The postmodernization of global economics started in earnest forty years ago when Richard Nixon announced the end of the gold standard, nominally to protect American economic interests. It behooves us to go back and listen to the man’s statements regarding the decision. Note the dark tone delivered toward “international financial speculators,” a group that is held in disrepute compared with the “working man” and “savers” who are presented as the drivers of real prosperity.

How interesting in retrospect that Nixon’s chief rationalization for creating a fiat currency is that if you are in the market for foreign cars or exotic trips, you may feel the pinch of devaluation, but for all you Americans who want to buy AMERICAN goods, your dollar will be worth just as much.

First, let us compare the long-term suspension of the convertability of the U.S. Dollar directly into gold:

It would seem that the value of gold has done quiet well against the U.S. Dollar since this decision. Or is it that the U.S. Dollar has lost its value? Eye of the holder, we suppose.

Nixon pointed out that as long as you only bought American goods, this would not be a big deal at all – your purchasing power would stay exactly the same.

I guess somewhere between Honda, Toyota, Hyundai, and Volkswagen cars, Samsung televisions, LG appliances, textiles, home goods, and chopsticks, Americans have been buying billions in foreign goods, leaving the United States with a trade balance that has never been equalized. Nixon loses some futurist points right there.

The economic prosperity of the United States has been more than enough to equal the loss of purchasing power of the dollar, correct?

Actually, it seems more that household debt, both as credit cards and student loan debt, have been making up the losses since the unshackling of the U.S. dollar from the Bretton Woods agreement.

Whether you take these trends to be correlation or causation, the last forty years of economics have been an experiment with a new international financial regime. Almost every currency on Earth is run by diktat, which means “it’s worth what we say it’s worth.” The world’s economic system becomes ever more complex as new countries trade in earnest, but there is no longer a limiting factor, i.e. the limited availability of reserve goal, to which to tether the system. The world system now requires a group of like-minded global financial engineers to keep fiscal infrastructure running through policies that beg and pray for status quo stability, rather than a group of reasonably unbiased referees who set a few rules and let the game play out as it may. This is where the intellectual work of Nassim Nicholas Taleb comes into play, posing the question, “Who could possibly possess the wisdom to manage a system of limitless complexity?” Answer: nobody we see in the public sphere today.

Returning to Nixon, he wanted to hamstring the “international financial speculators.” Today, megabanks, hedge funders, traders and George Soros-type financiers enjoy limitless access to Washington policy makers and even get made Treasury Secretary with significant frequency. Nixon wanted to end the crises that enriched financial engineers at the expense of real wealth creators. Hello double digit unemployment and simultaneous record-breaking financier bonus pools. He wanted to protect American purchasing power and promote American-made goods within her borders. We instead see never-ending trade deficits.

Where does monetary policy go from here? If you ask gold bugs, it is right back to some form of gold standard. If you ask central banks, they will tell you we just need one more bailout of some sunburned nation that lost control of its finances, but then we’ll be back to “normal.” If you ask the average working person or job-creating entrepreneur, they will likely look at you blankly, uninterested in the machinations of ultra-high level policymaking.

In any event, the trend lines suggest the end of an era. Step back hundreds of years, and there are no global systems of fiat currency to give us an instructive analogy. We will be creating our future anew.

What do you think? Is it back to precious metals with us? Will the system shatter into competing local currencies? Facebook credits? Giant stone wheels of the Yapman? Leave us your view in the comments section.

The term used by the major media and the U.S. government regarding the economy is “recovery.”

Here is our one major question: Recovery to what, and when?

Consider the latest Case-Shiller Price Index for home prices:

U.S. Home prices have dipped to pre-bubble levels, and appear to be on track for pre-Dot Com era levels.

Are we headed back for 1996? Hasn’t the United States become a different nation since then?

Is the “recovery” a trip back to 2007, 2002, or 1992?

Do those all count as recovery?

A commenter on the California employment situation asks the perfect follow-up question to every trend – what are the other important changes happening? Specifically, if job growth in California is flat over the last decade – are we really in the same economic situation as in 2000?

Answer: No, it’s worse.

According to the San Francisco gate, California has added around five million residents, but jobs have not grown along side them.

So really, today’s chart is even more evidence that a “recovery” is not underway in California. The shift must be called something else.

Our friend and colleague, energy analyst par excellence Gregor Macdonald keeps an eagle-eyed focus on trends in California as a bellwether for the rest of the United States economy. There is good reason behind this: if you just took California alone, it would be larger than France in terms of its GDP. (The French hate this, by the way.)

So when Gregor sees employment statistics rolled back a whole decade in the Golden State, while population has increased steadily, he finds it difficult to believe that we’re in anything like a “recovery.”

We tend to agree.

Did not know this until this morning – the third largest contributor to the United States’ trade deficit after oil and gas is SEAFOOD.

Plans are underway to possibly increase fish farming domestically so that the middle class can recover and we can hit Dow 90,000.

Come to think of it, I have been wondering why there is Chinese tilapia in Missouri grocery stores. Doesn’t seem to make sense.

Mish’s Global Economic Analysis has a wonderfully-juxtaposed view of two countries’ long-term economic strategies. He lays in stark terms, the implications of China’s current drive toward “indigenous innovation” as the next wave of its development strategy, versus the United States’ long-term obligations to the two nation-states currently occupied by its military.

Indigenous innovation is a massive and complicated plan to turn the Chinese economy into a technology powerhouse by 2020 and a global leader by 2050. The landmark document that launched the campaign carries the bureaucratic title “The National Medium- and Long-Term Plan for the Development of Science and Technology (2006-2020)” (now known in the West as the MLP). Bland as the title may be, the MLP describes itself as the “grand blueprint of science and technology development” to bring about the “great renaissance of the Chinese nation.”

If you care about the global economic future whatsoever and if you only read one document this year, this one should be it.

