The year ahead is going to be a tumultuous one, challenging in political, economic, and financial terms. Despite this, there are opportunities for those prepared to take advantage of them, because uncertain times mean that market share is up for grabs. And no, it’s not a coincidence that there are 12 trends for 2012. I discarded a bunch more, but it’s such a catchy title I couldn’t resist.

I’m going to approach these 12 trends with three objectives: What is important? Why is it important? And what does it mean to you?

And I’m going to start with the bad news, and end with the silver linings.

1)    Declining American influence – America’s absolute and relative influence in geopolitics, economics, finance, and the military is declining for a host of reasons: the rise of competing powers like China, India, Brazil, and others; the very expensive military adventures in Iraq and Afghanistan, which have sapped America’s willingness to engage in aggressive political and/or military action; the Arab Spring, which eliminated Middle Eastern strongmen like Mubarak who followed America’s political lead, and the continued stalemate over the fate of the Palestinians, means that America’s influence over this critical and unstable region is at or near an all-time low; the Great Recession, which has sapped America’s economic and financial clout; and the dysfunctional stand-off between Republicans and Democrats that has frequently led to policy paralysis.

The implications of this are a less stable, more dangerous world. America may have gone back and forth on whether it wanted to be the world’s policeman, even though it truly was the global cop, and it’s inability to fill that role now means that the world is a more dangerous place.

This sets the stage for sticky situations to emerge, such as the twin nuclear threats from a suddenly even less-stable North Korea, and the only slightly more stable and geopolitically ambitious theocracy in Iran. It also leaves more elbow room for the ever-ambitious China to expand its power and influence, notably in south Asia and the South China Sea. It also leaves critical global issues, like what to do about climate change, without essential leadership.

The implications of this is a world where there are more likely to be more, and more serious, geopolitical, financial, and economic crises, and greater uncertainty in virtually every aspect of life. Others may not always have agreed with American policies, but they will miss America’s steadying influence as it ebbs from their lives.

2)    Ho-hum! Just another financial crisis (European edition) – The daily drumbeat of scary headlines dealing with the financial crises in Europe have gradually deadened everyone’s awareness for how dangerous the situation truly is. In particular, Angela Merkel is juggling hand-grenades, and hoping that she won’t drop any, and that none of them will go off unexpectedly. Germany is the only European country with the potential to stop the rolling crises that are affecting Europe, and then only if Merkel acts in a timely basis. To do this, she must let Greece go bankrupt instead of propping it up, shore up the banks, notably German banks, that have bought far too many dodgy EU bonds in the past, allow the European Central Bank (ECB) to become a lender of last resort, with the ability to stop a run on European bonds, and halt the bond market attacks on other European countries, starting with Portugal and Ireland, but extending to the much bigger countries like Spain, Italy, and even France. But Germany doesn’t want to do these things, and German voters are adamant that they won’t subsidize what they see as the lazy, profligate lifestyles of southern Europeans. But if Germany doesn’t act, and in a timely fashion, it may lose the ability to act at all, and come under attack from the bond markets as well. Indeed, German bonds are no longer being bought with as much enthusiasm as they were even two months ago. If Germany doesn’t act soon, it may lose the ability to do so at all.

Remember what happened in the American financial markets in 2008? If Germany doesn’t act in time, we could see the same kind of thing happen in 2012, this time starting with a run on European government bonds. From there a run could spread to those banks – American as well as European – that hold too many of these bonds. And once such a run started, the most dangerous question of all would emerge: “Who’s next?” Investors, frightened by the panic, would look to sell any and every questionable credit, and their attention might turn to the various U.S. state and local governments, like Illinois, California, and Harrisburg, Pennsylvania, among many others, that are struggling with their finances.

The U.S. Federal Reserve has become the de facto lender of last resort to the entire developed world, and would undoubtedly step in and support the banks and markets with everything they had. But this time, remembering the callous, greedy ingratitude of last rescue of the banking industry, American voters and the American Congress would likely tell the banks to drop dead. It was a hard enough last time to get Congress to bail out the banks; this time I suspect it would be impossible, even though failing banks would take the global economy down with them. Moreover, the Fed doesn’t have anywhere near as many bullets today as they did in 2008, and Fed Chairman Bernanke already has some Republicans, notably Ron Paul, baying for his blood over the quantitative easing from the last crisis.

The danger here is frighteningly real, and even greater than the risks we faced in the panic of 2008. Yet, the steady drip of crisis headlines and last-minute rescues has left many people convinced that nothing will happen. If it does, it will catch people flat-footed, not because they didn’t know there was a crisis, but because they have been hearing about it for over two years now, and have tuned it out. We could muddle through, and probably will – but the risks are far higher than most people realize. It will be important to have thought out a Plan B to deal with the unthinkable, if it happens, one that prepares you and your finances for a bigger repeat of the 2008 panic. Again, it probably won’t happen – but it’s better to have a plan and not need it, than need a plan and not have it.

3)    Yes, China’s influence will continue to rise, but…  Napoleon famously said, “China is a sleeping giant. Let it sleep.” Well, China’s very much awake now, and throwing her weight around – although cautiously. If I were (God forbid) Emperor of China, I would require my minions to tread cautiously, to smile a lot at our trading partners and neighbors, and to make our gains slowly, one salami slice at a time, never appearing too greedy or overreaching. I would practice soft diplomacy, offering aid and comfort where I could do so cheaply, loudly proclaiming our respect for other countries’ internal policies, taking leadership positions in things, like climate change, where I knew I was going to have to make changes anyway, and generally trying to look like a good global citizen. I would act, in short, as if time were on my side, and I was going to be the next Big Thing.

And generally speaking, that is precisely what China is doing – except that every once in a while the mask slips, and the avarice and aggression shows, as with the boundary disputes with other countries, especially as related to the South “China” Sea, which China (the nation) seems to be trying to interpret literally as being a Chinese lake.

But China has an Achilles’ heel – several of them, in fact – and does not have (much) time on its side. Its biggest weakness is that it is aging faster than any other significant country on Earth. Because of its One Child policy, China’s population is expected to peak, and begin declining, sometime around 2020 – within the next 10 years. And its labor force is already in decline, even as the demands for higher wages push its cost structures higher.

Meanwhile, although there is a great deal of pride in China’s new affluence among the Chinese, that affluence is not evenly spread, and there is unrest among those who remain poor. Add to this the widespread corruption of Chinese officials at all levels, which often provokes revolts, like the one in Wukan, which leads to simmering dissatisfaction among many Chinese.

This will further be exacerbated by the fact that China’s factories are automating almost as quickly as those of the developed world, which threatens to slow the rate of job creation, productivity, and affluence markedly over the next 10 years. Yet, China dare not automate; to do so would mean a loss of competitiveness, which would produce even worse results as industries would move elsewhere.
So, with that in mind, what would I, as self-appointed Emperor of China, do? Worry about a future I couldn’t control, and for which I could not see a clear path forward. The next 10 years will mark the beginning of the end of China’s ascension, and if I were Emperor, I’d think about retiring to some warm, cushy haven before the revolution came. Chinese Spring, anyone?

The implications are for China to step up its attempts to increase power and influence, and throw its weight around even more actively before that power starts to wane, but as quietly as possible. Look for China to try to make this the China Decade, especially in finance, trade, and geopolitics, as it attempts to pull in as much as it can while it can.

4)    American Spring? Meanwhile, closer to home, while those on the political right like to dismiss the Occupy movement (e.g., Occupy Wall Street), the fact that the movement happened at all is the most significant part of it. Indeed, Time magazine made protestors its “Person of the Year”, and that’s not restricted to just the Arab countries. The Occupy movement and protests against cut-backs in many developed countries had many of the earmarks of the Arab Spring: protestors saying that their governments serve an elite clique and not the people; lots of people, especially young men, who cannot find work despite months or years of trying; and a belief that the political system is neither representative nor responsive. Just because winter has fallen, and the Occupy settlements have been disbanded does not mean that the dissatisfaction has gone away. And with increasingly dysfunctional government in America, the potential is there for a much stronger protest movement against the System, however that is defined. American Spring, perhaps? It sounds unlikely, but not as unlikely now as it did before, and it won’t be restricted to America for discontent will grow in all developed countries.

This is especially true as the boomers move towards retirement, only to find that their either don’t have the resources to retire and that no one is going to donate them, or that the civil servant pensions that they were promised are unaffordable.

The protest movements have only just begun, and they are going to be acrimonious, disruptive, and at times hijack the political process.

5)    Mixed signals for both weaker – and stronger – economic growth.  Europe and its prospects are dragging the global economy down. The uncertainty in Europe, combined with the painful budget cuts in Greece, Ireland, Portugal, Italy, Spain, and the United Kingdom, mean that Europe is now in recession and a drag on the global economy.

Meanwhile, China, which had been concerned about inflation, and hence was hiking interest rates in a bid to slow it, has now reversed itself, which I can only interpret as concern that growth will slow more than they want. That’s a potential positive, as it will add stimulus to the global economy.

Canada, which has to date seemed to skate above most of the problems of the rest of the developed world, now seems to be experiencing slower growth, with an unexpected jump in the unemployment rate, while its housing market is looking pricey, frothy, dangerous, and much like America’s prior to the collapse in 2008, especially in condo development in its major cities like Toronto, Vancouver, and Calgary. Moreover, its consumer debt levels are exceeding the levels of American consumers in 2007, and no less a figure than Mark Carney, the highly respected Governor of the Bank of Canada, has warned consumers and banks alike to cut back on consumer borrowing. Canada could be arriving late for the financial meltdown of 2008 – but if its consumers don’t mend their ways, they will get there.

And yet, America, which until 2008 was seen as the world’s engine of growth, seems to be picking up for no specific reason. Actually, this was almost inevitable because of the natural dynamism and entrepreneurship of the American economy. What has prevented America from rebounding earlier, or more strongly, has been the housing market, which is still in horrendous shape – but slowly improving.

So how will this balance out through 2012? Assuming that Europe doesn’t crash and burn, and drag everyone else down with it, and that Iran doesn’t precipitate a significant war in the Middle East, then America will continue to recover, its jobless rate will continue to decline (slowly), the world will lick its (economic) wounds, and things will slowly get better.

Accordingly, while I continue to counsel my clients to have a Plan B in their back pocket if things do go bad, my primary advice is the prepare now for better times ahead. There are problems – big problems – ahead, and the American election in 2012 is not going to help, but for 2012 we are likely to see an improving environment, and opportunities re-emerging for those with the courage to grasp them, as I outline in Trend #7 below.

6)    Climate change accelerates – and the consequences will multiply. The most significant and portentous climate news of 2011 was the discovery of methane gas bubbling up in the Arctic Ocean off the north coasts of both Siberia and Alaska. Methane is a far more potent greenhouse gas than carbon dioxide, and the melting of the Arctic ice cap, combined with the rise in the temperature of the Arctic Ocean, has started to release methane from the ocean floor. As well, as temperatures rise in the northern polar regions of Siberia, Alaska, and Canada, the permafrost melts, releasing even more methane into the atmosphere. The amounts of methane that could be released by both sea floor methyl hydrates and permafrost are staggeringly huge, and could dramatically accelerate the rate of climate change. If this trend continues, not only will the debate over climate change be over, but humanity will be forced to race to keep up with the potential changes.

As it happens, the vast majority of climate scientists – something approaching 95% – now agree that climate change is happening, and that humanity is at the very least a significant contributor to it. Since I speak to lots of different kinds of audiences, I can tell you that most groups now accept that climate change is happening, even those that have been among the most vocal doubters. The doubts they now raise are more along the lines of whether humanity is to blame. But from my point of view, it no longer matters: if your house is on fire, you don’t throw gasoline on the fire, regardless of how it started. That’s roughly the position we’re in now.

In 2012, we will get more information about the release of methane, and can only pray for good news. Meanwhile, brace yourself for more strange, and increasingly extreme weather. And because climate is a chaotic system (where chaos theory is a branch of mathematics), it is literally unpredictable. This means we can’t tell whether we will get floods or drought, hurricanes or tornados, or something else unforeseen. But it won’t be business as usual, either.

7)    Innovation as Steve Jobs’ legacy.  Jobs didn’t invent innovation, but he sure popularized it! Innovation has become a corporate religion in recent years, and with good reason: innovation can allow you to disrupt the marketplace, scoop up market share, increase profits, and win friends and influence people, just as Jobs and Apple have done. Yet, innovation is hard, especially because there’s a natural resistance to change and to the real risk-taking that innovation requires.

But if there is a theme for the corporate world in 2012, it is that now is the time to get serious about innovation. As an innovation specialist who runs seminars and workshops for corporate clients, I’m seeing this on a daily basis in genetic and medical research, agriculture, the automotive industry, the insurance industry and finance generally, plus just about every other sector of the economy. And technology itself embodies innovation. Indeed, the idea of a technological company not working hard at innovation seems like recipe for extinction. The world is changing rapidly, and there are lots of new opportunities – and disasters – out there. It’s raining soup, but if you just stand there, looking up in surprise, you’ll drown!

8)    Who dares, wins. Such is the motto of Britain’s fabled SAS – one of the world’s premier commando groups. But their motto applies equally to unsettled times. During such times, it’s easy and very, very tempting to hunker down, conserving cash, and wait for lazy, easy times to return. But study after study shows that companies that continue to market aggressively, and pursue research into new ideas, new products, and better results for their customers make far more inroads with modest expenditures during bad times than spending far more during good times, when everyone else is competing hard. Moreover, loyalty is won when times are bad, both among consumers, and among employees. And best of all, you can often accomplish a great deal with careful planning and foresight rather than lavish expenditures. This is where strategic planning comes to the fore. The time to be thoughtfully aggressive is when your competitors are playing turtle.

9)    The Red Invaders. The emergence of a Chinese middle class not only means upward pressure on food and fuel prices, it also means a vast invasion of Chinese tourists bearing money. For those countries and regions able to attract such tourists, it means a new source of revenue, and a big shot in the arm. And, as with all ethnic groups, it also means serving them the way they want to be served in terms of language, food, and customs. To the winner go the mega-spoils.

10) Haggling returns to North American retailing. Smart retailers are recognizing that it’s no longer enough to post a sign saying “10% off” to attract consumers, but that consumers are more demanding now, and are moving away from the traditional “no haggle” approach to buying. Moreover, haggling offers two additional benefits to consumers: it’s become somewhat of a game where they can enjoy the thrill of the hunt; and it offers bragging rights when talking with their friends. As a result, haggling has been emerging in two different ways, one passive, and the other active.

