Chinese Rooster Year Outlook, Part 2
Scenario Analysis

M.A. Nystrom, M.B.A.
Man on the street in (the Republic of) China
February 16, 2005

Last week, in Part 1 of this Rooster Year Outlook, I asked readers to share their thoughts about patterns and possibilities for the upcoming year. A number of those very interesting comments can be found here. I have been thinking about these myself, and this week present a scenario (rather than a prediction) for thought and future discussion. The Chinese New year began officially on February 9, 2005.

1. New Year Predictions

At the beginning of each year, financial analysts, brokerage houses and stock players release detailed forecasts for the upcoming year. They make predictions and try to guess the exact level of the Dow, the direction of the dollar, the price of gold, GDP growth, etc. Such forecasts usually share several common elements: 1. The predictors usually speak with the utmost authority, as though they have a magic ball that foresees The Future. 2. In order to be taken seriously, they rarely say anything outlandish (“We expect that growth will continue at a moderate pace this year…”) 3. Because of #1 and #2, they are usually both extremely boring and extremely wrong. This is because the future is, by definition, unpredictable.

This being the case, I cannot in good conscience offer up another staid analysis of continued moderate growth, nor go to the opposite extreme with a prediction of economic collapse (this year) as a certainty. But one thing is clear to mindful observers of the current US dollar-centric global financial system: it is unsustainable. Like all fiat currency schemes dating back to the dawn of time, this one too will come to an end. If history is any guide, the US dollar will be inflated out of existence by irresponsible government policies that make it more politically expedient to print money than to cut back on spending. We are already witness to this today, as the US government racks up massive financial debts that don't stand a chance of ever being repaid, while increasing military aggression shifts attention away from real issues such as these onto villains (real or imagined) on distant foreign shores.

Predicting the precise moment of the collapse of the global economic system is, however, a fool’s game. My bookshelf is lined with titles from year’s past, predicting imminent doom for the US-dollar based financial system. Reading these predictions years later, it is impossible to argue with the logic of these authors. Their analysis is as flawless today as it was a quarter century ago, yet the collapse has yet to materialize.

Does this mean that the unsustainable trends in the US economy will continue forever? No. A trend that cannot remain in existence forever won’t. The system is now so unbalanced that any number of unforeseen events could trigger a financial collapse. Most people today have very little understanding of how close we are to such a collapse because either A) They have never heard such outlandish talk or B) They've heard such outlandish talk for so long they no longer believe it.

2. Forecasting the Future via Scenario Analysis

Traditional forecasting techniques often fail to predict significant changes, especially when change is rapid or discontinuous. Scenario analysis is a tool that was specifically designed to deal with major, uncertain shifts in the future by "thinking the unthinkable." It involves constructing stories about different plausible futures, then planning strategies and reactions in response. It is not an attempt to predict the future but rather to describe future possibilities and plan contingencies based upon them. Scenario analysis can be a useful tool in helping people to think laterally and to question assumptions and beliefs about the future. Royal Dutch/Shell first used it commercially in the late 60's, and as a result was well prepared to deal with the oil shocks of the 1970s.

The rest of this article will be devoted to a Rooster Year 2005 scenario, based on the pattern of terrible events, endings and new beginnings we explored in Part 1. It is not a forecast for the future; it is a story. It is a possible future, and as such it gives you things to think about that you likely would not otherwise consider.

3. 2005 Scenario – A Story of Terrible Events, Endings and New Beginnings

Events in the year 2005 showed surprising symmetry with events of previous Rooster years, but most of these became mere footnotes when viewed from the long eye of history. Prince Charles, who first wed Lady Diana in the Rooster year of 1981, tied the knot again 24 years later in 2005. The last US penny was minted in 2005, as inflation took its toll, as it did on the British half-penny in 1969. AIDS, which first made its appearance in the Rooster Year of 1981, was back with a vengeance in 2005 with a new, extremely deadly strain. Osama bin Laden, born in the Rooster year of 1957, was captured and killed by US forces in Afghanistan after his spectacular reign of terror. And an attempted coup against President Bush by ultra leftists (mirroring the coup attempt against FDR by ultra rightists in 1933) was thwarted, and Bush’s power and popularity grew stronger as a result. He would need that for what was to come in the latter half of the year.

