The Democratic Eclipse

It has been an established norm over the past two centuries that the best way for a nation to organise its affairs is through democratic means. Democratic politics combined with liberal economics have been seen as the vehicle by which rising prosperity can be guaranteed. They form the basis of the 'Washington Consensus' which currently dominates our worldview and infuses our institutions.

In recent years, however, the Washington Consensus has been called into question. Liberal economics is seen to have delivered apparently ever growing levels of inequality and is held to be failing in it's core premise - ever rising prosperity for all. Many see the liberal economy as rigged in favour of self-perpetuating elites in a 'winner takes all' contest in which some people do very well, whilst the majority are simply left behind. Those left behind are increasingly angry and prepared to express that anger in terms that support increasingly illiberal politicians.

Whether an illiberal economy causes illiberal politics is an interesting question. We can note that the two have been associated over the course of the Twentieth Century, so there could well be some form of causal loop. However, the erosion of faith in democracy as a means to order our affairs has been evident in a number of long term trends.

The first is that we are living in an age of wicked problems. These are problems that are quite complicated, volatile, and non-linear in their manifestation. Climate change is one such case in hand. The climate science behind our fears for a changing climate is extremely complex, and very uncertain, given it's non-linear nature. We are accustomed to viewing the problems we face with a mindset that takes the view that every problem has a solution. In the case of climate change, that may not be so.

It is an essential tenet of democratic decision making that the electorate understands the issues on which they are voting. Climate change is such a complex issue that few can master the maths needed to understand the issue. In this case, we have resorted to relying upon the evidence of expert analysis, but the experts involved have proven to be partial, thus undermining public confidence in technocratic evidence. Trust in expert evidence has been severely damaged, so we are left to rely upon decisions made in ignorance.

The alternative is to give up the pretence of a democratic decision structure in favour of a technocratic one. One such institution relying upon this approach is the European Union, which is dominated by technocrats in Brussels. It has the thinnest of veneers of democratic legitimacy, which could well be an existential crisis in the making.

Another authority that has a thin veneer of democratic legitimacy is the People's Republic of China. This presents a serious challenge to the Washington Consensus. Just as liberal democracies appear to be failing to deliver ever rising prosperity, the 'Beijing Consensus' appears to be doing the opposite. The emerging Beijing Consensus mixes authoritarian politics with a state directed economy. This is enhanced further by recent developments in technology that are facilitating the surveillance state.

This authoritarianism has underpinned the emergence of the Chinese economy as a world titan and cannot be dismissed as an aberration. The simple appeal of the model has started to gain a foothold in western style democracies. The electorate in those countries, especially those which have suffered from years of austerity, have been prepared to resort to a 'strongman' style of government in the hope that their ills may be cured. This is unlikely to be the case, but that belief is not widespread at the moment.

Part of the problem lies in the third broad trend now manifesting itself - the rise of greed as the basis of self interest. An important tenet of representative democracy is that, once elected, the governing class rules for the good of the whole nation. That is not overly apparent at the moment. Government is now seen as a means to reward those factions that propelled you into office, and provides an opportunity for self-enrichment and self-aggrandisement. Contemporary office seems far away from the public interest as a motive. Few would argue that politicians act for the public good because we have become inured to the self-seeking politician. That undermines public faith in democratic institutions as a means to organise our collective affairs. 

As these trends come together, they tend to reinforce themselves. Self seeking politicians undermine faith in democratic institutions. This results in a paralysis in government, which fails to deliver on the basic prosperity that underpins the system. That means competing institutions start to look more favourable, and so the cycle continues.

There is nothing to suggest that this cycle will come to an end any time soon. Austerity gnaws away at fabric of democratic institutions, and that is unlikely to change in the foreseeable future. Politics is beholden to the ideology of small government and low taxes, and has been for decades. Public service is seen as self seeking behaviour, even if it isn't, which helps to perpetuate a disgruntled tax base. As the economy continues to under-perform, more extreme alternatives take in a tinge of respectability.

Some have recognised this democratic eclipse, but few are prepared to do anything about it.

Stephen Aguilar-Millan

© The European Futures Observatory 2018

The Return Of Two Nations

One of the unforeseen consequences of the financial crash in 2007 has been an increase in the levels of inequality across the developed world. This has come about as a consequence of  the policy of quantitative easing. QE is the process by which a monetary expansion is used to stimulate aggregate demand in lieu of a more active fiscal policy. It acts by pumping liquidity into the banking system through the purchase by central banks of liquid assets - usually Treasury bonds. That, in turn, inflates the values of financial assets and quasi-financial assets, such as property. Those with assets have seen their wealth grow considerably, whilst those without assets have had to simply watch it happen.

This process has continued long enough to have more systemic implications. The current levels of inequality, of income and wealth, have affected both the supply side of the economy as well as the demand side. The impact on the demand side is easier to see. Wages and salaries have been stagnant for the best part of a decade in nominal terms. In real terms, their share of GDP has been falling consistently over a long period. This has increased the number of people who are just getting by, and we have seen the expansion of poverty relief initiatives. In 2010, when the Coalition came to office, Food Banks were relatively unheard of. They are currently a feature of contemporary life.