The passive form of haggling is to wait for sales. You can witness this almost anywhere when consumers see an item they like in a store, and ask if it’s on sale. When they’re told that it’s not, they turn up their noses, and say they’ll wait until it is. This might be described as “temporal haggling”, where the consumer is saying, “I’ll wait until you lower the price before I buy it. And if you don’t lower it enough, I won’t buy it.” Smart stores are responding in creative ways. Some salespeople say, “No, that’s not on sale, but it will be starting next week,” which amounts to a counter-offer. A smart consumer will reply by saying, “Can you put it aside for me until then?”, implicitly offering to buy it if they do. Some salespeople say no, others say “Sure.” The net result is that store and consumer have haggled over the price to agree on a sale/purchase. Yet the smart retailer actually has an advantage in this exchange: they get to name the sale price in temporal haggling.

By comparison, in active, more traditional haggling the consumer takes the initiative, saying something like “What’s your best price on this widget?” If the salesperson replies with the sticker price, the haggle is over and the consumer leaves. If the salesperson names a price, the consumer responds dismissively, and says, “I wouldn’t pay a nickel over $X for that”, and the salesperson can choose to respond or not. This is, as I say, traditional marketplace haggling.

If a retailer wants to capitalize on the re-emergence of haggling into the North American marketplace, they need to anticipate it, and come up with a range of responses. One might be to say, “We can’t discount this item today, but it is going on sale next week. Would you like to put a deposit on it to hold it until then?” The retailer regains the initiative this way, and moves towards a close. Or better still, the retailer should look for a way to add value rather than cut price by making a counter-offer like, “No, I’m sorry, we can’t discount that item. But we can offer you a 50% discount on a matching accessory if you buy it.”

Regardless of approach, though, retailers should be prepared to return to marketplace haggling, and have a range of responses ready to deal with it. Consumers, as always, should decide what they want, and what their bottom line is in getting it.

11) Health care magic blossoms. Putting aside the issue of cost, which concerns everyone, the ability of health care to solve problems is beginning to move at computer speeds, in part because IT is increasingly being used by doctors, nurses, hospitals – and patients – to manage health care, and in part because research is increasingly being done using smart, powerful computer tools to perform research and execute treatments. Among the changes in the immediate future of health care are:

• The rapidly rising ability to repair failing hearts and minds (or at least brains) and other organs with stem cells. Stem cell treatments are starting to move out of the laboratory and into the operating room, and 2012 will see hundreds of people receiving this kind of therapy.
• Similarly, 3D printers, which have been in development for roughly 20 years, are now good enough that they are starting to be used to create replacement organs from a patient’s own tissue. This will gradually move into mainstream medicine, with replacement hearts, livers, and kidneys being at the top of the list.
• Quadriplegics will increasingly be able to interact with the world through prosthetics controlled by thought alone, either through electrodes that interpret brain wave patterns, or implanted chips which interpret specific thought-impulses.
• Retinal implants are starting to emerge that can help blind people discern light, shapes, and some objects. The implication is that we may be able to help aging boomers improve their failing eyesight as they age – one of the biggest complaints of old age!
• Health care is increasingly falling into the hands of the patient – literally. Smartphones, which are fundamentally wearable computers with all the capabilities of what used to be called “supercomputers”, can now work with Bluetooth-enabled sensors to monitor various aspects of health, from the vigor of your workout, to the health of your heart, to the level of your blood sugar. This will lead to a revolution in health management, with consumers sometimes way out in front of practitioner.
• Likewise, as patients become more and more comfortable with researching medical conditions and treatments online; they are demanding an increasing role in their own diagnosis and treatment; becoming active, important advocates for fund-raising and acceptance of treatments; and blunt critics of health care practitioners through social media and word of mouth. Smart practitioners are accepting this trend and rolling with it. Old school practitioners are resisting, but may wind up steamrolled by it.
• Crowdsourcing of tough diagnoses, and novel solutions to the medical and financial problems of health care promise to open yet another front in the health care revolution. This follows on with the success of crowdsourcing in helping leading-edge research scientists in astronomy (galaxyzoo.org) and protein research (Foldit game softwear).
• Sequencing your genome gets cheap. Sequencing the first genome cost billions of dollars and took decades to perform (culminating in the Human Genome Project). Today it costs about $1,000 (although analysis costs significantly more). Within 10 years, it will cost $100, and analysis will cost about $500 more, and will provide you a complete run-down of where your vulnerabilities lie, and what you can do to forestall future health problems. For 2012, we will see incremental advances towards that goal, with major diseases identified, and a short list of things you do – and don’t – want to do or eat prescribed. This is the true beginning of personalized medicine, and it will revolutionize health care.

12) Technology accelerates in 2012. It’s hard to know what to leave out: electronic mind-reading? Glasses that emit sounds and smells to allow you to enhance social media? The proliferating tablets and smartphones with ever-more wondrous abilities? Here’s a partial list of things I think demonstrate trends that will become increasingly important:

• 3D printers – As well as making replacement organs, 3D printers are coming into the price range of consumers, and may mean that you can buy your own desktop factory. Need a replacement screw for a door? Make it yourself. Need to duplicate a key? Ditto. See a nifty device on TV? Download the plans and make it yourself. Of course, who knows what the ink cartridges will cost.
• Near-eye monitors – These look like glasses, but are computer monitors. They’re the lineal descendents of jet fighter heads-up displays, and will revolutionize the way we use computers, particularly smartphones, but have been hampered by high costs. Prices are starting to approach luxury consumer levels, so applications will start to appear in things like immersive gaming, personal entertainment theaters, medical imaging, and augmented reality.
• Augmented reality through your smartphone – Augmented reality is overlaying information on top of the view from your Mark 1 eyeball, much as Google Street View overlays the names of shops on a photo. You’ll be able to hold up your smartphone’s camera and have your phone overlay directions, stores, infrastructure views, or whatever else might be useful to you. This gets better when you can view the results in your near-eye monitors.
• Cloud computing explodes – Owning a computer is so 2010. Cloud computing is rapidly placing the resources of today’s supercomputers in your hands for pennies a minute. One researcher used one of the commercial clouds to try to break his password to a social media website by brute force, just to see if he could do it. Using the cloud and standard code-breaking techniques he did it in minutes, and it cost him 39¢. As the tools to harness this power get more powerful and easier to use, the potential of the cloud will be adapted by more and more users.
• Siri & copycats + babbling to your smartphone – Siri is an application of the iPhone 4S that allows you to speak to your iPhone and get it to do things for you. This might be setting a count-down timer, converting milliliters to fluid ounces, finding an address and directions from your present location, or looking up a phone number (all of which I’ve done). Apple is offering this technology as a beta version now, but every Siri request goes through Apple’s servers. This means the potential exists to assess what people want to do, and come up with solutions, improving the results really quickly, making personal avatars (also called PDAs, butlers, or assistants) much more valuable in short order. And that means everyone will rush into the field. This will lead to lots of really bad copycat applications, but ultimately a revolution in how we use technology.
• Biometric passwords – Our world is becoming so full of passwords that need to be foolproof (meaning our tendency to forget them) that biometric passwords are almost inevitable, and they are beginning to appear. They will be expensive at first, but gradually retina, fingerprint, voiceprint, and other means of making sure you are you will become cheap and commonplace, and then you will become your own password, no memory required.
• Robots – Everyday robots are here, but they are clunky, expensive, or just plain cute. That’s changing very quickly, and 2012 will see more and more of them appearing in more and more places. Typically these will be commercial settings, but health care is one place where robots make sense and will be used. Rosie the Robot won’t be washing your dishes this year, but she’s coming – if you’re willing to pony up the equivalent of the price of a luxury car.

The Occupy movement is most significant not for what the protestors say, but rather that the movement is happening at all. It demonstrates significant unrest, and the greatest dissatisfaction with the capitalist system that we’ve witnessed since the fall of the Soviet Union. But where is it headed? That’s a much more worrisome question.

The fuel that powered the Vietnam war protests was the draft. There were many other issues – objections to the military-industrial complex, objections to American foreign policy, objections to the money misspent on the war, dislike and disagreement with McNamara and Johnson, even objections to war per se – but without the draft, the protests could not have been as sustained or as widespread as they were.

In the same way, the fuel that powers the Occupy movement is jobs – or rather, lack of jobs. In America, and most other developed countries, the official unemployment rate is high, but the true unemployment rate is obscenely so. In the U.S., for instance, the official rate is 9%. But if you include those who have stopped looking for work, and therefore are no longer counted in the official unemployment statistics, then add those who are underemployed, the true rate approaches 20%. And if you look at the rate for young men, particularly among minorities, it approaches 40%. There is immense frustration with the lack of opportunity, and the smug, self-righteous people who look at the protestors and sneer, “Get a job!” only reveal the vast depths of their ignorance.

It’s true there are many issues embraced by the Occupiers, but without the lack of jobs, the movement would never have developed into much of anything. Americans are not generally a jealous people. If people were prospering, the middle class was expanding, and young people were able to find jobs and start their careers, they wouldn’t really have cared what percentage of total wealth is held by the top 1% of income earners. What rankles is that the rich continue to get richer through a perceived manipulation of “the system”, while the vast majority of other people suffer economically. It leads to the belief that the game is fixed in favor of those who can afford to buy the politicians. Whether this is right or not may not matter – it’s the perception that’s important here. And that perception may be explosive.

But where is this movement going? What’s next?

The Future of Work

If the future holds more jobs, and greater prosperity for most workers, then the Occupy movement will collapse from lack of fuel, and be remembered as a strange fad that came and went, like pet rocks or hula hoops. That’s not the case, because the future of work is much bleaker than people, even most top economists realize.

There are two forces that are squeezing workers in all developed countries: foreign competition, and domestic automation. One is going to get much worse, and the other is going to get slightly better.

The one that will get slightly better, at least in manufacturing, is foreign competition. There have been headlines for decades about the offshoring of jobs. There was even a management cliché for it in the 1990s: “Emigrate, automate, or evaporate,” which meant move your factories offshore in order to take advantage of dramatically lower wages in developing countries; decrease the labor content of your products in order to reduce the advantage of cheap labor in developing countries, or go out of business. (As an aside, there’s actually a fourth option: innovate, but that’s another story.)

This happened because of the emergence of the global economy. A global marketplace implies a global labor pool. If workers in developing countries can do similar work, but at much lower wages, then the work will naturally gravitate to them, and away from workers in developed countries. This has been going on since the 1970s, and is a familiar tale. It makes headlines, and becomes the subject of learned papers by economists, and protests by industries and unions that want protection. And the offshoring of jobs will continue until there is a rough parity between those producing things offshore, using cheaper labor, and the cost of producing things at home, using more expensive labor.

One way this could happen is through wages falling in developed countries, and rising in developing countries. But wages tend to be sticky; not many people are willing to take a cut in pay. As a result, what has tended to happen instead is that workers here are let go, and their jobs disappear, even as the wages in places like China and India are, indeed, rising.

The mild good news here is that much of this adjustment has already happened. Indeed, there are a few reports of manufacturers moving production back to America as the cost of labor in China, for instance, has risen, and as governments, particularly in the southern American states, have reduced legal protections for workers, effectively lowering their cost. (Whether you view this as a good thing or not is a separate issue. Indeed, it’s a difficult issue: do we want good worker protection, but no jobs, or bad worker protection and some jobs?)

The other way for workers in developed countries to compete is through higher productivity, and many companies have survived and kept their production in America that way. Yet, even when they succeed, the number of jobs required goes down. Businesses survive, but only by shedding jobs, leaving a trail of unemployment in the wake.

This is the past and present. The future will be different.

Increased productivity comes most notably through increased automation, and we’ve all experienced that, as when we go to the gas pump, swipe our credit card, and pump our own gas, all without an attendant. But automation is about to become supercharged.

The rate of change in computing speed and cost-effectiveness is not only accelerating, but the rate of acceleration is increasing. Some technology forecasters believe that computers will increase in power by 1,000 times over the next 10 years. With this growth in computing power available at steadily cheaper prices, automation is going to accelerate dramatically, eating its way up the workplace food chain. Only this time, it’s not going to be primarily blue-collar jobs that disappear – that’s pretty well already happened – but white-collar jobs that are hard hit. Indeed, anyone who uses a contemporary computer can experience this for themselves.

With the Macintosh laptop that I’m using to write this blog, I could (if I had the talent) write a new piece of music, score it, perform it with dozens of (computerized) instruments, record it and release it for sale. I could take videos with my iPhone, download them to my laptop, edit them, add titles and special effects, add in the music that I had created, and then publish the end result on YouTube. In effect, with these two tools, a laptop computer and a smartphone, I can replace composers, performers, and an entire movie making team – and that’s using today’s technology. Very shortly, I could make an entire movie, using technology to create photo-realistic virtual actors and background scenes, dub the voices myself, then change the sound of my voice using technology, and produce an entire movie without anyone else. True, it would be a terrible movie as I know nothing about directing, editing, or acting, and not much about composing or playing musical instruments – but that’s not the point. The point is that the tools we use are becoming so powerful that high-end jobs that used to require skilled people can now be done by ordinary folk.

Likewise, computers will move into medicine, performing research using Genetic Programming, and assisting doctors to do complex diagnoses using smart computers like IBM’s Watson; performing clerical work in almost every conceivable industry, and displacing millions of white collars workers along the way; drive cars, trucks, and trains unassisted; and almost any other kind of routine work. Indeed, computer intelligences and everyday robots will move towards replacing workers in any and every kind of repetitive work, leaving only creative, innovative, entrepreneurial work – and leaving millions, or even tens of millions of people unemployed.

What Happens When Too Many People Are Unemployed?

If you look at the Arab Spring from earlier this year, it wasn’t so much a yearning for the freedom to read newspapers not approved by dictators, or the desire to vote that was the driving force that caused people to revolt, but unemployment, especially among young men – leading the inability to create a life, to feed your children, or even to be able to afford to get married and start a family – that drove the revolutions, and inspired young men to face bullets and tanks. If you look at the protests in Europe, it’s not just the anger that a lazy, luxurious way of life is being taken away from Greek citizens, but a very real fear that they won’t be able to live that drives citizens to the barricades.

Unemployment, the specter of want, and the inability to make a decent living, to have a decent life, is historically a very potent, very scary force in geopolitics, and it’s with us now. The Occupy movement is not just about fairness, but driven by the fear and anger that there is no opportunity unless you are one of the privileged class that has a job. As the number of jobs lost to automation rises, so too will the number of people who will respond to the goad of fear and anger about their future.

