Monthly Archives: January 2012

Last week’s decision by the Federal Reserve to provide a quantitative definition of price stability and the publication of the 17 Federal Open Market Committee members’ expectations of the Fed funds rate over the next few years aims at improving transparency and accountability of the central bank. It also raises several questions.

To be effective, central bank communication needs to be well understood not only by sophisticated market participants but also by the public. As they are currently designed, the new tools might turn out to be too complex, and risk creating confusion, for both groups. This could be exploited by those, in particular in Congress, who are looking for new excuses to undermine the independence of the Fed. This risk should not be underestimated. 

With the Arab League passing the buck to the UN on how to deal with Syria, there is an urgent need for a strategy that promotes President Bashar al-Assad’s early departure and a transition, perhaps via his vice-president, to a broader government and from there to elections. At the same time, there needs to be unified international pressure on the regime to stop the killing and for both sides to respect a monitored ceasefire. Now that the fighting has reached Damascus, this is becoming even more urgent. This is all broadly consistent with the Arab League’s own plan.

Establishing humanitarian protection and a plan for political transition, without the big stick of threatened military action to back it, might seem a tall order for a divided Security Council. However if the two major dynamics of the Syrian crisis are respected, there could still be a happy conclusion. The first is that Syria’s religious complexity, where a small Alawite minority has been reluctantly trusted by other minorities as well the Damascus urban middle class, to hold in check a Sunni majority that comprises three quarters of the population, needs to be factored into a solution. The second is the need to include Syria’s neighbours into the peacemaking process to help ensure that chaos does not follow change. 

The ancient Greeks thought that “those whom the gods wish to destroy, they first make mad.” For them, the surest way to destroy a person is to fill him or her with success, power, prosperity and fame. Excessive success induces inordinate self-confidence, which inevitably leads them to make disastrous mistakes and to failure. Hubris, they called it.

Many centuries later we got the Brics: poor countries whose economic and geopolitical success and influence – and hubris – is growing quickly. And its not just these countries. HSBC, reckons that if current trends continue, by 2050 the 100 largest economies in the world will include (in addition to the Brics and traditional leaders such as the US, Germany and Japan) countries such as the Philippines, Peru, Bangladesh and Colombia. Of course, the critical assumption is “if current trends continue”.

Here is where it is worth mentioning the meeting hosted by the World Economic Forum in Davos. After many years of attending these meetings, I have become a great believer in the existence – and the power – of hubris. I do not know if it is the gods or human nature, but success and failure are too frequently inextricably linked and the Davos meeting offers an extraordinary laboratory to observe the phenomenon.

As I was recently talking in Davos with Turks, Brazilians, Indians, Indonesians, Russians and Chinese, the symptoms of the many fallen celebrities who no longer stalk the corridors of this Swiss mountain town seemed just below the surface. Are the gods plotting to put these new arrogant characters in their place? Could it be that a crash is in the future of these emerging countries? Could this be one of the most important warnings coming from this year’s meeting on the Alps? 

As world leaders meeting in Davos discuss “The Great Transformation: Shaping New Models”, a central question is how to grapple with the rise of regionalism – a consequence of a system of global governance that increasingly seems to have fallen short of expectations.

The dearth of truly effective global institutions is consistent with the broader geopolitical trend where the global agenda is increasingly influenced on a regional level. With general agreement that the unbridled pursuit of individual national interests would produce suboptimal results, regionalism, while far from ideal, is emerging as a stopgap to the shortage of effective global decision-making.

The problem is that while demands on global institutions have increased, their ability to respond effectively and quickly has stagnated and even weakened. This is due, in part, to governance structures that lack legitimacy and insufficient support from today’s great powers, namely the US and China.

A world where regional groupings and organisations address regional, and sometimes wider issues, is clearly second-best to a world of effective global governance. But it is nevertheless preferable to raw nationalism and reflects the broader diffusion of international power away from a pure “might-makes-right” system. The trick for global leaders is to recognise this new reality and try to ensure that the emerging institutions and alliances can work together. 

Policy experimentation continues unabated in the US with the Federal Reserve launching on Wednesday a new initiative to influence market valuations and, through this, the outlook for the country’s economy. The Fed hopes to use greater transparency to mould expectations in a manner that promotes economic growth and price stability. But this new approach could also create confusion and even greater hesitancy on the part of healthy balance sheets to engage in productive investments.