The impact of inequality on the supply side is a little more roundabout, but present nonetheless. Sluggish demand has helped to reduce the amount of productive investment in the economy. This, in turn, has capped productivity growth, which in turn limits the degree to which wages and salaries can rise. There has been a growth in part-time, zero-hours, minimum wage, employment in recent years, partly as a consequence of more restrictive benefit entitlements. This has made employment structures far more precarious than they were prior to 2007.

What investment there has been is directed towards unproductive assets (i.e. assets that are not employment creating), such as buy-to-let residential accommodation. Given the poor returns on cash as a consequence of QE, returns on property have provided some of the best risk-weighted returns on capital over the past ten years. However, this has tended to make property expensive to buy, causing a fall in owner-occupation, and adding demand to the rental sector. This demand closes the loop for buy-to-let property by bidding up rents, which underpins the returns to be had from property as an investment class.

One result of this process is a class of people who are doing very nicely and a class of people who are being left behind. There are different gradations within these two classes, but broadly speaking this is a useful distinction. These social divisions, derived from the underlying economic circumstances, have now found a political manifestation. In the UK, the manifestation was Brexit. By and large, those who supported Brexit are those who felt left behind in an economy where some were doing rather nicely, but they were struggling. The feeling was that there wouldn't be much to lose from leaving the EU. Of course, leaving the EU could well fail to solve the problem because it is much deeper than that.

A few weeks back, I drove past Blenheim Palace in Oxfordshire. It gave me an opportunity to reflect on an historical perspective to inequality. The current levels of inequality are not at all extreme when compared to the inequality of the Ancien Regime, or Imperial Rome, or even Feudal England. When taking a long perspective, we are in a relatively egalitarian age. What is different now is that we aspire to equality - both equality of opportunity and equality of outcome, an impossible task - in a way that is different to previous ages. We aspire to a more equal society, and it is this aspiration that is frustrated by the current state of affairs.

Looking ahead rather than backwards, how might this change? QE, the source of much of the current inequality, is an experiment that has done what it set out to do (i.e. to prevent a Great Depression style economic downturn after 2007). It is not clear how QE should be wound down. This is potentially the part of the experiment that contains the greatest dangers. Loosening too quickly risks an runaway expansion with an acute inflation risk. Loosening too slowly risks keeping on the economic brakes too long and causing damage to the economy in terms of unrealised production. There is evidence that the latter effect has made itself felt more readily than the former. Most Central Banks have stated that they intend to hold the underlying financial instruments until maturity, and then to fold the proceeds back into the money supply. That suggests we shall be in QE for decades to come.

If that's the case, then the underlying pressures that gave rise to growing inequality will also be in place for some time to come. Ultra low interest rates and unconventionally loose money are no longer unusual, they have become the new normal. This is where things become awkward. Rising inequality is a process and not a state. If QE is to continue for years to come then inequality will continue to grow for years to come, in the absence of any factor to prevent it. As this happens, the gulf between those doing nicely and those just managing will continue to grow. The ranks of the former will shrink, whilst the ranks of the latter will expand. Britain will again become the land of Two Nations again.

Perhaps it's time to brush up on our Disraeli?

Stephen Aguilar-Millan

© The European Futures Observatory 2018

Which World Are We Living In?

The July 2018 edition of Foreign Affairs contains a special feature on different perspectives of the world in which we are living. I was attracted to this approach because I often feel that the way in which we view the future depends upon, in large part, they way in which we view the present. If that's so, then it's important to gather different worldviews of the present in order to tap into how people expect the future to unfold. The feature gives us six views of the world - the realist world, the liberal world, the tribal world, the Marxist world, the tech world, and the warming world. Each of these has its merits and is worth considering.

The realist world provides us with a description of big power politics. The base argument is that the players might change, but the game remains the same. It is big power rivalry and conflict that drives forward events, and thus progress. Every now and then, the conflict turns violent, but this has a restorative effect as the game continues with different players. Much of this worldview is evident in contemporary geopolitics, and the author does not have to hunt too hard for examples of his case.

Opposed to the realist world is the liberal world. Whereas the realist world is marked by conflict, the liberal world is marked by co-operation. In this case, nations come together and agree to certain modes of behaviour for everyone's mutual advantage. This world order is dominated by international organisations and rule sets. The main justification for this is that it provides a sustainable basis from which to grow prosperity in many parts of the world. Some economists see this as a pre-condition to prosperity. Once again, there are many examples to support this worldview.

The disadvantage of the liberal world is that it assumes that all people are basically the same. This assumption is questioned in the tribal world. The core tenet of the tribal world is that people naturally divide into groups, and that it is the group identity that provides human cohesion. By defining 'us', we also, ipso facto, define 'not-us'. It is the tension between us and not-us that gives rise to rivalry and conflict. There are numerous examples where this view explains much of geo-politics.

