The period between now and Easter should be an interesting one. As the Eurozone settles down and no immediate crisis looms, attention is likely to turn to the United States. Just to recap, the US has public finances that are, in many respects, worse than those of the Eurozone. It also doesn't really have a credible deficit reduction plan. By virtue of its global reserve currency, America has been spared the need to resort to the types of austerity programme that are now common elsewhere in the OECD. That may start to change soon.

At the beginning of 2013, a compromise of sorts about the US Federal deficit was reached. Modest tax rises were agreed, accompanied by a postponement of spending cuts to the end of February. In addition to this, the debt ceiling - an overdraft limit, if you like, managed by Congress - is likely to be reached in February as well. Far from reaching a consensus about the shape of American public finances, the matter was simply kicked into the long grass. We will be in the long grass in a week or two, and no real progress seems to have been made in finding a solution to the longer term problem of American deficits.

Is there a problem? There is the question of how long a government can run a perpetual deficit before it encounters a major problem. Most public debt is simply rolled forward from one generation to another. The example of France in the Sixteenth and Seventeenth Centuries suggests that public debt could be rolled forward for over 150 years. But then, it did end rather unfortunately for the French monarchy during the French Revolution. In modern times, the ability to roll forward a perpetual deficit is rather questionable because the bond markets may test this ability somewhat sooner. This is what the Eurozone found to its cost in 2012.

On the assumption that the government wishes to address the issue of US Federal debt, what are its options? There are only really two - increase taxes or reduce spending - or a combination of both. There are a number of possible areas where taxes could be raised. For example, the US is one of the few developed nations that does not have a national sales tax. Other governments find it convenient to use the tax system to nudge behaviour away from goods they disapprove of, such as tobacco and alcohol. From an outsiders perspective, this might seem like a useful way to enforce gun control. Americans have the right to bear arms, but that right does not extend to making ammunition affordable. If each round were to carry a $100 sales tax, then firing off a clip of ammunition would become a very expensive hobby! The problem is that there is a very deep resistance to tax increases amongst a significant part of US society.

The other option would be to reduce spending. But spending on what? Once again, there are a number of alternatives that could be possible. One such possibility would be to reap a peace dividend. As US troops are withdrawn from the parts of the world in which they serve, the current force establishments could be reviewed. Are so many ships, tanks, and aeroplanes absolutely necessary? If so, to do what? Alternatively, as other OECD nations are doing, there could be a review of welfare spending. Could it be possible to increase the state retirement age to, say, 70? Such a move would lessen the fiscal impact of an ageing society. However, entitlement reduction is very unpopular with another part of American society.

And so we reach the impasse that we have today. American society, from the perspective of an outsider, seems very fragmented and divided. These divisions handicap the public debate about effective deficit reduction programmes. In those economies where the questions of austerity are being successfully handled, such as the UK, the issue is not one of austerity or not austerity, but of how much austerity. One side of the political divide (Labour) argues for a slower path, whilst the other side (the Coalition) argues for a quicker path. One side (Labour) argues for a mix of 66% spending cuts and 34% tax rises, whilst the other (the Coalition) argues for 80% spending cuts and 20% tax rises. The consensus is that there must be deficit reduction and it must be a blend of spending cuts and tax rises. In the US, that broad political consensus does not exist.

This is a shame because America faces a number of long term difficulties that will need some form of cross-party consensus to address. Two problems stand out above the others. The first is an ageing population. If things continue as they are, then the long term commitments to healthcare and retirement benefits are likely to bankrupt the public finances. A resolution to this problem will need a strong political consensus to find the right blend of reductions in entitlements and increases in taxes just to keep the system afloat. Equally, the US infrastructure is in desperate need of renewal. The US stands out as one of the few nations within the OECD to have a national high speed rail network on the drawing board. This will have an impact on the long term competitiveness of the US economy. To address this issue will take a long term perspective of public infrastructure that will not work without a strong political consensus.

And there we reach, in our view, the most significant problem facing American society - an inability to conduct grown up politics. This child like nature of US politics has given rise to the problem of the US Federal deficit in the first place, and its resolution is a pre-condition to the solution of that problem. This places the responsibility squarely back at the feet of the American public. You get the politicians you vote for. Why don't Americans vote for adults for a change?


Stephen Aguilar-Millan
© The European Futures Observatory 2013

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Occupy Wall Street may best be described as a meta-protest. The Occupy Movement, which spread from Wall Street to Occupy movements throughout the world all shared a common theme. People from different walks of life have come together to voice their displeasure at a wide range of things: bank bailouts, student loan debt, lack of healthcare, to name a few. The list is as diverse as the people involved in the Occupy movements. However, at the heart of it all, the Occupiers’ main critique is a protest against the rise of economic inequality, with much of their ire focused on the big banks, or “banksters” according to many in the Occupy movement. This is personified in their signature “we are the 99%”.

