Predictions of the dollar’s demise are as old as the greenback itself of course, but over recent weeks the specter of the dollar heading way way below its trading range — a dollar crunch — has entered the zone of the credible, or, in scenario terms, the ‘cone of plausible uncertainty.’ That means decision-makers with lots at stake are taking it seriously.

Like the British pound, the dollar has been under a cloud due to perceptions of economic fallout from the credit crunch and global recession, but particular questions about the US currency have recently surfaced, driven by reports [Robert Fisk's 'The Demise of the Dollar' story in The Independent (Oct 6)]  that “Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council” (Saudi Arabia, Abu Dhabi, Kuwait and Qatar).

The subtext is far from merely financial. Practically, it would mean that on any day, the real cost of oil to US consumers and businesses would go up or down depending on the strength of the currency. This is something America is not used to. But, more deeeply, dropping dollar-denomination of oil is a direct shot across the bows of Washington’s say over oil affairs, and the hegemony of the dollar as the dominant global reserve currency.

De-dollarizing oil would not in itself push the US currency below its 25-year range. But it is portentous of the clear trend to a genuinely multi-power world, for better or worse, in which the dollar will get no favors. That will push the dollar down, at least while the news and fallout make their way through the financial and real economic systems.

Rumors of de-dollarization have been hotly denied, as further reported here, but as the Independent points out, denials are to be expected, and are always issued in these situations. They mean nothing. Even cub reporters know that.

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Scenario thinking

What’s particularly interesting to me is that a ‘scenario’ of dollar demise has become not only plausible in the mainstream view of the future, but scenario thinking is being used as a way to consider the nature of this outcome, and how best to respond without predicting the outcome either way. As recently as directly pre-credit crunch, the media question would have been: ‘what is the best prediction for the dollar (or the housing market, or credit default swaps?) and that, rather then scoping out the implications of the lesser-likelihood, would have dominated the discussion.

So, what struck me forcefully in the Business Week video interview above, where BW Chief Economist Mike Mandel interviews the news magazine’s Economics Editor Peter Coy (see Coy’s underlying story here), is how the less-likely, non-predicted, but very significant outcome is actively addressed:

Says Coy: “It’s so hard to know what the dollar is going to do. We don’t argue that we know… what we do is we say, ‘it could happen’ and let’s take that possibility seriously, in the same way we should have taken the possibility of falling housing prices seriously…”

This is not formal scenario-building of course. But it is, fundamentally an adoption of the framework, saying in the classic ‘scenarios’ way: “we can’t predict if it will happen or it won’t, but if it does it will have significant impact. So let’s just ask: ‘what if ‘ it does and explore the outcomes and our responses. What will the word look like? What would be the implications, the knock-ons and spinoffs? If it comes to pass, what would be wish we had done today?”

Perhaps failing to predict the credit crunch has dented predictors’ halos enough to cause a mini-zeitgeist-shift towards the only real way to cope with important uncertainty: exploring all outcomes that pass the plausibility and significance test, whether or not we actually believe they will happen.

That is: disaster, mayhem, and death goes to the top of the page and towards the front of the newspaper.**

“If it bleeds, it leads” can be interpreted more or less narrowly. Mostly it means, literally, that accidents, explosions, injuries, and deaths will take page priority in the news over “talking stories” about politics and government and society. Disasters sell more newspapers than policy debates. But more generally it means bad news is more arresting and interesting, and will get more attention (and, again, sell more newspapers or gather more listeners and viewers) than good news, therefore it takes priority.

Now, if you were a ‘forecasting pundit’ or a think tank, or investment institution with an interest in getting media attention for yourself, which route would you choose in garnering media exposure? Good news or bad news?

Bad news. Of course. Russian Professor Igor Panarin gets an insane amount of publicity because his book claims that the United States could collapse soon (in two months time, I believe.) Ditto asset manager, Egon von Greyerz, who bangs on, for example saying: “America is hemorrhaging financially and economically. Other countries now realize they hold ‘worthless’ US dollars” in a piece called: The Dark Years Are Here. And just in case you think these are all gloomy foreigners, consider how Bronx boy, Gerald Celente, has dominated media coverage in the credit-crunch era predicting doom-and-gloom in every way, including riots and revolution on U.S. streeets within in the Obama-presidency term. For example http://www.youtube.com/watch?v=46MEqEgdLTg

These are just three that I single out just to make the point, but they are not different from many hundreds that trawl for media attention by predicting, essentially … “bleeding.” In fact, the real future will have good and bad in balance, just like the past. One of the lessons of Future Savvy is: if a prediction bleeds, it probably shouldn’t lead your thinking.