The Marxist world considers what it is that defines tribal identities and comes up with the answer that it is a shared socio-economic experience that translates into a form of political tribalism that we call 'class'. In this case, conflict is driven by competition between the capitalist class and the proletariat, and between rival groups within the ruling class, as each strives to resist a naturally falling rate of profit. This worldview as its merits, but seems a bit dated in a world in which the rate of profit is rising rather than falling.

The tech world sees everything as a body of data that is waiting for an algorithm to compute. This is the world for which I have the least sympathy because I find it to be quite one dimensional. I think that part of my problem is that I don't share the base tenet of this worldview that history is nothing more that a sequence of technological advances. I will concede that there is a point to this, but, to me, this is only part of the story and a long way from the whole of it. To me, the lack of well developed examples in the piece is telling.

The final world - the warming world - is one that resonates with me. The basic tenet of the worldview is that all of the other worldviews are redundant because impending climate change, and our inability to deal with it collectively, has the capacity to fundamentally change the way in which we organise our affairs. To that extent, climate change matters more than anything else. When looking deeper into the future from today, this point has some resonance. However, I would argue that the evidence to date suggests that humanity won't be up to the job until it's too late.

The interesting thing I find about the six worldviews is that they are not mutually exclusive. It is entirely possible for, say, the realist view to reconcile with the liberal view in a world in which pragmatic co-operation is a rational strategy. Equally, the tribal worldview and the Marxist worldview are, in my opinion, different sides of the same coin. This makes things a bit more difficult when moving from the present into the future because a well nuanced view of the future would want to balance all of these perspectives. In many cases, there is a little of each world in the present and the problem is to assign weights to their relative importance. These weights are likely to vary over time. 

It is important to consider differing worldviews when conducting a futures exercise. We can consider how robust our views are by looking at the futures through a different lens. If it stands up to scrutiny, then perhaps we have something useful? If it doesn't, then perhaps we ought to keep thinking?

Stephen Aguilar-Millan

© The European Futures Observatory 2018

A Murmuration Of Markets

I was raised in a clockwork universe. Most of my education was based upon the presumption of Newtonian physics. This presumption extended into how I was taught economics. It was believed that human affairs could be distilled into mathematical models that worked like clockwork, a dance of algorithms.  It could explain our behaviour and, more importantly, could be used to predict how we would behave in the future. Models of markets were described in very mechanical terms.

If demand exceeded supply, consumers would bid up the price of goods paid to producers until the market cleared. If supply exceeded demand, producers would lower the prices paid by consumers until the market cleared. Intuitively, this reasoning has a great appeal. We can see it happening in any fruit and veg market in virtually any country. If there is fruit and veg left at the end of the day, the market traders reduce the price to get rid of it. Equally, if there is a rush on certain products, the traders can re-price the stock to account for the additional demand.

It's hard to say when I stopped believing this view of the world. The model of how markets behave didn't quite fit the facts of the real world. I think that it was the issue of food waste that first confirmed my suspicions. According to the Newtonian model of supply and demand, there should be no food waste. The price of food should fall and the market should clear (i.e. there should be no waste). For there to be waste meant that the markets weren't functioning as they should.

This has been the usual policy response when reality doesn't quite accord to what the theory would lead us to expect. If there is a mismatch between what the models lead us to expect and what we actually experience, then there has to be a flaw in reality. We have been able to rub along with this for most of the time because most of the remedial action has been to tinker around at the edge of markets. For most of the time, markets worked perfectly adequately. Until suddenly they didn't.

The financial crisis is dated differently in different parts of the world. In the US, it is dated from the demise of Lehman Brothers in 2008. In the UK, we tend to date the crisis from the run on Northern Rock in 2007. Irrespective of which date we select, the point is that we are describing different aspects of the same thing - the failure of global markets. If markets fail on such a systemic scale, then perhaps it's not the fault of reality? Might it be that there are fundamental flaws in the models of markets? Could it be that we ought not to be slaves to Newtonian mechanics?

There was a deep soul searching in the economics profession following the financial crisis. It was patently obvious that economics, as a profession, was not fit for purpose. And so, a quest for a new economics started, this time based on the presumption that reality is always right, and that models either describe reality, or they don't. If they do, they are useful. If they don't, they are redundant. Taken from this perspective, human affairs might not have a Newtonian certainty after all.

If we reject the clockwork universe, what do we have to replace it? Markets are obviously a fact. They generally work adequately for most of the time. So how can we conceptualise this behaviour? There are some, and I count myself in this number, who are attracted to a more organic view of human affairs. Might the economy work less like a giant clock, and more like a giant organism? Admittedly, a very complex organism, but an organism nonetheless. 

If we accept that view, then economics can be extended to include aspects of the economy that have been downplayed. The models can be extended to include the dynamics of time and space, two pretty important features of the economy that classical economics ignores. We can include the social and political dimensions that traditional economics dismisses as normative. More importantly, we can introduce such features as the impact of the environment - natural resources and the climate - which current models abstract away from. We can start to arrive at a more rounded view of human activity by incorporating more of reality into the rather bland Newtonian economic models.

