January 2006 Early Indications I: A Macro View

Before we get into the business of predicting what might happen in
technology-related areas in 2006, I wanted to step back and note six
macro-level factors that, if they break in a certain way, will make
discussions about Google vs. Microsoft, cable vs. DSL, Intel vs. AMD,
or Blu-Ray vs. HD DVD utterly irrelevant. The other factor here is
timing: it's impossible to know when a hurricane, epidemic, or
political uprising might hit, so these kinds of long-wave changes
don't fit neatly into a chronological prediction. Nevertheless, all of
them have the potential to rearrange the landscape of hundreds of
millions of individuals.

Of the six macro trend areas, three are political, two are natural,
and one straddles the line between the two.

-Two natural areas of potential disruption-

1) Climate change

Regardless of one's interpretations of various claims as to causation
and severity, evidence for the _existence_ of what's called "global
warming" mounts yearly. Foreseeing the _consequences_ is another
matter. How much will coastlines be altered by rising water levels
caused by melting polar ice? What will be the political and economic
consequences of newly exposed mineral resources in the Arctic?
Normally peaceful nations, including Canada and Denmark, are
contesting several previously ice-bound islands and surrounding areas
that could include such attractive resources as diamonds and oil; the
former country recently staged military exercises in the region to
bolster its presence.

Much was learned in the twentieth century about the interconnectedness
of ecosystems, but the scale of those connections seems to be
increasing as knowledge expands. Researchers at the Woods Hole
Oceanographic Institute have hypothesized dramatic shifts in what they
call the Atlantic Conveyor: a loop that begins with warm water flowing
north along the eastern U.S. coastline, powered by equatorial warmth
and related energy. After warming the Canadian Maritimes, the water
flows toward Europe, then south toward the equator. During this
stage, the cold, fresher water falls because it's heavier, further
helping fuel currents.

Shifting the balance of fresh versus salt water at different places in
the loop generates climate change, which changes what foods will grow
where and how much heat is needed for the resident populations.
(Migration patterns of butterflies, for example, are being found to be
much more dynamic than previously thought as they discover newly
hospitable habitats.) In the extreme case, currents could actually
flip directions, as they have in the distant past. The climatic
consequences of the Gulf stream's moving only slightly, or cooling by
a few degrees -- as a result of melting ice caps -- involve not only
hotter summers or fewer hard frosts in the winter (and a probable rise
in mosquito-borne disease) but also, paradoxically, colder
temperatures in parts of North America and/or Europe. And nobody knows yet if there's a connection between global warming
and all those hurricanes.

2) Avian flu

Nature is at base a system of checks and balances: growth and decay,
life and death, order and disorder all exist in dynamic tension. As
some forms of disease like bacterial infection or smallpox come under
attack from improved hygiene, medications, or new social practices,
new ones emerge. (It was fascinating to hear President Bush
supporting Intelligent Design in the same week he authorized a
relatively aggressive government response to a disease that doesn't
exist yet but will if a virus mutates in a certain way.)

No current adults in leadership positions have ever seen a pandemic.
The last one was in 1918, and had the nasty trait of attacking people
with the strongest immune systems in what is called a cytokine storm:
People's faces turned purple and they coughed blood as their lungs
were destroyed in 24 to 36 hours. Having thousands or tens of
thousands of prime-of-life adults would have unforeseeable
psychological and economic effects this time around.

Here's a back-of-the-envelope estimate of how bad an H5N1 pandemic
could be, courtesy of public-health expert Dr. Larry Brilliant via the
Strategic News Service:
****
First, assume that over the three-year period that pandemics usually
run their course, one-third of humanity contracted the disease (about
the same proportion as the 1918 flu and the same order of magnitude as
other flu pandemics). Then, assume that the death rate from H5N1 drops
from the currently reported 50% human fatality rate (it is almost 100%
fatal in chickens) reported today.