Worse, it’s not just about finding a job – it’s also about keeping one. Jobs appear and disappear faster than at any time in history, and someone who is a valued employee and a rising star one day can be redundant and valueless the next. A person in that position can try to retrain and find new work, but they find themselves among the multitudes of people desperately seeking work. Without the in-demand skill that got them a job in the first place, they are reduced to the same pavement-pounding, resuming-producing, faith-sapping odyssey that afflicts so many out of work people today.

I’ve seen this coming for some time. In 1993, I wrote a book called Facing the Future. In that book I wrote the following passage:

It’s an overall decline in the need for work that concerns me, brought about by the increasing capabilities and sophistication of computers.

I seem to be very much in the minority on this view, and I may be dead wrong. The conventional view is that as jobs disappear from manufacturing and clerical work, for instance, the steadily rising productivity of workers using increasingly sophisticated automation will create a new prosperity that will increase demand and create new jobs. This is certainly reasonable, because it is precisely what has happened throughout history. But where, I wonder, will the new jobs appear? The conventional view is that new services will spring up, and that higher living standards will allow people to spend money on things they could never afford before, and that much of this will be for personal and personalized services.

I can see logic in this. New services do appear. There were no aerobic instructors, for example, in my grandfather’s day. But how much personal service can we use? Moreover, generally speaking, service jobs pay less than manufacturing jobs. As for being able to buy things that we couldn’t afford before, since manufacturing will increasingly be automated the higher demand for manufactured goods won’t necessarily generate more jobs.

This is not a problem that will burst on the scene in the next five to ten years. Humans are still capable of offering a flexibility, initiative, and creativity that machines cannot duplicate. But at some point, whether it’s twenty years away or one hundred, I’m afraid that the time will come when there will be very few jobs that computers can’t do better, faster, cheaper, and more reliably than humans. As that day approaches, we will be confronted with several problems.

In the first place, we will need a new economic system. Much as it grieves me to say so, free market capitalism may be dying, for it only pays those who are part of the production process. If virtually no one is part of this process, all the fruits of production will belong to those who own the machines – a recipe for the peon-and-aristocracy patterns of Third World economies. But where will the machine-owners find their customers? People can’t be consumers unless they have money to spend. …[1]

In the intervening 18 years, I’ve seen nothing to change my mind. We are, indeed, heading towards a world of aristocrats and peons. Indeed, that is precisely what the Occupy forces are demonstrating against, only they use a slightly different terminology: the 1% and the 99%. Same thing.

So where is this leading us? If I’m right, then even if the economy and employment picks up, and mollifies the Occupy protestors and their spiritual kin, the concerns will return again and again as the long-term rates of unemployment, especially among the young, continue to rise. And that way lies revolution.

What Should We Do About This?

If we lived in Naples in 79 A.D., and saw steam pouring out of the top of Mount Vesuvius, we would try to warn the residents to flee. We are in an analogous situation. This volcano won’t erupt in the next month or next year – but as things are trending, we need to take action, and soon, or we risk precisely the kind of revolution we witnessed in the Arab Spring earlier this year.

It’s no good trying to stem the tide of automation. That smacks of the 19^th century luddites smashing mechanized looms that they felt were stealing their jobs. Moreover, it would be like trying to hold back the tide, and about as successful. It is possible that politicians, under voter pressure, will seek to ban automation and the productivity increases that automation produces in order to preserve jobs. (This is also called “featherbedding”.) All that means is that countries that do not ban automation will see their relative productivity increase, their cost structure decrease, so that the jobs will migrate from here to there rather than being lost to automation.

Instead, politicians, economists, and anyone else interested in our future prosperity and stability should be taking a serious look at how to create new, better jobs that people can do best. These will largely be entrepreneurial, I suspect, and will all be creative, and focus on innovation. This also implies a complete revamp of our education system, away from rote learning and memorization, and towards creativity and individually customized education, to enable each person to emphasize the things they are best at.

None of this will happen quickly or easily. It requires a very different view of “job creation” and a very different understanding of the future of work. The “magic of the markets” won’t solve this problem. Capitalism, left to itself, will emphasize greater productivity through automation, leading to greater profits for the owners of the machines – until profits collapse because there aren’t enough consumers to by the goods and services industry produces. Capitalism will lead to a dead end.

This is not the conventional view, and many will decry my message as “socialist”, although I’ve said nothing at all about redistributing wealth. Some will pillory me for being alarmist, but without attempting to refute my reasoning. And some will just hide their heads in the sand and say “it can’t happen here.”

To this last group, I would suggest that they tell that to Moammar Gadhafi and Hosni Mubarak. They were sure it couldn’t happen there, either.

The world as we know it may very well end on August 2^nd. This won’t be the end of the world in a metaphysical or spiritual sense, but rather in a financial and economic one because of the incredible, almost unbelievable stupidity of the extreme members of the Republican Party. These wing-nuts are using the financial equivalent of the threat of nuclear winter to negotiate their agenda of spending cuts, coupled with no tax increases or even tax cuts, to eliminate the U.S. federal deficit, or else. In this case, the “or else” is a refusal to raise the debt ceiling for the U.S. government. If that happened, then the U.S. government would run out of money by about August 2^nd, and begin to default on its obligations. There are two major aspects of this: financial, and political. Let me deal with the financial aspects first.

The debt ceiling is the maximum amount of debt that the U.S. government is allowed to borrow to finance it’s operations, and is legislation originating in the House, approved by the Senate, and passed by the President, like any other financial legislation. The U.S. government cannot borrow any money beyond this authorization. Given the current massive deficit being run up by the American government, this would force the U.S. government to default on its debt. Such a default would produce a vast disruption in the financial markets, and cause America’s credit rating to be downgraded from AAA to AA or less. This, in turn, would require many pension funds and other investment groups required to hold nothing but AAA securities to sell all of their holdings in U.S. government bonds and T-bills. This forced sale would trigger a panic on Wall Street, and in financial centers around the world. U.S. treasury bonds and T-bills are considered the most secure investments in the world – but then, suddenly, they wouldn’t be. Investors would have no idea what was safe, or where they should put their money. And the amount of U.S. securities held by investors, including countries like China, runs into the trillions. If there were a run on U.S. securities, it wouldn’t just be dramatic, it would be cataclysmic because there would be nobody to buy them.

And it wouldn’t just be the U.S. federal government. All of its agencies and the agencies it supports would be downgraded (and their securities dumped). And it’s quite possible that a number of state governments would also be downgraded as well. Indeed, as anyone who has studied financial panics of the past (as I have) knows, once a panic starts, the mob sells anything with any hint or rumor of possible financial difficulties. As a result, the panic would instantly spread to all of the shaky sovereign credits of Europe (Greece, Ireland, Portugal, Belgium, and more), and move into American state governments (Illinois, California, and more), and into corporations thought to be less than rock solid. Eventually, everything would become suspect, and gold and precious metals would shoot through the roof.

This would cause a huge spike in interest rates, causing stock prices to collapse, and, worst of all, would critically damage investor confidence. Since all investment markets rely on confidence, this could produce a panic as severe, or worse, than the panic that seized Wall Street in October of 2008. Worse than that, there would be no U.S. Federal Reserve to save the markets from themselves. They wouldn’t have any money with which to operate, and whereas the U.S. government was seen as the only possible savior in the Panic of 2008, it would be the cause of the problem this time. With no one left to act as “lender of last resort,” it’s entirely possible that financial markets around the world would collapse, possibly triggering a depression on the scale of the 1930s or worse. We really do not know how bad it would be – only that it would be unprecedented, and very, very scary.

But if the consequences are potentially so extreme, why are the markets not reflecting this? Let’s run over the potential counter-arguments.

“This is all just negotiating tactics. They won’t allow a default to happen.”

Perhaps so, but playing chicken while driving a truck full of nitroglycerine over rocky terrain doesn’t leave you much room for mistakes. Moreover, I’m not sure that the players involved are smart enough to understand the magnitude of the problem, and they could easily misjudge the situation. Even if they are planning to come to a last minute compromise, it’s not clear that the markets will wait that long. The rating agencies have already warned that if they don’t see a settlement by mid-July, they could downgrade U.S. securities, even without a default. Since a negotiating posture is only effective if you make the other side believe that you’re serious, the Republicans will have to act as if they are prepared to allow a default if they don’t get what they want. In so doing, they may also convince the rating agencies of the same thing, triggering the kind of run on Treasuries that I described above.

Moreover, the markets might get spooked before the rating agencies can act. The thing that scares investors most is uncertainty. If the biggest, most important financial entity in the world suddenly looks shaky, investors might suddenly decide that they need to run for the hills. Once a panic starts, it would be very difficult to stop.

“The U.S. government can’t possibly be this stupid. This is all show. It’ll blow over.”

Not true, and there’s precedent to prove it. On June 17^th, 1930, President Herbert Hoover signed the Smoot-Hawley Tariff Act of 1930 into law, raising tariffs on 20,000 imported items, and triggering a massive trade war that caused global trade to drop by two-thirds in a period of four years. Yet, Hoover had been warned by over 1,000 of America’s most eminent economists. He had been intensively lobbied by Henry Ford, who called the bill “economic stupidity.” The CEO of banking giant J.P. Morgan begged Hoover not to sign the bill – but he did, for political reasons.

Make no mistake, this is a very, very dangerous situation – a big, honkin’ Black Swan if there ever was one – that is comparable to the massive error of passing Smoot-Hawley. So don’t count on the government coming to its senses. History argues that governments sometimes do stupid things for ideological and political reasons.

“You’re exaggerating. The effects of a temporary halt in payments couldn’t possibly be this extreme.”

Who knows? This has never happened before. Once the U.S. government has failed to live up to its responsibilities for any reason, and for any period of time no matter how short, it will be impossible to regain the “full faith and credit” of a borrower that is beyond suspicion. Indeed, the rating agencies have a policy of automatically downgrading the ratings of a borrower that fails to live up to all of its obligations, if any investors lose money through delayed or halted payments of interest or principal. At time of writing, for instance, Standard & Poor’s has just warned that if Greece extends the payment schedule on its debts, as is being discussed within the EU as a possible solution to Greece’s debt problems, that would constitute a default and trigger a downgrade. And the rating agencies are still smarting from being accused (correctly) of not being tough enough on issuers in the asset-backed securities markets prior to 2008. They won’t want to be seen to be committing the same mistake again so soon, regardless of the consequences.

Perhaps I’m wrong, but as a former credit analyst, and one who used to assess sovereign credits for a living, I don’t believe I am. Moreover, those who pooh-pooh the consequences have no basis or evidence for their assertions. It is wishful thinking, pure and simple.

“This is nonsense. It can’t happen. They won’t let it. This just isn’t possible.”

Who’s “they”? This is just more wishful thinking, and is comparable to pulling the covers over your head to ward off danger while the house is on fire.

“You’re being irresponsible by talking about this. You’re going to create a panic by doing so.”

No, the irresponsible, brain-dead idiots at the extremes of the Republican party are running that risk. I’m just talking about the potential consequences of their actions. Besides, I’m not the first, nor am I the most important person to discuss it. The rating agencies have issued very forceful (for them) statements on this. The Chairman of the U.S. Federal Reserve, Ben Bernanke, has said this is dangerous folly (although not in those words). The International Monetary Fund has warned that this is an irresponsible and exceedingly dangerous path that could cause a “severe shock” to the American and global economies. The current Secretary of the Treasury, Tim Geithner, has said that it would be “catastrophic”, and even one of George W. Bush’s economic advisors, Keith Hennessey, has publicly said that he’s “terrified” at the prospect. I doubt if my comments will make much difference – except to my readers. For them, I hope it helps them prepare contingency plans in case the unthinkable happens.

“A default would actually be helpful, as it would force America’s government to face the reality of its financial position.”

Nope. As I’ve already said, it would trigger an absolute panic and bankrupt the government, which would then be forced to make long-term policy on the basis of emergency conditions. It would have to make bad choices, possibly even very bad choices, because better choices would no longer be available. Tackling the deficit is going to be tough. Trying to do it while simultaneously trying to keep the global financial markets and global economy from complete collapse would be impossible. This is just a bad idea.

“This is Obama’s fault. He’s the one that’s being unreasonable. We have to bring down the deficit, and this is the only way to force liberals to cut spending.”

Presidents and Congresses have disagreed about critical issues before, but no one has ever used the debt ceiling as a threat, and it is the Republican extremists that are doing so. This is on all fours with strapping a bomb to your chest, and threatening to blow everyone up if you don’t get exactly what you want. It’s no less threatening, and no less extreme than that, and it is Republican extremists that are doing it, which brings me to the political dimension of things.

I grew up in the Republican party. My father was a die-hard Republican, and I was raised that way. I voted that way when I first started voting. Since then, I’ve voted more discerningly and hopefully more thoughtfully for candidates that I thought were the best (or least-worst) choices, both Republican and Democrat. But this is not my father’s (or my) Republican party. The current Republican party seems to have been captured by fanatics who believe that ideological purity is more important than reality. They are spoiled children, throwing a tantrum to get what they want, and endangering us all in the process.

And those who have regularly read my blog know that I believe the U.S. budget deficit must be tackled, hard choices must be made, and sooner rather than later. But what the Republican extremists are demanding is that a process that should be thoughtfully devised, then carefully negotiated, and implemented over a period of years in order to minimize the necessary harm inflicted must, instead, be accomplished overnight, and that all the costs must be borne by someone else’s constituents, not theirs. Some of these extremists have even demanded tax cuts be part of the deal, even though such cuts would increase the deficit, not decrease it. They are clinging to an ideology as defunct as Soviet Communism, and pointing to the Reagan tax cuts as being self-financing, even though Reagan’s own budget director, David Stockman, has said that tax cuts in today’s environment would be a bad mistake. Indeed, in talking about extending the Bush tax cuts during the 2010 debate, Mr. Stockman said that the Republican position was “Utterly disingenuous. I find it unconscionable that the Republican leadership faced with a 1.5 trillion deficit could possibly believe that good public policy is to maintain tax cuts for the top 2 percent of the population”.

But extremists don’t want to hear that, and so they don’t listen. They have substituted ideology for thought or reason. They are ideologues as blind as any group of religious fanatics, except they could cause much greater harm to a much larger group of people, both at home and abroad.

“Forcing the government into default is the best way to make sure we’ll beat Obama in 2012.”