Meanwhile, where is the United States’ attention going? Barack Obama’s speech the other night said we are going to win the future through all pulling together and using all kinds of clean energy and competing. But while all that great stuff comes to pass, Mish points out that the United States is still stuck fielding armies in 140 countries. This isn’t a condemnation of such a military strategy, it’s just a question: Since China isn’t stuck doing things like this, are they free to pursue other strategy and execute them well?

And they say nobody actually thinks about anything beyond the next quarter. Evidently, Wall Street is recommending that governments begin “solving” their debt issues by locking in low interest rates for forty, fifty, maybe one hundred years.

This is interesting. First of all, such a notion will change the financial logic of saving money for the long-term by locking in low interest- very interesting given the number of Boomers who saved for retirement their whole lives.

Otherwise, this gives us a fascinating opening to discuss the very long-term future of America. Let’s get speculating on what America 2111 will look like.

Name that country:

It was a society in stagnation, if not decline. Despite ostensible stability, its people — especially its young people — faced a future bleaker than the dark side of Pluto. For decades, the richest grew even richer, as national debt mounted, middle-class people tried to make ends meet, and upward mobility fell. Government failed to address these problems, and the governed felt increasingly disenfranchised — and partisan. Mass unemployment metastasized from a temporary illness to a chronic condition. One of its major cities decided to erect a permanent tent city, for a permanently excluded, marginalized underclass.

You guessed it: AMERICA. Or so says Umair Haque.

What we’re watching is a massive malfunctioning of the global economy. At the root of the problem: dumb growth. Dumb growth is, in many ways, bogus — rather than reflecting enduring wealth creation, it largely reflects the transfer of wealth: from the poor to the rich, the young to the old, tomorrow to today, and human beings to corporate “people.” Dumb growth is growth without prosperity. And it’s far from an Egyptian problem.

Oh, and did you know that Egypt just hit peak oil?

The Economist put out a fantastic interactive map of which countries correspond to each of the United States in terms of GDP and population.

From an analysis perspective, this map shows us that when we hear about California’s budget shortfalls or Illinois’ bankrupt pension system, that we are hearing about some local or regional matter. When you put it perspective of California being equivalent to Italy’s economy or Illinois being the same economic footprint as Turkey, perhaps it’s time to tune into news from Sacramento and Springfield.

From a personal perspective, my native Vermont’s economy is equivalent to YEMEN. I suppose that our cheese and maple syrup-based economy is not enough to win us an equivalence to a major world power such as, say, Malta.

Though many sources have been making this point, it is notable that the American Institute of Biological Sciences is taking a macroecological approach to the future of human economic activity. In a purely scientific fashion, they look at the relationship between energy consumption and economics, and conclude – not surprisingly – that you can’t have one without the other.

If, then, we are running into stalling production and skyrocketing demand – lots of places simply won’t grow economically, they conclude.

Makes sense. Now, if your government is projecting massive deficits into the future, and in the future economic growth will be constrained, what does that mean to the debt?

I always thought that debt which will never be paid back is either inflation or bankruptcy.

This is a big deal.

China has launched trading in its currency in the U.S. for the first time, an explicit endorsement by Beijing of the fast-growing market in the yuan and a significant step in the country’s plan to foster global trading in its currency.

Repeat this scenario after me: RUSSIA SELLING OIL TO CHINA IN YUAN INSTEAD OF DOLLARS.

And right there, it’s going to be a brand new world.

People are often surprised to discover that I have a significant interest in history, from pre-history to the ancient world, the dark ages to the Renaissance, and of course the modern scientific era. Often, people think that an interest in history is somehow incompatible with an interest in the future.

It’s the other way around – you can’t understand the future without understanding the complex dynamics of the past. Moreover – study of the future and the past are linked by the scarcity of reliable data. Analysis and interpretation tend to be more important than raw data collection.

In that spirit, I propose this, a chart of world “GDP” from 1 A.D. to the current moment:

Simply note that throughout history, India and China have had the majority of economic activity on Earth. Note how Britain, despite its colonial force and powerful navy, never really dominated the world in terms of total economy. And see the miracle that is the United States – where did those guys come from?

When you consider data in long, broad strokes, you can ask more interesting questions, such as “Where do we go from here?”

And also, what the heck is GDP, anyway?

If you don’t at least appreciate history, you’re its prisoner.

Zero Hedge has a copy of the latest newsletter from PIMCO’s CEO Bill Gross to his customers. The topic is the quasi-certainty of the U.S. Government continuing its deficit for decades. His tone is very unusual – especially for this member of Generation X – in that he talks about the ethical obligation to future generations in this piece called “Off with our heads!”

Perhaps you did or did not make it through the entire lecture and Q&A with Prof Niall Ferguson in yesterday’s post. Either way, you may have missed the key forecast that underlies all of his thinking about the future of the American economic system:

The U.S. is poised to run major budget deficits in addition to its current debt through 2080.

Take a second to think about that.

This morning’s papers, in advance of the Republican takeover of the House of Representatives, are reporting the upcoming “serious budget cuts” to be proposed by the new house members. It makes for good copy – after all, things might soon be different!

Let’s look at the actual projections from the Congressional Budget Office.

Ferguson points out that there is not currently the political will to reverse this trend since it involves the sweeping entitlements of Medicare and Medicaid. These two programs alone will, by 2080, equal the entire size of the United States government in 2010, never mind military and education and all the rest. Ferguson is not bullish on the notion that future generations of politicos will stare into the eyes of retiring Baby Boomers and say, “sorry, no pensions for you, and you can buy your own healthcare.”

So America, despite its headlines, will still engage in deficit spending unless something very drastic and unexpected comes to pass. That’s an important long view to have as the politicians take to the airways.

There is a great post today on Mish’s blog about the future of job growth in the United States. He’s at odds with Calculated Risk blog on the forecasts for employment in America.

CR forecasts a growth in between two million and three million jobs in the United States in 2011 alone.

Calculated Risk takes the time to point out that this is not necessarily going to be seen as a tremendous recovery:

With over 15 million unemployed workers – and 6.3 million unemployed for more than 26 weeks – adding 2.4 million private sector jobs will not seem like much of job recovery for many Americans. Hopefully I’m too pessimistic.