Supposing we adopt this approach, how would we represent markets? There is one feature of the natural world that could be very instructive here. Starlings have a collective behaviour - a murmuration - that could help us to understand how markets work. The Starlings fly as a group, much in the way that we shop at supermarkets as a group. No one starling is in charge, and each starling acts on their own volition, very much in the way that we can all exercise choice in our shopping habits according to our individual needs and desires. External factors can change the behaviour of the murmuration. If a bird of prey comes into view, the murmuration will fly away from it, very much as the imposition of VAT on a product will discourage us from purchasing it. 

Despite this, there is still much we do not know about collective and aggregative behaviour in the economy. The insights of the macroeconomists suggest that the economy in the aggregate is not the same as the sum of all microeconomic activity. Perhaps we are having trouble in explaining this disconnect because we are looking in the wrong place. Perhaps we should study the mechanics of general equilibrium less, and study the murmurations of starlings more?

Stephen Aguilar-Millan

© The European Futures Observatory 2018

The World If 2018

I have started to work through the current instalment of 'The World If' series - a published supplement to The Economist. Although two points don't make a trend, there is a regularity that is appearing within these publications. They remain a set of end state scenarios. They continue to be organised into four sections: politics, business & economics, science & technology, and history. One difference this year appears to be a greater inclusion of a process based approach to the end state scenarios. The path by which we arrive at the end state scenarios has taken a greater emphasis. It is hoped that this trend continues.

Some of the scenarios continue some of the themes from 2017. For example, there is a scenario that asks what if China were to dominate the world order in 2024. What would the world look like if it were to be a Chinese rules based system? This is an interesting question that is predicated by a Trump second term, which was one of the speculations in the 2017 edition. The answer to that question suggested by the piece is pretty discomforting to western readers. We see a fairly full deployment of the surveillance state. The automation of transport and the internet of things are used to harvest masses of data about individuals which is then used for the purposes of social control. The scenario draws a picture of a Chinese world order as one in which an authoritarian state is greatly enhanced. I imagine that we have all been warned now.

Another scenario that caught my eye is not set too far in the future - in 2020, to be exact - and concerns the break up of the European Union. In this scenario, there are two triggers - an increasing authoritarianism in Eastern Europe (Poland in this case), and a growing disillusionment with the Euro as a currency (in Italy, in this case). There is also a backdrop of a further migrant crisis in the summer of 2019, which just sharpens the point a little. It's quite a well worked scenario. By being very close to the present, there are a number of pointers in European politics to be aware of. The most acute of these is the European budget, which has yet to be set, and has the uncertainty of not knowing what contribution, if any, can be expected from the United Kingdom. In this scenario, then monetary arrangements are the breaking point. That sounds about right.

There are one or two fanciful scenarios. For example, one asks what the world would be like if there were to be no moon. I accept that this is an interesting question, but I see it as no more than an indulgent curiosity. I do wonder of the editorial team has run out of steam? There are far more interesting questions that a future science & technology pose that could have been asked, but weren't. For example, we could have bee asked if there is a technological solution to climate change? Or does synthetic biology have the potential to feed the world whilst retaining our dietary habits? I do wonder about the contributions of futurists to this publication because they seem fairly absent. I wonder if their inclusion would improve it?

The historical scenario is an interesting counter-factual speculation on what might have happened had Martin Luther King not been assassinated? This I found interesting because the article suggested that his reputation would have been much lower than currently is. He might have lived, but his reputation would have been nowhere near as high as it currently stands. What I found interesting is the parallel this scenario has with one in which President Kennedy hadn't been assassinated. Both speculations suggest that they were killed at the peak of their reputations, which have only been enhanced as the memory fades and the myth takes over, and the myth then becomes extended and exaggerated. Of course, this is just idle speculation.

I shall add these scenarios to my bank of end state scenarios because they provide useful way points in constructing timelines. My current take away is the significance of the current push by President Trump to be re-elected and how Europe adjusts to a post-Brexit environment. Both of these are imminent and both appear to be significant potential turning points. They are currently not studied as much as they ought to be, but that only provides a commercial opportunity for a futurist in practice.

Stephen Aguilar-Millan

© The European Futures Observatory 2018

The World If 2017

In what has become an annual publication, The Economist has taken to publishing a series of speculative scenarios that consider what the world would look like if certain key events were to happen. The speculations are in the form of end state scenarios (i.e. they describe what the world looks like at that key point in the future) rather than process scenarios (i.e. they are fairly thin on how we managed to arrive at that end state). They represent how a more general readership expects to consume futures work.

From our perspective, we tend to be more involved in process scenarios because it seems to us more important to see how we get from the present to the future. The timelines involved are central because they can provide milestones to gauge which future, from an array of competing alternative futures, is emerging as we move away from the present. This is not to invalidate end state futures. It is simply not our cup of tea.