The banks have come to represent a system that has potentially failed. Bankers were given huge incentives to create complex financial products and extend cheap lines of credit, in many cases to people who normally would not qualify for loans. The bankers were making vast sums as of money when things were going well, but  when things began to unravel, these very same banks - who were engaged in a high risk / high reward game - suddenly became “too big too fail” and had to be bailed out with public funds. This incited the Occupiers’ sense of unfairness. Looking into the future, does the failure and bailout of the banks represent a turning point? Has Western style capitalism failed? If so, do the Occupiers give us any signals of what may replace it?

While the Occupy movement’s critique is accurate, they fall short in terms of any substantive solutions. The Occupiers have made a good start, but have seemingly reached the natural limits to where they could go. A solution for this could be that the Occupy movement widens its scope to help with constructing an alternative form of banking, one that can address the issues of economic equality. By joining with other groups, the Occupiers can move from being a loud voice that is too vague, to become a group working with the banks against which they protest. The purpose of this would be to create a banking system in the future that is socially useful for everyone. A banking system that contains regulatory and operational reforms, as well as dealing with the issues of equity that form the basis of the Occupy Movement. To devise a system of solidarity and reciprocity that meets the needs of our communities, not a system that divides the world into the ultra wealthy 1% and the other 99%.

Were the Occupiers right? They were. In highlighting the rise of inequality they helped to bring into light and popularize the problems of the global financial system. In coming up short in terms of solutions, the Occupiers may have reached their limits, and it may be necessary for them to reach out to other groups in order to craft a new financial system in the future, one that serves everyone, and not just the 1%.

Jason Swanson
© The European Futures Observatory 2013

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Resources:

A Leaf Being Turned: A speech given by Andrew Haldane (Bank of England) to Occupy Economics, 29 Oct 2012.

A Blueprint For Better Business?: A speech given by Archbishop Vincent Nichols at conference 18 Sept 2012.

www.blueprintforbusiness.org : Making the case for the need for change.

Are we entering an Age of Scarcity? For a number of years, our stock answer to this question is that we are. This answer was formed, in part, by the view that Peak Oil - the point at which 50% of the oil resources of the planet were out of the ground - had been passed. A recent report by the International Energy Association suggests that this assumption could be mistaken. According to the IEA, the production of oil in the United States is growing at a pace that will make it the worlds largest oil producer by 2020, and which will leave the US self-sufficient in energy by 2035. The IEA report also suggests that American production of oil will outstrip that of the current oil producers, such as Saudi Arabia, by 2020. This forecast is shown in the graph, which originates from The Economist, using IEA data.

There is a bit more to the story than just the changing patterns of energy production. There is also an appreciation of the impact of water resources upon energy production. This is a point made in a piece in the Daily Telegraph, that modern energy production tends to be rather water intensive. It highlights that our future potential energy abundance could be curtailed by water shortages. A different approach was taken in the New York Times, which highlighted some of the assumptions made by the IEA about energy usage in the US. It would appear that the forecast relies heavily on the introduction and widespread use of energy saving technologies in the US, to place something of a cap upon the consumption of oil derived products.

Where does that leave the scarcity agenda? In one respect, we could take the view that the whole issue of Peak Oil has been something of an alarmist position, and that the worst aspects of Peak Oil were never going to happen. There is an element of truth in this view. The concept of Peak Oil, as used by futurists, served as something of a warning of an unpleasant future for which there was time to avoid. We could take the view that this is happening.

In many respects, this reinforces the scarcity agenda. One could argue that, in the face of an impending shortage of oil, the price mechanism has worked to ensure that technologies have been developed to secure a new supply of oil, and are currently working to improve a more efficient use of the oil which we do have. This was always going to be the path out of scarcity, in which case, we could say, the whole scarcity agenda has had an effect.

We are caught between the two positions. The development of new production methods for extracting oil are not cost free. They tend to have a large environmental footprint, the externalities of which are nowhere near being covered in the current market price of oil. It is almost a position where we can continue to drive our cars, but at the costs of the environment. There is also a case to say that we are moving a key scarcity from one area (oil) to another (water). In doing so, we are fudging the problem rather than solving it.

There is a case to say that we have seen the end of Peak Oil - for the moment - but that does not mean that we have grounds to rejoice. We have yet to see the full bill for this development.