Mish is skeptical, unable to see what exactly will drive this growth. This chart from the Bureau of Labor Statistics that he cites shows how manufacturing jobs have been declining steadily for a decade, in both recession and boom.

We have been discussing how America, as the world’s largest economy, is in a transition to a “Knowledge Economy.” Clearly we are seeing the decline in jobs that involve actually manufacturing things. Supposedly, we are supposed to move as a nation toward intellectual property law and management innovation consulting and branding. Yet those jobs are not filling the losses from other types of non-farm labor.

Is the Knowledge Economy still a good term for what is happening? What will America do for a living?

Quote for the day:

The purpose of an economy is not to serve statistical analysis, but rather, to serve people. This is in response to the statistical claim that California’s recovery is on the way

Funny, this is also the topic of a chapter in the followup to Future, Inc – that fake numbers are no replacement for actual analysis, no matter how comforting the statistics we’ve invented.

(The full book is due in early 2011 – watch this space!)

For a decade, our friend and colleague Storm Cunningham has been ahead of the curve on all things green and sustainable – so far ahead, in fact, that his work in restoration and revitalization almost has nothing to do with those overused marketing tropes. Storm’s work declares that if you want a better, healthier, more prosperous world, you don’t sustain what already doesn’t work, you restore places and make them vital. You don’t need to achieve elaborate engineering and magical green algae juice jetfuel to make the world a better place – just start by improving things, right where you, in all ways ecological, economic and social. This can be fixing up houses, improving school systems, restoring aquifers to being healthy parts of the ecosystem – anything that is the opposite of the entropy that plagues our post-industrial world.

In this talk for TedxMidatlantic, Storm has four huge, important messages for the future:

• Sustainable development is at least 200 years too late.
• We, and future generations, can make the world healthier, wealthier and more livable, for a living.
• The process of revitalizing our ecosystems and communities is finally becoming a rigorous discipline with the proper tools and education.
• Restoring the world can also restore peace.

Yup, huge messages. When you’re done with this talk don’t forget to pick up copies of Storm’s two great, in depth books on this emerging discipline The Restoration Economy and reWealth.

In the wake of the financial shock waves rocking the Western world, there is a group of thinkers who represent a new school of thought – that there will indeed be no “recovery” of economies in the traditional sense. Their forecasts for the future of practically everything are transformative in nature, and should be considered by all strategists. I call these thinkers the “survivalists” for the way they not only see an end to current financial regimes across the world (that ideology is increasingly common), but also see a return to a more disintegrated, localized 19th century version of economics.

Perhaps the most conventional of these thought leaders are those in the peak oil camp, energy analysts who often come from an investment background. Guys like Gregor MacDonald and Chris Nelder come to mind, analysts who are convinced that peak oil supply is upon us. They give a variety of hard data on the matter, and are talking about how the assumptions of our economy are about to be upended. Both have been guests of the Competitive Futures Podcast.

With a buzzsaw sense of dark humor, James Howard Kunstler has been pointing out the unsustainability of America’s economy for years. His 1997 book The Long Emergency is a classic for describing the policies needed to deal with a post-cheap-oil world, a work of great foresight in the way it predicted that financial calamity would accompany the peak in oil supply. His weekly missives are available on his blog, which are usually more bracing than six shots of espresso.

Another writer is Charles Hugh Smith of the blog Of Two Minds. His new book is called Survival Plus, a guide that takes the coming collapse as a virtual certainty and actually moves people toward steps they can take to rebuild their local economies, far beyond a simple call to stock up food and shotgun shells in the cellar. A sample chapter can be found here.

The idea that the old system may never regain its integrity is one that should be on the mind of every leader. This school of thought is only covered on the margins of today’s media, but its ideas will give you new perspective on potential future scenarios for your business.

I don’t think there’s a finer example of economic theory hip-hop than the deathmatch rap battles of F.A. Hayek and J.M. Keynes, which appeared earlier this year and which managed to garner around 2,000,000 hits on YouTube. I’m sure you will agree that this is a major success in the field of econ-based pop music.

Now those crazy 20th century intellectual opponents are back at it now that the world is in full Keynesian swing. In some ways, it’s even better than the produced video clip, since these guys are rapping flawlessly about monetary policy in real time. Big up yourselves, boys.

Make sure you watch to the end: the discussion of how Hayek is making a comeback in response to Keynes’ comeback adds much needed perspective for those of us who are not naturally steeped in the history of the subject.

Forget what we have to say on the subject, take it from the CEO of financial giant HSBC: The world’s economy is shifting with terrible swiftness toward China and India. Now, you’ve heard that opinion expressed a million times – but what Michael Geoghegan is saying is that this is NOT an incremental transition, as many leaders still perceive it.

We still meet executives who believe that a global outlook is a luxury – nice if you have one, but you can live without it. It is hard to imagine understanding the message presented here and persisting in that worldview.

We’re always excited to talk once every few months with the inimitable Pam Atherton on her fabulous radio show A Closer Look. She provides one of the few media forums where we can talk about future trends and their implications, in depth.

In this episode, we go into a question on the minds of everyone these days – what are the jobs of the future? We talk about agriculture, manufacturing, old time values, and why the future will be a struggle between savers and spenders.

While economic policy and national politics have always been a couple, sometimes the relationship can be strained by the injection of partisanship. The current crisis requires insight into the actual issues to make policy suggestions. The United States is running a risk by having its economics so colored by bitter partisan divisions, as this is one area where there needs to be solidarity.

In a thought provoking GPS episode, Fareed Zakaria interviews two very different schools of thought on the actions necessary. His conclusions are that we must meet in the middle of the political agendas and look at the economic possibilities. Essentially, his view is that the U.S. government needs to spend more now while also reviewing entitlement programs to make sure each dollar is spent in the most efficient manner – a classic centrist approach.

It is always a risk for a country when political in-fighting colors international economic policy. That is true for Greece, Spain, China, Iceland, and, of course, the United States.