The scenarios were published in the summer of 2017. I read them at the time, but set them aside for more mature reflection. Coming to them again in the summer of 2018 gives me the benefit of a year's hindsight. The most striking thing about the scenarios is the way in which they reflect the hopes and concerns of summer 2017. Some are current a year later, some are really no longer that interesting. 

For example, the opening piece examines what France could look like if President Macron's reforms were to be successful. The reforms would not only rejuvenate the French economy, but also give France a stronger voice within the European framework. They would give Mr Macron (who is assumed to be re-elected for a second term) a platform to encourage Germany to undertake the public investment that it is currently reluctant to do. Those were the hopes of 2017. The reality of 2018 is President Macron struggling to reform the French economy, Germany to continue to pull ahead of France, and underinvestment in public services continuing in Germany. This has become an idle hope.

It contrasts quite strongly with the following piece, which considers what the world would look like if President Trump were to win a second term. We may shudder at that thought, but it ought to be given serious consideration. The most serious speculation is that a second Trump term would simply run out of steam. The view is expressed that the Trump administration is policy light, which allows him to be buffeted by events. There is a certain attractiveness to this view. Once the tax cuts have been passed, what else is there? The wall between the US and Mexico continues unbuilt, President Trump continues to be disengaged in foreign affairs, and he has the good luck to enjoy an economy that motors along. One note in the piece sounds off today - President Trump is very unlikely to stand against Mark Zuckerberg in 2020. In less than a year, Mr Zuckerberg has become very damaged goods.

The scenarios are organised into four sections: politics, business & economics, science & technology, and history. The historical section contains only one piece on what the world would have looked like had the Ottoman Empire not collapsed after World War I. My favourite piece is in the science & technology section. It examines what the world would be like if an electro-magnetic pulse were to disable large parts of the electrical grid in the US. This is already the subject of a number of works in fiction, but this piece draws together in short form some of the various consequences. It is one of those wild card futures that deserves more attention than it receives.

I imagine that I will return to these scenarios from time to time. I quite enjoyed reading them. They are well written and well thought out, even if they have dated quite soon. They are an expression of our thinking in 2017 and in no way constitute a forecast of future events. They are an idle speculation, if this were to happen, then what would the world look like? It's best to bear that in mind when reading them.

Stephen Aguilar-Millan

© The European Futures Observatory 2018

What If ... An Exercise In Alternatives

I just happened to have some time to kill in our local supermarket a few weeks back. Normally, the way I like to while away my time is to browse either the wine or the magazine sections. Good fortune that day put me into the magazine section, and I came across 'What If … Book Of Alternative History'. I had to buy it.

I take the view that if we want to master alternative futures, we must also learn to grapple with alternative pasts. There happens to be a genre of fiction - Alternative History - that caters for this. Some of it is quite good. Some of it quite poor. However, the point is not to conduct literary criticism, but to be able to derive from a common starting point an alternative route into the present. If a futurist can master that technique, they will be able to start at a point in the present, and navigate a route into the future. To do this several times, with different results, is to produce a set of alternative futures. Or scenarios, as we commonly call them.

This little publication - it calls itself a bookazine, a cross between a book and a magazine - is a mixed bag. It is American in origin and reflects a set of American values and priorities. Each piece starts with a question, outlines what actually happened, describes the pivotal event, and then presents a narrative as if the pivotal event hadn't happened. As a template for exploring alternative history, it has much to commend it. As a methodology to explore alternative futures, it is very important.

One pivotal point in history, a favourite of the alternative history genre, considers what might have happened had the Confederate States performed better at Gettysburg? This work contains an entry on this subject. It outlines the fault lines in American politics that led to the Civil War, and explains how, with the loss at Gettysburg and Vicksburg, the South could no longer win. But what if Lee were to have been victorious at Gettysburg? That is the starting point of the narrative. It has McClellan  defeating Lincoln in the 1864 election, a negotiated peace following, and then a divided continent. The narrative places something of a brake upon the industrialisation in the North, and provides a different trajectory for the expansion of the frontier westwards. It finishes with both the Confederate and Union governments taking a non-aligned stance in World War I.

We can argue over specific events along this timeline, and that is it's point. The purpose of a counter-factual timeline is to provide discussion points. Only by examining these key events can we understand their significance. The fun then starts when we add one timeline to another. For example, the US neutrality result of the American Civil War piece ties in naturally with the piece considering what may have resulted from Germany not losing World War I. Could that have led to the marginalisation of the Nazi Party in German politics? I find these questions interesting as an intellectual challenge, but the main benefit from them comes when we apply then to our consideration of the future.

Take Brexit as an example. This is a highly complicated situation with many moving parts. Anyone who can say what will or will not happen in Brexit is a fantasist. There are so many possibilities that the only way to view the situation is from the lens of multiple futures. At this point in time, each of those futures deserves an equal weight because they are equally likely to happen. We can narrow down the range of potential futures by mapping out a rudimentary timeline. Will Brexit be Hard or Soft? Will the detachment be amicable or acrimonious? Will there be a last minute change of heart by the British public? And so the questions go on. The point is that the answer to each of these questions unlocks a different timeline. The identification of these potential timelines is where the technique shows its worth.