I haven’t actually read any reports where someone has said this, but some Republicans seem to be thinking it awfully loudly. If I’m right in thinking this, then it is a morally bankrupt attitude, verging on treason. It amounts to saying that you are willing to crash the American economy, trigger a collapse of the world banking system, and bankrupt many American citizens for selfish political gain. It would be like deliberately losing a war in order to win the presidency.

“So, what should we do about it? If the situation is as bad as you say, what’s the answer?”

Now we come to the reason for this blog: to offer some thoughts about what individuals should do to prepare for this possible black swan event.

The first thing to do is to hope that the participants are more intelligent than I give them credit for, and resolve this issue quickly, before they spook the markets or the rating agencies. If they wait too long, it may be too late, so August 2^nd (or sometime that week) may be the outside deadline; the markets might panic before than. And writing to your Congresscritter wouldn’t hurt. Tell them that Congress & the president need to come up with a credible plan for reducing the deficit through painful spending cuts, tax increases, and especially through reductions to Social Security & Medicare entitlements, but that not raising the debt ceiling is not a legitimate negotiating tactic.

Next, watch the news for developments. Assuming that we can’t influence the participants (and they seem impervious to argument no matter who offers it), then you need to prepare yourself for the worst. You needn’t do it all at once, but make sure you stay ahead of the market’s perception of a crisis. And this is where systematic risk management comes into play.

In this situation, we are running two opposing kinds of risk: the risk that there will be a panic, market collapse, and massive recession or depression; and the risk that the U.S. won’t default, that a crisis will be avoided, and the markets will continue to advance. Let me deal with the second risk first.

If a crisis is averted, and the world carries on with business as usual (which is what I devoutly hope will happen), then the market will carry on as if nothing important happened. As the stock market has been rising of late, it’s possible that if you sold holdings in advance of a possible crisis, you could forego potential capital gains by liquidating your holdings. This is a potential opportunity cost, but not a large risk. Suppose the S&P 500 were to regain its previous 2008 high before you could manage to buy back into the market. This means it would have to run up by about 16% in a very short period of time. So, on the extreme high end of things, the second risk is that you might forego about a 16% gain from where we are today – and that’s assuming that the market keeps going up, and actually goes up much faster than it has of late. I think this is highly unlikely, but let’s leave it at that: the risk of missing an upside move by the markets is foregoing a 16% increase in your portfolio.

The Default Risk

Now let’s consider the first risk: that, intentionally or not, by August 2^nd or somewhat before or after, the U.S. government defaults on its obligations, and that triggers a panic. What would be the financial risk if you don’t prepare for that possibility?

Well, first, how far might the market fall? In the market panic of 2008, the S&P 500 fell more about 54% from its October 4^th high. The stock market crash of 1929 was slightly worse, with the Dow Jones Industrial Index (“DJII”) falling on the order of 58%.

But the initial market crash of 1929 is not the biggest risk; the potential for a prolonged severe recession or depression is. Indeed, the stock market decline from 1930 to 1932 was actually worse than the crash of 1929, with the DJII falling 79% from the market low of 1929 to the market bottom in 1932. All told, from the 1929 high to the 1932 low, the DJII lost an incredible 89% in value. And that is, in my opinion, the comparable risk investors run from a potential default, aside from any economic damage they might incur, such as losing their income or their home.

So, now we come to the issue of risk assessment: Which is the greater risk? Missing out on a potential 16% investment gain from here, or losing 89% of the value of your current portfolio from here, plus experiencing significant economic suffering? Remember that the markets are largely ignoring the closed-door discussions on raising the debt ceiling, so that if a deal is announced, it is unlikely that the stock market will blast off to that 16% gain in a short period of time, whereas if a default occurs, everyone will thunder for the exits at the same time. In my mind, there is no comparison: it is far riskier to ignore the potential for a default than it is to forego the potential for gain.

So What Actions Should You Take to Prepare?

If you concur with my assessment, what do you sell, what do you buy, and how do you prepare? I’d start by selling investments that have done well for you, but may have limited upside from here. You can always reinvest later if the crisis passes. If the days tick by, and there is still no word of settlement, I’d start selling more earnestly, including things that perhaps you don’t feel have done as well as they should. Remember that the rating agencies have warned that they are expecting to see a settlement by the middle of July. If no such signals emerge, they may start being more vocal, and the markets may become more unsettled.

If, by the third week of July, there is no sign of a settlement, and the two sides continue to say they are deadlocked, it’s time to take serious defensive action. Sell any investment that is not a disaster scenario holding. Perhaps even sell money market funds to hold cash. And check the terms and conditions on your financial accounts. Following the banking crisis of the Great Depression, financial institutions added clauses that give them the option to require 3-5 day’s notice of a withdrawal. Just because they have waived that requirement for almost 80 years doesn’t mean that it’s not there, so check with your banker or broker.

In the extreme, if it seems likely that a disaster is going to happen, think about what you think will hold its value. This starts with gold & precious metals, but also think about how you want to hold it. If you have investments in a mutual fund that invests in precious metals, and the company that runs that fund goes bankrupt, what will the value of your holding be? Cash is likely to be worth having, or being able to get hold of quickly – but who’s cash? Do you want US dollars? And always keep in mind safety. Do you really want to have bunches of cash under your mattress? What about the risk of fire or theft? How do you want to deal with that? These are issues that deserve some serious consideration.

And if a deal is struck “at the last minute” (whenever that might be), and there is no default, and no run on the markets, then what? Then you take a long look at the risks as they are at that time, and, if you’re convinced that the risks are now on the upside (i.e., that you might lose more by missing a major market advance than remaining on defense), then unwind your defensive positions, and go back to your investments.

If I’m overreacting to the potential risks, and life goes on as usual instead, it will have cost you some money in transaction costs, and you might possibly forego some upside on your investments. If I’m correct in my assessment of the risks, then taking a defensive position may make the difference between financial survival or not.

And, for the record, I sincerely hope a deal is struck. I may wind up looking foolish, rather like Chicken Little screaming that the sky is falling, but I would prefer that result to the horrors of being proven right. If it’s a choice between pride and survival, I’ll pick survival. But I’d be prepared for either one.

© Copyright, IF Research, July 5th, 2011.

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There’s an unusual amount of dissension among economists and other commentators about whether we’re heading towards higher inflation or devastating deflation, and whether the economy will continue to grow, or slip into a double-dip recession. This is happening because we are in uncharted waters, with few, if any, precedents to guide us.

My own view is that the American economy will continue its anemic growth in a mostly jobless recovery; that the prices of necessities, particularly food and energy, will continue to tick upwards, gnawing away at workers’ real take-home pay; and that the economy’s precarious growth could be tipped over into a renewed recession by one of several different crises. I believe, in short, that all of the scenarios described above are possible. So, how do you plan for the future, whether it’s your investment portfolio or your company’s marketing plans?

Let’s start by looking at the various different forces at work on the economy today.

Inflation

Those concerned about inflation are connecting dots and concluding that inflation or even hyperinflation are ahead of us. They see the U.S. Federal Reserve Bank (the “Fed”) pour newly-printed money into the economy via so-called quantitative easing, and they watch oil and food prices rise, and decide that one is causing the other. And since monetary inflation, caused by printing too much money, affects all prices, oil and food prices are merely harbingers of a much broader, more rampant inflation. This is not the case because these two dots aren’t, in fact, connected.

The Fed is, indeed, printing money, but it’s a kind of money with a relatively low inflation potential. Normally, the Fed, or any central bank, creates money by encouraging the banking system to create it. They do this by lowering reserve requirements, or by lower interest rates. Reserve requirements are the amount of cash that banks must hold for every dollar of money they loan out. Since this requirement is a small fraction of the loans on their books, every dollar in increased cash reserves creates many dollars loaned out and placed into the economy. Likewise, lowering interest rates makes it more attractive for corporations and individuals to borrow money, increasing the loans outstanding, which again multiplies the amount of money in the economy. This is high-impact money.

What the Fed is doing is almost literally printing money, then using it to pay the government’s bills. (There’s a bookkeeping entry where the U.S. Treasury issues bonds, then the Fed buys the bonds for cash, which the Treasury then uses to pay bills. Hence, the U.S. government borrows from itself, and prints money as a result.) But while this money winds up in the economy, the effect is only of the amount of money printed, not some multiple of that amount. This is a technical issue, but the effect is that while, yes, there is some inflationary effect from the Fed’s quantitative easing, it is nowhere near as important as the inflation hawks fear, especially in an economy where demand is weak, and there is virtually no leverage for workers to increase their wage demands.

Meanwhile, the prices of food and oil are going up because of the supply and demand for food and oil, without reference to the amount of money being created in the United States. Hence, the prices of food and oil are going up even in Japan, which is experiencing persistent deflation, not inflation. Both are global commodities, and the demand for both is being driven by the rapid expansion of the Rapidly Developing Countries (“RDCs”), like China, India, Brazil, and Indonesia. Hence, in an example I’ve used before (because it’s so compelling), China’s middle class expanded dramatically during the 40 years from 1960 to 2000, with the result that China’s food consumption tripled in forty years. As the developed world economies emerged from recession (albeit slowly), and added their demand to that of the RDCs, the demand for both rose faster than the supply, pushing prices up.

Unless the developed world slips back into recession, or the growth of the RDCs slow significantly, the prices of both food and oil will continue to move up.

Deflation

Deflation is a widespread, persistent decline in prices, and is actually more dangerous than inflation (although neither are desirable). To see this, consider what happens if you’re considering buying a new car, but believe that the price will go down if you wait a month. Chances are you and others like you will postpone your purchase. A month later, if you are proven correct, but believe that the price of the car  you want will fall further in the next month, you’re likely, again, to wait to buy the car. Hence, deflation creates a vicious, downward spiral: people postpone purchases, which lowers demand, which causes prices to fall, which cause people to postpone purchases. When entrenched, deflation can wreak havoc on an economy – as has happened with Japan. Japan has experienced almost 20 years of recession-like non-growth in part because of deflation. (The Japanese government has also made persistent policy mistakes that have prevented the economy from breaking out of this cycle.)

So, are we likely to experience the same kind of persistent, widespread declines in prices? Based on what I’ve said above, not in oil and food, but what about beyond that?  In many ways that depends on what happens to the economy. If the U.S. economy continues to grow, even weakly, then the prospect of serious deflation is remote. I could see the possibility of weakness in discretionary consumer purchases, such as TVs and consumer electronics, if employment growth remains weak. When people are hurtin’ financially, they’re less likely to splurge on a large luxury item. So let’s turn to the prospects of a renewed recession, which is the scenario where I can see widespread deflation.

Recession

There are several reasons why this recovery is weak. First, it was provoked by a severe financial debacle, and such recessions typically take longer to recover from as people feel poorer. It will take time – years – for people to rebuild their balance sheets, and meanwhile, demand will remain weak.

Next, there is no group within the economy to really stimulate demand. Most recoveries are lead by the consumer, but as I’ve just said, that’s not happening this time. Governments, notably the U.S. federal government, have largely shot their bolts, and are now more worried about repairing their balance sheets. And businesses, which are actually in pretty good financial shape as a group, see no reason to overextend themselves. In particular, businesses are not eager to take on more staff. Instead, they are either asking their current employees to work longer hours or take on additional shifts as demand slowly rises, or they are investing in increasingly sophisticated automation. The knock-on effect of this is that employment is likely to stay weak. In total, then, this is a recovery without leadership.

A longer-term problem is that all countries are going to experience a squeeze in employment growth, but it will be particularly noticeable in the developed countries. First, a global economy implies a global labor force, which means that workers in Canada or America, for instance, are competing with workers everywhere. It used to be most noticeable in low-skilled industries, but as RDCs increase the number of highly educated people they have, and as they build up more sophisticated commercial bases, they are competing in broader swaths of the global workplace, including very highly skilled areas that used to be the exclusive preserve of rich countries. Meanwhile, in an attempt to minimize the differential in labor costs, companies in developed countries are automating as quickly as they can. This is helping in that companies that might otherwise go out of business are surviving, but even when they do, it means that they do so with fewer employees. Hence the economy will grow faster than the number of jobs.

Automation is also affecting RDC economies and workers as well, but their faster rate of GDP growth is masking the effects. Still, the Chinese government worries about not creating enough jobs to maintain social stability.

But beyond economic growth and employment growth, there’s another factor that’s in play: the fragility of governments, notably because of their heavy debt loads, means that the recovery is not as robust. It also means that the recovery would be easier to derail, much as an overloaded boat is easier to sink.

This brings me to my major point: we are vulnerable to nasty surprises or shocks. If, for example, Greece defaults on it’s debts (or perhaps I should say “when” as it seems pretty inevitable to me), this could trigger a re-evaluation of all sovereign and sub-sovereign (i.e., state and local) debts. This might throw a jurisdiction like California or Illinois into the spotlight, or trigger a run on Portuguese bonds. It could, in short, trigger a panic that could produce another financial catastrophe. Only this time, governments have fewer bullets available to stop a financial stampede, and we could well see the financial collapse that we so very, very narrowly avoided in 2009.

Is this likely? Probably not, but the odds of it happening are higher than I would like. And if a scenario like that does happen, then deflation is a real threat, and you can forget about inflation because even the RDC economies will slow or go into reverse.

So what do we do now?

The highest probability is still for continued economic growth in the developed world, albeit slower than we would like, and that’s how I’m placing my bets right now. I believe that the cost of necessities will continue to rise, but that it won’t degenerate into high, widespread inflation. This is consistent with a slow growth scenario coupled with rising demand from RDCs.

But I’m also watching developments very carefully, and have an exit strategy in mind in case I don’t like the way things develop in Europe, with the foolish, almost-suicidal discussions over the U.S. federal debt ceiling, and with credit watches on shaky governments (both national and American states). I’ve been saying this for some time, and it may be that readers are getting bored with the message, but this is a time to plan for the worst, and hope for the best. I’m not sure, in the current situation, what else you can do.

© Copyright, IF Research, June 2011.

What follows is another excerpt from the manuscript of a book I’m currently working on. I expect it to come out in late Spring or early Summer.

———

“But with Benedict … he’ll kill you, and then he’ll go to work on you!”