Does anybody need economists?

This is the subject of a fascinating polemic raised by our colleague Gregor MacDonald. He notes, in an incredible understatement, “economists don’t ‘do’ energy.” They are content to set Keynes and Hayek in a never-ending cage match over monetarism versus free markets, while petroleum dwindles, Boomers retire, technology flattens work hierarchies – while real things are actually happening.

Some of the debate is set off by the paper embedded below by a Federal Reserve Bank economist. As the title indicates, he doesn’t think much of the input of non-specialists. We then have a similar question for his profession – how is it that we all participate in economic activity, and only you feel qualified to comment on it? And while we’re on the subject, why didn’t you predict an absurdly obvious bubble and subsequent crash?

Some things are too difficult for the laity to understand. Most of the hard sciences are really impossible to comprehend to outsiders, and news reports on their breakthroughs are often comically misunderstood. But is economics a hard science? Isn’t it a social science based around people trading things? Can we discuss our economy without the need for technocrats of this sort?

Economics is Hard

Go to your newsstand and pick up a copy of Foreign Policy magazine’s July/August 201o issue entitled “The Committee to Destroy the World.” It’s a fascinating, broad analysis of all those countries who don’t play by the rules set out by industrial powerhouses – and why they don’t. If you sweat about the failure of American pension funds, Icelandic treasury bills, or German austerity, then cast also an eye toward North Korea, Zimbabwe and Iran for contrast.

One particular item of interest – failed states aren’t all bad, according to the magazine. They make for cheap and pliable partners for China when it comes to natural resources. We reported on this trend back in 2007 with our STEEP Report series, how China’s massive investment in infrastructure requires a broad range of partners, most of whom then become warmer to the rest of the Middle Kingdom’s strategic goals.

Click on the image for a map of China’s investments in natural resources.

The US has come close to labeling China as a manipulator of exchange rates. The undervalued renminbi allows for cheap exports, especially into their largest market: the EU. The last G-20 talks were a concerted effort to pressure China to allow the renminbi to rise, and last week the US got some, but not nearly enough. China has opened up to a crawling peg: a feckless economic move but a highly deft political move.

Since the last G-20 talks, the EU was emasculated by the Greek and Spanish crises, to which the US had to divert efforts away from nudging the Chinese into a more buoyant exchange rate. Even before loosening the exchange rate the renminbi had strengthened to the euro. Why would China allow their exports to become more expensive to their largest markets? China now has left the US flat on its heels with only a week to prepare complaints about the actual topic at hand—doing business in and with China—before the G-20 talks in Toronto, June 26-27. Brilliant timing.

Now, what is China’s end game in this? Obviously, the value of its currency is merely a tool in its larger political and economic strategy. So what does this mean and where is China going?

Welcome to my first of many dispatches as director of economic risk analysis at Competitive Futures, Inc. I look forward to sharing with you some the insights we provide clients on current economic trends from around the world. Jumping right in: Is Brazil’s economy too hot?

These days, the orthodox view is that economic growth is GOOD, inflation is BAD. Most countries around the world have too little of the former and risk far too much from the latter, mostly from profligate spending and “quantitative easing.” Which is why it’s easy to see Brazil as a bright spot in the global economy. Brazil’s GDP growth is at a scorching 9%- which would normally be so hot as to cause worry of inflation. But wait – Brazil’s inflation won’t cause the same problems that the world will see in all the other countries at risk of inflation due to monster deficits. The land of futbol, caipirinhas and Copacabana is more dynamic and innovative than ever before, and will overcome inflation through investment.

Inflation in hot economies is often caused by a lack of sufficient infrastructure to meet growing demand. In Brazil, this won’t be a problem going forward, to listen to the country’s forward-looking economic policy makers. The country’s economic future appears to be poised to grow past any inflation concerns. The consumer market has grown exponentially for the past 15 years; massive investment opportunities such as the 2014 World Cup across Brazil and the 2016 Rio Olympics will see inflows from across the globe; and mass infrastructure projects in energy, transportation, and extraction (Franco fields and Tupí finds) are increasing. In a world where North America and Europe look backward to find their Golden Age, Brazil is looking at the next decades.

Imagine businesses looking for growing seeing Sao Paolo as a better bet for stability than the ailing eurozone or deficit prone North America. Brazil won’t be “one of the BRIC countries” it might be “where we have our headquarters.”

We couldn’t love  Nassim Nicholas Taleb’s work any more here at CompFutures. His book The Black Swan has become an instant classic for its application of scenario planning to financial markets, showing us that humility and constant skepticism are our constant allies when thinking about future. His work shows us that past performance is not necessarily future reality, and that we probably aren’t as smart as we think we are when making predictions about an ultra-complex, superconnected world.

Plus, he called the financial crisis well before 2008. It’s a small group of contrarians who got that one right. (Ahem.)

For a while, Taleb was in a self-imposed media blackout, terribly weary of having expressed the same ideas time and time again about how “eternal growth” isn’t the only scenario nations and companies should expect. Black swans, he contended in endless interviews, were still on the horizon, circling with plans to challenge the orthodoxies of Keynesianism, Hayekian free markets, or any other old fashioned 20th century notions.

With the new round of economic stimulus, bailouts, and other such faith-based superstitious economic rituals, Taleb is back on the scene to discuss why, contra Krugman, debt-based stimulus packages are making us less safe, giving us growth wrapped in a dangerous package of fragility.

A wonderful, weary, frank interview.

My latest interview with Pam Atherton of A Closer Look Radio, covering the superconnection between peak oil, European fiscal crises, local economics, and even the iPad. It’s all about institutions in transition and what you will do to assure your future success.

I spoke recently with an American diplomat who outlined the larger importance of having the European currency succeed. Her concern is for the geopolitical balance that will be affected if the eurozone is not stabilized.

“Think of the Euro currency as the first baby in a marriage. Sure, there’s a difference between marriage and dating, but a baby is a real, concrete, serious output from that union, a tangible expression of your interaction. Think of the countries of Europe as participants in a somewhat new marriage. Right now, if the euro turns out to be a failure, if it is no longer considered as a reserve currency, it will be significant embarrassment on the parents – sort of like if their first kid ends up in prison.

