Thinking About the Future
by Reynolds Griffith
The Future and Your Financial Plans
Have you ever thought about how important the future is to you? All the
plans you make in the present must be carried out in the future. How well your plans work
will depend much on how well they are adapted, or are adaptable, to the conditions that
will prevail. Thus a realistic picture of what the future might be like is an important
element of your financial planning. Naturally, there is no way for you to know just what
the future will bring, but some conscious thought about it can keep your picture from
being completely foggy.
A common tendency in human affairs is to project the future as a continuation of the
recent past. As you will see in the next section, this is a factor that reinforces the
cyclical movements in the economy. This tendency also leads to surprises which have an
adverse effect on peoples' financial plans and wellbeing. Often, the future is not just
like the past and realizing that fact can help you be better prepared in your financial
affairs. Both this section and the next will encourage you to think about the nature of
the future and help you to develop a clearer picture of it.
Multiple Futures
Often in making your financial plans you have in mind a particular picture of the future,
even when you are not merely projecting the recent past. This picture presumably is the
one which you think is most likely to occur. Often, however, it is actually the outlook
you are hoping for rather than the view you have decided, after careful analysis, is the
most likely. E.g. you may hope that the economy will be very good, so you assume that is
the most likely outlook instead of analysing conditions carefully to decide what is most
likely. In any case, it can be valuable in making your plans and decisions to consider
alternate possible futures or "scenarios" as they are called.
The term "scenario" comes from the movie industry where it is an outline of the
story and its scenes which is more detailed than a synopsis but much less than a full
script. Likewise scenarios which you use in thinking about the future are more than an
outline but less than a future history. Scenarios can be a valuable tool for your
financial planning and decision making. Naturally, you can find help in your thinking
about different possibilities for the future from the ideas that others have presented.
Significant underlying trends discussed below help get you started. In considering
scenarios suggested by others, you need to avoid dismissing them just because you don't
like the picture they present. The work done by others can help you in your own thinking
even when you disagree with them.
Philosophies of the Future
People have different philosophies which influence how they think about the future and how
they make decisions about it. These different philosophies affect not only the people who
hold them but, to the extent one or another is prevalent, affect the future of the nation
as well. Here are four distinct philosophies which you can observe influencing people
(there may be others as well):
The grasshopper philosophy. The person with this view says "I'm
going to live for myself today. Why should I be concerned about the future? If something
happens to me the government or somebody will take care of me." Naturally, someone
who thinks like this does not look very far ahead, does not do much planning, and spends
most of their income.
Rugged individualism. This might be termed the traditional American way
of looking at things. Someone who thinks this way says, "I'm going to take care of
myself (and my family). I don't want to be a burden on anyone else (including my
children). I'll provide for my own future." Persons with this view try to plan ahead,
both for the near future and for retirement, and save part of their income. Often this
view includes the idea of giving children a good start in life, particularly an education,
and perhaps leaving them a legacy.
Generational continuity. People who hold this view say, "We received
a great deal from the past, both materially and culturally. We should take good care of it
and pass it along to future generations." These people may not conduct their personal
affairs much differently from those with the previous view, but will look at matters of
public policy, law, and regulation rather differently.
God's stewards. People with this philosophy say, "Everything we have
comes from God. Therefore, we must use it wisely and carefully." In many respects
these peoples' personal affairs will be much like the two previous groups, though some of
their decisions, on spending especially, will be different. However, these people are more
likely to look for ways to use their personal resources to help others than those in the
other two groups. In matters of public policy there seems to be a split in this group -
some would say that stewardship is primarily a personal responsibility, others would
characterize it as a national responsibility too.
Many people, of course, are influenced by more than one of these philosophies at the same
time. Most of us are probably guided sometimes by one, at other times by another.
Realizing the differences in philosophies and how they affect your actions may help you
avoid being influenced by one of them at a particular time to do something in opposition
to the view that is most important to you.
The Major Driving Trends
In thinking about the future it is difficult to consider all the possible factors which
might have an effect. Thus, it is useful to decide which trends will be especially
important and to make judgments as to the range of possible variations in these trends.
