The Futurist

Is China A Threat?

2009-07-10T11:10:00.002+01:00

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

According to Mr Krepinevich:

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

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

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

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

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

The Pentagon's Wasting Assets Foreign Affairs

Does China Need The US?

2009-07-09T15:33:00.002+01:00

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

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

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

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

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

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

Globalization in Retreat Foreign Affairs

When Is China Not China?

2009-07-07T09:38:00.002+01:00

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

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

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

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

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

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

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

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

What Follows The Dollar?

2009-07-04T17:40:00.003+01:00

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

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

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

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

Buttonwood: Birth pains | The Economist

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

2009-07-03T16:45:00.002+01:00

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

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

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

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

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

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

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

2009-07-02T14:13:00.002+01:00

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

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

More Green Shoots?

2009-06-20T13:33:00.005+01:00

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

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

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

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

Are We Seeing Green Shoots?

2009-05-22T17:08:00.004+01:00

Life has kept me busy over the past couple of months, but I have still been watching for news that gives an idea of how the economy is doing. In March, we were concerned that unemployment may actually reach 3 million by the end of the year (see post). It now appears that our worst fears might have been misgiven.

After a rise in unemployment of 138,400 in February, unemployment has increased by 62,900 in March (see report) and by 57,100 in April (see report). This would indicate that the pace of the increase in unemployment is slowing. If the pace continues at an increase of 60,000 per month, then unemployment will reach 2.75 million by December. Each one of these statistics is a tragedy in itself, but not quite as bad as the doomsters have been forecasting.

There is a possibility, however, that we shall witness a 'double dip' recession. If so, then we may be currently experiencing that false recovery after the first recessionary impact. If this is the case, then the pace of the increase in unemployment may accelerate over the summer. Let us hope that this is not so.

We also ought not to assume that recovery, when it comes, will entail an uptick in employment. It is entirely possible that we could experience a 'jobless recovery', where business improves, but fewer new staff are taken on. To a certain extent, we ought to porepare for this if there presently is a great deal of slack in the economy - 'hidden unemployment' within organisations.

Let us hope that we are witnessing the start of the full recovery. That is certainly what the financial markets seem to be saying.

Expanding The Public Sector

2009-05-18T17:35:00.001+01:00

All across the world Governments are rapidly expanding their Public Sectors in the name of ‘Fiscal Stimulus’. Some of this expansion is through ‘automatic stabilisers’ (falling tax receipts and rising welfare payments as the economy shrinks), and some of this expansion is through ‘discretionary measures’ (roads, infrastructure, selective tax cuts, and so on). The key difference between the North American economies and the European economies is that the North American economies have a predisposition for discretionary measures whilst the European economies have a predisposition for automatic stabilisers.

Some figures might help to show the case. The IMF estimates the discretionary measures of the following nations - as a percentage of GDP - to be: USA 1.6%, Germany 1.1%, France 0.4%, UK 0.5%. On this basis, Germany is the only European nation that seems to be making an attempt at stimulating demand. However, when we add in the value of the automatic stabilisers to the discretionary measures – again, according to the IMF and as a percentage of GDP – the situation takes on a different colour: USA 3.2%, Germany 2.7%, France 2.8%. UK 3.0%. It would appear that there has been a more balanced approach to the fiscal stimulus when the automatic stabilisers are included with the discretionary measures.

Generally speaking, the fiscal stimulus has been financed by debt. The PSBR, right across the global economy, is set to expand well into the next decade. It is this expansion that brings to our attention, as futurists, the long term impact of an expanded Public Sector. Automatic stabilisers are just that – automatic. As trading conditions improve, so tax receipts will increase and welfare payments fall, thus easing the pressure on the PSBR. The discretionary measures are a different case all together.

