
In many ways, this provides a glimpse of how we can see our economic future unfolding over the next two or three decades. Faced with acute shortages, global markets are likely to respond with relatively high price rises, which, in turn, has two effects. On the demand side, there is a substitution from individual consumption to collective consumption in order to enjoy increasing marginal returns of scale. And on the supply side, there is a financial incentive to invest in technologies that allow us to derive more from less. It is quite possible that resource efficiency may become the next hot technology wave.
As Willian Gibson is alleged to have said, ‘the future is here already, it’s just unevenly distributed’.
Wednesday, 17 September 2008
Traditionally the summer is a good time to bury bad news. This summer has provided extremely good cover for bad news. In the US, the news has been dominated by the Presidential Election. In Europe, the news has been dominated by a resurgent Russia in the Caucasus. In the UK, the news has been dominated by the Prime Minister’s inability to get anything right. Under the cover of this smokescreen, the US Department of Defense has, very quietly, declared the ‘War on Terror’ to be over.
Buried in an obscure American Forces Press Release from the Department of Defense (see Press Release) is a reference to the new National Defense Strategy (which can be accessed through the Press Release). In this new strategy, we are told on Page 7 that the War on Terror has been replaced by ‘Winning the Long War against violent extremist movements’ as “the central objective of the US”. From a futures perspective, this raises a number of interesting points.
First and foremost, it indicates that the American unipolar moment is coming to an end, if it hasn’t ended already, especially when, on Page 8, we are told that the US must act “in concert with others”. Unilateralism is at the core of the Bush Doctrine. Furthermore, we are told that “we face a clash of arms, a war of ideas, and an assistance effort that will require patience and innovation”. It is interesting that the undue reliance purely upon force – again central to the Bush Doctrine – is to be supplemented with the use of soft power as a means to achieve the US national interests in the future.
Eventually, we can expect that war fighting will be left to soldiers and law enforcement will be left to the police. There are many in the world who would welcome this. It seems to us that the legal tangle that the US faces over Guantanamo Bay derives from an inappropriate mixing of these roles. The military are poorly equipped to supervise the effective running of law enforcement (running trials and operating prisons). Police operations rely upon the intelligence gathering and interdiction capabilities of the military. In an ideal world – which is one that we can create in the future – the two organs of government would complement each other.
In many ways, the National Defense Strategy represents a significant departure in US policy towards the rest of the world. If it does mean that the ‘War on Terror’ is over, then we are left wondering who might have won the war. It would be hard to argue that President Bush and the Neo-Cons have come even close to winning the war. Their policy in this area – at best a shambles, at worst criminality beyond comprehension – is in tatters and very unlikely to survive to February 2009. It is ironic that the Bush Doctrine has not outlasted the Presidency after which it was named.
Al Qaeda might claim to have won the War on Terror. They could point to regime change in Washington as their success. This, however, might stretch the point too far. It conveniently ignores the inability of Al Qaeda to operate effectively in the Post 9-11 environment. According to the FBI, the number of deaths in the US from terrorist incidents has fallen to zero. This reflects the success of the law enforcement agencies across the world in containing Al Qaeda and in diminishing its ability to operate.
In many respects, there is a lot to be said for the view that nobody has won the war on terror. We have all been losers in some way. In Europe and North America, the trade off between personal liberty and collective security has shifted decisively towards lesser personal liberty. This loss of liberty has become more intrusive in recent years, particularly when some law enforcement agencies are unable to resist the abuse of their additional powers. Surely this has to be one of the greatest losses because it affects us all.
The National Defense Strategy may prove to be an important realignment in US military policy. It represents a more realistic – even more pragmatic – approach to the security issues facing the US and the world in the future. We may yet see a return to the position where soldiers fight, police arrest, and judges imprison. If so, then we will be better equipped to deal with the issues of global criminality, of which global terror is part.
Perhaps that is a future worth building?
Friday, 12 September 2008
It is often said that the 1980s was a decade that demonstrated that Soviet style Communism was unworkable. The decade culminated with the fall of the Berlin Wall and the collapse of the Soviet Union itself. This was followed in the 1990s by a decade that showed that Russian style Capitalism could not work also. The financial repercussions of the Russian Default in 1998 and the subsequent LTCM crisis placed great strains on the international financial system. The 1990s was followed by the current decade where large financial imbalances have developed within the world economy. These have now resulted in the nationalisation of Freddie Mac and Fannie Mae, who together underwrite 80% of US residential mortgages. What are the long term consequences of this?
