Experts, with wrinkled brows, warn about the future

Summary: Experts often see the future with alarm, seeing the dangers but not benefits. That gets attention, from both the media and an increasinly fearful public. Both sides feed this process. It need not be so, as most trends contain the seeds of good and bad futures. This post considers two examples.

Over several decades I have politely listened to countless lectures — by professors, generals, directors of this and that — with the same message: the world changes, which might bring bad things. Thousands of words then follow. Why do we listen to such things without throwing fruit?

Planning for worst-case scenarios is just good sense. Speculative exercises, such as War Plan Red — war with the United Kingdom, including invading Canada (see here for more) — are useful on many levels. But preparing for worst-case scenarios can easily be taken to extreme. Focusing on worst-case scenarios, to the exclusion of more likely outcomes, is madness.

Except in geopolitics, where it is often standard operating procedure (more or less, depending on the person involved). Examine studies of any broad geopolitical issue, and you will many that describe change as inherently dangerous.

1. the Iraq war — withdrawing might produce catastrophic civil war, even genocide.
2. population growth — inherently destabilizing
3. population decline — inherently destabilizing
4. global cooling (a 1970’s favorite) — inherently destabilizing, all effects are bad
5. global warming (today’s favorite) — inherently destabilizing, all effects are bad
6. nations growing richer — potentially destabilizing, wrecks havoc on a country’s economy and politics, unequal distribution of gains aggravates internal conflicts.
7. nations growing poorer — potentially destabilizing

It is not that these concerns are “wrong” or “invalid”. Rather they are too often expressed in an unbalanced fashion, without considering that these things also bring benefits — and might lead to better conditions, depending on what we do. Here are two specimens of this genre. The first shows a too-typically fearful look at the future.  The author of the second sees both sides of the coin.

What you probably do not know about China’s food crisis

With the support of modern media and the Internet, we are well-informed about the state of the world. But perhaps not so well-informed as we believe. In The Myth of Grand Strategy I state

It is hubris to believe that any person or small group has sufficient information to develop a plan on a global scale. There are too many complex, unknowable factors. Social factors, such as ethic and religious dynamics. Plus economic, military, and political factors. We lack the understanding to process the data into accurate patterns – a plan. That requires a science of sociology developed to the degree of modern chemistry, so that we could reliably predict results of our actions. Unfortunately sociology is at the stage of chemistry in the Middle Ages, when it was called alchemy. In fact, the yearning for a grand strategy is the equivalent to the search for the Philosopher’s Stone.

Here is a small, brief test. The global food crisis is front-page news. How well-informed are you? Here are a few questions, based on the Bank Credit Analyst report “Is China Running into an agricultural dead end?” (16 April 2008).

1. As China emerges from poverty and famine, their consumption of of food is low compared to the global average. True or False?

The US economy at Defcon 2

This analysis is far from the consensus viewpoint.  Unlike the consensus view, however, this has the advantage of accurately predicting the events of the past year. 

1. The deleveraging of the US economy is putting “torque” on the US financial system.  This is a process which cannot be stopped prior to completion, although the government will try.  The US economy resembles a rock balanced at the top of a cliff.  It was stable hanging on the top; it will be more stable at the bottom.  Hence the need for Defcon 2 — defense condition 2, one level below the maximum. 
2. As a result of #1, our financial fabric is ripping.  Weak links have been breaking one by one over the past year or so.  As each link breaks, there is more stress on the remaining links.  The tear is getting longer and wider due to several positive feedback loops.  In general, everybody’s (households’, businesses’, investors’ and creditors’) tolerance for risk decreases, and the inevitable reactions slow the economy. 
   1. Households and businesses increase their saving and reduce their spending.  This is good for our future, but reduces current economic activity.
   2. The price of credit increases (the premium of the rate at which you borrow above that the Treasury pays).  Investors sell things.  Creditors cancel loans, or do not roll them over at maturity. 

More good news about Peak Oil, on the demand side

Many in the Peak Oil community have trumpeted the rise of oil prices from their 1990’s average of aprox $20 (measured by West Texas Intermediate, aka WTI). For example, note these posts at The Old Drum:

• The Bet
• Oil Price Touches $100 a Barrel; Signal of Pending Oil Shortages Ignored
• Holding Daniel Yergin and CERA Accountable

Unfortunately much of this analysis not only misleads but also might prove counterproductive.

First, the “typical” Peak Oil explanation is likely wrong, even myopic. For example: “Despite the talking head rationale for today’s $4 rally, the underlying reasons for the 8 year+ climb in crude are geologic in nature.” As I discussed here, oil has risen since the recovery began in late 2002 along with the prices other industrial materials. Expansions often strain the supply of industrial inputs, which is why copper is often called Dr. Copper (due to its accuracy as an economic indicator). Oil has risen with commodities in general over the past year, a symptom of the inflation resulting from the rapid expansion of the global money supply in the past few years — also a typical late-cycle event.

More importantly, the straight-line extrapolations of many Peak Oil enthusiasts — forecasting using only a ruler — occasionally works, but usually proves unreliable over time. Cycles, not lines, dominate the real world. That is why folks earning a living in the risky business of forecasting, like Yergin, cannot be stuck clocks (always giving the same answer, right only twice a day).

So that we too are not stuck clocks, let us consider what cyclical dynamics might flatten or even decrease oil demand during the next few years?