This section will suggest several such trends for your consideration. Then the following
section will indicate briefly how you might think about scenarios and use them in your
financial planning. Finally, in section I.3 of the course you will learn more about the
analysis of economic trends and factors, which are the ones that have the most direct
impact on your financial affairs.
This section will discuss a total of nine trends which may affect the future.
Understanding these trends will help you to form a realistic and informed view of what the
future may be like. It is useful to deal with related areas together, so the nine trends
are grouped into three categories: physical trends, economic trends, and political &
social trends. The discussion here is necessarily brief, but should give you a foundation
for your further study and thought. The variations and interactions in these trends can be
used to construct various scenarios.
Physical Trends
Energy. Trends in the energy area are the ones that people are most
conscious of and are most likely to have opinions about. They are reminded of this topic
every time they fill up their gas tank or get a heating bill. Consumers in the United
States benefitted from artificially low energy prices in the fifties and sixties and were
shocked by the rapidly escalating prices of the seventies. Future trends will be governed
largely by two factors: demand and sources. Higher prices induce some conservation - the
question is whether such prices will continue to limit the growth of demand or whether
people will adjust to higher costs and demand will resume growing rapidly, as happened in
the eighties. The sources question is whether alternate energy sources such as solar and
geothermal will develop rapidly enough to reduce the dependence of the country on
dwindling supplies of oil, especially imported oil. The pessimists believe that the
economic feasibility of many of the alternate sources is far in the future. The optimists
think that technology will make the strides necessary to make them practical surprisingly
soon.
Climate. You may already be conscious of the impact of the weather on the
economy - rain or the lack of it affects food production, snow storms can disrupt
transportation, etc. However you should be concerned not only with weather conditions, but
also with the possibility of climate shifts over time. In the nation's experience for
several decades physical conditions were favorable, not something to be concerned about.
But some physical scientists in the area of climatology suggest that this recent period
was unusually favorable and that the next ten to thirty years will have less favorable
overall climatic conditions. Some climatologists, though not all, suggest that there will
be a noticeable warming trend. Your initial reaction probably is that a slight change in
average temperature doesn't make much difference. The climatologists reply that a change
of one degree in average annual temperature can have a significant effect, for example, on
such factors as growing conditions.
Food. Ample food supplies are something that most people take for
granted. Whether this condition continues to be true will have a major impact on your
future. The three major possibilities are a continuation of abundance at moderate prices,
adequate quantities at higher prices, and shortages accompanied by much higher prices. The
trends in weather and climate of course will be key determinants of what happens to food
supplies. Critics of the nation's present chemical based agricultural methods suggest that
while they are economically efficient, they are not sustainable. Certainly, higher oil
prices have a significant impact. Another element which affects the food situation is
worldwide demand, any substantial increase in which would raise prices for the U.S. as
well.
Social and Political Trends
Values. As you look at western societies you can see changing values and
changing structures that make conditions quite different from what an older generation was
used to in the forties and fifties. You should evaluate the extent to which a continued
deterioration of moral values will impact the economy and your life. Every economic system
has a moral basis. The maintenance of a base of virtue is especially important for the
well-being of a capitalist system. (People often forget that Adam Smith was a Professor of
Moral Philosophy.) Many existing economic problems are rooted in the decay of virtue. You
must decide if this trend shows any signs of reversing.
Structures. Over most of the twentieth century there was a definite trend
toward greater centralization in political and social structures. Political power became
concentrated in Washington, D.C. Within the federal government it flowed into the
bureaucracy from the elected segments. The states were threatened with becoming mere
agencies to carry out federal policies. Giant corporations seemed more and more to
dominate the economy. Control of the information media was concentrated in the hands of an
Eastern elite.
In the early eighties though, some observers (John Naisbitt in Megatrends for example)
pointed to indications of a reversal of this trend. Neighborhood groups of various sorts
have grown in importance. States and regional associations of states have shown a new
assertiveness. Encouraged by changes in technology as well as in thinking, many structures
are becoming less top-down pyramid shaped in form. The alternate network form is growing
in importance. The Internet has brought a dispersion of information sources and
communication. Considering the implications of this trend can really stretch your
mind, but its possible significance is so intriguing as to make it worth the effort.