The experience of Post War economies suggests that discretionary measures are quite asymmetrical. The political process finds it easy to vote them in, but very difficult to vote them out. This is, in part, because the nature of the expenditures changes. They normally start out as a single, discrete, expense item; but generally turn into a recurring continuous expense item. Roads and bridges invariably need upkeep, maintenance, and replacement. Hospitals need staff and equipment, and so on. Scaling back discretionary measures has proven to be very difficult in the past, and there is no reason to suggest that it would be any less so in the future, which implies that an expanded Public Sector should be with us well into the next decade.

If we think in terms of institutional degenerates, then it seems quite obvious that the Private Sector degenerates into greed and excess. The Public Sector usually degenerates into waste and inefficiency. Waste and inefficiency can be quite well hidden. For example, a recent case of a school tackling counterfeit £1 coins came to our attention. A letter was sent to the school parents (see letter) informing them of the situation and outlining the remedial action to be taken. On the face of it, this is a good example of a public agency acting to protect the public purse. However, a different picture emerges on closer inspection. We estimate the staff time to implement the policy, including on-costs, to be just over £6,000 in a two week period.

Spending over £6,000 to save £100 is exactly the type of hidden inefficiencies that are likely to arise as the Public Sector expands. These will expand both in terms of amount and scope across all of the economies in the G20. If the Public Sector does continue to expand well into the next decade, and if it is difficult to scale back the discretionary measures, then a relatively large amount of waste and inefficiency will have accumulated by the year 2020. This being so, the political conditions would be right for the next Thatcher to attempt to eliminate that waste and to prune back the Public Sector. The pendulum will swing back again with the contraction of the Public Sector and the deregulation of the economy.

Much of long term futuring is looking to find those swings in the pendulum. Sometimes they appear just plain obvious.

© The European Futures Observatory 2009

Icarus In Pictures

2009-04-20T15:57:00.005+01:00

Developing the theme of The Icarus Effect that we outlined in a recent post (see post), we are now starting to amass data that allows us to demonstrate the point graphically. For example, the following graph appeared in a recent article in The Economist (see article):

The graph shows the economic performance of the Baltic States since accession to the EU, along with a forecast of economic performance into 2009. From 2004 to 2007, the three nations (Latvia, Lithuania, and Estonia) performed well above the EU average (GDP growth between 7% and 12% per annum). In 2007 this performance nosedived. Between 2007 and 2009 (forecast), GDP is set to fall substantially, between -8% and -12%, with no clear view as to where the bottom is likely to be. A performance well below the EU average.

This is The Icarus Effect in action. Those economies flying high at the beginning of the decade are now starting to crash in a spectacular fashion. However, it is not the economic consequences if this that grab our attention. It is the political (and social) fall-out that will mark this phenomenon.

The Return Of Big Brother!

2009-03-30T19:15:00.002+01:00

We have speculated in a previous post that one of the features of the New Normal would be a greater involvement of Government in the working environment (see post). Originally we thought that this would be through politically inspired lending criteria deployed by the banking sector of which most Governments now own a greater part.

It now transpires that Governments are willing to intervene in areas beyond the past boundaries of interference, to become active in matters that formerly they would not have. For example, the resignation (sacking?) of Rick Wagoner at General Motors serves as a good illustration of this point (see story). It seems that Mr Wagoner had become too associated with the failed GM business model and was too unwilling to adopt the new agenda that he became an unacceptible CEO of GM for President Obama. The story implies that Mr Wagoner's resignation was a pre-condition for further government assistance.

This raises an interesting point of company law. The CEO is normally appointed by and accountable to the shareholders of a company. It now appears that, if the company receives public bailout money, the political masters have the right of veto over the decisions made by the shareholders as to who the CEO ought to be.

One could argue that as public money is being used to prop up the company, the public - through their elected representatives - ought to have some say over how that money is spent. This argument has traction, but loses its force in a globalised world. Is GM an American company? It is owned by shareholders from all over the world. It operates on a global level. It is receiving public bailout funds from more than the USA. So ought the American President hold such an important veto?