– Character Reuben Tishkoff in the movie, Oceans’ Eleven

The section below is a vignette – a story about the future – that is intended to illustrate how I think we will experience the future:

Maria breathed a deep sigh, then turned the newspaper page. She’s spent a good 5 minutes reading the full-page ad for the Disney Cruise Line, mostly out of a sense of nostalgia and longing. At least, she told herself, if we can’t go on a cruise, I can dream about one. At least that’s free. She and her husband and two kids had gone on a four day cruise back in 2012, when the Disney Dream was still relatively new, and they’d loved it. They’d vowed to go back, and had even put down a deposit for another cruise in 18 months’ time.

Times had gotten tougher after that, though, and they’d had to ask for their deposit back when their full payment for the cruise was due. The Disney people were very nice, and had even offered to change the reservation for a later sail date and increase their On Board Credit from $100 to $200 – but Maria and Sean had needed the money, so just asked for the deposit back.

Sean still had his job, and Maria’s occasional graphic freelancing was still going reasonably well, but the cost of living was getting well out of hand. Sean had to commute 45 minutes each way to work in the city – and the cost of gas was horrendous. Last week, when they’d gone grocery shopping, Maria had noticed it was $4.57 a gallon! Sean had gone quiet when she commented, which was a bad sign. It meant he didn’t want to talk about it. Finally he’d told her that the price of gas had actually come down in the last couple of weeks, and he’d even seen it posted at $4.99 a gallon at one station in the neighborhood.

Meanwhile, their weekly grocery bill kept skyrocketing, too. They’d cut out almost all of their luxury foods, and were down to buying basics and staples, but it still went up. They were eating vegetarian twice a week to save money, and were using powdered milk, though their son, Sebastian, complained about it. And the steadily rising costs of the things they had to have kept going up, which meant that the fun things kept getting whittled away. She kept asking Sean to go in and demand a raise – and he kept telling her that they were laying people off. He was lucky to still have a job; there was no way he could ask for more money and keep his. And she kept telling him that if things went on as they were, she didn’t know how they were going to cope.

Then this week they’d received their property taxes for the new municipal year – and they’d gone up almost 60%! Maria had almost fainted when she saw it. Sean looked at it in disgust, and said it was the state government’s fault; the legislature was coping with their deficit by raising taxes, cutting spending, and downloading as much of the burden on the cities as possible. And the cities were responding by raising property taxes, which was killing the housing market. Sean and Maria had congratulated themselves by dodging the bullet of falling housing prices when they bought their house in 2010, but now it had fallen in price and was worth less than their mortgage – and the market wasn’t moving, anyway. They were trapped, and it hurt.

It meant that their world was getting smaller – and they were getting poorer. What Maria didn’t understand, and Sean couldn’t explain, which meant he probably didn’t understand either, was why this was happening. Maria felt poorer than at any time in her life – including when she was girl. Her family had been middle class more by courtesy than by money, but her mama hadn’t scrimped the way she was now, and her dad had never looked as worried as Sean did.

Something was badly wrong, and she didn’t know what to do about it.

—–

Why Inflation Is Coming Back

The RDCs [Rapidly Developing Countries] are making up a steadily increasing share of global GDP, so that their needs are having a progressively greater effect on global demand. According to the Organization for Economic Co-operation and Development (the “OECD”, sometimes known as the “rich countries club”), RDCs accounted for 40% of the global economy in 2000, growing to 49% in 2010, and will grow to 57% by 2030 (I actually think these estimates are conservative; I believe the RDC’s will account for 57% of global GDP well before 2030). So whereas what the developed countries did and bought had the largest effect on commodity prices through the 20^th century and into the beginning of the 21^st, today more than half of global demand is coming from countries whose economies are growing faster than ours.

And, as I described earlier about China’s rising demand for food, with the development of a rapidly expanding middle class, RDC demand for more expensive things that soak up more resources will rise much faster than their rate of population growth. Hence, while China’s population doubled from 1960 to 2000, it’s demand for food more than tripled, and an increasing share of those calories came from meat and dairy products. As a result, the resources required to feed China increased by roughly a factor of four. There’s a multiplier effect: it’s not just more people; it’s more people each consuming more resources. And as the economies of the developed world emerge from recession and begin to grow more robustly, our recovering demand will be added to the rapidly growing demands of the RDCs. Over time, this is going to create a perfect storm first for oil and food, but then other essential commodities as well, including metals, non-food agricultural products, and more.

Moreover, while demand in the Western economies slipped during the Great Recession, taking pressure off essential materials, China’s consumption continued to grow:

“… commodity prices are rising at an early stage in the economic cycle. Jeffrey Currie of Goldman Sachs worries that, as American oil demand recovers, it will “bump up against” China, which is consuming 23% more oil than it did in 2007—as well as 63% more copper, 18% more cotton and soybeans … With the global recovery fragile and unbalanced, higher commodity prices are the last thing the world needs right now.”[1]

The same is true of India, Brazil, and the other RDCs: their economies recovered before ours, resumed their expansion – and their consumption of oil, food, metals, and so on ballooned as well. This puts a much higher floor under commodity prices from which tomorrow’s demand will grow. That is why commodity prices are already rising at what would otherwise be an astonishingly early stage of the (Western) economic recovery.

The only (temporary) good news on that front is that commodity price increases so far are more moderate in this cycle than they were in 2008, when there was a virtual panic in developing markets over increases in the price of food in particular, and a near-panic everywhere over $147 a barrel oil. In January of 2011, for instance, the rate of global food price inflation was up “only” 37% over the year before, whereas in 2008, the rate of increase peaked at over 75%.[2] But as the American economy continues to improve, along with Canada and Europe, the demand for raw materials will grow far more rapidly in the short run than production can increase. As that happens, bottlenecks will begin to appear in supply chains, and prices won’t just rise, they’ll skyrocket, as happened with oil prices in 2007.

So we are guaranteed a rapid rise in inflation – unless demand winds up being substantially weaker than expected because of a renewed recession. Either way, we wind up losing out; another “heads I win, tails you lose” situation.

Now when central banks track inflation, they often use a yardstick called “core inflation”, which is typically the Consumer Price Index without food and energy prices. The reason why they leave these two important factors out of their calculations is that these two commodities tend to be very volatile, bouncing up and down from period to period. They look at other, slightly less volatile measures because they want to get a better reading on what’s happening overall.

Yet, this approach also attracts quite a lot of criticism: people don’t live in a world where they can choose to ignore food and energy prices, we have to suffer through them. Accordingly, I want to look at both of these for a moment, precisely because of their importance. I’m not going to go into detail on either subject. You can write books, or devote entire careers to these issues. Instead, I’m going to frost the highlights. The fundamental issue is the one discussed above: that the swiftly growing demand from the RDCs, when added to the demand from the recovering developed countries, is going to unbalance supply and demand and send prices through the roof.

Oil

First let me say that the world is not about to run out of oil. The statistic that I cite to underline that has nothing to do with oil: almost three-quarters of the Earth’s surface is covered with water. So far, the vast majority of the oil discovered and exploited has either been on, or very close to land. This means that there is an enormous amount of oil yet to be discovered, perhaps three times as much as has been exploited throughout history to date. To see this, witness the enormous oil find off the coast of Brazil. The Tupi field is estimated to contain five to eight billion barrels of light crude oil, which will make Brazil one of the world’s biggest producers of gasoline.

And oil from the ocean floor is not the only future source: both Canada and Venezuela produce less conventional heavy oils that require a great deal of processing to extract and use. And beyond these existing sources, there are other, even less conventional sources with enormous potential, such as shale oil, like the reserves locked up in the Green River deposits in the Western United States. A 2005 estimate set the world reserves of oil from shale oil deposits, for example, at over 400 gigatons, enough to yield around 3 trillion barrels of oil.

So there’s lots of oil left in the world; it’s just expensive, and will be slow to bring to market. Meanwhile, the demand for oil continues to expand. Here’s how the U.S. Energy Information Administration, an agency of the U.S. government, assessed the growing demand for oil:

World crude oil and liquid fuels consumption grew by an estimated 2.4 million bbl/d in 2010 to 86.7 million bbl/d, the second largest annual increase in at least 30 years.  This growth more than offset the reductions in demand during the prior two years and surpassed the 2007 consumption level of 86.3 million bbl/d. … Non-OECD countries will make up almost all of the growth in consumption over the next 2 years, with the largest demand increases coming from China, Brazil, and the Middle East.[3]

So, unless the global economy nose-dives into a renewed recession, the demand for oil will continue to grow faster than supply, forcing the price up. This will continue until consumers and organizations radically change their consumption patterns, which will happen when prices become painful enough. (Recall that in 2007, when oil prices spiked at $147 a barrel, some people were trying to give away their SUV’s because it was so expensive to fuel them.) And that pain will translate into reduced economic growth, as I’ll describe in a moment.

For those interested in pursuing this subject further, there are entire books on this topic, such as Jeff Rubin’s Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization. Rubin, formerly the chief economist for CIBC World Markets, foresees a world with $200 a barrel oil, and projects the consequences of that. He may or may not be right, but to my view, there’s much more to the story than just oil. With that in mind, let’s move on to food.

Food

As I described earlier, the demand for food is multiplied by the numbers of people in the RDCs moving into the middle class. Yet, the food equation is, in many ways, much more complicated than that for oil, for all of its complications. In response to higher prices and demand for food, farmers can start planting more marginal land, as some Brazilian farmers have done by cutting swaths of the Amazon rainforest. Scientists and seed companies can come up with new kinds of plants, either through traditional hybridization, or through the more controversial – but more effective – genetic modification. And advances in genomics generally lead me to believe that we are rapidly approaching a new Green Revolution that may blow the lid off previous yields.

And yet, there will also be major difficulties in producing enough food to feed a global population that is expected to grow from today’s 6.8 billion to the projected peak of about 9 billion by the middle of this century before it starts to decline, particularly as the burgeoning global middle class will want to eat more meat and dairy products. Moreover, we are reaching limits on agricultural productivity. As The Economist wrote in a recent special report on food (February 26^th, 2011, page 8): “…at some point it may no longer be possible to persuade plants to put ever more energy into seeds [which are the parts we eat]. In animals biological limits are already clear: turkeys are so bloated that they can no longer walk; chickens grow so quickly that they suffer stress fractures.”

As well, agriculture naturally and universally attracts politics, which fouls up decision-making. For instance, it is virtually impossible to defend making ethanol from corn in America as an economic proposition. Yet, the politics of energy, environmentalism, and agriculture, plus the importance of the Iowa caucuses in American presidential elections, have combined to cause the American governments to mandate the blending of up to 10% ethanol in all gasoline sold to American motorists. Moreover, there is talk that America should aim for a 30% blend of ethanol in gasoline by 2030 for environmental reasons. Yet, while ethanol currently makes up only about 8% of America’s fuel, it takes almost 40% of its corn production to produce even that amount.[4] Quadrupling the amount of ethanol produced over the next 20 years, at least from corn, is not even possible, and makes no economic or environmental sense – except for a strange sort of political sense that takes little account of reality. But such efforts vastly complicate the prospects of significantly increasing the production of food – and in keeping food prices from shooting skywards.

And one of the biggest limitations on food production will be water – but I’ll deal with that in a separate chapter later on.

When you look at the factors at work – growing global population, the increase in food consumption in RDCs, and the difficulties in increasing food production fast enough in the short-run, it’s hard to escape the conclusion that food prices are going to rise dramatically over the next several years.

So unless we experience a renewed recession, our old nemesis, inflation, is going to return to savage us once again.

Harm’s way

Those who lived through the inflation of the 1970s know how corrosive it is. Your pay, pension, and investment income aren’t safe because their value is constantly being nibbled away. It’s harder to manage your investments because stock prices fall even when corporate profits rise. Even though interest rates are high, fixed income investors find that the combination of inflation and taxes leaves them worse off than before. And doing nothing isn’t safe, either, for inflation finds you anywhere. It’s very difficult to prosper during periods of high inflation. Indeed, about the only things in which to invest are commodities – which creates an ever-expanding speculative bubble in commodities, which then feeds back into even higher inflation.

This coming bout of inflation will be particularly hard on working people in developed countries. In the 1970s and into the 1980s, increases in the cost of living were at least partly offset by wage and salary increases. Indeed, some economists seem to be relieved that the prospects of price inflation are not translating into increased wage demands. This leads me to wonder whether such commentators actually live in the real world: one of the primary issues in most developing countries is high unemployment. As a result, while a few workers may be in a position to seek higher pay, most workers who have jobs will be keeping their heads down, and watching helplessly as the value of their pay-packets erode, just grateful to be employed. There is very little room for wage increases in today’s labor markets, for all the reasons I described in Chapter 7. Workers will mostly just helplessly soak up the damage.

Meanwhile, governments are hard-pressed to deal with inflation, much of which is international in scope, and they have their own problems coping with rising expenditures. And inflation plays favorites: savers are penalized, and debtors are rewarded as savings are eaten away and debts dwindle in value. So inflation is corrosive, and, left untreated, eventually degenerates into hyperinflation, which destroys faith in government, the value of currency, and the very pillars of the economy.

And inflation will limit growth

Beyond this, I expect that rising inflation will eventually put a damper on economic growth everywhere, because increases in commodity prices, especially for essentials like food and fuel, act as tax on consumption. Higher prices for essentials here will reduce the amount available for luxury or discretionary purchases. This will hurt consumers in our world, and will slow the movement of people in developing countries from poverty to economic middle class status; they’ll be spending much more on food and fuel, and won’t be able to buy televisions and cars.

So, in effect, there is a built-in restraint on global growth: higher demand produces higher prices, which reduces discretionary purchases. This might happen gradually, or it might happen because of a recession. But regardless of how it happens, the emergence of the RDCs as a major economic force puts upper limits on how fast the global economy can grow by causing significant price increases in essentials that eat into people’s ability to make discretionary purchases, effectively making them poorer than they would otherwise be.

Moreover, rising inflation causes national governments and central banks to seek to restrain it. Hence, as of early 2011, China was raising interest rates and reserve requirements for banks – policy steps that the Federal Reserve in the United States is talking about in only the most general possible terms. Meanwhile, inflation is already above the target ranges set by both the Bank of England and the European Central Bank (the central bank of the EU). So far, at time of writing, they have resisted raising interest rates because economic growth is still weak, but when they finally do raise rates, that will act as a further brake on demand and growth.

© Copyright, IF Research, April 2011.

[2] ibid.

[3] “Short-Term Energy Outlook”, U.S. Energy Information Adminsitration website, http://www.eia.doe.gov/steo/.

[4] “Plagued by politics”, from “The 9 billion-person question: A special report on feeding the world”, Economist, Feb. 26, 2011, p.6.

This article was originally published in Teach magazine.

