Things to watch through 2011 and through the decade

by futurist Richard Worzel, C.F.A.

Like all years, there will be good news and bad in 2011. Because of the bad planning, bad judgment, and bad behavior of previous years and decades, some of the potential bad news is very scary indeed, as I’ll get to in a moment. The odds are that 2011 will be a not bad year, but the risks are higher than normal for economies emerging from a recession. I’m going to deal with the scarier parts first, and then move on to happier things, so bear with me.

GEOPOLITICS

North Korea has worn out everyone’s patience, including China’s, but nobody knows what to do about it. As well Kim Jong Il and his anointed successor have grown up being told that they are always right, and everything they want to do is perfect, which makes them unlikely to listen to even allies (or ally) like China when they don’t like what China has to say. As a result, while the odds are against it, and some kind of negotiated stand-down is still the most likely outcome, North Korea’s narcissist leader could go too far and finally provoke a disaster, up to and including a shooting war. This is specially true now that South Koreans have turned hostile to North Korea because of it’s recent killing of South Koreans.

Iran will continue to work towards nuclear weapons, plus the missiles to deliver them, no matter what anyone says to them. Nobody in the Middle East or the West wants that. The critical question is: do China and Russia put their narrow self-interests before peace, or do they work to stop what could lead to a potential (nuclear) war in the region?

What seems like a revolution in a country that rarely makes news in the West, Tunisia, could become a massive problem for America, and complicate the entire geopolitical equation. What started as food riots in Tunisia rapidly became political protests, and led to the ouster of the former president, Zine El Abidine Ben Ali. As this gained attention elsewhere, the long-suppressed opposition to Hosni Mubarack’s American-backed dictatorship in Egypt flared up. America is now in a position of supporting a despot against what could become a popular uprising. This not only makes it look hypocritical for cheering on democratic uprisings in places like the Ukraine and Iran, but is a big risk for them going forward. If Mubarack falls, he’s likely to be replaced by a government far less amenable to Washington, and much more hostile to Israel. This could seriously complicate the Middle Eastern political situation, especially in the wake of the PLO’s embarrassment by Israel, as revealed by leaks about concessions that PLO leaders were prepared to make to get a Palestinian state. Moreover, there are now protests in the streets of Yemen. This could be the beginning of the end for the satrapies of the Middle East, redrawing the map of one of the key flashpoints of global geopolitics. And if Saudi Arabia’s monarch were to go, you could add real uncertainty to the price of oil, and the strength of the global recovery.

ECONOMY & FINANCE

Canada spent 2010 crowing about what a great country it is, how well it fared in the Great Recession, and how sound it’s public finances and banks are. We may well eat those words in 2011 as our economy slows down, the price of oil goes up, increasing tension between oil-producing and manufacturing provinces, and consumers find that they are struggling with too much debt. If we’re truly unlucky, we could have the crash that everyone else had in 2008.

As well, the unfunded liabilities of retirement benefits promised to civil servants are starting to come home to roost. Already in developed countries around the world, stories are starting to appear about the unpopularity of high salaries and retirement benefits accruing to civil servants. This will continue to grow as a story – and as a fiscal reality at federal, state/provincial, and municipal levels of government. Ultimately, these stresses will lead to pitched political battles, with civil servants rightly pointing to the fact that they have firm contracts for these benefits which can’t be rolled back after-the-fact, and critics rightly pointing out that governments can’t afford to fulfill the promises they’ve made. As this problem continues to gain prominence, as it has in the financial crises in Europe, it will raise the noise level of the debate everywhere else. We’ve already seen the final resolution in a parallel case: the unions of the American car companies gave back the store when the alternative was to bankrupt those paying for pensions and benefits. But it’s going to be a long, painful, noisy road before we get there.

America’s financial position could get even worse than it was in 2008, only this time it will be the state governments in trouble rather than banks and car companies. The list is led by Illinois, California, and New York, but more than half of all state governments are in some financial difficulty, and not all of this is related to the anemic recovery. The over-promises made by governments to their civil services, as just noted, is now threatening to overwhelm state finances. There’s a very real chance of multiple state insolvencies in 2011, leading to a run on state and municipal credits, and potentially triggering a run on the dollar and US Treasuries. What happens after that is anyone’s guess.