The terrible path to war became increasingly murky; political tensions were rising along with temperatures across the globe. Conflict simmered just below the surface between the US/Japan/Taiwan coalition in Asia, and the increasingly powerful China. North Korea and Iran were menacing the world with nuclear threats, and Iraq remained mired in a quagmire in spite of democratic elections, demonstrating clearly that democracy cannot be forced at gunpoint.

But 2005 will be remembered in history as the year of the Great Quake, the year that the entire earth shook. Generations to come will recall the terrible events of 2005, and how the world was reorganized in an instant. The Christmas quake of 2004 that spawned the massive tsunamis in Asia that killed over 200,000 was just a precursor of what was to come in 2005.

The Great Quake of 2005 was actually more than just a single event; it was a weeklong swarm of powerful quakes ripping across the Pacific Rim of Fire, causing the entire earth to vibrate. In retrospect, it was the filling of the Three Gorges Dam in China that was found to be the culprit. As the dam filled, the weight of untold hundreds of trillions of gallons of water exerted a tremendous amount of pressure on such a small (geologically speaking) point on the Eurasian plate, deep below the earth's surface. Like a thumb pressing down with tremendous force on a brittle plane, the plate first bucked, then snapped. The large, previously stable Eurasian plate shattered, leading to a chain reaction readjustment of all adjoining plates, most notably the Pacific plate, parts of which shifted several miles.

It began in late September, when huge quakes began to rock China and the Pacific. From Indonesia to Taiwan, Japan, Alaska, Seattle, California, and Mexico, quake swarms in excess of 7.0 struck like thunderbolts from nowhere. So many quakes rocked the world that the world lost count as they increased in frequency, duration and intensity. When the Eurasian plate finally shattered, a global quake beyond measurement rocked the world, reducing cities to rubble and washing away coastlines. The greatest tragedy was the near complete loss of California, most of which collapsed violently into the Pacific Ocean. Between the quakes, the tsunamis and the disease and pestilence that followed, over 500 million lives were lost.

3.1 Consequences

The Great Quake was a global economic disaster. Every nation suffered, but no nation fared worse than the United States. California was no more. The state's 35 million inhabitants were responsible for 14% of US GDP, and at nearly $1.4 trillion, its economy was larger than that of every other country in the world save Japan, China, Germany, France, Italy, and the United Kingdom. But beyond just the numbers, California was the heart of so many of America’s advantages in aerospace, computing, entertainment, creative finance and agriculture. When California crumbled into the sea, the innovation of Silicon Valley and the imagination of Hollywood disappeared along with most of the latest developments and competitive advantages in biotechnology, whose industry was centered in the Valley. The font of America’s advantages, which sprang from a dual dominance in technology and entertainment simply disappeared. With the disappearance of Silicon Valley, the remaining technology centers in Taiwan, India, China and Japan suddenly increased in importance.

The US stock market’s reaction was to be expected. It had been in a slump all year on increasing military tensions, violence in the Middle East, collapsing corporate earnings and the continuing disappearance of jobs. The Dow was already down close to 30% for the year, and the uneasiness caused by the quakes drove it to an 8 year low, below 6,900 on the Monday of the Great Quake. World markets were closed for the remainder of the week, and when trading finally resumed, the opening gap down on the Dow was the largest ever seen. The Dow fell 50% at the open to 3,400, a 12 year low. But it was no wonder – innovative California companies such as Adobe, Apple, Applied Materials, Cisco, Google, Hewlett Packard, Intel, Oracle, Sun Microsystems and Yahoo! simply vanished, taking their market caps with them.