Looking at the short term first, the action has been undertaken to restore confidence in the US financial system – particularly regarding domestic residential financing. The cost to the US taxpayer of this intervention is subject to much debate, depending upon the assumptions made about how badly the situation may develop. The estimates range from $300 billion to $1.6 trillion. To put this into perspective, it would equate to between 10% and 50% of the long term cost of the war in Iraq, but it is a bill which has a much shorter timescale for payment. It is not unreasonable to believe that, whoever wins the election in November, their ability to act as President will be seriously circumscribed by financial constraints handed to them by the outgoing Administration. The pessimists might say that the new Administration will almost be doomed to failure.
Although the intervention may cost the US taxpayer between $300 billion and $1.6 trillion, the Federal Government doesn’t actually have the money to pay this bill. The Federal deficit is currently heading towards $500 billion a year and the national debt is growing significantly. Who, we might ask, is going to finance the intervention? In recent years, we might have answered that the East Asian central banks - swelled by trade surpluses - and the Petro economies - swelled by rising energy prices – would provide the cash. However, the East Asian – particularly Chinese – trade surpluses are not as great as they once were. Additionally, energy prices have come off the boil somewhat this year. All of this will act to limit the ability of the Federal authorities to raise finance. It is not unreasonable to suspect that US interest rates, in the medium term, might be a lot higher than they otherwise would have been without the intervention.
If so, then more of America will be purchased by the rest of the world. This is a long term trend that may come to dominate domestic politics within the US. It is one of the mechanisms by which other international players – particularly those in East Asia, Europe, and Russia – will raise their international standing. From our perspective, we see this as a hint that the US unipolar moment is coming to an end. The ‘rise of the rest’, as Fareed Zakaria calls it, is becoming evident through the purchase of T-Bills. By making the Federal government susceptible to potential shifts in confidence, another constraint is placed upon the US President to act within the international arena. The US president currently does not need to seek the approval of Moscow or Beijing before acting, but events are moving in that direction.
The Federal authorities intervened in the markets in order to shore up the US (and global) financial system. They needed to do this in order to rectify what economists call ‘market failure’. Market failure arises when freely operating markets generate a sub-optimal and stable equilibrium. This happened in the 1920s, when the world returned to gold at pre-1914 exchange rates. That policy mistake led to a recession that lasted a generation. At the time, the whole future of Capitalism, as an institution, was called into question. We are in a parallel position today. In the 1930s, Keynes came to rescue Capitalism through the development of state intervention – Social Welfarism as we know it today. In recent decades, this Keynesian legacy has been attacked by those who we now call the Neo-Cons, who have developed an aggressive brand of American Capitalism.
American Capitalism has been offered as a solution around the world since the 1960s, but hasn’t gained much traction for one simple reason – it doesn’t work. It does not offer any solution for those market failures that arise on a regular basis. It certainly offers no hope for the largest market failure facing humanity today – that of Climate Change. We now see, through the nationalisation of Freddie Mac and Fannie Mae, an admission from the US Federal government that American Capitalism does not work. We ought not to celebrate too much just yet. The Keynesians came to the rescue in the 1930s and 1940s, but there is no parallel school of thought today. Perhaps necessity will generate it? Perhaps it is time for China, or India, to take the intellectual lead?
It seems ironic, almost comedic, that President Bush, the archetypal Neo-Con President, has come to cause the destruction of that which he cherishes most – American Capitalism. They say that the Gods first send mad those who they wish to destroy!
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Thursday, 4 September 2008
Why is it that the ancient Greeks, despite a multitude of competing city-states, only had one truly destructive war? Many scholars have considered this question over the years and the conclusion usually points to a uniquely Greek non-martial way of expressing inter-state conflict – the Olympic Games. Sport, as a metaphor for inter-state conflict, has entered into the modern Olympic Games. Starting with the Berlin games of 1936, and continuing throughout the Cold War, the medal count, as an expression of international power, has been used by propagandists and apologists to show how great their nation or system of government is in relation to all other nations and systems of government. Just suppose that this is true. What does it tell us about the Beijing Games?