I suspect the Fed recognises that the policies at its disposal are a long way from ideal. Interest rates are already floored at zero and, according to the latest statement, will likely stay there at least through the end of 2014. Meanwhile, its balance sheet has ballooned to a previously-unthinkable 20 per cent of gross domestic product through direct purchases of securities in the market place.

Few expect this new initiative to have an immediate or durable impact. Beyond 2012, individual FOMC members’ forecasts are quite dispersed, including a 0.25 per cent to 2.75 per cent range for the target Federal Funds rate for end 2014. It will also take time for households, companies and investors to digest yet another set of signals. Moreover, they are much more interested in the likelihood of a new round of Fed purchases, QE3, than forecasts that deal with an unusually uncertain future and are likely to change frequently. 

The longer-term refinancing operations launched by the European Central Bank last month have relieved the liquidity problems of European banks, but not the financing disadvantage of the highly indebted member states. Since high-risk premiums on government bonds endanger banks’ capital adequacy, half a solution is not enough. It leaves half the eurozone relegated to the status of developing countries that became highly indebted in a foreign currency. Instead of the International Monetary Fund, Germany is acting as the taskmaster imposing fiscal discipline. This will generate tensions that could destroy the European Union.

I have proposed a plan, inspired by Tomasso Padoa-Schioppa, the Italian central banker, that would allow Italy and Spain to refinance their debt by issuing treasury bills at about 1 per cent. It is complicated, but legally and technically sound. But the authorities rejected my plan in favour of the LTRO.

The difference between the two schemes is that mine would provide instant relief to Italy and Spain, while the LTRO allows Italian and Spanish banks to engage in a very profitable and practically riskless arbitrage but has kept government bonds hovering on the edge of a precipice – though the last few days brought some relief.

Contrary to the current discourse, the long-term solution must provide a stimulus to get Europe out of a deflationary vicious circle: structural reform alone will not do it. The stimulus must come from the EU because individual countries will be under strict fiscal discipline. It will have to be guaranteed jointly and severally – and that means eurobonds in one guise or another. 

One of the few potential areas for bipartisan cooperation in Congress this year is tax reform. There is broad agreement on both the right and left that the US tax system is a mess. Since the last major tax overhaul in 1986, the tax code has become cluttered with far too many special tax breaks that cost a great deal of revenue and show little proof of effectiveness. Unfortunately, Barack Obama effectively threw cold water on any tax reform effort in his State of the Union Address on Tuesday.

The president proposes a variety of gimmicky new tax penalties, to punish companies that move jobs overseas for example. He wants to force every US-based multinational corporation to pay a minimum tax, and made individuals earning at least $1m per year to pay at least 30 per cent of their income in tax.

Whatever the merits of these specific tax proposals, they do not move twoards tax reform. They move in the opposite direction, by cluttering up the tax code with still more special tax breaks for activities in current political favour and penalties for individuals and businesses in disfavor. This is exactly the sort of thing that created America’s current tax mess. His decision to move away from reforming the tax code this year is both a substantive and political error that I believe he will come to regret. 

There is a clear sense that collectively we have spent 20 years building a system that can’t really last. Financial market volatility, personal and government debt and rising inequality are not the canaries in the global economic coal mine. They are the coal mine itself.

This week the Institute of Public Policy Research, a British think tank, is publishing the report of a year-long review of globalisation, which I have led. It argues that, like our model of capitalism itself, globalisation is not working in the way it can and should in progressive societies. It also makes the case that globalisation remains one of the best tools we have to achieve those progressive goals at the global level as long as we have the right policies to guide it.

Capitalism’s ability to adapt and reinvent itself is its greatest strength. The same is true of globalisation. There are few who would argue that the status quo ante of the last decade is tenable. Preserving the benefits that come with open global markets for ideas, trade and investment means acting now to reduce the risk in those markets and better share the benefits they bring to our own economies. The IPPR’s case is absolutely right: the complicated reality is that for global prosperity, like capitalism, globalisation is both the problem and the solution. Globalisation is dead. Long live globalisation. 

The year has started well for financial markets. Equities are generally up. European sovereigns have borrowed with an ease that has surprised many observers. Economic data, particularly in the US, have beaten expectations. So as President Barack Obama prepares to give his State of the Union address, and as policymakers and corporate chiefs come together in Davos, there is less alarm among the global community, though not yet a sense of relief. Indeed, anxiety about the future remains a major driver of economic performance.