I am a fan of alternative futures and timelines. This little magazine, despite its flaws, is an interesting exercise in timeline construction. That's why it commends itself to me.

Stephen Aguilar-Millan

© The European Futures Observatory 2018

When Central Banks Go To War

I had a chance to give Dragonstrike Revisited an outing a couple of weeks back. It was at a gaming conference where the players were experienced gamers, but who had little subject knowledge of financial markets and economic warfare. For me, it was an interesting experiment in moving a game from one context (great subject knowledge, little gaming experience) to another (little subject knowledge, a good deal of gaming experience). We used the same narrative as before, but had a greater focus on the economic wargaming aspects.

Most of the players managed to pick up the basic context after a couple of turns. I am fairly sure that the same group of players would play a better game the second time round simply because they had a greater familiarity with the game mechanisms and underlying concepts. By construct, there was very little central bank co-ordination and co-operation. The game was channelled along the lines of using the financial markets as an instrument of war, and conflict was inevitable.

The setting was an armed confrontation between China and Japan just off the Paracel Islands in the South China Sea. There have been several confrontations in the past off the coast of China, the latest being in 2013. What marked the difference in this game is the willingness of the US to provide military support to Japan in the incident. The game was set over just a few days (21st April 2020 to 15th May 2020) and represents the prelude to a US carrier strike group sailing from San Diego to the Paracel Islands. The diplomatic manoeuvring of this period was external to the game, whose focus was to be the movements in the financial markets during this period.

As umpire, I played all roles other than those played by the players. The play sequence was quite straightforward. Each turn, I would announce the events within that turn, and invite the players to respond to those events in relation to how they moved the markets. I appreciate that this was a steep learning curve for the players, who tended not to have a background in financial markets. To that extent, it was something of a learning experience. The players would then tell me what they intended to do, I would map out the consequences of this onto a master scoreboard, and we would move on to the next turn.

The scoreboard consisted of a series of financial indicators in five key areas – stock market indices, the foreign exchange markets, the bond markets, shipping rates, and commodity prices. The actions, or inactions, of the players would move the markets, up, down, and sideways, according to what they did. The aim was to move the markets to achieve the goals of their characters.

In the event, we only managed to play four turns before running out of time. This represented the period 21st April 2020 to 29th April 2020, a bit more than a week. In this time, stock markets worldwide fell, in the US more than Japan and China. This represented the activities of the People’s Bank of China in the US stock markets, who were very aggressive in shorting the market. I would have liked to explore that further. The Dollar fell appreciably against the Euro, as the Euro became a safe haven. I found that interesting. The bond markets were quite unstable, with the US and Japan both experiencing a downgrade. I think that reflected quite aggressive behaviour on the part of the China player, but it was to be expected. Shipping rates rose considerably. This was to be expected if the South China Sea were to become a conflict zone, but it also reflected the purchase of spare shipping capacity by Chinese and Japanese governmental agencies. Commodity prices rose as all nations started to stockpile key resources, and the price of oil rose significantly. This was to be expected. Looking at the results as a whole, there were no major surprises in store. In a sense, that’s satisfying because it argues for the validation of the game, if only a limited validation.

There were a number of features of the game that could do with further thought. Once again, the question of the ability of the Chinese monetary authorities to de-stabilise the US financial markets became a moot point. This is worth some further thought because it is almost a default first move for the China player. Opinion does differ on this, and it could do with more thought about the process by which this could happen. The stockpiling of strategic commodities and shipping capacity was also another feature worth further consideration. These are some of the issues we shall think about in the weeks to come.


Stephen Aguilar-Millan
© The European Futures Observatory 2018

Dragonstrike Revisited

Recently I was asked to umpire an economic wargame that sought to model the impact upon the global markets of a diplomatic incident in the South China Sea. The markets in question were the financial markets, the shipping markets, and the real economy. The time frame was short - about six months in game time - and the horizon was the very near future. This framework was very familiar to me because it came close to the scenario outlined in the book 'Dragonstrike'.

Dragonstrike was a scenario written by Humphrey Hawksely and Simon Holberton in 1997. It was set in the then near future (February 2001) and was about the rise of China as a modern great power. In the book, China fabricates a diplomatic incident in the South China Sea to disturb the financial markets, from which it gains a significant financial and commercial advantage.

The book has been quite influential in my thought. It brought to my attention the possibility of the rise of China, years before the concept of the BRICs took root. It brought to my attention the disputed nature of the islands and reefs in the South China Sea, and their importance. It added the Paracel Islands and the Spratly Islands to my strategic awareness. And it inspired a whole raft of spin off games, ranging from our 1999 megagame modelling the issue (100+ players using the Senkaku Islands as a flash point) to our 2004 matrix game examining some of the features of the issues involved (how could the EU have an impact on events in the South China Sea?). In their day, each of these games had their influence, some of which still can be seen today.