It is usual to order the medal table according to the number of Gold Medals a nation has won. On this basis, with 51G, China led the medal table (the US was second with 36G, Russia third with 23G, and Great Britain fourth with 19G). China, however, didn’t win the most medals. With 100 medals (51G, 21S, 28B), China came second to the US in the number of medals won. The US won 110 medals (36G, 38S, 36B). It has been interesting this week to watch how the various pundits have presented these facts.
Those who take a hostile stance towards the US highlight that America has been displaced at the top of the medal table by China. This has been interpreted as a corollary to the rise of China to displace the US as the leading economic force in the world. Equally, those favourable to the US have pointed out that the US won the most medals at Beijing – an indication that America is “still number 1”. Numerically, both camps are right. They are simply using the numbers to advocate their political perspective.
As an exercise, we added the medal awards of the 27 European Union member states to see what we come up with. In total, the EU nations won 275 medals (87G, 101S, 87B). Of course, this exercise is not strictly additive, but it does point to a theme that the Europhiles are keen to highlight. If the EU were to act in a coherent and co-ordinated manner, it would dominate the medal table (and, by extension, the world!). This point does have some merit, if not pressed too hard. The EU is something of an under-stated power that may well come into the light by the time that the Olympic Games reach London in 2012.
In reviewing the whole debate, I was much impressed by an excellent piece by John Mahaffie (see piece), who reminds us that a rock becomes a bear if we are looking for bear, and a bear becomes a rock if we don’t want to see a bear. We can all use the same set of numbers to demonstrate different points according to our subjective interpretation of those numbers. In futures work, one might ask how there can be consensus about the future if we can’t agree what has happened in the past. And that is the whole point of futuring. We are describing a world that has yet to happen. We can all be both right and wrong simultaneously.
A point that is almost Grecian in subtlety. Had the Ancient Greeks discovered futurism, they may well have made it a god. I wonder how Pausanias would have described it.
© The European Futures Observatory 2008
Saturday, 30 August 2008
August is always a slow news month. The key decision makers are generally on holiday, activity falls away, and not a lot happens. Newspapers, however, still have to sell copy. This has given rise to the ‘silly season’, where stories that ordinarily wouldn’t merit too much thought are given a prominence that they possibly do not deserve. One such story this August concerned a rant by Prince Charles (the heir to the British throne) over GM foods (see article). The Prince suggests that the cultivation of GM foods is a gigantic experiment with nature that has gone “seriously wrong”. He also suggests that relying upon “gigantic corporations” for our food would result in an “absolute disaster”.
From a futures perspective, this claim is worth examining. The cultivation of GM crops has been going on for 10 years now, and there is little evidence to suggest that there are any unduly harmful effects from this method of cultivation. The practice has been occurring long enough for any detrimental side effects to have become evident. We currently consume the produce from GM cultivation in three ways. First, there are the GM crops grown abroad that are imported into the UK. Second, there are the processed foodstuffs that are manufactured outside of the UK and then imported as finished products. And finally, there is the livestock feed that is processed with GM crops, that then enters our food chain through the meat that we eat. In this respect, the genie is already out of the bottle.
The Prince offers no evidence to support his claim. Equally, there is no evidence to suggest that the means of making a market for foods (the “gigantic corporations”) is either superior or inferior to any other form of market organisation. We can suspect that a global trade in food actually needs global corporations to move the food from the producer to the consumer.
On the other side of the coin, there is much to suggest that GM cultivation has been beneficial. GM cultivation is a way to improve crop yields and to cultivate crops more efficiently with regards to the environment. This year, we have seen the start of what we feel is likely to be persistent food shortages across the world. As prosperity wraps itself around the globe, as living standards rise, as people rise out of poverty, they are likely to want to eat more of a better diet. If the growth of the supply of food cannot match the growth in demand for food, global food prices are likely to rise – as they have this year. GM cultivation offers a technological solution for the growth in the supply of food to match the growth in demand for food.
Food crops, of course, are also resource intensive. One particular resource that is vital to crop growth, that is starting to register as scarce across the globe, is water. Water is a vital input to the growing process, and there are very few cash crops that can be cultivated successfully without it. An impending shortage of water raises the prospect of declining crop yields. Once again, GM cultivation offers the hope of a solution for this problem, as crop strains that need less water for successful commercial cultivation can be engineered.
If the Prince were to have his way, what would be the implications? We could expect a world in which there is less food than there is now as the GM crops currently in cultivation are replaced by lower yielding crops. We could expect the price of food generally to be more expensive than it is now. However, worse of all, we could expect the incidence of hunger and starvation to be greater than it is now. The cause of poverty eradication in the world would be set back much further than it is now.
