The Smartest Question in the World

 

“What if I’m wrong? What else might happen instead?” This (two-part) question may just be the smartest question in the world, because it allows you to lift your head and look around at a broader world, outside the boundaries of your opinions and preconceptions. If you’re considering the future, as I do, then this is a critical question that can save your, uh, face repeatedly, and the current financial-crisis-and-recession environment is a perfect example.

This has been, and continues to be, an economic period for which there are no good precedents, and the only ones that come close, like the Great Depression of the 1930s, are unnerving, so that people don’t want to contemplate them. And there are so many things that can happen to change the course of events that trying to predict the One Right Thing That Will Happen is effectively impossible. But you still need to decide what to do, and that’s where this question becomes so valuable.

Strong Opinions, Weakly Held

So the first step is to come to a decision about what you think is going to happen. Someone once defined the job of a futurist as having strong opinions, weakly held. This means that, first, you have to have an opinion, but then, you have to be willing to change your mind when the facts indicate that you’re wrong. This goes against what most people do: they have weak opinions, strongly held, by which I mean that they usually don’t have strong opinions, but once they voice a thought, they will defend it to the death rather than admit they made a mistake, even in the face of clear evidence that they are wrong. This is exceptionally dangerous, especially in a world that changes as quickly as ours does.

In this case, I believe the current recession in America will continue throughout 2009, but with the signs and portents getting better and better as the year goes on. I expect the recession will end in early 2010, possibly as late as the 2nd quarter, but I doubt it will take that long. I also believe that growth will be so slow that unemployment will continue to expand, so that GDP and unemployment will both rise at the same time, which is both distressing and unusual. Moreover, I believe that people will continue to feel challenged by the economy through all of 2010 and into 2011. Towards the end of 2011, I expect things to be getting better, and people to be feeling more positive – and that’s the point where people will begin to believe the recession is over, even though it ended in 2009.

Meanwhile, the Rapidly Developing Countries (“RDCs”), notably China, India, and Brazil, will be growing more strongly, and recovering from their growth slow-downs more quickly. Their growth will put upward pressure on commodity prices, especially oil, faster than we would normally expect, so that inflation will re-emerge, particularly in energy prices and food, in 2010. If central banks don’t start to mop up all the excess liquidity in the global financial system at about that time, inflation could become a serious issue in 2011 and the years that follow.

Other Possible Futures

That’s what I think is most likely to happen. But what if I’m wrong? What might happen instead? Well, there are a number of alternative possibilities, also called scenarios, but let me focus on two in particular. The first is that there is another financial crisis. This could happen if a major, non-financial company runs out of cash, and slips into bankruptcy unexpectedly. They might be profitable, have significant assets and book value, but just run out of cash, and are unable to borrow working capital from the still shell-shocked banks. If that were to happen, it would panic the financial markets, because here is a solid, apparently stable company catching everyone off-guard with an unexpected bankruptcy. Or the banking system could go into another tailspin as loan losses, this time from commercial real estate, start hitting their balance sheets, triggering another round of unexpected bank runs. This, too, would trigger another panic. Or deflation, which is a vicious downward cycle of prices caused by weak economic demand, leading to weak prices, leading to weak profits, lead to weak demand, and so on. Any of these things could trigger another panic, and kill off any nascent economic recovery, producing a persistent recession or depression, which might last for years.

But I could also be unduly pessimistic about the economy. It might come back more rapidly than I expect, with scavengers swooping in to buy distressed houses at bargain prices, leading to a literal land rush in real estate, repairing bank balance sheets, and encouraging consumers. A stronger stock market, with rebounding values, would add fuel to the fire, and further increase confidence, leading consumers to start buying – cautiously and judiciously at first, then with greater strength and vigor. This could lead to an earlier recovery, stronger tax revenues, and a rapid rebound in government finances, especially at the state and local levels. In turn, stronger demand in the developed world would lead to a more rapid turnaround in the RDC economies, and trigger a faster rise in inflation, with oil pushing through $80 in 2010, and pointing much higher later. Indeed, if things get too strong, too quickly, we could see inflation return to levels unseen since the 1970s, and central banks being slow off the mark for fear of bringing the recovery to a screeching halt. This could lead to a new asset bubble, this time in commodities, with oil and food leading the way.

The Payoff

But however you see the future unfolding, the whole point in asking “What if I’m wrong?” is to give yourself greater breadth of vision, and allow yourself to make and, as appropriate, develop and use contingency plans to deal with alternative futures. There’s a structured way of doing this, called scenario planning – but that’s another rap for another time.

Oh, and one more advantage to asking “What if I’m wrong?”: it keeps you humble, and makes it easier to see the world as it really is, not as you expect it to be. And that may be the most valuable benefit of all.

Please feel free to pass this blog along to others you think might find it of value.

Best regards,
Richard Worzel