For shareholders from outside of the US, this is a de facto nationalisation, only without the necessary legislation and, more importantly, compensation. It will be interesting to see how the Chinese stockholders of GM respond to this, as the US sends out the message that it is not open for business and that it can be quite an unreliable trade partner by not keeping to its own rules when they prove to be inconvenient. In many ways, this is a blow to globalisation and narrow victory for the Neo Nationalists (see post).

Neo-Nationalism

2009-03-26T19:48:00.002Z

Almost a year ago we wrote anout the New Nationalism as a counter-poise to the process of globalisation (see post). This is an area that we have revisited quite often in recent weeks. In a recent report, the World Bank has highlighted how 17 of the G20 nations have imposed impediments to trade, despite promising not to do so at the G20 in November 2008 (see story).

As we prepare for the G20 in London next week, we can only see this as a worrying trend. Trade barriers tend to give rise to retaliatory trade barriers, as the current tiff between the US and Mexico quite ably demonstrates. The primary losers are those consumers behind the trade barriers who have to pay more than necessary for their goods and services. And yet we all lose as well because the total amount of trade within the global system will shrink.

We are now witnessing a struggle between the forces of integration and the forces of separation. It is too early to say which will predominate. We can only hope that common sense will prevail to our mutual advantage. The problem is that is hasn't so far!

Could 3 Million Be Possible?

2009-03-25T11:38:00.003Z

For some time, I have been sceptical about the claim that unemployment could reach 3 million this year. I am now starting to entertain doubts about my view. The February figures were published last week (see report), in which unemployment rose by 138,400 to cross the 2 million mark to stand at 2.03 million. The figures contain a couple of sinister aspects.

On the one hand, the increase in unemplyment for the three months to February was 290,100. If annualised at this rate, there is every chance of seeing unemployment at 3 million this year. Equally, the rate at which unemployment is rising - the second order derivative for the really nerdy (the rate of growth of the rate of growth) - which also sets off alarms.

It is quite likely that employers had been waiting until the end of the year to see if trading conditions improve before laying off staff. Conditions haven't improved and those staff were laid off towards the end of 2008 and in January 2009, to start appearing in the figures for February. We can but hope that there is a large element of the increase that is once off, and that the rate of increase next month will fall back again.

Of course, it may not. As I write this piece on Lady Day, the quarterly rent for most commercial lets has fallen due. Poor trading conditions in the high street, along with squeezed cash flows, are likely to lead to a number of rent defaults that are much higher than usual. If so, then another twist to the downward spiral of retailing is likely to occur in the next couple of months.

There are those who believe that we are touching the bottom at the moment. Let's hope that they are right. However, from where I sit, there is still a lot of pain in system.

More On Futurists ...

2009-03-10T17:07:00.005Z

A number of correspondents have asked me to clarify what I am saying about the three time horizons and weak signals (see post). I have produced a chart that might help to explain this:

What I am suggesting is that in traditional practice we consider three time horizons, whereas there are, in fact, four. The fourth – that of weak signals is not normally considered because it is subsumed into our consideration of ‘the long term’. However, what recent events have done is to challenge that presumption because, even in the short term now, we cannot presume that our underlying business model will be stable.

I suspect that this may settle down again once order is restored to the financial system. However, in the meantime, organisations may need to resort to scenario planning in order to generate a range of budgets. In part this is a reflection of the degree of risk and uncertainty that exists in the current environment. In part it reflects the chaotic systemic change that we are all experiencing.

To extend a previous argument (see post), if a lesser reliance can be placed on financial forecasts, then this would in part explain the reluctance on the part of the banks to lend to businesses. In order to restore normal lending conditions, a necessary (but not sufficient) condition would be to stabilise the business environment to allow a degree of certainty to return to financial forecasts.

In Praise Of Futurists

2009-03-09T14:53:00.001Z

I have always thought of a continuum in organisational planning. There are three key time horizons – the short, medium, and long term – each of which has their associated planning techniques. We may discuss how long each of the time horizons might be - Is the short term one year? Or is it three years? Or is it even five years? There is no clear answer to this question. However, a more productive line of enquiry might be to consider what distinguishes the short, medium, and long term.

