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It's the Economy Stupid—and It Won't Ever Be Predictable Again

The next uncertainty in this series looks at economic attributes. Not only is the economy uncertain, but it is uncertain in many ways and many of those attributes inter-related, making prediction even more difficult.

Regardless of the shows you watch on a financial news network, there is a battle about the future taking place. All of the commentary looks forward, based on some current event. This battle between pundits takes place because the future is uncertain. Rarely, if ever, does a commenter on CNBC or Bloomberg or CNN say they don't know the implications of the Japanese Tsunami and Earthquake, or the tide of pro-democratic uprisings in the Middle East, or the meaning of AT&Ts attempted takeover of T-Mobile, or the Texas Instruments bid for National Semiconductor. Their job is to tell you what they think, either to remain a pundit, or influence you to take some action that it advantageous to them or their partners.

When it comes to the economy, few things are more uncertain—and few areas attract so many trying to assert certainty where none exists.

In the past, powerful countries could control much of their destiny. But that said, the period of time when a country, like the the United Kingdom, the United States, or the Soviet Union actually controlled its own economic destiny spans a very short period of history—from say, for the U.S., the end of World War II to the early 1970s. And that is probably a stretch because the Cuban Missile Crisis along with internal social unrest challenged assumptions and shifted the status quo prior to the 1973 oil embargo. We do, however, try to craft a history that imagines a pseudo-control and that works for a time, until some event relieves us of our tenuous delusions.

We are crafting such a story again around the Great Recession. We are crafting a story which exudes cause-and-effect, painting the deregulated banks and derivatives as the central chaos, and the new regulations and more tenacious Treasury, FED, SEC, and others as the heroes of sanity returning us to a more stable time.

When conducting scenario planning, that kind of thinking leads to misconceptions not only about control, but about future states that may appear more stable and controlled than they will be, leading to poor plans and wrong choices—a lack of anticipation, and a dearth of preparation. It is not that a period of stability is incorrect, but it isn't the only possible outcome, and therefore needs to be reasoned about, and planned for, along with other potential outcomes.

The truth is, the housing bubble and its financial ramifications in the United States, leading to the exposure of overly sophisticated, unregulated trading instruments and watchdog algorithms that failed to shout because their models had become too disconnected from the reality they were intended to monitor, were just the tip of the uncertain attributes about the future of the economy. Here are several more attributes to consider:

Institutional Skepticism Will we regain trust in banks and banking regulators? Will new issues arise with regulatory bodies that reveal corruption or favoritism? Will ethical watchdogs emerge that change the games significantly, making entire systems more transparent? Will the role of citizens as regulators precipitate such an action, and with their popular wins mounting, create trust in the collective's ability to regulate, therefore returning trust? Or will movements like this be squelched, further disenfranchising customers? Will marketing say one thing, while companies do another, developing yet another schism with institutions. And how will these questions apply to governments, both local and national?

Political Unrest The Middle East is a starting point, and the future shape of the Middle East remains far from certain. China has a huge population of young males in their cities as a result of the One Child policy. Over the next decade these young Chinese men will make many choices, individually and collectively, about their relationship to China, and China will react to those choices. Will we witness a future China riddled with unrest, or an even more nationalistic and centered population? And what about the United States and Europe, as mounting financial issues perpetuate questions into unforeseeable futures while their established military power continues to be called upon to police the world, further driving the idea of economic balance into the future.

Demand Will we continue to consume, as a species, at rates greater than supply? What things will be short of (Water? Rice? Corn? Copper? Oil?). What will those shortages cause people to do? What new industries will emerge? What replacements will challenges seats of presumed power?

Trade Will globalization continue unabated, or will it fracture. Will countries make a choice to return to a more local supply chain? Will they be satisfied with few choices? Or will trade continue to create a chaotic, emergent and self-organizing way of distributing and redistributing wealth and resources?

Knowledge Will the next generation of workers, from the streets of Los Angeles to the streets of Chennai and Dar es Salaam, find little interest in perpetuating the knowledge of previous generations, eventually abandoning entire industries? Or will they acquiesce and temper their ambitions for change, and sit in still rooms listening to old men tell them again and again how to clear checks and repair punch presses. How will the old knowledge and the new knowledge co-exist? Will they remain separate and at odds, or will they knowledge of the industrial age and the information age create the knowledge economy that has been forecast by so many for so long?