At the next US Treasury Auction, no bidders showed up. The largest traditional buyers of US debt – China, Japan and Taiwan, needed to deploy their resources at home, to begin the rebuilding process that the quakes had caused in their home lands. The US government went into default, unable to pay its bills. It simply had no choice. The IMF and World Bank tried to step in with a restructuring plan for America’s $8 trillion in national debt, but the President flatly refused. The government disowned the dollar and cancelled all foreign debts. The president closed all borders, declaring a national state of emergency, and suspended the Constitution until further notice.

With US dollars no longer accepted internationally as payment for goods and services, the global economic system ground to a halt. The era of cheap electronics flooding American shores was over, as Americans focused on more immediate needs. Unemployment in the US shot back to Great Depression highs over 25%. In spite of the fact that there was plenty of work to be done, and rebuilding to undertake, people sat idle and the work went undone because there was no money to pay them. The safety nets that were carefully woven into place during FDR’s New Deal Administration were shredded to tatters. Unemployment insurance, Social Security and FDIC insurance on bank accounts went unpaid. People lost their life’s savings in the stock market as well as in banks that they believed to be Federally insured. Insurance companies were bankrupted by massive claims, and the world was thrown back into uncertainty ruled by risk.

The Dow continued on a downward spiral, finally bottoming at a 24 year low, below 1,000. The President was emboldened with a fiery new religious fervor. He declared that it was the beginning of Armageddon. God was angry with the United States for overreaching its bounds, for separating the state from religion, for pushing the boundaries of science. He made fiery, incoherent speeches with his face growing red with anger, and demonized dissent. He claimed that he received personal instructions from God, and led a revival in religious fundamentalism. The President withdrew the nation from international relations of all kinds, martial law remained in effect, and daily prayer became a Federally mandated activity.

In time, California came to be remembered as a mythic place, the stuff of legend where life was free and people were able to pursue their dreams, unencumbered by mandated religion or restrictions on international travel. It was idealized as a lost world, and in time people came to wonder whether such a magical place ever existed at all, or if it was only a fantasy, like the long lost fairy tale of the mythical land of Atlantis.

4. Moral of the Story

The moral of this story is not to prepare for an earthquake that demolishes California. Instead, the story is intended to emphasize a few key points:

1) The global economy is a subset of the environment and Mother Nature, not the other way around. I do not know whether the weight of the water of the Three Gorges Dam could cause tectonic plates to shatter or shift, but I do know that many of the technologies of modern man have effects on our environment and on ourselves that we are unaware of. Like the move “The Day After Tomorrow”, this example is just a metaphor. Reckless disregard for the environment for the sake of economic growth does not come without costs.

2) The biggest disasters are those that no one sees coming. We know that the global financial system is extremely unstable and that it is teetering in an uncomfortable balance that could break at any time. It is overdue for a collapse, and it is simply waiting for a trigger. Preparation should therefore be made either 1) to prevent the impending collapse with responsible policies and/or 2) to plan and prepare contingencies to mitigate damage in the aftermath of a collapse.

3) If we accept the premise that the demise of the USD-based global financial system is inevitable, we should begin to think now about devising a better system to replace it. Are there other ways to organize global society rather than on the basis of competition, which is the centerpiece of modern capitalism? Capitalism won the Cold War, but apparently it didn't know where to stop. If we have no enemies, wouldn't it be better to cooperate with one another rather than to compete? Can we devise and implement a fairer and more equitable system in which everyone is a winner, rather that one in which the winners gain at the expense of the losers?

4) Finally, if the world were destroyed, there would be no greater loss to you than the loss of your loved ones. The best things in life are still free, and in fact, they are priceless, beyond the reach of capitalism's gnarled claw. We live in a world of amazing technology and physical abundance, yet we tend to focus more on what we lack, instead of what we have. It is only after it is gone that we realize how good we had it.

Send me your comments and ideas on this story. As with previous stories, I will publish the best, most thought-provoking ones.

Read Part 1 of the Rooster Year Outlook.

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