When I was offered the chance to revisit Dragonstrike, I jumped at it. It allowed me to focus on an update of the material, to see how things have developed over the past 20 years, and to project ahead along the current trajectories. There were about 30 players, which made the event a bit too small for a megagame and a bit too large for a matrix game, so we developed a hybrid form of game that contained elements of both.

The client gave us a fairly tight brief. The Thucydides Trap is to be sprung, but the conflict was not to include either kinetic or cyber means. The conflict would be conducted entirely in the financial markets, with consequential impacts on the shipping markets and the real economy. We were to assess those impacts on a number of key indices as outputs of the game. The players were senior members of the security and financial community in New York, London, and Hong Kong; and we were to assume that they had a good acquaintance with the subject matter. Our role was to stir the pot to see what happened.

The game progressed more or less along the lines of my expectations. We spent a good deal of time focussing on relatively inessential matters, but I found that quite useful. In a conflict, it is often the case that the inessential captures the attention of the press and the public mood. That provides a degree of misdirection which creates the opportunity for the actors to do some unpalatable things. A good day to bury bad news, as they say.

I did come away from the game with some useful takeaways. The China team wanted to dispose of their holdings of US Treasuries to de-stabilise the bond market sufficiently to induce a sharp downturn in the US real economy. We had a long and well informed discussion about their ability to do this, and what defensive measures the monetary authorities in the US might be able to take to counter the move. This is a theme to which I shall return at a later date.

The US team wanted to exclude the China and Russia teams from the global payments system. This called forth an interesting discussion about their ability to do so and the potential consequences of such an action. The conclusion that I drew from this is twofold. First, sanctions can only be effective if they are applied by all of the major players. If a single player, such as the US, attempts a sanction regime unilaterally, it will do more harm to that single player than the intended target of the sanctions. If sanctions are to work, then they need support of friends and allies. Second, if sanctions are over-used, then they create an incentive for the targets of the sanctions to develop alternative systems to render them ineffective. Once sanctions become a tool in general use, their effectiveness will diminish quite rapidly. 

There was a discussion around the shipping markets. In particular, there was a discussion about the degree to which the Chinese team could purchase spare shipping capacity to keep up the trade flows in the real economy. The discussion  about containerised shipping capacity wasn't settled in the game. It was only afterwards that I found out that the pre-purchase of options on shipping capacity is possible, and would be made visible in the movements of the Shanghai Container Index. The discussion, however, drifted into the 'Belt and Road Initiative' and gave me an important insight into the strategy of China. The strategic perspective is continental and looks westward into the Eurasian land mass. The conventional wisdom about the strategic perspective is that it is oceanic and faces eastward. If so, we ought not to worry about conflict between China and the US, but be concerned about conflict between China and Russia. This puts Russian strategic concerns into a new light.

The original Dragonstrike gave me enough to think about for 20 years. The more recent update has extended that process. It is unlikely to resolve itself in my time because it has the potential to run for quite a number of decades yet. It is a space that we need to keep watching and updating.

Stephen Aguilar-Millan

© The European Futures Observatory 2018

Strange Weather For The Time Of Year

In February, it was colder in Italy than in Iceland.

We have just experienced some unseasonably cold weather. In broad terms, we have just experienced a week in which the temperature was somewhere between 10ºC and 15ºC below the average we could expect for this time of year. This was accompanied by a high pressure cell originating in Siberia, along with a good deal of snow. There was considerable disruption to our daily lives, and invariably GDP will be weaker this quarter as people couldn't get to work, and tax revenues will be down because people weren't earning and spending. Needless to say, this was all greeted with the chorus of, "What's happening to our weather?"

The simple answer to that question is climate change. Perhaps we might expand that answer. The climate in the UK is much milder than the latitudinal mean. The UK is on the same latitude as the prairies of Canada and the wilds of Siberia. It is kept warm by the Gulf Stream. This is a warm current originating in the Caribbean and flowing up to north west Europe. The key to the Gulf Stream is it's high salinity. This winter, there has been unusually low ice formation in the Arctic. The fresh water that, in previous years would have formed this polar ice has remained in the North Atlantic, lowering it's salinity. It has caused the Polar Vortex usually present over the Arctic to slip onto Siberia. A few years back, the Polar Vortex slipped onto North America, with similar results.

What does this mean to us? In 2011, as part of the National Ecosystem Assessment to 2060, I produced a set of wild card scenarios to speculate about the impact of climate change. One of the wild card scenarios held that the UK would become a lot colder as a result of global warming. This is a counter-intuitive result. The changing climate is balancing a warmer planet (much hotter weather) against a reversion to the latitudinal mean temperature (much colder temperatures). Sometimes we have unduly warm winters, and sometimes we have unduly cold winters. Such is our lot. An unduly cold winter has the effect of delaying the growing season. Already, we are currently between one to two weeks behind in our planting season, which means lower crop yields this year. It will lead to higher food imports, food prices turning upwards, and a bit more pressure on UK living standards. It will take years, if not decades, for the climate scientists to model, measure, and quantify these changes. I prefer to rely upon the evidence of my own eyes.