Meanwhile, the situation of the PIIGS of Europe isn’t getting any better. Bond investors aren’t buying the Euro bail-outs of Ireland and Greece, and it becomes a question of whether the skepticism stops there, or whether it spreads to Italy, Portugal (already under scrutiny), and, most importantly, Spain, the fourth largest economy in the Euro-zone. The real risk is that someone that the market isn’t already worried about, like Belgium, goes belly-up. If that happened, it would throw everyone’s credit into question, and could trigger a run on almost all Euro-credits (possibly exception Germany). And if there’s a run on Euro-credits, it could trigger a run on the Euro – but if that happens at the same time as a run on the dollar, where do currency traders flee? There are no other currencies capable of taking the gaffe. Gold, of course, would skyrocket, but there just isn’t enough gold to absorb the demand – but that would leave an awful lot of unhappy investors looking for alternatives, and crowding into niche currencies like Swiss francs and Canadian dollars, spreading the pain by forcing their currencies to shoot up.

If none of these disasters occur – and it’s hard to see how we can dodge all of these bullets – then the global economy will continue to improve. (Admittedly, this is a little like saying “If we don’t die, we’ll be fine.”) America’s economy will grow, but not terribly quickly. Projections range from 1.5% to 3.5%, which really indicates how uncertain the outlook is. I would estimate that, absent major shocks from the issues above, the U.S. economy will grow closer to the high end at something close to 3-3 ½ %. This will lower unemployment, but very slowly, leaving a lot of dissatisfied Americans, and threatening Obama’s re-election in 2012.

And the U.S. Congress is likely to be more than slightly fractious, with the Tea Party ideologues trying to run Congress on right-wing ideals and running smack into the real world of congressional politics. This is going to lead to widespread frustration on many fronts, and from all parties involved. It’s going to be particularly interesting to watch the Republican party try to digest the Tea Party-ites, while the Tea Party tries to take over the GOP. I suspect the GOP will win through sheer size and inertia, but will use the Tea Partiers as shock troops in the war against evil (the Democrats) and the devil (Obama).

A related question will be: Can anyone in the Republican party stop Sarah Palin? They’re scared to death she’ll win the nomination – and blow the election. What Americans should be more afraid of is if she wins the nomination, and then wins the election. Everyone I talk to about this says that it’s not possible (except for die-hard right wing-nuts who say “Please God!”), but stranger things have happened in electoral politics.

TRADE & EMPLOYMENT

Tensions between trading partners over competitive devaluations, notably between China, America, and the Euro block, will rise. If cool heads do not prevail, we could see a full-out currency war, and, if protectionists, who are in the ascendant everywhere (“American jobs for Americans!”), get their way, it could degenerate into a 1930s-style trade war with disastrous results.

There’s another aspect of the employment picture that is also worrying. What we are seeing is a massive change in the world of work. As the Rapidly Developing Countries (“RDCs”) like China, India, Brazil, Mexico, and so on, expand their economies, and take on increasingly sophisticated jobs at wage rates that are significantly below those of the developed countries, jobs have migrated, and will continue to migrate, from developed countries to RDCs. In effect, a global economy implies a global labor force. What we are now witnessing is wages in the RDCs rising, and wages in the developed world falling – an equalization of the disparities in wage rates. Since workers in developed countries won’t like this, it is going to further exacerbate the acrimony between trading partners.

TECHNOLOGY

There are a number of technological developments that will start to emerge in 2011, and continue through the decade. The first is that television broadcasters and their delivery people – being satellite and cable providers – are fighting a running (and ultimately losing) battle against online video. Smartphones already offer TV without a television, and in the home users are increasingly going to turn to devices like Apple TV and Google TV, combined with services like iTunes, YouTube, and Netflix, for their video entertainment. Given that this also opens up their living rooms to Internet shopping, it’s going to be difficult time for traditional TV suppliers. It’s also going to be an even greater reason why video production companies are going to gradually move away from TV distributors: they can start having relationships with individual video consumers instead of broadcasting through middlemen.