Deficits From Athens to Lisbon to California, the global "recovery" remains challenged at the micro-level. Disruptions in tax revenues caused by unemployment and legislated limits and boisterous electorates are keeping the coffers short. Not to mention the burden of pensions and entitlements. Will these deficits become destabilizing elements that cause the recovery to implode, or will these deficits force governments to re-evaluate their role, and to reinvent themselves as smaller and more agile service providers.

Role of Emerging Markets I have already mentioned questions about China and its potentially disenfranchised male youth, but what of its economics. Will it be able to balance the burgeoning cities with its rural populations where its food is produced? Will China establish is credibility in quality and innovation? What of India, and its rather lumpy distribution of wealth and resources. And what if the Middle East unites, or Africa awakens fully? What of Malaysia and Vietnam? What if they create an industry of power, of reach and influence, and what if that industry doesn't fit current models? How will they be welcomed into the existing power structures, how well will their economic prosperity be welcomed?

Inflation The deficits make inflation all but inevitable, at some point, unless there is a huge uptick in productivity, or if the models and measurements change. In a sustainable economy, deflation might be preferred. And remember those who say deflation is bad are tied to economic models based on consumerism. If we maintain current models, and inflation rises greatly in the West, what will that do to global economic stability? The value of the U.S. dollar? General currency markets and trust in the reserve currency? And what if automation kicks productivity into high gear, but leaves human employment increasingly out of the equation.

Natural Disasters As we have just seen in Japan, a natural event can result in devastating losses of human life and create uncertainty about the future economic position of an entire country. The Japanese saga remains far from written, with ongoing nuclear concerns topping the list of uncertainties. These localized events are not the only natural disasters that could shake the global economy. Consider a solar burst pointed directly at Earth. Widespread disruptions in technology and communications might take place. How would the economies function without electronic funds clearing houses, ATMs and cash points, credit cards and all of the other systems that we rely on to keep the economy humming?

U.S. Power and Reach Will the U.S. overreach its capabilities, or its welcome? What happens if the U.S. losses face as a conflict agent, or fails to meet its objectives, and its promises, time and again? What if its wealth is redistributed, not through innovation but through external humanitarians efforts combined with military action?

Regulatory Environment The U.S., Europe—the WTO and the European Commission—what will the regulatory environment look like in a decade? Will it be largely written and rewritten to ameliorate current complacencies and comforts, reinforcing bad behavior while appearing to moderate it? Or will the regulatory environment erode even more as new nations assert non-Western ideas over concepts like Intellectual Property. Or will populist movements create more stringent regulations for large corporations as they express their institutional skepticism and their electoral hypocrisy by simultaneously voting for smaller government and heavier regulations with one pull of the ballot lever?

The Economic Model The Economic model has two aspects. The first is the model itself. Capitalism and communism offer alternative economic models, and both have proven themselves when implemented well. Neither was designed for this time in history, nor for our future state. Consider the creation of a new system called Sustainable Capitalism which includes a balance between creation and consumption in its mantra. This new system would value different things than a consumer-oriented capitalism driven by growth—what if such a system was designed to maintain rather than to grow. What would that do to our institutions?

And that leads to the second aspect of this attribute: measurement, which is where even good economic systems go bad. The measurements of success, say, in the Soviet Union, were very different from those on a kibbutz in Israel where the same economic principals were ascribed, but because of measurement (and some other factors) the results varied widely. For any future economic model, it will be imperative that measurements be created that reinforce a desired behavior, rather than distort the model. In capitalism, for instance, long-term wealth is a desired goal, but because of intellectual dissonance, we find we measure the success of firms on quarterly results. The model has become distorted by the measures. Those who seek long-term wealth by sacrificing of short-term results are punished. In this increasingly green-aware world, firms are still financially compensated for growth. Take housing starts as a measure of builders—clearly there is already too much existing inventory—so not only do the measurements incent the wrong behavior, but they drive the consumption of natural resources when it can be clearly shown the supply exceeds demand. And this is a case where that measure is combined with unemployment to exacerbate the problem. It appears better to over-create and therefore put people back to work—fueling perhaps a future bubble, than it is for the short-term numbers to be outside of the historical norms, when a better solution would be to rethink the measurements. What if housing starts needed to be off-set with neighborhood reinventions? Abandoned parts of town would have to be refurbished, and their inventory replenished, before housing starts in a new area could begin.

The Economics of the Future

As with all of these posts, the ideas expressed outline a range of possible outcomes, but not all possible outcomes. The intent is to have the reader recognize that uncertainty exists, and that it exists to a great extent—and because of that, reasoning about uncertainty in a rational and systematic way is a worthy investment for individuals and for institutions.