What can I do about it? The usefulness of futuring is it's ability to warn us of an unpleasant future and to give us time to take action today to mitigate that future. A future with a changed climate has been flagged for some time. The weather experienced (stormier, more windy, colder in the winter and hotter in the summer) is consistent with the forecast trajectory. What action can we take now to prepare for this situation worsening?

In my own life, I am taking actions in three areas - transportation, energy, and food. In terms of transportation, I simply travel less. I got rid of my car some years ago, although my wife lets me borrow hers if I need to. I generally travel by public transport, which, for me, includes taxis. Inter-continental travel is now the exception rather than the rule.

We have diversified our energy supplies. We use gas for cooking, although, on occasions we revert to cooking on a wood grill. For heating, we have gas fired central heating, electric heaters for when we want to heat a single room rather than the whole house, and we have a log fire. One weakness we have is that we rely on the National Grid for electricity. We plan to address that in the near future by installing solar panels.

Although we are not self-sufficient, we do grow a good portion of our own food. This is limited by the size of our garden. We plan to downsize to a smaller house in the near future, and this will act as a trigger to get an allotment, increasing our cultivated area. Most importantly, we are re-learning how to grow our own food. This is a valuable skill set that tends to be lost in modern living.

We are at a point where a radically different future can be seen today. If the climate scientists are anywhere near correct, this will all worsen. Our weather will become more extreme and intemperate. We will have to redefine what we mean by normal weather patterns. We will also have to adapt our behaviour to adjust to this new reality. We have all been warned. I have started my journey into the future. Have you?

Stephen Aguilar-Millan

© The European Futures Observatory 2018

Financial Crashes Past And Present - 2018

This book rather continues the theme of past and present financial crises. If anything, it belongs in the category of 'financial crises soon to come'. It has been interesting to chart how financial crises arise (the Overends Crisis of 1866) and how a policy response was framed (the financial crisis of 1914). It is disturbing to see that the conditions of 1866 are not that very different to those today, and our policy response is quite timid compared to that of 1914.

The book starts by considering two shortcomings of conventional macroeconomics - the belief in the exogeneity of the money supply and the consequent setting aside of the financial sector. This provides the starting point for the book. The author demonstrates how credit conditions have a multiplier effect within the financial sector. This makes the money supply endogenous to the system, and not exogenous, as is currently assumed by the mainstream.

If we take that insight, we can derive some interesting conclusions from it. For example, one that stayed with me the most is that, if we move from the monetary economy to the real economy, purchasing power can be seen as aggregate demand plus credit growth. This helps to explain the recent bout of debt fuelled growth in China, which has been a bit of a puzzle. It also helps to explain the observation that households have been maintaining their living standards in the face of falling real incomes by taking on more debt. Our recent growth has not been propelled by growth in our productive capacity. It has been propelled by the growth in total credit within the economy.

This works fine until credit growth stops. One of the reasons why it stops is that lenders become wary about the ability of the borrowers to repay and service their loans. If credit growth just falters - a stumble rather than a fall - then the multiplier effect works in the reverse direction. Credit then becomes scarce and operational conditions in the real economy become tighter. A downturn begins. Conventional economics says that this downturn couldn't happen, which is probably why conventional economics was blind-sided by the crash of 2007.

The policy prescriptions in this case are quite clear. There is a case for the government to make up any reductions in aggregate demand through a programme of spending. Spending on investment is better, but spending on the current account will do just as well. This will help to shore up credit and help to counter the downward multiplier.

Since 2010, we have seen the exact opposite of this. Whereas trading conditions have called for a fiscal expansion, we have actually been on the receiving end of a fiscal contraction - austerity. The role of a fiscal expansion is to inject liquidity into the monetary system, as well as demand into the real economy to mop up that additional liquidity. A monetary expansion through QE serves to inject liquidity into the monetary system. Without the corresponding fiscal expansion, that monetary injection only serves to pump up asset bubbles, in our case in the stock markets and property markets. These then have the side effect of growing inequality.

It is at this point that we get to see the answer in the title. Pumped up asset bubbles have not gone any way to resolve the disruption of the credit system. We still have the global financial imbalances that gave rise to the growth of credit to begin with. This suggests that it is a matter of time before we experience another financial crisis, except that, this time around, the monetary authorities have far fewer policy tools through which they can address it.

A heavy dose of inflation would help to resolve the matter, but politics tends to get in the way here. Inflation tends to redistribute income shares from the 'haves' to the 'have nots', and the current political structure is not geared to achieve this. It is for this reason we can expect that future economic turbulence may be closely associated with political turbulence. One feels that the political pressure is rising as further austerity fails to resolve the crash of 2007.

This is a very short book, but it is very deep. It is surprisingly easy to read for an economics polemic. The author understands what he is saying, and sets it out in a very clear, logical, and methodical way. Prior familiarity with economics would be useful in reading the book, but a lay person acquainted with current affairs ought not to find it too much of a struggle. I found it to be a very useful text.

Stephen Aguilar-Millan

© The European Futures Observatory 2018