At Davos and beyond there will be many who argue that we must prioritise increasing business confidence and who say that government stimulus is at best useless and at worst counterproductive. Others will argue that priority must be given to stimulus and that issues of business confidence are red herrings.

Government has no higher responsibility than insuring economies have an adequate level of demand. Without growing demand, there is no prospect of sustained growth, let alone a significant fall in joblessness. And without either of these there is no chance of reducing debt-to-income ratios.

The best chance for economic recovery involves governments working directly to increase demand and to augment business confidence. At Davos and beyond, this should be the focus of economic debates. 

The majority of writers in the ‘Crisis in Capitalism’ series agree that the crisis in capitalism is caused by two distinct failures: the inability of the system to deliver sustained prosperity through economic growth and jobs; and the perception that it is grossly unfair and socially unjust.

To fail on one count is a problem. Yet many would have probably glossed over that, especially those who – erroneously in my view – believe that there are rigid trade-offs between efficiency and equity. However, to fail on both counts, and to do so in such a spectacular manner, is indeed a “crisis.”

Theoretically at least, what has occurred is less a calamity of the system as a whole, and more an issue of how it was run. Yet, four years into the crisis, little has been done to repair the damage coherently and comprehensively and to safeguard the real victims, let alone counter the risk of further costly dislocations. Until this is done, it will be difficult to convince the world that capitalism itself is not the problem. 

The slowdown in China’s economic growth last year has fostered mixed reactions. Some argue the recently-released 9.2 per cent annual rate exceeds expectations and is consistent with a soft landing. Others see the fall from 10.4 per cent in 2010 as an indication that a sharper drop is still to come.

Without actions to support growth, the pace may fall below eight per cent in 2012. Beijing is likely to lower taxes and consider special incentives to spur consumption. But the real challenge is to encourage less frugality among the Chinese, especially among migrant workers. Policies must be designed to deal directly with the exceptionally high rates of saving by people and corporations. This would have big implications for the trade balance, a contentious issue with the west.

Providing migrants with more security and encouraging higher corporate dividends could increase consumption by some five percentage points of national output. This could turn China’s current trade surplus into a deficit. These distinct and politically sensitive reforms would also lessen China’s alarmingly high income disparities. This strategy, with benefits for all, contrasts with that of pressuring China to strengthen the renminbi, perceived by Beijing as benefiting the US at China’s expense. 

Capitalism earns its keep through Adam Smith’s famous paradox of the invisible hand: self-interest, operating through markets, leads to the common good. Yet the paradox of self-interest breaks down when stretched too far. This is our global predicament today.

Global capitalism has mostly shed its moral constraints today. Self-interest is no longer embedded in higher values. Consumerism is the world’s secular religion, more than science, humanism, or any other -ism. “Greed is good” is not only the mantra of a 1980s Hollywood moral fable: it is the operating principle of the top tiers of world society.

Unless we regain our moral bearings our scope for collective action will be lost. The day may soon arrive when money fully owns our politics, markets have utterly devastated the environment, and gluttony relentlessly commands our personal choices. Then we will have arrived at the ultimate paradox: the self-destruction of prosperity at the very moment when technological knowhow enables sustainable prosperity for all. 

Pakistan’s deepening political crisis has escalated dramatically, with the Supreme Court initiating contempt proceedings against Prime Minister Yousuf Raza Gilani. The judgement could lead to the dismissal of Mr Gilani and eventually President Asif Ali Zardari, as the army appears to be giving full backing to the courts.

Since the 1950s every political crisis Pakistan has faced has been a result of civilians trying to wrest power and control from the military. This crisis is no different except for one important aspect – the military has no intention of seizing power. Instead it has allied with the Supreme Court in an attempt to get rid of a government that is widely perceived to be corrupt and irresponsible.

But in an era when hope of democracy is spreading through the Arab Muslim world and powerful armies in countries such as Thailand and Turkey have learnt to live under civilian control, Pakistan is an ongoing tragedy. Its military refuses to give up its huge stake in the economy and its privileges, while its politicians refuse to govern wisely or honestly and decline to carry out basic economic reforms such as taxing themselves.

The military cannot afford a coup now, nor do they need one. Once the courts order the expected dismissal of Mr Gilani and perhaps Mr Zardari, the army and opposition politicians can mount relentless pressure on the two leaders to accept the court’s verdicts and resign. What would follow would be an interim government followed by general elections within three months. That may not be such a bad thing but the tragedy is that nothing is in place to prevent such a crisis occurring again and again. 