For most of the 18 years I’ve written this column, I’ve focused on how education will change. This time, I’m going to focus on why it must change, and it relates to the purposes of education.

There are two major schools of thought about the purpose of education, and for some strange reason, most people believe they are mutually exclusive. One school believes that education should primarily be devoted to the enlightenment of the individual, to equip them with the mental tools to enable them to appreciate the fine and important things of life, and to enable them to contribute to their society and the world. The other school believes that education should provide the individual with the skills they need to  get a good job and a vocation, so that they can support themselves, contribute to the economy, and enjoy the material things of life. Both are right, and they are actually mutually supportive, not mutually exclusive – but that’s a topic for another day.

For both purposes, education must change. Let’s look first at the enlightenment of the individual. The world around us is being driven largely by commercial interests. This has become such a normal part of our lives that we hardly even notice the daily bombardment of advertising, and the pervasive, subtle pressures to own something, or behave in a particular way. And there is nothing especially wrong with society because these pressures exist – this pressure has largely been responsible for the richness and luxury of our daily lives. Yet, there is more to life than just commercial offerings, and most commercial offerings are shallow, and lack deeper purpose. Moreover, commerce and society generally tends to emphasize novelty, and while, again, there’s nothing wrong with new things per se, there is much more to life than just the novel.

On their own, few people would delve deeper than today’s satisfactions – which is where education enters the picture. Education provides context, history, art, depth of understanding, and perspective that most people would not otherwise be exposed to. This is part of the traditional role of education as it fulfills part of the purpose of culture, which is the transmission of our society’s values.

But the world is changing, and at ever accelerating rates. And the shiny baubles that novelty and commerce provide are increasingly being designed to be “sticky” or addictive. If education is to capture the attention of children, and persuade them of the value of what we know, what we have, where we’ve come from, and who we are, then it must compete with the increasingly effective seductions of commercial offerings. Assuming that just because we can hold students captive for six hours a day, 180 days a year, for 12 years is enough to allow us to brainwash them into appreciating the riches or our society is, in my view, a short-sighted and foolish view. Instead, I believe that education must compete for attention, not just for enforced time, and the only way we can do that is to seduce students into a state of fascination with what the wider world has to offer. As I say when I’m invited to speak to groups of students, we adults have perpetrated a cruel hoax on you: we’ve convinced you that learning is an intolerably boring process that you have no choice but to endure, when the reality is that learning is the most fun you can have with your clothes on.

We need to change that. Today’s students are, in my view, smarter, hipper, more skeptical, and less likely to believe propaganda than any other generation in history. They know that no matter what the school system tells them, the odds of them needing, wanting, or using most of the crap we teach them is vanishingly small once they leave their formal education. And yet, there are things that they will need to know that we’re not teaching them, and there are things they would love to know if we could present them in a way that doesn’t bore than pants off them. And as far as I can see, the only way we can seduce students into loving education is if we approach that education by appealing to those things that the individual students themselves are passionate about. We have to stop teaching the curriculum, and start teaching the individual – each individual, every single individual, and teach them as individuals, with unique interests and abilities. We have to stop teaching Mr. Smith’s grade 11 English class, Ms. Phansalkar’s grade 9 geometry class, or most of the groupings that assume that 25 kids are all the same simply because that makes education simple for us (and excruciatingly boring for them). And I don’t see any way that our current education system can achieve the level of interest or seduction necessary to compete with the enthralling, but shallow, offerings of commerce and society.

Now let me turn to the vocational aspects of education. And if anything, the need for change is even more compelling here.

We are all aware that countries like China and India, plus fast gaining countries like Brazil, Mexico, Indonesia, and Malaysia, are providing enormous competition for low-level and low-skilled jobs. What is not as well known is that these same countries are aiming for the best jobs that require the highest levels of education. They will not be satisfied with low-skilled jobs that don’t pay well and offer little opportunity. This means that our students will be competing with the best in the world in almost any field. Worse, they are starting at a big disadvantage: our school days are shorter, our school years are shorter, and our society no longer has the devotion to higher education that parents in developing countries have.

Some commentators and politicians contend that the way to deal with this issue is to lengthen school years and school days, pile on the homework, and really get “back to basics.” I think this is precisely the wrong answer, because it means making our education system even more boring than it already is. Moreover, we are headed into a world where creativity and innovative thinking will be more valuable than rote learning of any depth. Indeed, what’s the point of memorizing facts if you can command them with a wave of your search engine? Understanding and context, on the other hand, are critically important. Accordingly, if our kids are to compete with smart kids from around the world, our children will be better equipped if we focus on helping them identify their peculiar talents and abilities, and then develop them.

But there’s another threat that is, perhaps, even more worrying than rising competition from smart kids abroad, and that is automation. Most people are familiar with Moore’s Law, coined (and repeatedly reframed) by Gordon Moore, one of the founders of Intel. In economic terms, Moore’s Law states that computers will double in speed, and halve in price, every 18 months. Yet, it turns out that Moore’s Law is wrong because it’s too conservative. Moore’s Law posits an exponential growth rate – which means a constant rate of change (i.e., doubling every 18 months). But computers are evolving faster than that, and not only is the rate of change accelerating, but the rate of acceleration is increasing. As a result, a rough estimate indicates that computers will become about 1,000 times faster and more cost-effective over the next 10 years. And, as we develop new, more effective tools and techniques to harness this power, it means that automation will become dramatically more powerful in the next decade.

Automation has been increasing in power for millennia, since the invention of fire and the wheel. It really started to accelerate with the advent of the Industrial Revolution in the 18th century. Now it is moving at a rate that may be beyond our comprehension.

In the past, automation has led to a steadily rising standard of living, as well as new, better paying jobs that offer more opportunity. And so it still does. However, the major difference now is that automation is changing things so fast that the skills we develop at the beginning of our careers may not be enough to allow us to make a living for more than a few years – and eventually a few months – before they become obsolete. We are being thrown out of work at ever-faster rates, and if we are to hope to continue to work, we will need to constantly upgrade our abilities.

To some extent, the effects of both of these developments – foreign competition and domestic automation – are already evident. Whereas when I and my peers left our formal educations, we had a choice of jobs available to us, today students finish a university education, and spend years looking for anything more than menial labour. Worse, the next 10 years are going to make this seem like a happy outcome. Within the next 10 years, we will face an employment crisis that will shake the foundations of our society, our political system, and our economy. And the only answer is education, and education for adults as well as young people.

But it can’t be the same old education. It has to be education that emphasizes our human talents and abilities, our creativity and our ability to improvise and innovate. Skills training in most fields, with a few exceptions, will become obsolete at faster and faster rates. We will, instead, need to fall back on those things that are uniquely human, like art, teamwork, leadership, empathy, understanding, creativity, ingenuity, and all of the deeper aspects of human life and society. Computers, robots, and cheaper competition from abroad will take everything else.

And for those who say that the way to combat these things is by protecting domestic jobs, and halting the use of automation, let me say that like King Canute, you might as well try to stop the tide from coming in. Such efforts are not only doomed to fail, they will also make it even harder for us to succeed by diverting our attention and efforts away from the real task for tomorrow’s education: helping us to blossom into self-actualization, to become the best people we can be.

Do we have the wit to see the problems that are racing towards us? And do we have the will do to something about them? Those are the questions that will determine why we need to change education.

© Copyright, IF Research, September 2010.

The next 10 years will dramatically change your life and almost everything in it. And while there are lots of things likely to change, I’d like to focus on 10 that will be of particular importance to you personally, to our society, and to the meeting planners generally.

Someone always benefits from change – and those who will benefit most will be those who prepare most successfully for what’s to come. Since I’m necessarily going to have to be brief, I would encourage you to contact me if you’d like to discuss any or all of these 10 points.

1. Everyday robots

The first thing you need to know is that we are about to experience the emergence of what might be called “everyday robots” and computer intelligences. We’ve been raised on the idea of robots, and they’ve always been just beyond the horizon, like flying cars, vacations on the moon, and the three-day workweek. We grew up with pulp fiction fantasies about what robots would be like, such as Rosie the Robot from The Jetsons, the Terminator from the governor’s mansion in California, or the classic Isaac Asimov I, Robot series of stories. But over the next 10 years, we are going to experience an increase in computing power of roughly 1000 times, and that means that that the hesitant, clumsy robots that are now appearing in laboratories will get dramatically better over the next decade, improving about as quickly as an 18 month-old toddler improves at walking. Robots will first be used with applications in the military, police, health care, and be created by hobbyists for fun. Much of the non-military development is in Japan, because they have, by many measures, the oldest population in the world, and need arms and legs to do things.

Aside from the sex trade, which seems to soak up new technologies and harness them for sexploitation, the development of robots for civilian use will start primarily in the workplace, especially in fields like health care. (I’ll deal with sex robots at a later date, because they are a real prospect.) It will take time for robots to come to households, because they will cost about as much as a car. But the business potential of another household possession in a field that may become as important as the automotive industry is going to drive development. And along with everyday robots, we will also get computer intelligences that rival human intelligence in certain, tightly defined areas. This leads to my second point.

2. Dramatic increases in productivity

Related to the rise of robots will be automation and dramatic increases in productivity, which has several implications. The first is that increased productivity will lead to cheaper goods and services, which will produce a substantial increase in your standard of living and a much higher level of wealth – if you have a job or occupation. But greater productivity also implies that companies won’t need to employ as many people, which will mean that many jobs will disappear, replaced by automation.

Traditionally, automation has led to new jobs with better wages and prospects appearing, and that will happen – but these new jobs will also require more education, more intellect, and more creativity. This means that people who don’t have appropriate skill sets will become chronically unemployed or underemployed. This could make it even harder for young people, just finishing their formal educations, to get their feet on the bottom rungs of the employment ladder.

In the meeting industry, it also means smart tools for planning your conferences and running your business. Think of having an automated assistant that can do a lot of the routine work in organizing a conference, including the routine interactions with hotels, travel agencies, printers, communicating with conferees, and so on, leaving you to do the tougher creative work, and to focus on the human, interpersonal aspects of your job

3. The ascent of women

Next is the ascent of women and different ways of doing business. The first part of this is the decline of men, as men seem to be harmed more by environmental degradation than women. Based on research that is only just starting to emerge, two to four times more boys than girls are afflicted by attention-deficit disorders and hyperactivity disorders in America. Sperm counts are dropping in many parts of the world, and testosterone levels are lower. Testicular cancer is higher in many places. And the birth rate of boys in many countries, including America and Japan, is far lower than statistical variance should allow. We don’t really know why this is happening, but researchers are theorizing that males are more vulnerable to new chemicals, such as synthetic hormones, that are making their way into the biosphere.

Meanwhile, girls have better roles models now than ever before in our society, up to, but not quite including president of the United States. More businesses are being started by women than men, and the businesses started by women are more likely to survive, so that over time, more and more businesses will be headed by women. But the clincher is that almost 60% of college and university students are women, and the ratio is even higher in most graduate fields. As a result, a steadily rising share of tomorrow’s leaders will be women, which will lead to a cultural shift. Without being too glib, I think it’s safe to say that women have a different way of thinking and acting in the world than men, and this power shift to women is going to change the way our society – and this industry – behaves.

4. The health care revolution

Point four is the health care revolution, starting with customized drugs and treatments. Herceptin is a drug used to treat breast cancer – but it is only used with patients that have two particular genetic markers. If you don’t have these two specific genetic characteristics, there’s no point in giving you Herceptin, because it won’t help you. And it’s the precursor of customized drugs. They will be dramatically more effective – and, at least initially, dramatically more expensive as well because the research costs will have to be spread over a much smaller population.

Meanwhile, decoding your personal DNA is rapidly becoming affordable. You can already get genetic tests that show whether you are susceptible to certain kinds of diseases, such as Alzheimers, ALS ( Lou Gherig’s disease), or Huntington’s. But whereas it took decades, and billions of dollars to decode the first human genome, within 10 years, having your personal genome fully decoded will cost about $1000 or less, and take a few hours, bringing it into the realm of the possible. And this cascade of data about you will, gradually, allow us not only to ascertain what diseases you need to guard against, but also which lifestyle choices, including foods, will work best for you.

And a third leg of the future of health care is the wearable computer companion to monitor your health and guard against threats. There are already smartphone applications to monitor heart rate, blood sugar, calories burned, and so on. These are going to become increasingly sophisticated, and will, over time, become dedicated to monitoring your health, heartbeat-by-heartbeat, and intervening as necessary to reduce the risks of health crises, such as heart attacks or strokes, as well as to advise you on optimal health management.

These three things, combined with electronic health records, will, over time, produce the greatest tool for health treatment and research humanity has ever had: a global system to identify health risks, and find cures or treatments for them in something approaching real time. And I fully expect that they will eventually lead to life expectancies of 120 years and more, although this development will take much more than just 10 years. Which leads me to my next point.

5. Transhumanism

Like my previous point, this is going to start over the next 10 years, but will carry on into the indefinite future as we learn more, and figure out what to do with what we know. Transhumanism is the school of thought that science and technology are going to allow us to first cope with disabilities, and then to augment and exceed our natural abilities. Some of this, such as stem cell therapies, will mean using biological mechanisms to repair our own bodies. Beyond that, transhumanism also projects that we will use artificial means to augment our abilities. It has already started with devices that help us survive. Some, like heart pacemakers, have been around for decades. Others, like brain pacemakers to prevent seizures, are relatively new. Next are prosthetics. Of course, the oldest prosthetics, like peg legs and hook hands, have been around since Disney invented pirates, but I’m talking about arms and legs controlled by thoughts and nerves. Prosthetic arms & legs will act and seem natural.

As we move towards computers that can read your intentions and interpret your thoughts, we get into interesting man-machine combinations. Eventually we will be able to choose, by an act of will, to control distant machines and mechanisms by thought. We’ll be able to use the power of computers to augment the speed with which we think, and the depth of things we can “remember.” Imagine, for instance, being able to Google something on the Internet just by thinking a query, and getting the answer either whispered into your ear, or displayed on contact lenses on your eyes that act as a computer monitor. There are already prototypes of precursors of these things, from thought-controlled wheelchairs for paraplegics, to memory glasses that can remind the forgetful who the person in front of them is. As I said, this is a brand new field, so I doubt if you’ll need to worry about the Borg just yet.

6. Critical economic uncertainties

The headlines this spring have centered on whether we’re likely to have a double-dip recession, and the financial and fiscal crises of the PIIGS of Europe (Portugal, Ireland, Italy, Greece, and Spain). These uncertainties are caused by too much debt borrowed by consumers and governments alike.