Before, the European nations were just dating, nothing serious. They allowed passport-free travel between countries; they liberalized trade policies and labor pools; they didn’t go to war for the first time in a while. This currency has been their first major project as a group. Even their military assistance in Afghanistan isn’t truly an expression of Europe as a force – it is a NATO action. The currency, on the other hand, is designed to show Europe as a major economic counterbalance to China, Japan, and the United States. If that currency fails on the first try, essentially the rest of the world may – rightfully – see Europe as a collection of diverse states that are not able to coordinate even simple policies.

The world may be left with a more bipolar world between China and the U.S., with Europe left as nothing more than a tourist destination full of aging populations and delicious cheeses.”

Time to put your scenario-planning hats on, especially if Europe figures prominently as a market or as a supplier for your organization.

Egads, Reuters has a really great set of scenarios for how the Greek crisis could play out.

Good stuff, very positive to see in major media.

We’ve been sitting back, examining the situation of sovereign debt in Europe and watching its impact on global markets.

Today, Greek debt is reduced to junk bond status, and a two-year bond’s yield has reached 26%. It was 18% yesterday.

As much as European officials say that this won’t have any systemic impact, that is often what people say when they don’t want it to have impact.

Think of multiple scenarios for this outcome. Use game theory, scenario planning, or old-fashioned guessing – but think it through.

Collectively, we have desperately wanted to ignore the larger implications of what people falsely call the “Crisis of 2008” or the “Banking Crisis” or even less correctly, the “Subprime Crisis.” The implications are too big, so it’s better not to pay attention, soothing ourselves with discussions of “green shoots” and chipper news reports that “the American consumer is BACK, baby!” The last thing our news media wants to do is continue the study of what happened, what it really means, and what’s next. This is a shame, as we are guessing that there is much in the way of “crisis” to come.

Here at Competitive Futures, we absolutely recommend studying disruptive events with the goal of creating strategies for the survival of YOUR company. Over and over again, we say a crisis for some is not necessarily a crisis for you, if you plan ahead. So when we predict major disruption, it’s not that we want to gather up a few bottles of tequila, some old records, good friends, and just wait for “the end.” Quite on the contrary, we think that it’s time for action, no matter how disruptive the news may be.

So then, just some of the news:

• Japan, the world’s second largest economy, may begin missing payments on its bonds, rendering it functionally bankrupt.

• Los Angeles, the second largest city in the United States, the tax base of which includes media, defense contracting, and major shipping, is nearly out of cash. It’s bond rating has been reduced by Moody’s to Aa3, a medium-grade risk investment.

• Greece has been saved by preferential loans of thirty billion Euros from fifteen of the EU member states. Nobody, however, is discussing what happened, why it happened, or how to keep it from happening again.

The pattern emerging here is that we have major early warning signals that the current “crisis” is part of a much larger reorganization of society and economics. Whereas last time we focused on the debt shenanigans of private companies (AIG, Wells Fargo, Bear Stearns, Lehman, et al.) this time the focus is on nation-states themselves. This isn’t about stocks, from which people expect some risks, but government bonds, which are supposed to be the dullest part of anybody’s portfolio next to shoelace futures or large stockpiles of sugar packets.

Nobody is talking about how much of a rupture this could be, which is no surprise given how little people wanted to discuss the last “crisis.” Before, this was presented as a crisis of economy – “The economy has taken a bad turn; we will bail out the private actors and things will return to normal. Oh yeah, and regulate some stuff…maybe, so that this doesn’t happen again. Not that we knew what happened.”

Now, with the bankruptcy of major cities and states and entire countries, we have a crisis of the global system. Nation-states are attempting the regulate financial actors that are orders of magnitude larger than the agencies that purport to have legal control over them. It doesn’t really work, but when push comes to shove, the people accept the sovereignty of their elected governments to print currency, engage a stimulus, or create new regulatory regimes. The inverse is not true for nation-states.  Once nations have failed, our final unit of geopolitical analysis is finally gone. If Japan defaults, they can’t really send out Mizuho Financial to negotiate on their behalf or print a stimulus. The Yomiuri Shimbun isn’t really the official spokesperson for the nation – their foreign ministry is. And after all, it’s the government that backs the currency the businesses use, not the other way around.

You might imagine, after being caught flat-footed in 2008, that our managerial culture would be more sensitive to these emerging patterns and their potential implications.

Some will pay attention, and those people can position themselves for success. Will that be you?

One of our more accurate predictions at the end of 2008 was the soon-to-be-discovered catastrophe of unfunded pensions. As 2010 develops, we see that many of the current hotspots in the ill-defined “financial crisis” are tied to this one issue of having overvalued the future at the expense of the present.

California is sitting on around $500 billion (!) in liability. The state of Illinois is short $78 billion for it’s pensions. Now, here comes The New General Motors, still losing billions after a taxpayer bailout. The Government Accountability Office has recently released a report about how pensions will likely drag the ailing manufacturer down starting in 2012 or so. (h/t to Megan McArdle at The Atlantic for quality analysis here – also, the comments section is a stitch)

What happens in 2012? The bulk of the Boomers start cashing in those defined-benefit pension plans, heading to the doctor’s more often, and generally turning 65 at the rate of 7000 per day. Aren’t forecasts useful? This is why we call it a megatrend – it will impact car companies, state governments, universities, national governments, baseball teams, travel agencies – everybody.

Nothing is more dangerous than a business decision based entirely on, “sunny, bright scenarios of fantastic success at 8% returns for all of our investors, forever!”

One of the great economic tensions right now in the Great Transition is between national organizations and smaller bureaucracies at the edge. For example: the economy melts down from an incredibly predictable housing bubble crash after a decade of equity destruction and flat GDP growth. Banks should fall, currencies should be scrambled. At the last minute, national governments step in, flood new printed money into the market, force stronger megabanks to buy weaker ones and – WHEW – everything can go back to normal.