It is far too easy to blame the crisis of capitalism on global finance and sky-high executive salaries. At a deeper level the crisis marks the triumph of consumers and investors over workers and citizens. And since most of us occupy all four roles, the real crisis centres on the increasing efficiency by which we as consumers and investors can get great deals, and our declining capacity to be heard as workers and citizens.

Modern technologies allow us to shop in real time, often worldwide, for the lowest prices, highest quality, and best returns. Through the internet we can now get relevant information instantaneously, compare deals, and move our money at the speed of electronic impulses. Consumers and investors have never been so empowered.

Yet these great deals come at the expense of our jobs and wages, and widening inequality. The goods we want or the returns we seek can often be produced more efficiently elsewhere by companies offering lower pay and fewer benefits. They come at the expense of main streets, the hubs of our communities.

Job insecurity is on the rise, inequality is widening, communities are becoming less stable, and climate change is worsening. None of this is sustainable over the long term but no one has yet figured out a way to get capitalism back into balance. Blame global finance and worldwide corporations all you want. But save some of your blame for the insatiable consumers and investors inhabiting almost every one of us, who are entirely complicit. 

Friday’s actions from Standard and Poor’s were hardly the biggest surprise in the financial universe: the ratings agency warned in December that eurozone nations were in danger of being downgraded.

Germany is, in effect, the last man standing. Others have succumbed to a mixture of three deadly sins: optimism, inaction and omission.

In the months ahead, the eurozone’s difficulties are likely to mount. As the contagion spreads, and as investors lose confidence in the ability of countries to deliver lasting fiscal austerity, countries which, to date, have benefited from immunity will also begin to suffer. Next in the firing line may be Germany, not so much because its bond yields are about to spike higher but, instead, because its exporters are hugely exposed to trade with the rest of the eurozone and its financial institutions are groaning under the weight of the region’s financial disorder.

The narrative may then change. Germany may go the way of the others, unable to avoid a descent into recession.

That could provide the eurozone with an unexpected lifeline. Faced with a downturn in both the periphery and the core, and with interest rates already close to zero, the European Central Bank may have to bite the bullet and begin a programme of quantitative easing, using newly-created money to buy government bonds. It won’t solve the crisis – that requires a leap of political imagination – but it would at least make the crisis easier to solve. 

 

How close is Mitt Romney to locking up the Republican party’s nomination for president? Close enough that his remaining viable GOP rival is now accusing him of committing capitalism.

Newt Gingrich wants voters to know that, under Mr Romney’s leadership, Bain Capital, the private equity firm, bought up poorly performing companies, fired workers to revitalise them and sold the newly-streamlined firm for enormous profits. Mr Gingrich’s charge may be smart politics during a period of high unemployment, but it seems a bizarre one from a man who uses the word socialism almost as an expletive.

The problem with this is that it obscures a much more important debate: what is the proper role of corporate money in American politics?

Following a Supreme Court decision in January 2010, super-political action committees that support a particular candidate without formal ties to his/her campaign, can now spend unlimited sums without having to disclose where the money came from. This gives corporate America extraordinary power within the US political process. But Americans won’t hear their public officials debating the wisdom of this system because elected officials in both parties know that it provides incumbents with crucial electoral advantages.

It is corporate influence in US politics, not “predatory capitalism”, that is the primary force now widening the gap between America’s haves and have-nots. 

The unexpected departure of Bill Daley as Barack Obama’s chief of staff and replacement by Jacob Lew, director of the Office of Management and Budget, is a setback for economic policy going into a critical period. But it also presents the president with an opportunity to improve his case for re-election.

Mr Lew will have no difficulty filling Mr Daley’s shoes. He has significant government experience both at OMB and the State Department. However, his departure leaves the OMB, which has primary responsibility for drafting and implementing the federal budget, without a leader at a time when budget issues are unusually sensitive, both economically and politically.

Democratic partisans will question whether Mr Lew, who is known principally as a technocrat, has the political skills to be chief of staff during a presidential election year. While his managerial skills are unquestioned, Mr Lew has never been known as a “politico”. Mr Obama may need to bring in a seasoned political operator in a senior capacity to fulfil that function.

While there is obviously danger in being forced to make a major staff change at an inconvenient time, Mr Obama may benefit by having an opportunity to set a new tone and direction. In Mr Lew he has someone he can rely upon, who is well versed in the issues upon which his re-election will succeed or fail. It could be a blessing in disguise. 