International. The international area is important, though people in the
United States have traditionally not paid much attention to it. In the past, Americans
were much less conscious of events in other countries and in the international area in
general and of the potential effects of such events than, say, the Europeans were.
Economically, that made some sense because the U.S. economy was relatively
self-sufficient. It was isolated, compared to the European economies, from what was
happening in the rest of the world. This is no longer true. What occurs elsewhere affects
the U.S. Political trends like problems in the Middle East, as well as economic events,
can affect the United States substantially. You can see a combination of the two in what
happened to oil in the early seventies. There are clear signs of continued turmoil in the
international area, of friction and disturbances arising in different parts of the world,
which have the potential to affect the nation. We've gotten a dramatic illustration of
this with the terrorist attacks and the war on terror. Again, it is an area in which
you must look ahead and make decisions about what might be coming, including an evaluation
of the probability of a major war. International conflict short of a full scale general
war is quite possible. With U.S. dependence on foreign sources not only for oil but for
many other resources, its economy is quite vulnerable to such turmoil.
An element of particular concern which doesn't fit into the above categories is the
social security system, including medicare. We'll discuss this some more in the risk
section of the course.
Economic Trends
Technology. Technology is included here as being closely intertwined with
the economy in both its impact on the economy and the effect of economic restraints in
translating technological developments into actual benefits. It takes the investment of
capital to turn technology into useful products and services. It is the factor for
which it is easiest to find optimistic projections and present indications of a favorable
outlook. Computer and communication technologies have already had effects that only
science fiction writers dreamed of thirty or forty years ago. The linking together of
these two technologies is affecting even more areas of people's lives, including the way
the financial system works and the efficiency of information oriented service industries.
Robotics, which substitutes robots for human labor, and biotechnology, such as using
bacteria to produce medicines, hold the promise of major economic impact.
Productivity. Coming to purely economic factors, the two that are of
particular concern are productivity and inflation. It appears that unless drastic changes
occur, the productivity of the U.S. economy will continue to increase only slowly. In
earlier times, the fifties and sixties especially, productivity increased at a rather
rapid rate. People were accustomed to their standards of living rising consistently as a
result of growth in productivity surpassing increases in population. The overall American
standard of living increased rather rapidly in the period of the fifties and sixties and
even into the early seventies. However, in the latter seventies and the eighties there
were decreases in the rate of productivity gains. Part of the decline may be from the
changes in values mentioned above. Changes in work ethics, for example, may have
contributed to the problem, as well as changes in rates of savings among the general
population. It may just be my prejudices, but I believe that some of the political
regulation, environmental controls for example, have had an adverse effect on
productivity. Slower growth in productivity would mean slow growth or even decline in
average living standards. Some would say that this slower growth in productivity was
reversed in the nineties. However, it is difficult to judge at this point whether our
experience in that decade was a change in trend or just the effect of the long upswing
phase in the business cycle.
Inflation. Inflation is a key element to which the country has already
had to adjust considerably. In the fifties and early sixties Americans became accustomed
to fairly stable prices. They thought that 6 percent was a high rate of inflation. Of
course by the early eighties, people had adjusted enough so that 6 percent sounded good -
they would have been glad to get back down to 6 percent consistently. Inflation was
generally thought to be almost permanent, although the experience of 1982-84 dampened that
expectation somewhat. Here and there you can even see a few suggestions that deflation and
depression may be possible. Certainly the rate of inflation drifted off in the 1981-82
recession and has been relatively low the past few years. However, it is hard to imagine
the Federal Reserve maintaining a modest expansion of the money supply in the face of a
drastic economic decline, given its past record of so often jumping in too soon with an
excessive expansion. Thus, a resurgence of inflation seems possible. (In section I.3 you
will learn how to make your own judgments about the outlook for inflation.)