The problem is, not everybody is a national government or a megabank with cellphone access to the Secretary of the Treasury. That’s when we see the smaller organizations at the edge begin to suffer the long term effects of this Transition.

We’ve spoken quite a bit about states, provinces, and smaller countries. Now, cities, municipal corporations, are on the chopping block. Harrisburg, capitol of Pennsylvania, is considering Chapter 9 bankruptcy as it considers its inability to meet the debt payments on critical infrastructure investments.

Today, it seems that a little backwoods village out west called Los Angeles is out of cash, may miss payments to vendors, and is in bad need of emergency financing.

Nation-states have rights that smaller units do not. Nations – provinces – cities – neighborhoods – individuals. If systems don’t work from the individuals on up, we predict an increase in bureaucratic peccadillos that nobody can solve through talent and hard work alone.

I have no idea how I managed to miss this incredible video for so long:

Are You Ready for the 21st Century ? from Michel Cartier on Vimeo.

Envision, if you will, rioting octogenarians, phalanxes of retired teachers, government office managers and firefighters protesting the sudden cessation of payments from their pension funds.

Imagine some way that American states are going to overcome the apparently one trillion dollar gap in state pension funds while simultaneously dealing with an economy so clearly in transition.

Pause with me, as I add a little extra whisky to the morning coffee. That’s trillion with a T.

The Pew Center for the States sure had a headline for us all today with that report, especially speaking as we are about fiscal “challenges” that are popping up, threatening to return Greece to an olive-based economy, put Spain back in the Conquistador business, and convince us to give California back to Mexico if they agree to keep making the lease payments.

Between the Greeks staying in the European monetary union, or Detroiters keeping their dry cleaners and doggie-daycares afloat, there is a considerable amount of talk about the role of currency. The crux of the European issue is that the Portuguese and Greek economies are so different from the French and German ones, it is difficult to keep one currency with the same rules and assumptions in play. The fringe actors are no longer able to keep up the facade required for membership in the club.

We are seeing a microcosm of this in local towns in America, and the issue comes down to the ability to maintain a central currency. We note with interest an uptick in stories about local currencies not seen since the banking meltdown of 2008 and 2009.

Last year, two Detroit tavern owners were sitting at the bar, sampling their beverages and bemoaning the local economy — no one in the city had cash, and when they did, they spent it in the suburbs. Then the pair hit on a solution: Print their own money.

It is, after all, perfectly legal for anyone to issue currency, as long as it doesn’t look too much like a U.S. dollar. Thus was born the Detroit cheer, a local scrip accepted by a handful of city businesses, including a pizzeria, an electrician and a doggy day care center.

But why would people go to such trouble? Money is money, right?

When the Treasury prints billions to bail out banks and automakers, people look for alternatives. These folks may look nutty now, goes the quip, but wait till the dollar goes the way of the Argentine peso. Then you’ll be exchanging a wheelbarrow of cash for a bay buck, local currency boosters say.

What could this mean in terms of business strategies? One of the most likely implications would be a return to local distributors, those able to deal best with the local market and even local currencies. Compare this to the recent trend of market consolidation in a variety of industries. It just doesn’t match.

First Greece and Portugal, but they are on the outskirts of civilization. First Detroit and Western North Carolina, but those places aren’t prime time.

Next…California? Spain? Iceland? New York State?

Last week I had the enormous pleasure to speak with Pam Atherton on A Closer Look radio. She’s a bona fide radio professional with a profound understanding of society, the media, information, wisdom, and how to ask great questions. This hour-long interview on the future of energy and local communities could have gone on much longer, and felt like in went by in a few moments.

We delve into the implications of peak oil, why local gardens are the new hotness, and how organizations deal with information about the future. Definitely worth a listen.

Usually, it’s the job of tin-pot dictators like Chavez and Ahmedinejad to trot out their intelligence services and declare that the world is out to get them.

But when the Spanish intelligence service says the country is under attack from speculators in a clear conspiracy, it’s a sign of something deeply interesting. First, it’s a telltale sign that people high in the Spanish government are concerned that greater instability is on the way from the sovereign debt crisis, and they are attempting to control the narrative.

For those of us practicing future intelligence, this is a call for us to examine the broader political trends at play. Most views of the future take the Euroland to be a stable economic entity for all scenarios. Generally, a meltdown of the single currency and a brushfire war between Belgium and Portugal are considered far out.  At the very least, most people consider the continued operation of the EU to be a given – after all, it has resulted in one of the most successful, peaceful, prosperous times in the history of the continent, especially after the tumult of the early 20th century.

Still, it may be that the success of Euroland has required all countries to play a part for which they are ill-suited. Spain still has 20% unemployment. Greece’s debt is out of control. In the days before the single currency, each country would have been free to fail, unsupported by the largesse of France and Germany. Today, they have been supported through their use of a stable, global reserve currency. Like so much, this may be borrowed equity, and borrowed time.

Imagine a future for your business, and indeed your nation, in a world where Europe re-fragments. It may be less far-out than previously thought.

Somewhere between California’s budget shortfall and Vermont’s neosecessionist movement, somewhere between Arizona thinking of sell the gold off the dome in the state capitol building to Michigan pulling away police department units, somewhere between Portugal and Greece, it has become evident that just because the American and European Central Banks could solve “the crisis” through deficit spending, not everyone would be able to keep up the illusion.

Tyler Durden at Zero Hedge says it in typical brilliant, pithy, fin-de-siècle wit:

The only thing in this world worse than Hank Paulson showing up in Congress with his initial 3-page TARP proposal giving him unlimited control over the US printing press? 12 non-Hank Paulsons, all of whom speak different languages, all of whom are hell bent on bailing everyone and everything out (just not on their political or physical dime…or 10 eurocents as the case may be), and all of whom have no idea how to bail out others’ (and soon their own) economy… oh, and none of whom have access to Hank’s reserve currency printer. In short, more than 24 hours after announcing a “bailout” of Greece, nobody in Europe has any idea what they need to do to actually “bail” Greece out.