In the short term, the basic business model is fixed, as are the available number of factor inputs. When you think about it, there are problems with varying the scale of an enterprise. On the upside, it takes time to recruit staff, premises have to be found, and systems have to be integrated. On the downside, it takes time to make staff redundant, to unwind a position regarding premises, and to dispose of systems machinery. This is why budgeting is a useful planning tool in the short term – it works on the presumption that the scale of the operation and the basic business model is fixed.

As we move into a future horizon, the scale of the organisational undertaking becomes more fluid. In the medium term, whilst the basic operational business model remains fixed, the available number of inputs (the scale of the operation) can become variable. This is the world of the trendspotter and the horizon scanner, where we can look sufficiently far enough into the future to derive valuable insights, but without disturbing the comfort of the underlying business model that would represent a complete paradigm shift. This is the area inhabited by the strategic planners.

Moving further into the future, we can start to explore the consequences of not only the scale of operations changing, but also the impact of changes in the basic business model. This is the world of the scenario writer, for whom nothing is fixed and for whom everything may change in a plethora of alternative futures. This type of thinking does require an ability to grasp a change in paradigm, and is not one that comes readily to most organisations. What passes for scenario work is often horizon scanning in disguise.

There is also a fourth possibility – one that has been more of a theoretical nature until recent times. There is the case where the scale of operations is relatively fixed, but the basic business model is variable. This is the world of weak signals of an emerging future. At face value, this looks like a form of trendspotting, but, on reflection, it is the shift in the business model that makes this activity different. Much weak signals work is in its infancy at the moment, but it is definitely an up and coming area of futurism.

And so we have a continuum – the short, medium, and long terms – that has an associated continuum of tools – from budgets to trends and on to scenarios. Until recently, this has occupied a fairly stable pattern. The current recession is shaking up that pattern. The fixed nature of the short term is being challenged. The changes in the economy are calling into question many of the axioms that are implicit in current business models. For example, an SME client last week reported anxiety over that fact that the bank through which they conduct business might go bust. The net result of this anxiety is to increase the background level of risk and uncertainty in the organisational setting, which is having an impact on the ability of organisations to plan ahead.

The certainty that is needed for effective budgeting is not present at the moment. One response of organisations is to continue with the creation of the works of fiction that are called budgets. Another response is to take the view that planning is a haphazard activity and to abandon any serious attempt at planning. However, as reported in The Economist (see article), a number of organisations are embracing the current uncertainty by using the long term technique of scenario building for the short term purpose of constructing budgets.

Of course, there are those in the profession who would see the irony here. The Economist famously lambasted the profession in an article on the future of futurology a couple of years ago (see article). In an interesting twist, it would now appear that the techniques that were ridiculed in 2007 are in great demand in 2009. There is a saying that every dog has its day, and it would appear that the day of the futurist has come.

At a time when the business world needs to better deal with the issues of ambiguity and uncertainty, here we have a profession that is devoted to reconciling those issues. The proper use of future studies can allow organisations to plan better. It can allow organisations to identify and manage risks better. More importantly, it can also allow organisations to identify and appraise opportunities as they arise in the shake out of the economy. A good futures project will prepare for the upside as well as preparing for the disasters that befall us.

The case for the futurist has rarely been as strong as it is today.

© The European Futures Observatory 2009

It's A Bit Of A Puzzle

2009-03-05T17:41:00.002Z

The question of inflation has been exercising my mind again. As I previously wrote, the pressures of the FEW (Food, Energy, and Water) are still driving the engine of inflation (see post). The good news is that petrol prices have stopped rising. Locally, they have stabilised at 87.9p per litre.

The bad news is that food prices seem to be racing ahead. A recent report in The Times informed us that, despite inflation falling, food prices are rising at an annual rate of 9% per annum (see article). This confirms what I am being told by those who go shopping, but contradicts what I am being told elsewhere. According to The Economist, food prices on the global markets have fallen by 6.4% in the past month, and by 34.9% in the past year (see source).