Another extension of something we’ve already seen is augmented reality, which is adding information to the real world. Hence you might look at a picture of an intersection on your smartphone while you’re getting driving directions, and have arrows and labels appear on the photo (or live) image of your location, identifying the stores (or addresses), and possibly listing items that are on sale you might be interested in. Location advertising is catching on, and will become bigger over time, in part because merchants (and cellphone suppliers) want it. How eager consumers are for this is going to be the real determining factor.

The real advance in augmented reality, though, as well as many other potential applications, will come if consumers adopt near-eye video monitors. Near-eye video means putting an eye-sized video screen right up in front of your eye, which means that a small image can look very big. If such monitors are clear except when there are images for display, they could look like a pair of ordinary glasses, but act as computer (or video) monitors. If that were to happen, augmented reality could become an everyday tool. The real key is whether consumers want near-eye video; the technology has been kicking around for years as the lineal descendent of jet fighter pilots’ heads-up displays. So far, though, consumers have shown little interest. On the other hand, 3D images have been around since the 1800s, but only recently have consumers found a form they were willing to accept. The same is true of ebooks (about which more in a moment), which have been kicking around for well over a decade, but didn’t make the grade until Amazon and Apple made them desirable. What technology will be capable of in the future is relatively simple to foresee. What consumers will want, especially with technologies they’ve never experienced, is much harder to project.

Perhaps the biggest technological change coming in this decade is going to be the arrival of everyday robots and computer intelligences. This marks the full emergence of the Third Industrial revolution. The first, which blossomed in the 19th century, was when humans used machines to augment their muscles. The second emerged in the 1960s when machines (computers) helped humans manipulate information and make decisions. The third will happen when seemingly intelligent computers make the decisions and act on them autonomously, while humans set objectives, but leave implementation to the computer. Functioning robots, as opposed to prototypes and toys, already exist, but they are expensive, and used only in specialized situations. As computing power continues its faster-than-exponential increase, and decision-making and self-learning software becomes more sophisticated, robots, computer intelligences, and automation will begin to appear in industrial, commercial, and health care facilities. This will lead to two major effects: First, it will lead to a significant increase in the standard of living by increasing worker productivity. And second, it will throw more and more people out of work as automation becomes financially preferable to human workers, and in a steadily widening range of jobs. This is going to cause the divide between those who are gainfully employed (the well-off, and the so-called “gold collar” workers) and everyone else to expand dramatically. This is a recipe for political and social instability.

Meanwhile, social media will continue to expand, and their influence will become more pervasive. The pressure for another means of communicating beyond keyboarding, text, and screens is building, but so far, no one has come up with a better interface between users and computers. Near-eye monitors, verbal commands, virtual keyboards, and gesture commands have been tried, but have not gained much traction. It may be that Microsoft’s Kinect™ may be the beginning of something big, if it can translate into an interface that is used in serious computing as well as gaming. Perhaps Apple will, once again, revolutionize computing with a new interface. If someone does come up with a more intuitive computer interface that is faster, slicker, and more natural than typing, then social media will explode like a gasoline fire on a hot, windy night.

And ebooks have finally arrived, after many years of false promise and false starts. As happened in music, Apple didn’t invent the ebook, and wasn’t the first mover, but has produced the most popular device for it in the iPad that will only get better in successive versions. What hasn’t happened quite yet is for ebooks to become something more than text on a screen and printed words on a page. There is a hybrid out there, waiting to be invented, that is significantly more powerful than either medium alone. We may see it emerge in 2011.

The revolution in health care is only getting started. Computer intelligences are going to start being used to identify new epidemics as they emerging, and to analyze the microbes involved to find cures in record time. A new technology, called Genetic Programming (“GP”) is about to emerge on the health care scene, and will first produce diagnostics and prognostics in the treatment of cancer, and eventually revolutionize cancer treatments and drugs themselves before moving on to other areas, such as diabetes and other diseases.

Meanwhile, the continuing struggle to find enough money to finance all the health care that consumers (and voters) want in the aging developed economies is going to heat up. Ironically, there are lots of ways of improving both the effectiveness and the efficiency in health care, but our social structures have become so calcified, and health care has become so politicized, that it’s impeding real improvements. It’s ironic that this is happening simultaneously with a technological revolution in health care that promises so much.

© Copyright, IF Research, January 2011

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