The larger issue here is the primacy of centralized banking authorities, central currencies, even central governments. Those large and unwieldy organizations can resist a great number of insults, and they have more options available to them that their smaller counterparts – but they are not invincible. When faced with a large enough catastrophe, they too must feel the pain, react, choose a new path.

It’s time to think in terms of scenarios. One scenario would be that the world’s central banks manage to keep the cash flowing among countries and banks and bond holders and municipalities, even in the face of expensive entitlements, shifting asset values, rising unemployment, and stagnant wages. Status quo. Now, what are the chances that things don’t change in the face of the trends that are so evident.

One other scenario is a series of defaults from smaller nations, regions, and municipalities unable to make their minimum payments, challenging the legitimacy of central control, requiring additional taxes levied on those areas who are tax-cashflow positive. What happens when entire cities, regions, and sovereign nation-states simply withdraw from the global system? What happens to currency? Which geopolitical tensions will flare up? What goods and services might stop flowing? What could happen in the next phase?

Look, if you’re running a business of any size, this is probably pretty heady stuff. Most of us never went to school to remake the geopolitical and financial systems. Nobody woke up this morning hoping to re-justify the fiscal reasoning behind the European Union, or the constitutional relationship of the U.S. federal government with the States.

Then again, nobody really wanted to be all that interested in subprime versus Alt-A mortgages, nor their relationship to CDOs and CDSs, did they? But we all got a good lesson.

If there’s a forecast in here from us, it’s this: we have a surplus of complexity in the world’s fiscal and financial dealings. Nobody can really understand them, which is why they are so hard to manage, even from New York, Washington, Brussels, and Hong Kong. And for that reason, things may get much less complex in the years to come.

Think about what that means.

Tim Geithner says the United States will never lose it’s AAA bond rating.

Sure it will: if it does those things that cause countries and corporations to degrade their credit ratings. Those things specifically include printing lots of money – which the United States is doing, and has been doing for decades. And all this before the Boomers start to really tap Social Security and Medicare and cease flipping homes and buying new cars and receiving taxable income. And last time I checked, the United States is still engaged in two sprawling wars in Central Asia, noted to be a bad idea. Those cost money, too.

In the world of professional futurists, the words “never” and “always” indicate a rich vein of assumptions which leaders refuse to examine. They almost always beg us to examine the potential implications of the scenario which is never to occur. For example, “What if the United States loses its AAA bond rating.”

That said, there is a way Geithner’s forecast could be true. If bonds are rated according to the assumption that the United States is the gold standard, as the governor of the Bank of Israel indicates, then perhaps bond ratings might disappear or become quite un-indicative of reality rather than ever betray that standard.

But by that point, what would all this analysis of central banking really matter? We would be well on our way to new systems of investment and public financing, however painful the transition might be.

It looks like the United States and England aren’t the only countries facing billions in bad loans.

When you read “trillions of renminbi of defaulting loans already in China that no one is doing anything about,” you perk up about the coming crises in sovereign debt and realize it is truly global, with global repercussions.

Sign up for the free Competitive Futures Trend Report for more analysis on this topic.

For those of you who know Gregor MacDonald, you know you’re in for a treat with this podcast- a full hour of some of Gregor’s latest forecasts on energy, economics and society, insights you simply won’t get anywhere else.

For those of you who haven’t discovered Gregor yet, he is one of the top energy analysts in the world, and in our minds, one of the top analysts of anything, period.

This podcast covers sweeping ground:

• Why we’re at peak automobiles
• The end of cheap oil
• Coal’s role in the development of the world economy
• The return to human capital and small towns
• Why waterways are the future
• Our current period of “late phase economic decadence
• Why PAKISTAN holds the key to the Copenhagen Protocol

Crazier still, we could have spend ANOTHER hour talking to him and still not exhausted him of insight.

Enjoy.

Keynes and Hayek cutting heads, playing the dozens on their economic philosophies. Entertaining, and a fairly accurate breakdown of the Austrian school versus the resurgent Keynesianism which we are all experiencing.

That said, what if both these economic theories are dead and something new is on the horizon? Then this “battle” framework is distracting us from the hard work of original thinking.

There is an interesting development at the intersection of political trends and economic trends. We have been recently covering the economic fissures in some of our largest states. California, Arizona, Illinois and Michigan teeter on the brink of financial crisis, and this in turn menaces the integrity of the United States Constitution. Letting California’s bonds go to junk will have long-reaching impacts – but if the Federal government begins distributing bailouts selectively, there are bigger legal problems at stake. Other states will have recourse to ask for money from the Federal government, making the relationships of the 50 states complicated indeed.

What’s another option for states? Leaving altogether. Now that’s a new trend in these parts.

The state of Vermont has had a secessionist movement dating back over 200 years, back to the time when it was an independent republic. It’s mostly been a topic of discussion over an excess of beer in pubs – until recently. Now, Time magazine reports that seven separate candidates are running for the state senate on a secessionist platform – plus a candidate for Lieutenant Governor. One of the points they raise is that the state is a net positive to the federal government, only receiving 75 cents in services for each dollar collected in taxes. Thus, a way to balance the books for Vermont is to cease paying US Federal taxes, and to move out on its own. And they are forecasting:

By 2020, they foresee Vermont producing at least 75% of its own electricity and heat, using wind-, solar-, biomass- and hydro-power. They want to establish a Bank of Vermont owned by the people of Vermont — freed from the arbitrary controls of central bankers — as well as a local alternative currency, with Vermont pension and operating funds invested not in Wall Street but in locally owned financial institutions.

Obama’s State of the Union speech mentioned many classic problems facing the United States – unemployment, healthcare, security. Sure, there was some mention of the more recent banking fiascos – but how much of what was mentioned showed a nation facing unprecedented challenges requiring untested solutions?

For example, where was the mention of the fiscal crisis of the largest, most productive American states, like California, New York, and Illinois?

Investing and planning for the future? Look beyond the headlines toward the trendlines.