Assume that as a result of both better surveillance (so that we find
more mild cases, reducing the denominator of the case fatality rate,
which is number of deaths divided by number of cases) and the virus
becoming less virulent over time - as do most viruses as they pass
through the human population - the case fatality rate drops by
nine-tenths. That would reduce the case fatality from H5N1 to 5%. Even
then, we face a disaster of unimaginable proportions: if 33% of the
6.5 billion people in the world get infected, and 5% of them die, we
are looking at over 100 million deaths from the disease.
******
The economic consequences would be a massive extrapolation from what
we saw with SARS, which caused 44 deaths in Canada but paralyzed the
economy: imagine the world's airlines being grounded, for example.
Slowdowns in just-in-time logistics will quickly shut down
manufacturing lines that lack inventory buffers. Public places like
office buildings, arenas, and train stations will empty out. People
are already hoarding vaccines, but even anti-viral hand wipes could
become coveted items. The picture gets worse from there, if (and it's
a huge if) H5N1 mutates to spread by human-to-human contact.

-One area of natural and political overlap-

3) Unstable energy prices

The reasons for oil's being dramatically more expensive are of course
many and varied; they're also sometimes secret. Even visible records
are suspect: Shell downgraded its published statement of proven oil
and gas reserves five times in a twelve-month period. The lack of
transparency into the operations of key producers (OPEC nations), key
decision-makers (Vice President Cheney), and major markets (China)
means that tracing cause to effect will be effectively impossible,
particularly when catastrophic events (earthquakes, tsunamis,
hurricanes) disrupt matters further.

The Iraq war is of course a major factor in this instability; so is
Israel's current political situation. China's surge in urbanization
and manufacturing capacity is spurring demand, while, in the near
term, supply is unlikely to grow from either new discoveries of
current fuels or commercialization of new fuels. One exception may be
biofuels: Brazil's calorie-rich sugar cane converts to ethanol costing
about a third of what American grain-based ethanol does. Biodiesel,
made from used fryer grease and similar byproducts, can also be made
from soybeans, another major crop in Brazil.

But the rise of alternative fuels will not reduce oil's primacy any
time soon, and the imbalance between growth in consumption, speed of
depletion, and available reserves looks like it will widen before it
can stabilize. Add a climate shift (what if London used as much
heating fuel per capita as Stockholm?), a political disruption in
supply or distribution (whether from terrorists, taxing authorities,
or regime change), or a natural disaster, and oil prices could shock
the global economy since virtually every product and service folds
energy into the final price.

-Three long-wave political shifts-

4) The end of the bi-polar world

From the 18th century through most of the twentieth, prosperous
nations organized competing networks of far-away, less developed
territories. France had possessions everywhere from Louisiana to
Algeria to Vietnam, England's empire truly spanned the globe, and more
recently the U.S. used economic, military, and cultural incentives to
maintain if not an empire at least a sphere of influence from Korea,
Japan, and Taiwan to Canada to NATO.

Now, World War II fades into the past and less frequently dominates
policy debates. Differentials in birth rates create population
imbalance between religions and regions. Communications
simultaneously reinforces local cultures and connects disparate
peoples into a global cultural fabric. For these and other reasons,
the model of the big countries shaping smaller and poorer countries'
destinies is falling from favor. Arms deals can be had from the U.S.,
France - and China, with the wild card of the former Soviet states
selling off armaments for hard currency, no questions asked.
Intellectual capital comes less exclusively from the
Harvard-Sorbonne-Oxbridge axis given that China, India, and the former
Soviet states are both home-growing and temporarily exporting hundreds
of thousands of motivated and talented students.