** In fact, the task of deciding what story to lead page one (or any other page) with, and what other stories to run, in what order, and at what length, is one of the more intellectually demanding tasks around, and one that quality journalist take seriously. So, “if it bleeds, it leads” is, in part, cynical journalist-ese for saying that the popular audience doesn’t have the time, patience, or interest in the deeper issues.

The environmental pitch is a new salvo in the old “war on drugs,” which has been waged backwards and forwards, over decades now, without being won. It’s worth stopping to think why it has not been won, because it’s a salutory lesson in thinking about the future. It has nothing to do with the morals of “pushers” or willpower of “addicts” or the “the youth of today.” It is perfectly explained by the reinforcing loop (aka viscious/virtuous cycle) that dominates the drug-prevention system. This can be diagrammed as follows:

Alternatively the identical idea may be represented as a “fixes that fail” archetype, as defined in “The Fifth Discipline Fieldbook” (Peter Senge et al, Doubleday, 1994, p125).

For more on systems thinking see The Systems Dynamics Society. The role of systems thinking in improving our understanding of change (or non-change) is also the topic of Chapter 8 of Future Savvy.

So, yes, these are simple charts. We could make them more complex by filling in details of all agents and institutions at work in drug supply, demand, and prevention – but this would only elaborate, not alter the logic of the system. Either way, the chart allows us to see the wood for the trees, which is that drugs and their prevention are in a reinforcing loop. While it appears that preventive laws and their enforcement will lower drug use, in fact law enforcement constrains availability, pushing up the price, which makes production more attractive, which creates incentives to farm (incl, in rainforests), which raises supply, which leads to drug pushing (marketing by another name), which leads to drug trial, usage and addiction, therefore social concern, and therein renewed pressure for stricter legislation and crackdown, which sends the loop round once again. (There are many side effects of this main loop, including increased street crime – funding drug habits; the creation and enrichment of gangs and warlords; and so on.)

Scratching doesn’t help

Nobody in their right mind wants this to happen. But even a kindergarden child can see that policing and jailing, like a good scratch, feels good in the short term but just drives the wheel of the problem in the long term. What are the alternatives? From time to time pressure is brought to bear on production, for example, trying to obliterate coca or poppy fields, or disrupt supply chains. But this is also hopeless because as long as there is a good price to be had, the systemic reality is that drugs will be grown, produced, and shipped. What shows great promise is tackling price. The legalization lobby is all about capping price by making drugs legal, supervised, available, and free (or low-price), removing the superprofits from the industry and thereby blunting the primary interest of drug bosses and warlords. (This is what happened when Prohibition was repealed).

From a systemically informed viewpoint, only a solution that changes the system (interrupts the reinforcing cycle) can change the future. In other words nothing significant will occur in the future until the system changes, and removing drug barons’ price interest is the only way to do it. Until this happens the savvy forecast must be: no change.

Educating consumers

But the public is not ready for such policies. So we are left with the holding pattern we are in. And this includes exhorting the consumer, as Vice-President Calderón is doing. (The same story and interview was featured earlier this week on Radio 4′s “Today” Show.) He’s targeting the middle class, occasional, and recreational drug users who, he says, otherwise recycle, and compost, and “drive a hybrid” and buy fair trade coffee, and so on, and so should be desist from drug use because of it’s environmental impact.) This is not the first time that consumers have been “educated” – school and public education programs consistently target, inform, and discourage consumers and would-be consumers (including, of course, in the laughable “Just Say No” campaign.) All good or at least harmless work, in a good cause.

Into this Calderón has added a new-to-the-industry category of demotivator – the environment. Sure, this should work in giving middle-class consumers pause. But if environmentally sensitive cocaine customers are a big part of the market — and it’s hard to tell if they really are — expect producers to just respond with Green reassurance, real or fake: “No trees were ploughed under in the creation of your snort.”