With a h/t to Calculated Risk, hotel occupancy has reached record low levels:

In terms of the occupancy rate, 2009 was the worst year since the Great Depression (close to 55%). And last week was no exception with Smith Travel Research reporting the occupancy rate fell to 33.8 percent – the lowest weekly occupancy rate on record.

At CompFutures, we are waiting to see what the retail numbers are for Q4 2009, specifically to see if this pushes retail and commercial real estate over the edge.

The endless oil-soaked financial Bacchanal known as Dubai, home to air-conditioned ski parks, seven-star hotels, the new headquarters of Halliburton, Roger Federer’s income, and a army of foreign servants supporting a few ultra-wealthy is now officially out of wine, the band gone home, the hangover beginning . It turns out that like so much, Dubai, or at least Dubai World, is leveraged to the edge of its financial capabilities and has ultimately defaulted on the interest payments.

In the streets of Washington and on the Internet, we hear murmurs about the crisis of confidence in sovereign debt, questions on whether Dubai is really a country, really a city-state, really real enough to matter. So many questions about future bond ratings, the effect on gold, a retreat to commodities-backed currencies, the impact on equities. Also, there is speculation on the cause: is it real estate, peak oil, an overestimation of the global ultra-wealthy, the instability of the financial services industry?

In addition to those questions, I have a few basic questions first :

1. How is Dubai any different from the United States, France, or Japan, countries swimming in massive debt?
2. Has debt as a concept somehow morphed? Is sovereign debt really expected to be repaid? If not, are the bonds issued from such debt legal financial instruments, or some form of fraud?
3. How is it that countries basing their fiscal health on debt expect the future to be so much more fruitful, profitable and taxable? Which strategic trends are they seeing to value the future performance of their assets so highly?

Basically, how is it that all these banks, companies, pension funds, and nations can be so extended, engorged on debt? Does anybody run black ink anymore? Why is the future perceived to be of greater value than the present?

I think the answers may be simple. Painful but simple. Better to make money than to owe money.

Now, who is making money out there?

Round numbered years are boom times for forecasters. There is something intellectually symmetrical about round numbers that makes people hungry for the future. Back in 2000, it was really easy to get people excited about forecasts for 2005, 2010, 2020, 2050 – all divisible by ten, mathematically elegant! There is something more confusing about analyzing trends from 2007 – 2016 than there is from looking at 2000 – 2020. The brain is a funny thing.

As we begin a new decade, you will see quite a bit of retrospective about the last ten years, and copious forecasts around the year 2020. Now is a good time for executives to brush up on their skills in evaluating forecasts, so they can critically assess what is really coming down the road. Given the high level of complexity facing our economies, this is really quite important.

Assessing forecasts is more important than the act of collecting the data itself. When you see numbers about the future in particular, we are instantly attracted to their comforting certainty. Rarely do we ask, “which assumption are packed into this trend line?” For example, take a look at this projection of potential unemployment in the United States from Q4 2009 through Q4 2020. I got this forecast from the indispensable Mike Shedlock, and he got these projections from a mix of Bureau of Labor Statistics reports and assumptions.

There is also a spreadsheet on offer “detailing” the assumptions, getting into the specifics of how many jobs might be created and when they might enter the economy.

Here’s how my analyst’s brain immediately sees this in terms of the future: I want to know what will really be HAPPENING in order to create this abstract curve. Curves like this are pure PowerPoint candy, giving us beautiful visual aids to support our discussions of the future, but the lack of explicit discussion of the future leaves us an intellectual vacuum. To really evaluate the validity of such a scenario about unemployment in the United States, we can’t leave this trend line alone – we must complicate it with all the factors that will actually go into economics in the next ten years

• Aren’t the Baby Boomers retiring during this time, or at least leaving active work?
• The Boomer “retirement” will leave a talent crisis in its wake. Will unemployment mean the same thing?
• Is there a tipping point of high employment at which American society will change and become less stable? 12%? 15%? 20%?
• What about peak oil? What if economic activity is squeezed from high energy costs?
• Which industries are assumed to create the jobs? Why will they provide more value in the next ten years?
• Does this curve assume any backlash from the Ponzi scheme meltdown of the banks? What if we crash again in 2010 or 2011?
• Will US unemployment rates roughly follow the world economy, or is this trend indicative of a shift in economic power to Asia Pacific, Europe, or Latin America?

These questions are not meant to knock down the validity of such forecasts – I’d rather have an unexamined forecast that gets us talking rather than fixate on more blather from the day’s stock market trades. More forecasts lead to more discussions and better decisions.

Hopefully 2010 will be a banner year for forecasting and strategy. If you want to more, we can recommend the book Future Inc, which dives deeper into this methodology. If you want to know even more, get in touch with us to schedule training to make your analysis more valuable to your organization.

Bloomberg won’t allow embeds, but check out this clip with Robert Shiller of Case-Shiller Index fame as he discusses the housing market.

This guy likely understands housing better than anyone else in America, and he seems absolutely perplexed as to the banks, the stimulus, the whole thing. It defies rational analysis, in response to no structural trend in particular.

Bloomberg, as in most of the business media, has a classic position: Up is GOOD! But Bob Shiller seems more interested in talking about how quantitative forecasting no longer works as a predictive model. He just seems confused as to what just happened. As well he should be.

What is left undiscussed: the notion that a group of our institutions have banded together to defy most of the logic that underpinned capitalism: that there is a free market, and that the winners are not picked by the government. That’s why the trends don’t matter in this case. The Treasury, Federal Reserve, White House and Congress banded together to make banks the winners, to allow them to suspend marking their assets to market, and to artificially keep housing prices inflated. In an economy made by fiat, structural trends lose their predictive ability. Who cares what “the numbers” say if a small group of people can renegotiate what those numbers mean at any given time?

Ah, but this is not without cost. Unemployment, inflation, and consumer spending will still likely follow the laws of gravity. That will make the recent acts of our government a temporary solution at best. So keep your seat belt buckled.