Having too much debt is like having a rowboat that’s heavily loaded – it doesn’t take much to swamp it completely, and it doesn’t have much resilience. Moreover, it takes a long time to bail out of debt, so these problems are not going to go away overnight. Accordingly, in your plans and planning, I would strongly recommend that you be prepared for repeated, periodic shocks and crises that lead to financial upheaval, and economic slowdowns or outright recessions over the next decade. Believe me, I don’t like this prospect, but I think it’s better to be prepared for shocks than to be caught by surprise by them. You need to have plans in place for dealing with such upheavals and slowdowns, or else you’ll be flattened by them.

7. Growing political and social turmoil

In addition to the potential for new crises and turmoil in the global economy and global markets, there is also the potential for increased financial and political turmoil in the developed countries. Not only is the U.S. federal government, among other nations, running up unprecedented amounts of debt, increasing its financial vulnerability, but many of America’s individual states are in a squeeze. This is happening not just because of the Great Recession, but also because they’ve been too generous with pensions and benefits to their retirees over the years. For example, by 2018, the state of Illinois will have to pay $14 billion a year for benefits for retired state employees, which is more than a third of the state’s total revenues, and could bankrupt it, much as happened to General Motors.

And in a larger sense, there are going to be growing conflicts between public sector retirees, who mostly have decent pensions, and private sector retirees, who mostly don’t yet will be paying taxes to support their civil servant neighbors. As well, there will be conflict between aging boomers, who will vote for generous Social Security payments and unlimited health care, and their children who will be paying taxes for benefits they don’t believe they will ever receive. Accordingly, the political situation in most developed countries will likely get worse – hard as that is to believe!

8. Climate change accelerates

Within 10 years, the debate on climate change will be effectively over except for those who are willfully choosing to ignore evidence. It’s already clear from changes happening in the polar regions that climate change is happening, and climatologists are astonished by how fast they are occurring. Change may come not only more rapidly than we expect, but faster than we can adapt. I suspect we’re in for a wild ride, and that will almost certainly force changes on us that we will find difficult. We will also find some changes that are helpful, such as longer growing seasons in parts of North America – particularly the northern tier of Midwestern American states and the Prairies of Canada – IF we get the right rainfall patterns, which may also change. But it’s also clear that many of the changes will be harmful to us and the way we live.

I also suspect it is going to force us to make significant changes to our lifestyles, imposing Green Economy ideals on even disbelievers. This doesn’t have to be a bad thing, because another name for “pollution” is “waste,” and by decreasing waste, we can actually increase profits. Specifically for the meeting industry, I would suggest that we need to develop a “green index” to indicate the environmental cost per participant of conferences as a means of first measuring, then pushing for improved efficiencies.

9. The energy revolution

We’ve already seen with natural gas that new technologies can revolutionize even well-established industries – but that’s not going to be enough. If you look at the long-term cost of oil over the past 150 years, you can see that, with the added demand from rapidly developing countries like China and India, coupled with the sheer volume of energy we need to add each year just to maintain our lifestyles, we will push up the price of oil at a remarkable rate – at least for the next several years, until we come up with good energy substittues.

Now, let me reassure you – we are not running out of oil, because almost ¾ of the Earth’s surface is covered in water. We haven’t discovered or exploited the vast majority of the oil under that water. But we are running out of cheap oil. The BP oil spill in the Gulf of Mexico is an example of the problems ahead. More expensive petroleum will provoke us to develop new ways of using energy more efficiently – so called “negawatts” – as well as developing new sources of energy. It’s astonishing what demand for a critical resource can do, but it’s going to take time to displace oil from the center of our energy equation.

For this industry, though, it’s also going to mean that travel is going to become more expensive. We will see more moves towards virtual meetings, more local meetings, and regional satellite meetings that combine through telecommunications into national conventions. Start thinking about, and looking for ways of stretching travel dollars, because it’s going to be a fact of life.

10. The purpose of life

When people ask the question, “What is the purpose of life?”, they are starting off in the wrong direction with an improperly formed question. This is not a question at all, but a statement: Life is purpose. Without purpose, there is no life.

But this raises a different question: What’s my purpose? And this is a question that can’t be answered by looking out there, but in here, inside yourself. I got this from a wise man, Viktor Frankl, in a book called Man’s Search for Meaning. And here’s the question he posed that you should ask yourself: “It’s not a matter of what you can expect of life, but what can life expect of you?” It may be that you think your purpose is to bring home a paycheck, and that’s certainly important. But I would urge you to stop and think about what life can expect of you, what you feel is your calling, and then be guided by this sense of purpose.

The decade ahead is going to be radically, remarkably, dangerously different than any period you’ve lived through or have experience with. And it’s going to offer opportunities that you cannot now anticipate. If you don’t have a clear sense of where you are going and why, and are not prepared for the challenges we face and the opportunities ahead, you will be devastated by what’s to come.

Someone always benefits from change. Let it be you.

Good luck, and God speed. Thank you.

‘America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves.’
– Abraham Lincoln

Unless America and Americans force a drastic change in the country’s direction, the American dream is dead, and America’s place as the leader of the world is over. I find this intensely distressing and worrisome, and have hopes that the situation may yet be retrieved, but the time available is short. Americans have repeatedly overcome fearsome odds throughout their history to survive and thrive, but if there were ever a time when they needed true grit, self-sacrifice, and a willingness to cooperate with other Americans of different backgrounds, politics, and beliefs, it is now.

To put it bluntly, America is hurtling towards bankruptcy. This is not due only to the Obama administration, or the administration of George W. Bush, but to American presidents dating all the way back to FDR, and the Congresses that accompanied them. There are two major reasons for this coming disaster, one short-term, and the other longer-term.

A massive deficit at the worst possible time in history

The short-term cause is the massive federal deficit. George W. Bush inherited the biggest budget surplus in history and turned it into the biggest deficit in history, and at exactly the worst possible time because of the aging of the oversized population of baby boomers. The boomers selfishly expect their governments to give them more than they have contributed, and get downright nasty when told they can’t have what they want. Bush also inherited a trend towards greater deregulation from Bill Clinton, and accelerated that trend, believing, wrongly, that the financial industry, among others, could be trusted to regulate itself. This is like expecting a greedy kid to regulate himself in a candy store. The events of 2007 & 2008 proved this policy to be both stupid and irresponsible. The resulting financial catastrophe could have led to a complete collapse of the global financial system, and only the massive intervention by virtually all central banks, coupled with unprecedented fiscal stimulus, prevented a complete collapse that would have resulted in a new, world-wide, Great Depression.

The Obama administration inherited this unholy mess, and is not responsible for it, but has not dealt with it well either, leaving too much of a leadership role to a Democratic Congress that too often substituted ideology and partisan politics for sound economics. Obama hasn’t been helped by the Republicans in Congress either, who seem to think that the president is their enemy, and anything they can do to harm him is good, regardless of the consequences for the country.

Yet, my point here is not just the deficits themselves; they are unfortunate but necessary in the short term to stave off a much worse economic crisis. My concern is that the stimulus spending has been directed more towards lobbyist-inspired pork than creating a solid underpinning for recovery. This is a self-indulgent luxury America can no longer afford. It is, alas, far too early to restrain spending, no matter what Tea Party enthusiasts may say. There will come a time for this, but it is not yet.

The scale of borrowing threatens both American and global stability

However they occurred, these deficits will require massive borrowing by the federal government: the Obama administration estimates the U.S. government will need to borrow $10 trillion over the next 10 years. Most commentators say that assumes higher levels of economic growth than are likely, and higher tax increases and deeper spending cuts than Congress will accept, and so are unrealistically low. I’ve seen estimates that place the borrowing requirements (which are remarkably difficult to pin down) as high as $9 trillion over the next 5 years. For the moment, let’s assume that the administration’s figure is correct, and place it in perspective.

China is America’s biggest external lender, and holds almost $2 trillion in foreign reserves. Let’s assume, for the sake of simplicity, that all of China’s holdings are in U.S. dollars, and all of those are in U.S. treasury bonds and bills. This isn’t true, but let’s make that assumption anyway. China has already expressed concern over the amount that America has borrowed, and is borrowing, and is diversifying away from U.S. securities; so how willing will they be to buy that much and more in U.S. debt over the next decade? And who else in the world will have enough in investable funds to buy U.S. debt? Financing of this magnitude has never been done before, and there may simply not be enough investment money to do it. And even if there is, there’s very little certainty that lenders will continue to funnel money to an increasingly debt-heavy American government. The federal government already has proportionately more debt than at any time in its history outside of times of war, and Moody’s rating agency has publicly expressed its belief that America in danger of losing it’s AAA credit rating. (This, on its own, may have severe consequences, which I’ll come back to in a later blog.)

If America cannot borrow the money it needs, then it becomes insolvent. The checks it writes will bounce, which could lead to a financial panic even greater than that of 2008, and one that no central bank or group of central banks will be able to stem, leading to an economic nuclear winter. (I’ve dealt with this prospect in an earlier blog, “WILD CARD WARNING”, published June 3rd, 2009.)

The rapidly approaching Social Security disaster

But the longer-term reason is even more dangerous. Both the U.S. Federal Reserve, America’s central banker, and the Government Accounting Office (GAO), America’s financial watchdog, have publicly stated that the unfunded liabilities of the U.S. government for Social Security and all forms of medical insurance, including Medicare, Medicaid, and Veteran’s Administration coverage, amount to approximately $100 trillion and are unsupportable. To see this, America’s total economic output (GDP) is about $14 trillion per year, so this $100 trillion figure amounts to roughly 7 times the nation’s entire annual income – a horrendous and unmanageable amount. Yet, when George W. Bush attempted a modest (if somewhat misguided) reform of Social Security, all he got was nasty complaints from selfish boomers, violent rhetoric from Congress, and reams of bad press. And these ticking time bombs have much shorter fuses than most people realize.

If you look at the Social Security Online Actuarial Publications website, you will see an extraordinary statement in the second paragraph:

“The financial condition of the Social Security and Medicare programs remains challenging. Projected long run program costs are not sustainable under current program parameters. Social Security’s annual surpluses of tax income over expenditures are expected to fall sharply this year and to stay about constant in 2010 because of the economic recession, and to rise only briefly before declining and turning to cash flow deficits beginning in 2016 that grow as the baby boom generation retires. The deficits will be made up by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay about three fourths of scheduled benefits through 2083.”

As bad as this sounds, it’s actually much worse. The ‘trust fund assets’ that the Social Security Administration is talking about redeeming are bonds and T-bills issued by the federal government. When 2016 rolls around, and Social Security starts ‘redeeming’ these ‘trust funds,’ it will be making demands on the government of the United States. In turn, the federal government can only redeem these securities in one of three ways:

• Raising taxes,


• Cutting spending, or


• Borrowing even more in the public markets.

Given the federal government’s current perilous financial position, any of these three choices will be painful at best, and potentially disastrous at worst.

As an aside, we could, and should, ask the obvious question: What happened to all the surpluses in the Social Security system in the decades that led to the build up of the so-called ‘trust assets’? Answer: Congress spent them and handed the Social Security Administration IOUs in return.

And Medicare is even worse

In the same paragraph, the Social Security Administration goes on to comment on the status of Medicare:

“Medicare’s financial status is much worse. As was true in 2008, Medicare’s Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures this year than it receives in taxes and other dedicated revenues. The difference will be made up by redeeming trust fund assets. Growing annual deficits are projected to exhaust HI reserves in 2017, after which the percentage of scheduled benefits payable from tax income would decline from 81 percent in 2017 to about 50 percent in 2035 and 30 percent in 2080. In addition, the Medicare Supplementary Medical Insurance (SMI) Trust Fund that pays for physician services and the prescription drug benefit will continue to require general revenue financing and charges on beneficiaries that grow substantially faster than the economy and beneficiary incomes over time.”

Translating this into English, Medicare is bankrupt, but keeps operating by soaking up current tax revenues to fund it, increasing the effective size of the deficit that needs to be financed. It also means that the benefits people are expecting will have to be cut drastically – undoubtedly accompanied by much squawking, finger-pointing, and political posturing as president and Congress-critters all try to deflect the huge amount of blame.

Ironically, the new health care bill just signed into law may actually ease the situation slightly, because now government-funded insurance will fund the young and healthy as well as the old, poor, and sickly. That’s how insurance is intended to operate: by spreading the risks. But this change will be well short of what is necessary to avert disaster, and was so botched in the compromises necessary to get it passed that the benefits will be far less than they should be.

Now let’s be clear: the problems with Social Security and Medicare are not the failure of the Obama administration, nor of the Bush administration before it, but of all administrations and Congresses since the 1960s, and even before that. It was always politically easier to ignore the growing problems, and leave them to the next generation of politicians. Now the problems are arriving, and there will be hell to pay. To my mind, the last politician that had the courage to attempt to deal with these issues was New York’s Senator Daniel Patrick Moynihan, who raised the age when boomers could collect Social Security. He is, unfortunately, now dead, and no one else has had the guts to step forward and tackle these problems.

Are these problems too big to solve?

So are these problems solvable? Maybe, but only with immediate, Herculean efforts, unprecedented cooperation between Republicans and Democrats, and a willingness to sacrifice and accept less by the American people. I would think this makes solutions unlikely.

Indeed, I would say that America’s financial problems can only be solved if it solves two other, unrelated problems, one political, and the other societal.

Republicans and Democrats conspire together against democracy

The first problem is the polarization of the American political system because of gerrymandering. (See related blog post.) Gerrymandering is a term we all learned in high school social studies, but which most of us have forgotten. But Congress has not forgotten it. Gerrymandering is the re-drawing of the boundaries of electoral districts to create as many safe seats as possible – that is, where the same party will almost invariably be elected. Republicans and Democrats have connived together to do just this, and the Supreme Court has given them a limited seal of approval. The result is that in normal times, the vast majority of incumbent members of the House of Representatives cannot be defeated in a general election. The Economist newsmagazine once commented that America’s record of re-electing incumbents to the House would do credit to the dictatorship of North Korea.

This means that a Republican in a safe seat cannot be defeated by a Democrat, so his political spectrum goes from the center to the extreme right wing. And a Democrat in a safe seat cannot be defeated by a Republican, so her political spectrum goes from the center to the extreme left wing. This has two unsavory results: First, it means that the majority of voters in the center are not represented at all. And second, it pushes the two parties further and further apart, so that they cannot agree on anything, and gridlock results. That’s where we are today.

