George Friedman's Thoughts: Resurrecting a Forecast
By: George Friedman
Geopolitical Futures is the second company I founded to forecast geopolitics. Many things such as the weather and econometrics are forecast with a degree of accuracy. Both methods are imperfect, based as they are on complex events, but they provide a sense of where things are going. It did not seem reasonable to me that the same could not be done with the relationships between nations.
We suppose that since nations are vast and require complex governments, their leaders are to some degree at the mercy of the institutional structures they govern. In engaging other nations, a nation is constrained by its weaknesses and driven by its imperatives. There are things it needs from other nations, and the tools of economics, politics and the military are deployed for the imperatives that compel a government to act and the constraints that will shape and sometimes prevent actions.
When we look at the world, my team and I look for recurring patterns of behavior embedded beneath the events that arise from them. The daily comings and goings themselves are circumstantial. Newspapers can deal with them. More interesting to us is the rhythm, regularity and, most important, direction of the events. This is the basis of our forecasts.
We wrote our 2020 forecast using our method of first considering our century forecast, then our 40-year forecast, then a running decade forecast, and in due course when we see patterns in the model that was constructed, we can predict, with a reasonable degree of accuracy, what will happen. This year, our central thesis was that the world was due for a cyclical recession, made more intense by the disrupting patterns left over from 2008. The recession would harm countries such as China and Germany that were addicted to exports because the appetite for their products would contract, and with it their gross domestic products. There was more in the forecast, but this was the rhythm that shaped the event.
Geopolitics dictates what is important; we do not. So when the coronavirus appeared in Wuhan just as our forecast was being completed, our internal assessment was that the virus was a China problem that would weaken China but matter little to everyone else. Partly that’s because forecasters are stubbornly in love with their forecasts, but mostly because the early information was ambiguous. The virus did not fit into any geopolitical rhythm we were prepared for, and so we screened out the event as noise. When new COVID-19 cases started spreading elsewhere, we began to realize we had a new rhythm to work with.
We were able to see fairly quickly that the economic effects would be dramatic. The worldwide lockdowns removed people from the workforce and slashed consumption. So we altered our forecast to say that though it remained intact, the recession would come faster and be more intense, and exports would contract but so would other processes, making this a more intense recession than we had expected but still in the same basic framework.
At this point, our view was born of neither stubbornness nor a lack of understanding of the rhythm the virus would take. It owes to underestimating the length and severity of sequestration. From a geopolitical point of view – which as we say is meant to tower above reality – the disease itself was significant but not out of the ordinary. Two things were extraordinary. The first was that there was no vaccine, and no medication that could mitigate the effect of the virus. The second was that the only protection from infection was social isolation.
From that, a few things were obvious. If there was no prevention and if mixing closely with people increased the rate of infection, a release from sequestration was impossible without acceptance or a viable treatment. Other than that, any attempt at ending isolation would trigger an increase in infections.
What followed seemed to us an economic crisis orders of magnitude greater than anything we had anticipated. The withdrawal of the workforce whether by layoffs or imposed self-isolation would hurt production, and the restriction of movement would disrupt supply chains. Consumption would also drop.
This led to a question that we are still debating: Is this a very bad recession or a depression? As I have explained, they are in geopolitical terms different events. A recession is a necessary corrective in the business cycle. A depression destroys elements of an economy, generating massive unemployment, personal financial stress and lower consumption. Recessions last a few quarters. Depressions can last years. In the former, all the systems are intact. In the latter, the economy must be rebuilt or at least massively repaired. Whereas there are political tensions during a recession, depressions are marked by political instability and, usually, repressive regimes. They transform governments and so change how people think about them.
At GPF, we have taken this week off from our routine work and meetings so that we can try to predict the consequences of this crisis. This is not only for economic reasons but also for political reasons. We work from patterns, and our last event of this type was the one that existed from 1920 to 1955. It began with the destruction of productive systems in World War II. The United States was the China of the time, selling low-cost industrial and agricultural goods to Europe. When Europe’s ability to consume undermined U.S. production, the depression spread to the United States. The economies of some countries recovered, and then another war broke out, ending in 1945, and led to a massive depression from Japan to Britain. Except for the U.S., the war crushed winners and losers alike.
To forecast this enormously complex thing, we need to determine whether we are facing a tough recession or a depression. We are divided on this, and the divisions shift. What we are looking for is the point at which the economy and political system break. This is essential to figure out. It is also hard. It is an area in which everyone has a view that seems obvious to him, and few can go through the logic that got him there. We need to build that logic. For us, it is not simply what economists focus on, but rather the total destabilization of what in this case would be the world. We should remember that previous depressions involved some major wars. They were connected.
There are those who argue that with a disease killing people, other things are not important. The disease is certainly important, but when you look at the time between 1920 and 1955, when most nations were recovering, many people died from both poverty and war. The coming economic calamity will not be triggered by war but by deaths from other causes. Still, there are deaths, poverty is possible and war always lurks. We can be afraid of both.
Our new forecast is not ready yet but will be soon. It may be the kind of forecast I hate, with a branching logic – if there is a vaccine and if there isn’t and if sequestration doesn’t fall apart, and so on. But the biggest question of all is whether this is a recession that will heal itself, or a depression. I obviously want it to be a recession and not a depression, but a geopolitical analyst is not permitted hopes, except late at night. An analyst must view the world as if he is not part of it and then return to humanity. In some ways, it is like a doctor who must not be emotionally involved. For me, the more I read about the Great Depression, the more I am struck by how much death and misery and hatred it produced, even in the non-military aspects. The expectation seems to me that when the virus is under control, the world will snap back as it was. Perhaps, but only if the straps are still there.