Stephen Aguilar-Millan
© The European Futures Observatory 2012

President Obama re-elected! We have all seen the headline, but what does it mean for the longer future of the US? We feel it appropriate that the first post of our new blog should contain an appraisal of the achievements of the Obama presidency, along with a review of the prospects for the second term.We published a prospective of the first term in November 2008, which can be found here. At the time, it seemed to us that President Obama faced four key challenges. First, he had inherited two costly wars in the Middle East, neither of which he could afford, and neither of which he was likely to win. Second, the US was dependent upon Middle Eastern oil as a source of energy. Third, America was dependent upon overseas funds to sustain its economy. And fourth, the US had made a number of welfare commitments to the Boomer generation that it would find difficult to pay for. This had created a prospective vicious circle where a dependence upon Middle Eastern oil increased the chances of military intervention in the Middle East, which was paid for by overseas - particularly Chinese - funding, which diverted funds away from American welfare to Middle Eastern nation building. To make matters worse, we had the overlay of a financial meltdown and economic depression. Not exactly an easy job!

In many respects, the first term hasn't fared as badly as it could have done. President Obama has managed to move the US away from its dependency upon Middle Eastern oil by developing new technologies that produce energy sources domestically. These methods, however, are likely to cause long term environmental damage, but they do provide a short term energy fix. The result of this is to make the Middle East less important to America today than it was four years ago. The depth of the on-going recession, which has placed the economy as the dominant issue in the US, combined with the lessening of the dependency upon Middle Eastern oil, allowed US troops in Iraq to be withdrawn in 2011, and will allow a draw down in Afghanistan in 2014.

The prospect of a peace dividend has allowed the potential re-balancing of federal spending away from the military and towards welfare - what we now know as Obamacare. This ought to make the care promises to the Boomer generation that more affordable towards the end of this decade. Another factor serves to strengthen this trend. Under the first term, the US use of high technology in military action - particulalrly in the use of drones - has rebalanced military operations away from direct intervention (which is very costly) and towards more modestly costing operations. The burden upon the federal purse is much lessened because of this. The final windfall from which President Obama has reaped benefits is, funnily enough, the recession itself. As the recession gripped the world economy, so funds moved away from high risk emerging economies and into relatively safe economies, such as the US. By a strange quirk of fate, this has lessened to importance of nations such as China in the purchase of US Federal bonds.

As we can see, although many may disagree, the long term health of the US is much better today than it was four years ago. Part of this is down to President Obama. Part of it is down to luck. And a good part of it is down to the hard work of countless American citizens. This does not necessarily mean that the immediate future will be quite so bright. There are a number of strategic long-term challenges that the second Obama administration will face.

We saw a foretaste of one of them in the final week of campaigning. Our weather patterns, right across the globe, are becoming more and more disrupted. The frequency of extreme weather events is increasing and the collateral damage they cause is increasing. America has not built up its resilience assets in the past few years, and this neglect may cause problems in the near future. In many respects, this results from the switch to the newer fossil fuel technologies and the relative neglect of the green fuel technologies. This is a long term problem that could be felt in the next few years.

The problem of the US Federal debt is one that has not gone away, and, if pundits are to be believed, will increase over the second Obama term. At present, it would appear that the policy towards the debt (note - the stock of debt, not the deficit, which is the rate at which the debt is increasing) is to rely upon a combination of growth and inflation. What happens if neither of these materialises? At some point, sooner or later, the US will have to address its debt situation, much as Europe has in recent years. One approach would be to refocus upon taxation, but this would be deeply unpopular, which another would be to restrict entitlements, again a deeply unpopular approach. It is not unreasonable to consider another financial crisis in the next Obama term if the bond markets become unconvinced by Obama's fiscal policy.

Much of the debt owed by the Federal government is held by non-US actors. This provides an interface with US foreign policy. In particular, one major creditor - China - is portrayed as a peer-to-peer competitor in foreign policy. This is a mistake. China wants nothing more than stability. A foreign policy that has a focus on the containment of China doesn't seem quite right. There is ample scope to make China more of a partner in Asia than a rival. If that is true of China, it is more so of Iran. A confrontational approach to Iran might not prove to be the best path for American foreign policy. If we look at the Iranian national ambition, it rarely boils down to more than an international acceptance of Iran as a regional power. Given the instability of the region, surely there is more scope to use Iran as a partner than a rival? Both of these foreign policy questions have not been adequately dealt with in the first Obama administration. He may not have this luxury in his second.

It is our view that the first Obama administration has more positive than negative for the long term prospects of the United States. Of course, we would never be able to convince the dogmatic extremists who oppose him of this, so perhaps our appeal may be better received outside of America. His second administration will face a number of long term challenges - climate change, a fiscal imbalance, and a challenge from Asia. It will be interesting to see how he deals with them as they arise because their resolution needs a different skill set to the one he has used to date. Does he have it in him? That is the key question for the next four years.

Stephen Aguilar-Millan

© The European Futures Observatory 2012