The obvious question that arises is how prices can be falling globally, and yet not be reflected at the point of sale. Some of the anomaly could be explained by currency movements (the Pound against both the US Dollar - in which most non-EU imports are priced - and the Euro - UK food prices are denominated in 'Green Euros' under the CAP). Whilst being sympathetic to this argument, one cannot but wonder if we are seeing another market failure in action.

The UK food market is dominated by an oligarchy of food giants, who have been accused of price fixing for years. Their profits have steadily risen for years against a backdrop of falling farm incomes. Is this how the food element of the Age of Scarcity will work itself out?

Filling The Gap

2009-03-04T17:36:00.004Z

We recently wrote about how the Arctic is rapidly becoming one of those areas to watch in geopolitics (see post). Within the context of the Arctic, there is an unresolved issue regarding who exactly owns and controls the area north of Alaska, Canada, and Russia (the'Gap'). As this is an area crucial to the two key shipping lanes, and one which contains a good deal of readily available energy deposits, we can expect the resolution of this issue to attain a certain degree of importance.

What is interesting is that there is a framework to resolve these issues - the UN Convention on the Law of the Sea (see background article). Unfortunately, the US has yet to ratify the Convention - allegedly on doctrinaire grounds - which means that the other Arctic powers are carving up the territory without the participation of the US.

This is now likely to be something of a test for President Obama. Can he deliver multilateralism? Can he deliver the rule of international law? Is he willing to protect US interests in the face of right-wing obstruction at home? A thoughtful article in Foreign Policy provides some insight onto these questions (see article).

The warning is there to see. The UN will provide the legitimacy for the Convention, and if the US is not at the table, it will have to accept laws made by others. It would be a shame if the right in the US were to make the Arctic a Russian lake by obstructing a process that could be used to restrain Russia.

Clinton Fumbles, The Awkward Squad Score!

2009-03-03T09:35:00.002Z

We have previously introduced the idea of the awkward squad (see post). These are the European nations that are likely to provide resistance to the Obama agenda. The UK is likely to oppose on economic policy, Germany on foreign and military policy, and France in the area of diplomacy. To achieve his agenda, President Obama will have to act with great subtlety to woo the awkward squad.

It is a shame that he appointed Hillary Clinton as Secretary of State. Mrs Clinton still occupies the mindset of the 1990s, which is starting to damage the Obama Presidency. As an example, there is a new framework for tripartite security talks between the US, Pakistan, and Afghanistan (see report). The problem with this is that the mission to Afghanistan is a NATO mission, not a US mission.

It sends the signal that the US is not willing to work in conjunction with its NATO partners and that the role of the European nations is to provide troops for the US to use as it wills. The response from the awkward squad is one that is unwilling to co-operate with the US. For example, Germany has refused to allow the NATO Response Force to be used to provide security during the forthcoming Afghan elections (see story).

None of this is helpful to President Obama, who needs the awkward squad to provide more troops to Afghanistan. If they don't, then the US will become even more bogged down in a war that cannot be won. At a time when the European allies need to be engaged, the Clintonista swagger of the 1990s is particularly unhelpful.

The Eastern Connection

2009-02-26T17:52:00.003Z

There are times when the future simply unfolds in front of us, and this is one of those times. Three recent stories help to highlight that future. First, we learned on Sunday that RBS - a 282 year old bank in the UK - was subject to record losses that would result in making the company vulnerable to vulture funds (see story). Second, the losses turned out to be in line with those leaked to the press at the weekend (see story). And finally, by coincidence, there happens to be a delegation from China that is in Europe to buy distressed assets (see story).

In this one sequence we can see two major trends into the future. the first trend is the shift in the locus of the world economy eastwards. The mechanism by which China will establish itself as a major power will be through the purchase of European and American assets. In recent years, there has been resistance to this. The resistance will melt away in the face of the choice of either domestic redundancies or foreign ownership.