Inflationary Depression. There are economists who say that there could be
a depression - that is, a substantial, drastic decline in economic activity - and at the
same time high rates of inflation. The next decade might be quite different from the
thirties in that respect. There might still be a depression but it would be unlike the
depression of the thirties because of continued inflation. There has already been a
situation somewhat like this alternate view. In 1974, there was the worst recession in
over thirty years and inflation was up to 15 percent at one time. There was substantial
inflation right in the middle of recession. So, although you should keep the possibility
of deflation at least in the back of your mind, depression with inflation would be more
likely.
That latter possibility sounds strange to most people; they think of deflation necessarily
going with depression. In the thirties, though, the Federal Reserve was not pumping up the
money supply quickly and consciously to try to offset economic declines. Thus, it is
possible that in current dollar terms there might not be much of a downturn at all, but in
real economic terms a drastic downturn occur. An analogy might be that if you were driving
your car and started slowing down, but switched your speedometer scale from miles per hour
to kilometers per hour, it could appear that your speed changed from 55 to 65, yet you
would have actually slowed down. The inflationary impact of government and Federal Reserve
actions could be similar - changing the scale of what a dollar measures. The economy could
be going down in real terms, but measures of it in dollar terms could still be increasing
because the value of the dollar was dropping so rapidly. When we have inflation, the value
of the dollar drops in terms of what it will buy.
Using Scenarios
Narrowly Focused Scenarios
Some scenarios can be characterized as narrowly focused - that is, they emphasize the
effect of a particular trend while more or less holding everything else constant. The
effect of trends in energy is often treated this way, as was the possibility of war.
Sometimes the impact of computers is illustrated by scenarios, though these can easily be
overoptimistic as a result of ignoring other trends.
Energy. Energy scenarios tend to be either extremely positive or
extremely negative. At one time many people believed in a scenario of nuclear power
supplying cheap, abundant energy and leading to ever increasing prosperity and rising
living standards. As the true cost and problems of fission energy came to light, this view
disappeared, although occasionally you may see a similar projection for fusion energy
sources.
Scenarios of cheap solar energy have their proponents. These envision solar panels on each
building eliminating the need for expensive transmission networks and massive production
facilities. Not so optimistic as the nuclear scenarios, the solar picture is drawn as
having substantial indirect benefits nevertheless. Realization of such results depends on
further technological progress and lowering the cost of solar panels.
The most common energy scenario seems to be a view of continued rising costs as fossil
fuel sources become depleted or require more expensive extraction processes. Often this is
painted as being so severe as to result in lower standards of living and other problems.
This view received a setback when the price of oil actually dropped in the early eighties.
Howeve, with the price of oil back up we may see it revived.
You can draw a lesson from the failure of the energy scenarios to materialize as their
proponents expected. Often an emphasis on a single trend is carried to an extreme. This
can make good science fiction, but is not a sturdy basis for planning your future.
Broadly Stated Scenarios
More broadly defined scenarios try to take into account possible variations in various
trends and their interactions. The scenarios summarized below are of this kind. The first
five are drawn from Seven Tomorrows and their titles are those given by the authors of
that book. The Coming Boom presents a view that is a distinct contrast to the
possibilities presented by the Seven Tomorrows authors; it is more optimistic than their
most favorable scenario. These two books together can give you a variety of possible
scenarios. (These books were written in 1982 so we can see that none of the scenarios
worked out exactly as drawn, but they remain good illustrations. I haven't found a
recent book with such a variety of scenarios.) In considering scenarios suggested by
others, you need to avoid dismissing them just because you don't like the picture they
present. Their work can help you in your own thinking even when you disagree with them.
The first scenario is labelled "the Official Future". It is marked by the
dominance of technology and generally favorable trends in climate, energy, food, and the
economy. Genetic engineering, computerization, and energy from space are some of the
marvels that combine to produce widespread affluence. However, this technological paradise
is marred by negative social trends. These include continued rising crime, the
breakdown of the family, and a substantial substrata of the "information poor"
who are not plugged into the marvelous computerized system. Omniscient data bases and
other invasions of privacy are accepted as normal as are the social problems. By the usual
material measures the Official Future is the most optimistic of the book's scenarios. The
authors of the Seven Tomorrows book do not think it particularly likely (nor desirable for
that matter).