For many years, conventional wisdom held that the U.S.-USSR two-camp
world, albeit with fatefully high stakes for live conflict, kept
smaller "rogue" states in line. The two superpowers held many
interests in common, and countries like Libya and North Korea, as well
as non-state actors, were held in check. Now, what some call the
"unipolar" world, with the U.S. as the sole superpower, works
differently. Europe is attempting to organize itself as a
countervailing force via the EU, Japan is moving out of its post-WW II
stance, and the "nuclear club" includes many relatively minor
countries who now carry potentially big sticks. China, meanwhile, is
modernizing in its distinctively Chinese way, becoming the world's
factory, extending some freedoms while curtailing others, and
reinventing itself at an unprecedented scale as millions of people
relocate every year.

There's no consensus understanding of the current world. Tom
Barnett's "core and gap" view probably has few fans in Europe and
fewer in Riyadh. The Bush administration's stance of unipolarity,
which both permits and necessitates unilaterality, has been fought
both within American politics and in Europe, never mind in the eastern
hemisphere. The simultaneous attack on and retreat from modernity,
meanwhile, joins religious fundamentalists from many faiths in
focusing on common or similar enemies, even as they differ in their
chosen path forward. Indeed, the single most important geopolitical
result of the fall of the Berlin wall may be the resurgence in the
number and power of non-state actors (such as clerics, media
personalities from Berlusconi to Murdoch to Ailes, and
non-governmental organizations like the Gates Foundation and
Greenpeace). Whatever their power, however, none of the emerging
entities can either countervail U.S. dominance or hold a cadre of
nation-states in loose alignment. The result is the instability that
we see today and a war fought not against a geopolitical entity but a
mode of political conflict.

5) Decreased faith in government and authority

The lack of faith in political institutions extends far beyond a
simple dislike or disapproval of a given politician's performance.
Across the globe, politics as an exercise is being viewed with less
trust and confidence than at any time in recent memory. George Bush's
approval rating, ever since New Orleans, has been less than 50%, a
stunning reversal for the apparently decisive winner of the 2004
election who at the time claimed a mandate. Even the process by which
that election was conducted, relying as it did on electronic voting
machines that lacked audit trails and hard copy but featured visibly
insecure code, is now widely distrusted.

Italy's Silvio Berlusconi has used his media holdings and government
powers to reinforce his position (in part by clamping down on
publications that satirize and criticize his alleged law-breaking),
but even with a hand-tailored legal code, a facellift, and a hair
transplant, Berlusconi trails his opponent in the upcoming April election.

Germany's Angela Merkel was hardly swept into office on a wave of
confidence and good feeling. After confusing gross and net income
twice in a single debate and later allegedly plagiarizing a Ronald
Reagan speech, her party limped into a first-place finish in the
election for Chancellor. After two months, her party (the Christian
Democratic Union/Christian Social Union, at 35.2% of the vote) and its
strongest challenger (the Social Democrats, with 34.2%) agreed to a coalition government.

Even England's Tony Blair, seemingly invulnerable to Tory opposition,
lost his first House of Commons vote in November. Much like George
Bush in the U.S., Blair faces public disapproval but has no credible
political opponent to contend with. History's grade on his handling
of the Iraq war is still incomplete, to say the least, but right now
voters seem ambivalent: when asked when he should act on his promise
to voluntarily leave government in the next several years, only 25% of
respondents hoped he would change his mind and stay on past the next
General Election.

In all four of the above-mentioned countries, public dissatisfaction
derives in part from a lack of confidence as old slogans and solutions
fail to address current reality. Economic uncertainty builds as jobs
and wages are being reoriented away from high-paying, often
unionized, positions toward part-time or otherwise lower-paying work.
An increasing number of jobs (and types of jobs) are being moved to
lower-wage nations, whether Mexico, Poland, India, or China.

6) Increasing signs of class conflict

Under the Bush presidency, the gap between rich and poor has
dramatically widened. The notion of a broad-based middle class,
serving as a buffer between the extremes and as a target for the
striving poor, can no longer be assumed. Even mainstream economists
like Mark Zandi at Economy.com contend that the middle class is
splitting, unevenly, into those who are doing well and those who,
largely because of globalization, are struggling.