Another day and another previously unthinkable development becomes reality in Europe. Yet what on the surface appears to be good news for Germany – the record low yield at its latest government debt auction – is actually an indication of growing stress elsewhere in the region.

At Monday’s regularly-scheduled auction, the German government sold six-month securities at a negative yield of 0.012 per cent. Investors who bought them made history. Rather than receive interest income for lending money, they opted to pay the German government for the privilege of converting their cash into securities that, at the margin, are less liquid and subject to mark-to-market volatility.

But German rejoicing for borrowing money at negative rates should thus be tempered by the reality of Europe experiencing an accelerating disengagement of the private sector from the region’s economic integration project. This undermines growth and employment, shifts more of the load to taxpayers, and places even greater demands on creditor and debtor countries alike – all serving to aggravate an already-strained process for agreeing on the appropriate policy response and related burden sharing. 

Barack Obama’s new defence strategy caps the most important year in American foreign policy for a decade. Whatever grade one gives to the president’s decisions, they are certainly consequential, adding up to the most profound shift in US foreign policy since the convulsive period between September 2001 and August 2002.

The shift is reflected in the planned defence posture outlined last week by the Obama administration, which makes clear that the “Atlantic community” is being eclipsed by the rising Asia-Pacific one.

Some of the Asia-Pacific move reflects older initiatives; some is mainly symbolic. However, the cumulative boost of American energy and commitment is palpable. Indeed, the main challenge now for Washington may be to restrain the momentum of the large, coarse Sino-neuralgic political forces it has set in motion. Some of America’s Asian friends are uneasy. They wanted more reassurance, but not at the expense of rattling the table.

In fact, one of the more interesting phenomena of the past year or so is the rising US reliance on “grey power” – neither traditional diplomacy nor conventional military might – that operates in twilight worlds of special operations and financial clearing houses. 

It would have been almost unimaginable five years ago that the Financial Times would convene a series of articles on “Capitalism in Crisis”. That it has done so is a reflection both of sour public opinion and distressing results on the ground in much of the industrial world.

Americans have traditionally been the most enthusiastic champions of capitalism. Yet, a recent public opinion survey found that among the US population as a whole 50 per cent had a positive opinion of capitalism while 40 per cent did not. The disillusionment was particularly marked among young people aged 18-29, African Americans and Hispanics, those with incomes under $30,000 and self-described Democrats.

So how justified is disillusionment with market capitalism? This depends on the answer to two critical questions. Do today’s problems inhere in the present form of market capitalism or are they subject to more direct solution? Are there imaginable better alternatives?

The spread of stagnation and abnormal unemployment from Japan to the rest of the industrialised world does raise doubts about capitalism’s efficacy as a promoter of employment and rising living standards for a broad middle class. The problem is genuine. Few would confidently bet that the US or Europe will see a return to full employment, as previously defined, within the next five years. The economies of both are likely to be demand constrained for a long time.  

With US non-farm payrolls posting an unexpectedly strong 200,000 gain in December and German industrial orders now shrinking, are we about to see a great transatlantic decoupling?

Germany was always vulnerable to the chill winds blowing in from southern Europe. A greater proportion of German exports goes in aggregate to Italy and Spain (9.8 per cent in 2010) than to either the US (6.9 per cent) or China (4.9 per cent). Demanding austerity from fiscal sinners is all very well but German exporters are now being presented with the bill: export orders are clearly in retreat – and not only to destinations within the eurozone.

At first sight, the December payrolls gain, alongside a further welcome drop in the unemployment rate, suggests the US has some degree of economic immunity from the eurozone crisis. Decoupling may be a dirty word but it does, occasionally, happen. After all, the US decoupled from Asia following the 1997 Thai baht crisis.

Could the same thing happen again? Compared with the late-1990s, however, there are also some big differences. Back then, payrolls gains were running at 300,000 or more a month, growth was ticking along at 4 per cent, the housing market was a picture of health, the word “subprime” had not yet been invented and the financial system worked (often a little too well). 

Lest we needed another reminder, Thursday’s announcement that the Italian automaker Fiat had achieved the final performance target in its alliance with Chrysler underscored once more the remarkable success of the rescue of the American automobile industry.

No capitalist (and I consider myself to be a full-throated one) likes the notion of government intervening in the private sector. But we must recognise the rare moments when deviations from this principle are not only to be tolerated, but welcomed. Due to courageous decisions by both former President George W. Bush and President Barack Obama, the industry is now thriving.