The second scenario is called "The Center Holds" (a more obscure title than the
others which comes from a poem by Yeats). It is the Official Future meeting more severe
problems with authoritarian answers. The authors' description began with a liberal,
secular humanist caricature of "conservative" and "Christian"
responses which bothered me sufficiently to cast doubt on my ability to fairly present
this scenario. The picture is essentially fascist, with increasing government controls,
concentration of business and industry, and required conformity. Technology again
counteracts some of the problems so that standards of living for those plugged into the
electronic financial system have bounced back by the end of the century to somewhat above
levels of the early eighties.
The next scenario, "Mature Calm", presents different reactions to similar
problems. Conservative national administrations introduce a combination of supply-side,
"pragmatic", and activist programs which work reasonably well to keep the
country going. The cities continue to crumble, but there is a resurgence of small town
America, including small business and craftsmanship. Increased local food production
cushions the impact of climate changes on rural and small town areas but the cities
suffer. Technological advances, especially in solar energy and transportation, contribute
to substantially higher standards of living by the end of the century. Diversity and local
self-reliance seem to be the watchwords.
The keynote of the "Beginnings of Sorrow" scenario is collapse. Problems even
worse than those of the other scenarios are met with a "failure of nerve" which
leads to massive hopelessness. Collapse of food supplies, the industrial economy, medical
care, the national news media, almost civilization itself, is accompanied by adverse
weather and a cancer epidemic. The government is repressive, but limited in extent,
sharing its power with the paramilitary "whiteshirts", a well organized
vigilante group. Real per capita income drops by half. Government workers and farmers are
relatively well off, but the majority struggle in poverty. The century ends with no
glimmer of a way out.
In the "Living Within Our Means" scenario the country is beset with problems
almost as severe as those in the Beginnings of Sorrow, especially a severe food crisis in
the eighties. However, it responds with adaptability instead of futility and
"American ingenuity, pluck, and gumption forestall social collapse". Simpler
life styles are adopted, production conforms to the high cost of transportation,
neighborhoods and communities become more important. Living standards decline
substantially when measured in material terms, but it is a devolvement rather than a
collapse and the true quality of life does not drop so drastically.
The "Coming Boom" scenario title is from a book by that name by Herman Kahn of
the Hudson Research Institute. It presents a view that is a distinct contrast to the
possibilities presented by the Seven Tomorrows authors; it is more optimistic than their
most favorable scenario. In this view several trends work out favorably and combine to
produce a boom, which while less dynamic than that of the 1950s, results in real income
per person almost doubling between 1980 and 2000.
In this scenario the maturing of the baby boom generation results in increasing
productivity. A combination of more efficient use of energy, the decline in the power of
OPEC, and the development of alternative sources produces a decline in the real price of
energy. Better economic policies, including an improvement in government regulation and
the encouragement of savings and investment, make their contribution. Inflation is
conquered and a long-term perspective restored to economic decision making. There is a
resurgence of traditional values and a restoration of a vision of progress that seemed
lost in the latter seventies and early eighties. Technology plays an especially important
role as a whole host of technological developments which began in the 1970s mature and,
with the favorable environment created by the other trends, are translated into real
benefits. The optimistic forecasts are tempered here and there by the phrase "barring
mismanagement or bad luck", but the overall view is quite favorable.
You may not want to depend on scenarios presented by others, but to develop your own. The
first step in developing a scenario is to come up with a set of answers to the question of
what might happen to each of the trends discussed above - not necessarily the answers you
think most likely, but ones you think have a reasonable chance of materializing. Next, you
check to see that the answers are consistent with each other (e.g. low food prices aren't
compatible with poor climate and weather conditions). Then you weave the answers into a
continuous narrative. A useful perspective is to write as if you were in the year 2015
writing a review of the previous 15-20 years. Then you can repeat the process with
different sets of answers to develop additional scenarios.
Many of the pictures resulting from the trends discussed above and scenarios presented by
some may seem somewhat negative. It would be easy to reject them because of that.