The second major trend is that of realignment in the economies of the world. Bottom feeding does serve a useful purpose in redistributing assets from those who don't know how to use them into the hands of those who do (see post). This periodic 'creative destruction' is an essential part of renewal. It is the capacity for renewal that make capitalism such a resiliant system.

In terms of where we are in the cycle of renewal, the appearance of bottom feeders and vulture funds is quite positive. It shows that the system is working and that we are once again moving forward.

Three cheers for that!

Bottom Feeding, Shopkeepers, and VAT

2009-02-23T16:41:00.004Z

We recently wrote about the process of bottom feeding as a natural part of the prelude to economic recovery (see post). It well be the case that the retail sector has been engaged in this activity itself over the question of VAT (a form of sales tax imposed in all EU nations, but at different national rates).

As part of the fiscal stimulus to the UK economy, the Government reduced VAT from 17.5% to 15% for the period 1st December 2008 to 31st December 2009. Ordinarily, we would expect this to lead to a reduction in UK consumer prices. However, it now transpires that a good portion of the UK retail sector has failed to pass on this reduction in VAT (see report). Instead of passing on the reduction in VAT, about a third of all retailers have retained the tax reduction to shore up their balance sheets.

How so? In the UK, retail stores tend to work to the 'price point'. For example, £9.99 is a popular price point. Prior to 1st December, of the £9.99 paid by the customer, the company would have kept £8.50 and remitted to the government £1.49.

When VAT was reduced to 15%, the company had a choice. It could have lowered it's price to £9.77, retained it's cut of £8.50, and remitted to the government only £1.27. Alternatively, the retailer could have retained the price point of £9.99, increased the amount retained to £8.69, and remitted £1.30 to the government. This, it appears, is what many retailers have chosen to do.

The turnover of the retailer has increased by 2.23% courtesy of the tax change, as has the government, who receives an additional 3p for each £10.00 spent at the till. If that isn't an example of bottom feeding, then what is?

Our Friends In The North

2009-02-22T14:21:00.000Z

To date, our view of the recession has been dominated by its economic impact. It is also changing the shape of global geopolitics and we need to be mindful of this. One area in which there could be profound geopolitical realignment is in the Arctic. The Arctic is an area which doesn’t normally attract a great deal of attention, but which has an enormous potential to dominate geopolitics over the next decade.

We are probably all aware that the Arctic ice cap is melting, at an increasingly accelerating rate. By 2020 the degradation of the ice cap is likely to be sufficient for the Arctic to be open to sea traffic for most of the year. There are two key shipping routes. Heading north through the Bering Sea, if you turn left across the northern coast of Russia, you would be following the Northern Route between East Asia and Europe. The Northern Route should reduce the shipping time between Japan, China, and Korea to Europe by about three weeks. Had you turned right at the Bering Sea and followed the northern coast of Canada, you would have followed the North Western Route between East Asia and the East Coast of the US. The North Western Route is likely to reduce the shipping time between Japan, China, and Korea to the East Coast of the US by about three weeks.

Two key advantages of these northerly shipping routes is that they by-pass the pirate infested waters of South East Asia and East Africa, and they also diminish the importance of the strategic bottlenecks of the Suez Canal and the Panama Canal. In terms of operation, owing to a thinner ice sheet, the Northern Route is likely to be open appreciably sooner than the North Western Route.

As the ice recedes, the energy and mineral deposits of the Arctic will become more open to extraction. The present economic recession has lessened the imperative of extracting these deposits but, as the global economy moves into recovery over the next decade, the issue of mineral rights is likely to dominate the agenda again. The problem is that there are no settled international borders to the North Pole. The issue is further complicated by the Lomonosov Ridge, to which Russia claims ownership.