I don’t know if Prince Charles is related to Marie Antoinette, but this sounds awfully close to exhorting the developing world to eat cake!
© The European Futures Observatory 2008
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Wednesday, 20 August 2008
Events this summer, in our view, have lent support to this view of the future. Encouraged by the US, a number of EU nations, and NATO, the Georgian army entered South Ossetia to assert the authority of the Georgian government over a dissident region. Russia interpreted this as the ethnic cleansing of Russian citizens residing in South Ossetia and deployed its troops in South Ossetia (thus invading a sovereign neighbour) to guarantee the security of Russian citizens residing in South Ossetia.
Military halt lines don’t follow administrative boundaries, and the Russian incursion halted beyond the South Ossetian border. In the meantime, the Georgian separatists in Abkhazia had received direct military support from Russia in their aspirations to break away from Georgia. Eventually, a ceasefire, brokered by France as the presidency of the EU, has been agreed. Russia has agreed that its troops will withdraw from Georgia at some point in the future and NATO – at the prompting of the US - has announced that ‘there can be no return to business as usual’ (whatever that might mean). The incident still has some way to run, but the basic pattern of events at the grand strategic level is now in place.
We have an article in print entitled ‘The Second Cold War’ (see article) in which we argue that one possible future that matches a resurgent Russia with a US in relative geopolitical decline could lead to a confrontation where the US is unlikely to emerge victorious. In accepting this confrontation, the US could accelerate the process of geopolitical decline. In our work leading to this scenario, we identified a number of potential flashpoints around the world (we call them ‘Geopolitical Hotspots’), one of which is the Caspian Basin.
We modelled the Caspian Basin Hotspot extensively last year - it has a volatile mixture of Russia; Iran; Turkey; the ‘Stans’; Chinese, EU and US oil and gas interests; the world’s largest growing area for opium poppies; militant Islamic interests; and post-Soviet resentments. Events this summer have tended to confirm the Caspian Basin as an area to watch for future conflict. In our models, a resurgent Russia – financed by rising oil and gas revenues – tended to be the more dominant power in the region.
In the model, the US, as the only global super-power, would want to adopt a more proactive role, but lacks the means to do so. The war in Iraq has overstretched the US military capacity, has indebted the Federal Government at just the wrong time, and has exhausted its diplomatic credit. The US, through NATO, could rally the EU nations on the diplomatic front, but a more aggressive military response from European NATO nations would be beyond their remit. The EU nations might consider deploying a peace-keeping force, but the experience of Lebanon in 2006 suggests that this might take some time to organise.
So far, we are encouraged by our model. However, it does have two key critical uncertainties that need to be questioned. First, will we see the continued resurgence of Russia? In many respects, the answer to this question depends upon how tight the energy markets remain. In our scenario, we assumed that we are close to Peak Oil and that Russia could presume high proceeds from energy sales. If energy markets were to soften, then perhaps Russia wouldn’t be so resurgent?
The second critical uncertainty asks if we are actually witnessing the relative decline of the US geopolitically. US influence has waned in recent years, but is this a permanent decline or a temporary undulation? Just suppose that the US Presidential elections in 2008 lead to an outstanding candidate entering the White House. Could the decline of the US in recent years be reversed? We think that it could, if the right candidate were to emerge from the political process in the US. However, whilst this is a possible event, given the current leading candidates and given the state of politics in the US, we feel it to be a highly unlikely event.
This, in a roundabout way, brings us back to Georgia. If the US is unable to assist Georgia, and if the EU nations are unwilling to put themselves out to help Georgia, what is Russia likely to do? NATO has called for Russian troops to be withdrawn to their positions of 6th August (i.e. to vacate Georgia and South Ossetia). Russia has stated that it will withdraw its troops, except for 500 ‘peacekeeping troops’ to be stationed in South Ossetia. The question of Abkhazia still remains in abeyance.
Whatever happens, Georgia, as a sovereign entity, has been destabilised, making the Caspian Basin an even hotter Hotspot. The biggest loser this summer has been the Georgian President, Mikhail Saakashvili, who seriously underestimated Russian resolve and seriously overestimated the willingness of the US and Europe to support his policies.
One wonders if the Russian presence in Georgia is now permanent and whether Mikhail Saakashvili will continue as the President of Georgia.
© The European Futures Observatory 2008