According to venture capitalist Stephen Rattner writing in Business
Week (8 August 2005),

"Every serious study shows that the U.S. income gap has become a
chasm. Over the past 30 years, the share of income going to the
highest-earning Americans has risen steadily to levels not seen since
shortly before the Great Depression.

JUST HOW DRAMATIC A SHIFT over the past three decades? Economists
Thomas Piketty and Emmanuel Saez calculated (using data from the
Internal Revenue Service, hardly a hotbed of partisanship) that the
share of income going to the top 1% of households nearly doubled, to
14.7% in 2002, up from a low of 7.7% in the early 1970s. By
comparison, the income share for the top 1% peaked at 19.6% in 1928
before beginning its long slide. What is particularly alarming is that
at every step up the ladder, the disparity has progressively widened.
Over the past 30 years, the share of income garnered by the top 10% of
Americans has grown by about a third; the share of the top 0.01% --
the 13,000 or so households with an average income of $10.8 million in
2002 -- has multiplied nearly four times."

Turning her focus away from the rich, Harvard Law School professor
Elizabeth Warren analyzes the rise in middle-class wages from a
different perspective: risk. Given that both spouses in a two-parent
family are often working full-time to meet recurring, fixed expenses
like day care, insurance premiums, mortgage, and taxes, (and not
discretionary items like food, travel, and clothing that can be
adjusted), there's no slack in the budget for time taken off to care
for sick kids or recuperating elders. Nor can the spouse working in
the home serve as a backup wage-earner in the case of layoff or
disability involving the main wage-earner. The notion of safety nets
has fallen from the center of public attention of late, but the fact
remains that there are complex moral, political, and economic
questions about caring for our fellow citizens that are not going
away.

The Katrina disaster linked several of these themes into a complex
tragedy. Decisions to evacuate and/or shut down oil wells and
pipelines were made in close conjunction with energy companies.
Racial tension has been a facet of New Orleans life for well over a
century as French treatment of blacks (and intermarriage) starkly
differed from Confederate and then Reconstruction attitudes and
policies. Class tension, meanwhile, followed the pattern of many
tourist-driven economies: to cite but one example, the status, and
stature, of the poorly-paid police department remains fragile even
now. When natural disaster hit and was compounded by the consequences
of bad human decisions made over decades, the decay of civil order was
frightening and remains poorly understood.

Nor is class redefinition and its resulting tensions solely a North
American issue. The riots in France last year sprang from complex
sources, but religious affiliation, economics, and government's mild
response to astounding unemployment figures were part of the mix.
Similar tensions are less volatile but equally present across Europe,
where immigration policies are being hotly debated and often
redrafted. The class component of much of the violence in the Arab
world is also impossible to ignore as differences in education, social
mobility, and personal prospects (as in arranged marriages, for
example) mix with religious intolerance across much of Africa and
through Asia.

If a rising tide was formerly said (reportedly by everyone from
Herbert Hoover to John F. Kennedy) to lift all boats, what happens
when there are areas of the bay where the less fortunate stay stuck in
the mud while they can see better-off brethren differentially profit
from war, globalization, oil shortages, and other burdens widely
shared? As we contemplate what 2006 will bring, seeing the magnitude
and complexity of these kinds of long-term developments that could
become either urgent or inexorable forces in our lives can be a
useful, if perhaps overly sobering, exercise.

For further information:

http://www.whoi.edu/oceanus/viewArticle.do?id=7115

http://companionship.typepad.com/critt/2006/01/brilliant_pande.html

http://www.bmonesbittburns.com/economics/reports/20050812/avian_flu.pdf

http://www.bmonesbittburns.com/economics/reports/20051011/dont_fear_fear.pdf

http://www.thomaspmbarnett.com/pnm/index.htm

http://www.businessweek.com/print/magazine/content/05_32/b3946130.htm?chan=gl

http://privatizationofrisk.ssrc.org/Warren/pf/