At present, there are six nations with an interest in the Arctic. We like to measure the weight of this interest in terms of ‘Degrees of Influence’, which are determined by the ‘slice’ of the Arctic controlled by them. The six nations, and their degrees of influence, are: Russia (160°), Canada (85°), US (30°), Greenland (35°), Norway (35°), and Iceland (15°). This pattern is changing due to the current financial crisis.

The viability of Iceland as an independent sovereign nation has been called into question after the collapse of the Icelandic banking system. Already Russia has provided a bailout of €4bn. It is likely that these funds have strings attached, possibly in terms of Arctic mineral rights and possibly in terms of the use of former NATO airbases (see report). However, the Russian funding is unlikely to be sufficient. A more permanent solution is likely to be EU membership for Iceland, which is currently being fast tracked (see report). This rather changes the complexion of things.

One of the interesting consequences of the current financial crisis is the potential it has for strengthening the Federalist case in Europe. The direction is towards a tighter and more co-ordinated foreign policy for Europe, with a tightening of the institutional framework to give it substance. As the recession grips, Greenland and Norway are reviewing the exact nature of their independent foreign policies. If this trend were to gain hold, then, by 2020, the complexion of the Arctic could well change to Russia (160°), Canada (85°), EU (85°), and US (30°) in terms of degrees of influence.

We are not suggesting that this will happen. What we are suggesting is that the scenarios regarding the Arctic, which rely upon six nations as the basis for the scenarios, might need to be reviewed for the possibility of consolidation of the European interest in the Arctic. This consolidation would be the direct consequence of the recession.

© The European Futures Observatory 2009

Bottom Feeding

2009-02-21T15:49:00.005Z

It's Saturday and I have spent the day bottom feeding.

In an ecosystem, a good balance of creatures will have a number of bottom feeders - those animals whose job it is to clean up the debris and waste in the ecosystem to allow for renewed growth within the system. Worms, ants, wasps, they all perform this vital function. They clean up the environment by removing waste in the ecosystem.

Exactly the same occurs in an economy. As companies cease trading, their assets are disposed of by the liquidators and administrators. In the current recession, we have seen a number of retail operations go into administration - usually with a great fanfare of job losses - only to come out of administration as the core business has been disposed of as a going concern. Funnily enough, there is little fanfare about the jobs saved - good news doesn't sell newspapers.

In recent weeks, we have seen Whittards come out of administration with 1,000 jobs saved (see report) and Adams has come out of administration with 1,900 jobs saved (see report). The bottom feeders in this process go under a sexier name - they are value investors. For some time, value investors have been buying in the stock market. The headlines surrounding Warren Buffet - possibly the most famous value investor - is a testament to this.

And now we see that value purchasers are returning to the High Street. January UK retail sales were up as shoppers took advantage of deep discounting by stores (see report). In this respect, we joined the trend today. We needed a new bed for our spare room, and managed to buy a bed normally costing £600 for £300.

We have wanted a new TV for some time, and we managed to buy one previously costing £450 for £370. Strangely enough, the TV that we bought was on sale for £350 two weeks ago. Perhaps there is a message that we ought to heed? Are retailers discounting less as people return to the stores?

This leads on to the key question. If we are seeing value investors purchasing assets for pennies on the pound, if we are seeing price sensitive consumers return to the High Street, then are we seeing the bottom of the recession start to emerge? Perhaps Baroness Vadera was right when she said that she could see a few green shoots of recovery (see report)?

For my part, I am now going to watch Ipswich Town thrash QPR on my new telly!

More On Audit ...

2009-02-20T14:15:00.002Z

I see a pattern emerging.

First we have a Ponzi scheme. It doesn't matter what the content of the scheme is, it needs to be just credible enough to part people from their money through a possible - but highly improbable - investment scheme. You then create a money funnel where the receipts from later entrants go to fund the payments to earlier entrants, who may not want cash anyway as they can be persuaded to let their paper gains ride on the casino.