Those who steadfastly oppose bail-outs – including Mitt Romney and the other Republican presidential hopefuls – insist that somehow this potential disaster could have been averted without government assistance. That is, quite simply, ridiculous. In late 2008 and early 2009, not a penny of private capital was available to finance companies in this sector, with or without bankruptcy. 

Is there anyone not frustrated by Mitt Romney’s narrow win in the Iowa caucuses? Conservatives are disappointed because they recognise that Mr Romney, who used to favour legal abortion and was for Obamacare before it was called that, is only pretending to be one of them. Seventy-five per cent of Iowa’s Republican voters wanted someone farther to the right. But because their votes were divided among a large field of weak candidates, the only moderate running in their state came out on top.

Liberals are disappointed because Mr Romney has moved closer to inevitability and is the strongest potential challenger to President Barack Obama. And journalists are most disappointed of all, because Mr Romney gliding to victory is a weak story.

Thanks to all this, there is tremendous reluctance on all sides to call the outcome before “the voters have spoken”. So expect to hear more and more about less and less likely alternatives to a Romney victory. Jon Huntsman, the only candidate yet to enjoy a moment of popular enthusiasm, could do better than expected in New Hampshire. Once Rick Perry joins Michele Bachmann in dropping out, conservative sentiment could coalesce around the unlikely survivor Rick Santorum. Given how unloved Mr Romney is, someone new could still enter the race. Anything is possible, of course. But in the end, the GOP is overwhelmingly likely to nominate Mr Romney because it is his turn and because he is the most electable candidate available. 

Iran has been relentlessly provoking America for the last ten days. Its military recently threatened to close the Strait of Hormuz, and Tehran warned on Tuesday that US carriers should not return to the Gulf. But Iran is bluffing, and war with the US or Israel is very unlikely in the foreseeable future.

Tehran is indeed angry, and its rage has been steadily building in recent months. The latest and strongest trigger was a sanctions bill, signed by President Barack Obama on December 31, which will make it more difficult and less profitable for Iran to sell oil. Nevertheless the regime doesn’t want war. Military conflict in the Strait would block its own ability to export oil. Tehran’s main goal is to scare the US and its allies away from implementing sanctions against exports.

For a war, Iran needs an opponent; but neither the US nor Israel are interested in an imminent fight. Leading members of the US military have spoken out against attacking Iran and the American public has no appetite for another military undertaking.

In the more distant future, as yet unseen progress by Iran on its nuclear programme, especially in building faster centrifuges, could cause conflict – particularly if the new equipment is used to build a bomb. But many observers are misreading the current joust in the Gulf. Iran is bluffing and baiting, but neither the US nor Israel will bite. 

The failure of the “Super Committee” last year to reach a budget deal underscored the underlying wedge in US politics. The distribution of the electorate through most of the post-1945 years has been a dominant centre, slightly to the left or right of centre. This enabled legislative compromises to be reached with relative ease.

But a political tsunami has emerged out of our past in the form of the Tea Party, with its ethos reminiscent of rugged individualism and self-reliance. It has yet to obtain sufficient traction to forge majorities for new legislation but its influence beyond its numerical strength has created an effective veto of new legislation before the current heavily Republican House of Representatives.

The emerging fight over the future of the welfare state, a paradigm without serious political challenge in eight decades, is accentuating the centre’s decline. The welfare state has run up against a brick wall of economic reality and fiscal book-keeping. Congress, having enacted increases in entitlements without visible means of funding them, is on the brink of stalemate. As studies have demonstrated, trying to solve significant budget deficits predominantly by raising taxes has tended to foster decline. Contractions have also occurred where spending was cut as well, but to a far smaller extent.

The only viable long-term solution appears to be a shift in federal entitlements programmes to defined contribution status, but the political problems of such a switch can be seen in state and local governments’ attempt to trim public defined pension plans. Public sector unions have fought mightily to avoid having their pensions shrink, as they have in the private sector.

We now face a true revolution, not so much in the streets but in the fundamental choices we will have to make to secure our fiscal future. Arithmetic demands it. 

I bravely predict more of the same in the coming twelve months.