I. A global recession

Power shifts from West to East: the end of the post-WWII regime in the news

Massive geopolitical changes occur in tiny increments as well as massive shifts. Look closely at your daily newspaper. The journalists report as casual news the small steps of history-making events. In the past few weeks we see tangible evidence of power shifting from West to East.

One: The Abu Dhabi Investment Authority spends $7.5 billion to buy a 4.9% stake in Citigroup (28 November 2007)

By agreeing to purchasing a $7.5 billion stake in the faltering banking giant Citigroup, the secretive, government-controlled Abu Dhabi Investment Authority is breaking with tradition. As the largest sovereign wealth fund in the world, with assets estimated at $650 billion, it poured money in the past into low-return, low-profile investments or small emerging market deals, unlike its flashy emirate neighbor, Dubai. … Flush with cash from its oil exports, Abu Dhabi turned to Wall Street, using a complicated transaction late Monday to buy 4.9 percent of Citigroup, acquiring high-yield, convertible stock that must be exchanged for common stock between March 2010 and September 2011.

Two: Singapore buys 9% stake in UBS. An unnamed Middle Eastern investor spends $1.73 billion to buy a 2% stake in UBS.

Update: Rumors point to Saudi Arabia as the home of the mystery investor.

Three: China spends $5 billion to buys a 9.9% stake in Morgan Stanley.

Power follows money. Creditors usually dominate debtors. These are just the opening rounds in the new great game, as foreign governments take non-voting stakes in major western financial institutions. Plenty of time to tighten the leash later, slowly over time. In the new era money might replace bullets as the last resort of Kings.

For a deeper perspective on this, we go to one of the world’s top experts on global capital flows: Brad Setser, of the Council on Foreign Relations. Here is an excerpt from his article of 19 December 2007:

The irony here is immense.

A few years ago the consensus view in the US financial community was that China’s state would have to relinquish control of Chinese banks in order for China’s financial sector to develop. State ownership was generally considered an impediment to a modern financial system. But rather than selling controlling stakes in China’s state banks to Wall Street firms, China’s state is now buying (non-controlling) stakes in Wall Street firms.

Talk about a change. There was a time not-so-long ago when the US was on a push to export its form of government (and its form of capitalism) around the world. Remember when the US was criticized for using the IMF to foist privatization on the world? Now both the US government and large Wall Street firms rely heavily on non-democratic governments for financing — and the US is, in a limited sense, importing other countries form of capitalism. The US government hasn’t historically owned large stakes in US banks and broker-dealers.

Update

“Is the Sun Setting on US Dominance?”, Joergen Oerstroem Moeller, YaleGlobal Online 

• Part I - Expect Asia to replace the US as the world’s dominant economic force.  (27 February 2008)
• Part II - Presiding over a network of powerful regional alliances, the US can maintain its preeminence  (29 February 2008)

Past posts about the End of the post-WWII geopolitical regime

• A brief note on the US Dollar. Is this like August 1914?  - (8 November 2007) How the current situation is as unstable financially as was Europe geopolitically in early 1914.

• The post-WWII geopolitical regime is dying. Chapter One  - (21 November 2007) Why the current geopolitical order is unstable, describing the policy choices that brought us here.

• We have been warned. Death of the post-WWII geopolitical regime, Chapter II - (28 November 2007) A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).

• Death of the post-WWII geopolitical regime, III - death by debt - (8 January 2008)  Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
• A recommendation to read these bulletins from the front! - (21 January 2008)  A brief note on today’s articles in the NY Times and Financial Times, with Brad Setser’s explanation of why they are important.

• Geopolitical implications of the current economic downturn – (24 January 2008)  How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.

• Let us light a candle while we walk, lest we fear what lies ahead  (10 February 2008)  Putting the end of the post-WWII regime in a larger historical context.

• A happy ending to the current economic recession (12 February 2008) –  The political actions which might end this downturn, and their long-term implications.

America’s Most Dangerous Enemy

Summary:  This essay examines the most dangerous enemies of America.  Two little known dangers appear far most serious than the usual suspects.  Appropriate responses are discussed.

Threat definition is the key phase when developing a grand strategy. Especially today, as America faces many dangerous enemies.  Who are our most dangerous foes?

China

Billions of people, a rapidly growing economy that will inevitably replace America in both economic and geopolitical importance. One of our largest creditors, its technological theft and unfair trade practices are destroying America’s industry. A military confrontation over Taiwan is inevitable in the near future.

Islamofascism

This mutant version of Islam combines traditional Islam, nostalgia for a long-gone age of Muslim supremacy, and Fascism. Motivated by hatred of western culture, if not stopped it will control not only the vital Middle East oil producers, but also important States such as Pakistan and Indonesia. Large minority populations of Muslims will destabilize other States (e.g., India and the EU). Even small Moslem enclaves, such as those in the US, can act as fifth columns.

The “Gap” Nations

As Thomas Barnett explained in his March 2003 Esquire article:  ”Disconnectedness defines danger. “

… show me where globalization is thinning or just plain absent, and I will show you regions plagued by politically repressive regimes, widespread poverty and disease, routine mass murder, and — most important — the chronic conflicts that incubate the next generation of global terrorists. … My list of real trouble for the world in the 1990s, today, and tomorrow, starting in our own backyard: (Haiti, Colombia, Brazil, Argentina, former Yugoslavia, Congo, Rwanda/Burundi, Angola, South Africa, Israel-Palestine, Saudi Arabia, Iraq, Somalia, Iran, Afghanistan, Pakistan, North Korea, Indonesia).

However terrifying you find these foes, we face two much greater dangers.

I.  Paranoia