You may attract the attention from whistleblowers along the way. If they are external, then that's just sour grapes from incompetent competitors, if they are internal, then get rid of them. You will need accounts to lodge with the regulators, so a compliant auditor would also be helpful. And so the money goes around until it crashes to a halt - a crash caused by the collapse of the property market or the stock market, perhaps? And then the scheme comes into the open.

This business model fits the scheme of Bernie Madoff (see report), it may well fit the scheme of Allen Stanford (see report), and it has an unbearable likeness to the case of HBoS described in a previous post (see post). In the latest case to hit the headlines - that of Stanford International Bank - it appears that we have internal warnings that served as resignation letters and a small firm of auditors who gave SIB an unqualified audit opinion (see report). this all hightens the need for the reform of the audit community.

However, it is easy to blame others and we need to confess our own culpability. The fraudster needs the victim (I believe that they are called the 'Marks'). If we all were less willing to believe the improbable, it would be more difficult to perpetrate the fraud. If we all gave up trying to find an 'edge', then it would be difficult to sell high risk schemes. If we all said that what we had was enough - to become satisficers rather than maximisers - then these schemes would never gain sufficient momentum to grow.

On my part, I groaned when I read that the auditor of Stanford International Bank qualifies where I did, albeit 15 years earlier.

Made In China

2009-02-19T15:18:00.003Z

China has an image problem.

Chinese manufacturing has come to be synonymous with cheap and of poor quality. The latest example of Chinese quality control is the Test Wicket at the Sir Viv Richards ground in Antigua. For those who don't follow cricket, the West Indies are hosting England in a series of test matches. Last Friday the second test match was abandoned because the outfield started to break up, making play dangerous (see report).

As we are told by The Times:

"The Sir Vivian Richards Stadium, built for the World Cup with money from the Chinese Government, has had a chequered history"

Quite! We have written before about our scepticism over the widely made claim that China is becoming the world's economic superpower (see post). Recent events do nothing to allay our scepticism. If China is to achieve it's industrial destiny, then it must move up the value chain by producing goods of a quality than it has so far.

At a different tangent, we are told that China is using it's soft power to create influence in places such as Africa through the construction of infrastructure projects. For example, it was recently announced that Angola is to receive a $1 billion makeover for the African Nations Cup (a soccer tournament) in 2010. The Shanghai Urban Construction Group is to build four stadia for the tournament (see report).

One wonders if these stadia will be built according to Chinese construction standards (pretty poor) or Angolan construction standards (even worse). We can also speculate about the long term goodwill created if the constructions need to be replaced after a few years.

If the stadia in Angola are on the same level as the Sir Viv Richards stadium, then we can expect the goodwill to be pretty short lived. That particular project is in need of rebuilding after only two years.

Inflation Again

2009-02-16T15:09:00.003Z

Following up on our previous post on inflation (see post), the question of fuel poverty seems to have worked its way into our thoughts for the medium term. In the UK, fuel poverty is defined as a situation where fuel costs take up more than 10% of total household disposable income.

It is estimated that 5.4 million people in the UK suffer from fuel poverty. To alleviate this situation, the government has funded a programme of initiatives to alleviate fuel poverty - mainly through grants distributed by Warm Front, a body set up specifically for this purpose. It is estimated that 3.1 million people in fuel poverty are eligible for a Warm Front grant, but only 1.8 million people have taken up that funding.

Why? Part of the problem seems to be the funding model. Warm Front will only fund the contractors it chooses to undertake the work. Leaving aside the question of value for money - which is a big question because there are allegations of contractors padding the cost of their work to inflate the price - there is also the issue of the householder being liable for the cost above the grant ceiling, which, in some cases, amounts to thousands of pounds. This seems like a scheme to exacerbate fuel poverty!

In a recent report (see report) the scheme has been charged with not being fit for purpose. This suggests that fuel poverty is likely to be with us for some time to come. An interesting point will come in the near future. The costing mechanism for domestic fuel is related to RPI. As RPI moves negative, will domestic fuel bills fall? If they don't, then this aspect of the Age of Scarcity will only become more acute in the recovery, when it comes.