Mitt Romney will win the Republican nomination after the party has exhausted its one-week-long love affairs with each of the non-Romneys. Barack Obama will be re-elected, because his one consistent strategy – to stay one step towards the centre of the rightwing Republican party – will prevail. But the presidential elections will do nothing to reinvigorate American society. Government will remain corrupt, incompetent and shortsighted. A chronic budget deficit will lead Congress to continue to slash education, family support, health for the poor, infrastructure, and science and technology. American exceptionalism will mean that the US is the only leading country at war with its own teachers and children.

The world as a whole will become less stable. Though word has not yet reached (drought-stricken) Texas, climate change is real; so too is a rapid increase of population whenever families have no access to family planning and basic healthcare. The young generation will increasingly tire of the increasingly turgid baby-boomer politics. The groups that took to the streets this year from Tunis to Cairo to Tel Aviv to Santiago to Wall Street to Moscow will be back.

This, then, is the meaning of more of the same: the continuity of change. As the great A-lister of the sixth century BC, Heraclitus, put it much better: “All is flux, nothing stays still.” 

The big issue of 2012 will be more of the same: rolling protests across multiple countries that will morph into revolutions in many. This is the result of “disruptive technology” – which means that disruptions in the lives of individuals – arrest, beatings, torture, rape and murder – are much more likely to disrupt entire societies.

The immediacy, apparent veracity and power of words and images instantly transmitted to millions of people can transform existing currents of dissent into a raging flood, and fuel determination that lives lost shall not be in vain. Success in one country fuels a sense of possibility and competition across a region.

In 2012 we should see many more protests in sub-Saharan Africa. Zimbabwe and Sudan are obvious candidates; Nigeria could rise up en masse against corruption; Ethiopia, Uganda and others are possible. In Russia, shame among educated classes that Vladimir Putin is just the latest czar, combined with growing economic desperation and corruption in rural areas, makes another revolution plausible if not probable.

Revolution is the ultimate disruption; it is an overturning rather than a reshaping through reform. Rolling disruption is somewhere in between. Wise governments will preempt and respond with rapid and meaningful reform. But wise governments are few and far between; wise governments able to act quickly far fewer. Expect a very turbulent year. 

Inequality will be the central theme of 2012, topping the agenda of voters, protesters and politicians running for office.

There is nothing new in the fact that a few people have too much and too many have too little. In the past, this has been hidden from the population (the Soviet Union), tolerated (Latin America) and even celebrated (the US). But the economic crisis made the world more aware of the extent and scope of economic inequality. In 2012, peaceful coexistence with inequality will end and demands and promises to fight it will become fiercer.

The problem is how to lower inequality without harming other goals (investment, innovation, risk-taking, hard work). The fight for a more equal society was the goal of countless experiments that resulted in even more inequality, widespread poverty and loss of freedoms.

This year, elections will take place in 12 important countries, while Spain and China will also change leadership. Inequality will become part of electoral debates that will influence the conversation even in countries where it has long been taken for granted. 

The big debate of 2012 will be over the role of government in the economy. Although this sounds like an economic issue, it is really about politics. There is no economically optimal size of government. The ongoing financial crisis provides stark evidence that the current model of high public sector spending financed by growing public sector debt has hit the buffers.

The US election campaign is already taking shape around this issue, but the US may be able to fudge the issue for a little longer. There are still willing buyers of US debt in Asia and, if 2012 brings more financial shocks, the dollar will benefit from safe haven flows. But Europe is running out of time and it starts from a worse position. Taxes are already so high that they depress growth. This problem is compounded for eurozone members, which cannot adjust by depreciation. Meanwhile welfare spending and public sector employment now benefit so many voters that it is hard for politicians to win backing to cut them.

The social contract that underpins democracy requires compromise. But the political debate will grow more confrontational in 2012. This will be the year that the financial crisis turns into a number of political crises. 

Technology is profoundly changing the world’s energy equation, and all its geopolitical implications. Energy efficiency in the advanced countries has risen sharply, implying that their demand has peaked, and vast discoveries of oil and gas have been made in politically stable areas, including in the US. This suggests that in future, gas will account for a much larger proportion of the world’s energy supply. While these developments are positive for geopolitical stability, they may pose difficulties for the climate.

The environmental implications of these new technologies are not yet clear. The movement towards renewable energy sources, nuclear power and climate stability may be slowed by the new abundance of oil and natural gas, and the relatively low price of gas. Even in 2040 respected forecasts now envision that fossil fuels will still supply 80 per cent of the world’s energy needs.

However, energy security and national security for much of the world will be improved, as the influence of rogue oil states diminishes. That is quite a plus.