Tag Archives: USSR

The Fragility of the Future (and Your Strategy)

Today I was reminded of the perils of forecasting while reviewing  a Department of Defense document, the Joint Operating Environment 2010.

“JOE 2010” as it’s called, is designed to provide the various branches of the US Armed Forces a joint perspective on likely global trends, possible shocks and their future operating environment.  If you’re interested in geopolitics and strategy, I recommend that you take a look.

Apart from its inherent interest, JOE 2010 opens with a defense planning timeline that business and financial strategy practitioners – and anyone who consumes their work  – would do well to bear in mind.  I have reproduced it verbatim here:

1900 If you are a strategic analyst for the world’s leading power, you are British, looking warily at Britain’s Age-old enemy, France.

1910 You are now allied with France, and the enemy is now Germany.

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China’s Present, the World’s Future, and the Pretense of Knowledge

Last Tuesday I attended the Economist’s Bellwether Europe conference in London.  Several speakers raised ideas that made me want to follow up Philippe’s latest piece “Has China Peaked?”.

At the conference, many speakers and panelist (from regulators like the FSA’s Martin Wheatley, to economists like Roubini’s Arnab Das, to portfolio managers like Blackrock’s Richard Kushel) linked the future stability of the Eurozone and the prosperity of America to the continued growth of China.  Niall Ferguson was even more explicit, saying at one point that “The governor of the PBOC has far more control over the future of the US and European economies than either Ben Bernanke or Jean-Claude Trichet”.  I tend to agree that US and EU economic stability is tied to Chinese growth, but am worried by that fact,  and skeptical about Chinese “control” of their economy either through their Central Bank or through “administrative measures”.

The People's Bank

The image evoked by statements such as Ferguson’s (even though I am sure he is too smart to have intended it) is of a carefully calculating Zhou Xiachuan sitting behind a desk in Beijing pressing buttons and pulling levers – a man in commanding a linear, essentially Newtonian system.  The same tends to happen when people talk about the powers and actions of the Fed and the ECB.  Even so-called “centrally planned” economies don’t work like that.  Economies are not not machines, and they are not linear in the sense that once the behavior of its component pieces are understood individually, one simply needs to add them up to predict – and control via a Central Bank or other bureaucracy – the behavior of the whole.

A point which is not original but which bears repeating because it is so often forgotten is that Economics is not Physics, it’s a “Social Science” (a false metaphor if there ever was one).  As one scholar says “God gave Physics the easy problems” and the behavior of economies is non-linear rather than additive.

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Has China peaked? An exercise in forecasting using Neustadt and May’s History framework

China has long been touted as the next leading power, and for many it seems that the question is no longer if China will overtake the US but when. Recently, however, a number of dissenting opinions have started to be heard. Economists point to the strong imbalances in China’s economy; political analysts observe that the political and social structure is unstable; human right activists warn of increasing censorship and repression, while historians suggest that, like the USSR in the late 80s, China’s communist regime has run its course and is on an unsustainable path. Indeed, “hard landing” stories about China have started to appear, by Roubini or by Gordon Chang.

Like any such debate, or lack of debate (instead, it is a series of proclamations), positions are often taken being selective about facts, based on false analogies, shallow extrapolations, ideology, or just plain ignorance. This is problematic because regardless of what we think about China, the country does matter to us in many ways. What can we do about this, then?

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“Facts” Everybody Knows – Statistical Cautions about the BRICs (in honor of Igor Birman)

In business and finance, statistics and quantitative comparisons are daily companions.  Sometimes, however, key statistics can become too familiar, and reify, i.e. harden into “facts” that everybody knows.  In so doing, they play a large part in strategic surprises.

In the late 1980s, for example, the US Intelligence Community “knew” that Soviet GDP was $2.5 trillion, i.e. about 52 percent of the US GDP of $4.8 trillion.  How?  Their computer models told them so.  These models relied upon – among other things – assumptions about ruble-dollar Purchasing Power Parity (PPP).

Western academic Sovietologists also “knew” the USSR’s economy was about $2.5 trillion.  How?  Mostly, they relied on an authoritative source:  the CIA.

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