What is necessary is for the drawing of electoral district boundaries to be taken away from politicians eager to protect their own seats, and given to non-partisan committees that draw boundaries based on geography and similar needs rather than voting patterns. This has been done successfully in a number of jurisdictions, such as Washington state, and defeated by political machines elsewhere, as in California. But without this kind of non-partisan protection of the American people, the country as a whole is being stage-managed for the benefit and security of the politicians and the political party machines, and not in the best interests of the country. If the Tea Party movement wants a real and important target, this should be it.

The dumbing of America

The second fundamental issue is America’s education system, which has many problems. These include those teachers’ unions that block progress to protect their prerogatives and power (but not necessarily the interests of their members); helicopter parents that verbally and even physically assault and intimidate teachers; students who are more dedicated to fun than learning; violence and drugs, which turn schools into armed camps, forcing students to worry more about their own safety than what they learn; and a culture that now glorifies winning at any cost, including cheating, and elevates sports and entertainment success over academics. Most school systems are such a mess that it’s hard to know where to start to improve them, but the result is that America is producing generations of citizens who neither know nor care about their own history; who believe that America will always be right, and will always be #1 without thought, effort, or sacrifice; and who are uninterested in the common welfare of anyone other than themselves, and have no concept of civic duty. Unfortunately, the odds of a widespread improvement in American education are, if anything, even less likely than a balanced budget, and even if such a miracle were to occur, it would take years to change America’s direction. Yet, even so, if America wants to continue to prosper, it must both improve its education systems, and its citizens must rediscover their dedication to education excellence. Without this, in the long run, nothing else will matter.

Does America still have what it takes?

The financial problems America faces are severe, potentially the worst in its history. To solve them will require higher taxes and cuts to the military to be sponsored by Republicans, and spending cuts and reductions in entitlements to be sponsored by Democrats. It will take the postponement of eligibility for Social Security and Medicare benefits for boomers as well as a reduction in benefits provided, plus the end of ‘gimme-gimme’ pork-barrel politics. It calls, in short, for sacrifice. The alternative is disaster, and the end of America.

America’s problems threaten the stability of the world’s financial system, and the global economy. They also threaten America’s leadership of the world, which has, in the main, been remarkable for its enlightenment and goodness. There are other countries waiting in the wings, notably America’s chief banker, China, who are eager to replace America as the dominant force in the world. If Americans do not immediately begin to grapple with its problems, then both the idea that is America, and the country that is the fact of America will crash with such force and violence that it may lead to the end of America as a coherent society, as well as precipitating a second global depression. The stakes are high. The time is short. And the critical question is: Does America still have the will to be the best?

© Copyright, Richard Worzel, March 2010.

The polarization of American politics is evident from the way that Republicans and Democrats seem to loathe each other. They scream at their counterparts; they rant for the cameras; their surrogates in the press besmirch each other as worse than foreign enemies. Indeed, the fact that John McCain, the unsuccessful Republican nominee for president, in his concession speech urged his followers to support Barrack Obama as president, was seen as a betrayal by Republicans. And the fact that President Obama has tried to reach out to moderate Republicans at times is seen as a betrayal by the Left, and an attempt to colonize and domesticate the center of American politics by the Right. (Let’s ignore, for the moment, that broadening your base is smart politics, and frankly what any smart president or national leader should do. The fact that George W. Bush made no attempt to reach out beyond his narrow, partisan base, save in the dying days of his administration, is merely one of many pieces of evidence that confirms my belief that he wasn’t a smart president. It has also left his party in dire straits.)

Now, American politics has always been a blood sport, right back to the conflicts between Jefferson and Adams, Hamilton and Aaron Burr, or Lincoln and Stephen Douglas. I can remember the first presidential election I was old enough to be aware of, Eisenhower versus Stevenson in 1956, where the popular jingle that made the rounds was crudely partisan: “Whistle while you work; Stevenson’s a jerk; Eisenhower’s got my power, so whistle while you work.” (My folks were Republicans.) But what’s happening today is much worse, dangerous to Americans and the rest of the world as well, and it all comes back to something we learned about in high-school social studies: gerrymandering.

The art of gerrymandering

Gerrymandering is the art of re-drawing electoral districts for the express purpose of benefiting a specific group, whether political, racial, economic, or otherwise, and it’s not a pretty concept. It basically seeks to screw those that do not fit into the group being favored by isolating them in a district whose boundaries make it difficult or impossible to defeat the representative of the favored group. Hence, a district that elects a member of the U.S. House of Representatives which has boundaries that effectively make it a safe seat for the Democratic Party disenfranchises all Republicans (and others) in that district, because only Democrats will be elected. And gerrymandering is being actively practiced in drawing the boundaries of members of the House of Representatives, with the connivance of both Republicans and Democrats, and with the limited approval of the U.S. Supreme Court. The Court ruled in 2006, hypocritically in my opinion, that it is OK to bias elections in the favor of Democrats or Republicans, but you cannot bias them on the basis of race. I’m sure this makes sense to someone (like the Supremes), but it makes no sense to me. However, my opinion counts for nothing, so gerrymandering is the law of the land in American national politics (and many states as well). What’s more, computer analysis and detailed demographic data has allowed the political parties to draw exquisitely precise district boundaries to create as many safe seats as possible (and to look as grotesque as you can imagine). Hence, in the 2006 mid-term Congressional elections, something like 96% of all incumbents who chose to run were re-elected – a record that The Economist newsmagazine said would have done credit to North Korea.

So what?

Now let’s look at the implications of this. First, it artificially polarizes American politics, and disenfranchises those Americans who are moderate – which, depending on how you look at it, is close to a majority. In a Republican safe district, the Republican incumbent cannot be defeated by a Democrat; he (or she) can only be defeated by another Republican in the primaries. This means that the entire political spectrum for anyone wishing to be the Republican nominee is from the center to the extreme right-wing. Likewise, in a Democratic safe district, the Democratic incumbent can’t be defeated by a Republican, only by another Democrat, which means that their political spectrum is from the center to the extreme left-wing. As a result, Republicans naturally move away from the center to the right, and Democrats naturally move from the center to the left, leaving those in the moderate middle of both parites unrepresented, and polarizing the House of Representatives.

As an aside, the Senate is not directly polarized in the same way because there are two senators for each state, and since state boundaries were fixed long ago, no gerrymandering is possible. However, state party machines are polarized, which tends, indirectly, to move senators away from the center.

This polarization leads to confrontational, “gotcha” politics, more intent on scoring points against the other party than formulating intelligent policy, or serving America’s broader interests. If you can make the other guys look bad, even if it harms America, you’ll probably do so because you need to be elected, and that’s the name of that game. And that means that the American Congress often creates dangerous, harmful policies, even when American legislators, as a whole, know it’s the wrong thing to do. That makes it dangerous for the rest of the world, because economically as well as militarily, America is still the only superpower, and what it does affects everyone.

A more dangerous side effect

But there’s another, subtler and potentially even more dangerous side effect. While most of the districts from which the members of the House of Representatives are elected are gerrymandered to be safe, there are some that are not or cannot be. This often gives the representatives in those “unsafe” seats the deciding votes in a close issue where votes matter. By the nature of House politics (whose members are up for election every two years, and hence are effectively always running for re-election), this means that they can ask for almost anything, and get it. Hence, if one such district has a lot of, say, widget manufacturers who are being hurt by cheap widgets from China, or religious fundamentalists who despise the distribution of condoms to teenagers, the representative from that district can make a trade: she gives her vote on, say, a budget appropriate bill in exchange for protectionist legislation against Chinese widget manufacturers, or a prohibition against funding contraception counseling in Third World countries. Meanwhile, this may well provoke retaliation, or poison a sensitive foreign-policy relationship. As a result, American policy on a broad range of issues is, at times, being made by widget manufacturers, or fundamentalists, or some other group that is only interested in its own narrow, parochial interests, and couldn’t give a damn about broader issues, or America’s broader interests.

So, what can be done about this? Well, some states establish independent tribunals to set Congressional district boundaries, and there is some faint hope that this idea will spread, and return (some) sanity to American politics. But truthfully, the backroom pols of both parties much prefer the present system, especially because it’s so difficult to explain, and doesn’t fit a 30-second sound bite. They like exercising power behind the scenes, and will fight – dirty, if possible – to make sure that no one takes it away from them by making it understandable. Therefore, an enlightened and active electorate is the only solution.

Please feel free to forward this to anyone you think might find it of interest.

© Copyright, IF Research, August 2009.

by futurist Richard Worzel, C.F.A.

I’ve been a free trader all my adult life. I studied international trade in university, watched it develop with the collapse of the Bretton Woods Agreement in the early 1970s, and have seen the amazing consequences of globalization, which has lifted hundreds of millions of people out of desolate poverty. Moreover, it makes sense: free trade is merely an extension of occupational specialization, so that just as it makes sense for the cobbler to make shoes and sell them to the farmer in exchange for food, it makes sense for countries to do what they do best, and trade with each other.

Of course, freer trade (because we don’t really have free trade) has a downside. It creates winners and losers. Some folks do very well out of free trade, including consumers who get cheaper goods, plus those who are capable of competing and finding new markets. Some folks lose their jobs, as those jobs migrate to other places where the wages are lower, or there’s a natural advantage. I remember hearing one labor leader, who represented workers at GM when those workers were on strike, saying in a radio interview that “We’re not going to let workers in other countries take our jobs just because they’re willing to work for lower wages.” I thought to myself: here’s somebody who’s really out of touch with reality: why should you be able to keep a job if there’s someone else who can do it as well, but for less money? Of course, if you have the job and are losing it, you will naturally object that it’s unfair. But I can’t see as you can make a reasonable case to anyone not related to you that you are entitled to that job.

But my purpose here is not to defend free trade, but, perversely, to warn about one of its unintended consequences. The fundamental (and correct) premise of free trade is that it destroys older jobs, and creates new jobs that offer better pay and working conditions. But it does that only if workers have the ability to fill more demanding jobs that require more thought and higher levels of education. Otherwise, workers wind up competing by cutting their wages or taking poorer, less rewarding service jobs.Generally speaking, this means that free trade benefits developed countries because they usually have better levels of education than developing countries. It also benefits developing countries because less remunerative jobs migrate to countries where those jobs are not only welcome, but a distinct improvement on what those people had available before. Hence, both sides are better off.

But what happens when the students in developing countries are better educated than those in developed countries? In the past, this would have sounded nonsensical; education is expensive, and so is more likely to be available in rich countries. Yet, this pattern is changing, partly because of our own laziness, and partly because of our conviction that we are naturally superior, and hence naturally deserve higher paying jobs.

A recent column in The Economist newsmagazine, published on June 11th, 2009, and entitled “The Underworked American,” described the development of just this kind of situation. American children, the Lexington columnist said, do substantially less work – and presumably learn less – than their counterparts in Europe and Asia. Our children go to school fewer days a year – about 180 days compared to up to 220 days. Over a 12-year primary and secondary school career, this means that American children “lose out on 180 days of school, equivalent to an entire year” compared to their future competitors abroad. They also have school days that are two or more hours shorter, and far less homework. And the same is true in Canada as well, which tends to mirror the patterns of its largest trading partner.

It has been known for many years that post-secondary education in North America is the finest in the world, but that secondary and primary school education lag behind other countries, including most of the emerging Asian countries. And there are other indications that things are going wrong as well.

Indicators of trouble

The first indicator is that graduate schools largely could not function without foreign students filling their classes. In many graduate schools, including most of the best, foreign students fill the majority of spaces. Interestingly, when I recount that to American audiences, their almost knee-jerk reaction is that we should get those foreigners out of there, and make room for American students. I gently point out to them that the reason there are so many foreign grad students is that there often aren’t enough Americans to fill the classes – there aren’t enough Americans who go to the trouble to work through grad school, and those that do apply, may not be as well prepared as their foreign counterparts.

The other, and in some ways more worrying, indicator is the steady rise of cheating at the undergraduate level. I was at a party the other night, and met a very bright young women. She has a graduate degree, and has started her own business, but is finding it tough to make ends meet. This isn’t unusual: the early days of any new enterprise can be tough. What caught my attention is that she said that she could make a very good living off the Internet by writing essays for undergraduate students who are too lazy or too ignorant to write their own. And this is only one example. Anyone who wants to look can find lots of descriptions of how colleges and universities are struggling to cope with widespread cheating. In other words, while education is clearly the currency of the future, we are systematically cheating ourselves, first with inferior primary and secondary education, and then by looking for ways of ducking the hard work of post-secondary education.

“Yellow Peril”?

I was recently a panelist in a discussion about the problems of North American education on a public-affairs program called “The Agenda.” One of the panelists had written a book about the short-comings of the American education system, and his thesis was that while we are the best at the world in holding football rallies, our education is going to relegate us to second-class status (this is my summation of his work, not his). We also had panelists who had grown up in other countries, one in India, and one in China, and they both agreed that school children worked much harder there than they do here. And there was a representative from a teachers’ union, who was brought in from another city by a remote hook-up. I was there as a futurist who writes about education (I’m a columnist for Teach magazine).

After the moderator introduced the topic, and spent some time talking with the author, the gentleman from China, the woman from India, and me, asking us all what we thought, he turned to the woman from the teachers’ union. That was when things became decidedly sticky. She was most insistent that there was nothing wrong with our education system, it was the finest in the world, and that we were all preaching a racist doctrine that amounted to scaring people about the coming “Yellow Peril,” meaning a metaphoric invasion of Asians. The author and I just looked at each other in disbelief, then he commented that we weren’t talking about a yellow peril, but an intellectual peril, where we were rendering ourselves uncompetitive in a world where education standards were rising. She wasn’t having any part of it; it was all lies, foul lies, and we should be ashamed of ourselves.

At that point we ran out of time, which ended the discussion, but off-camera, the host apologized to us for the unreasonable attitude of the union representative. I took it as yet another sign confirming my concerns about education and our future.

So the bottom line is this: Free trade is good for a country and a people if they are prepared to step up to more challenging, and more rewarding, work that requires better education and deeper thought and insight. Instead, we are trying to see how little work we can do. We idolize Homer Simpson instead of the author of the Iliad, and look for short-cuts instead of digging in to see much we can learn. In the short run we can get away with this. Eventually, it will mean a long slide into (relative) poverty, with our children and grandchildren having more and more difficulty finding meaningful work.

Free trade doesn’t work for the ignorant.

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© Copyright, IF Research, June 2009.