advertisement
advertisement
  • 04.11.11

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.

advertisement

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.

advertisement

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?

advertisement

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.

About the author

Daniel W. Rasmus, the author of Listening to the Future, is a strategist who helps clients put their future in context.

More

Video