Americans have a tradition of looking for the bright side. However, you will be
better off if you can avoid either an optimistic or a pessimistic bias in your
consideration of the future. A realistic evaluation of the possibilities, both good and
bad, will serve you better in your financial planning.
Characteristics of the Times
Even if you do not make use of fullfledged scenarios in your planning, you should at least
consider the general characteristics and nature of the times that you live in and are
headed into. The Seven Tomorrows authors did this as a starting point for their work. They
summarized several characteristics and conditions which they saw resulting from the past
and present, which set boundaries for their scenarios for the future. Their list included
diverse social values, a turbulent world, slow energy and economic growth, burdensome
debt, an aging population, a legacy of distrust (both nationally and internationally),
continuing crime, environmental degradation, new technologies, and increasing disease.
This may seem to some an unduly pessimistic list. Certainly, you will not merely accept
it, but will carefully think through your own ideas and observations of how the times are.
Let me suggest, though, several characteristics that seem to me to prevail.
Changing Conditions. The first, and most certain, characteristic is
rapidly changing conditions to which it is difficult to adjust. Many people my age have
had trouble adjusting to the cost of groceries or gasoline. Even with inflation being as
slow as it has, it's been hard to adapt. Conditions are going to continue to change,
perhaps even more rapidly. It will continue to be difficult, probably more difficult, to
adjust, especially if you don't think in advance about the changes.
Standards of Living. Another general characteristic which prevailed in
the late seventies and early eighties was a widespread decline in standards of living.
That's hard for the whole country to adjust to. In the fifties, sixties, and early
seventies most people became used to the idea that the economy always got better so that
they were almost always able to improve their standard of living. The economy may have
reached a point where you can't count on that any longer, though the record of the
nineties suggests otherwise. You must judge whether there is likely to be a continuing
decline in the general standard of living or whether the experience of the nineties is
likely to continue.
Government Responses. If you think about the government response to
problems, it is easy to see at least the possibility of additional restrictions on
personal freedom. Some see it already in the war on terror. The problems that
Germany had after World War I and the economic problems that it had in the early 1930s led
to the rise of Hitler. That may be an extreme case. There may not be a real likelihood of
the infringement getting that bad here, but at least it's a tendency you should recognize.
Integrating Scenarios into Your Financial Plans
The trends that affect the future are complex and it is difficult to make
judgments about their paths and interrelations. This may make you reluctant to
try to use a fullfledged scenario approach in your financial planning. However, at the
very least you should try to understand the basic characteristics of the times in which
you live and see how those characteristics form the background for your financial planning
and decision making. A next step up that is still short of a complete scenario approach is
to judge the trends that seem most significant and see their implications for your plans
and decisions.
You might decide, for example, that energy will become much more expensive. This would
influence your choice of a car to buy. It would make nearness to your job a more important
consideration in your choice of a home location. Observing the deterioration of values
might suggest that qualities such as honesty, competence, and willingness to work will be
even more valuable financially than in the past. This can reinforce your resolve to
develop these qualities in yourself. Being aware of certain technological trends can help
you in your choice of a career or even suggest a change of career. Of course, the apparent
brightness of the future in a certain field should not blind you to the primary importance
of your own talents and preferences in making such a choice.
Concentrating on the effects of a relatively small number of trends is easier than taking
a broader view, but it has the danger of causing you to overlook offsetting effects of
trends in areas you are not considering. A value of scenarios is their consideration of
the interrelatedness of various trends. Thus, you will be even better off if you make the
effort to judge possible scenarios.
How can you use the scenarios in your financial planning? One way to use them is to
consider each in turn and ask yourself what changes in your plans would be needed to
enable you to face that particular future. Naturally, you cannot be fully prepared to face
all possible futures, but you can make your plans broad enough to be reasonably well
prepared for those you think most likely. By considering many alternatives, you can also
keep your thinking flexible enough to adapt to the possibilities you think less likely
from your present perspective should one of them occur.
You can do a handout evaluation on this writeup if you like.
© 1985, 2000, 2004 R. Griffith