It is an interesting question and one far too seldom asked by people involved in the financial markets, and it seemed to me to deserve a better answer than the one I was able to mange over dinner on Saturday evening. Financial markets always focus on the short term, despite the fact that anyone buying a long-term government bond is making an implicit assumption about inflation, interest rates and currency movements a generation hence.
So here are some suggestions of possible shocks to the world economic system, or if not shocks, things which might make the first decade of the next century very different from the last decade of this one.
One - a switch in the pattern of strong and weak currencies. For the last 30 years there has been general pattern of currencies where the dollar, sterling and the lira tend to fall whereas the mark and the yen rise. People look now at the recovery of the dollar and pound and see this as a temporary upward blip on a downward general path. But that may be wrong. Both the Japanese and German economies, for all their virtues, appear relatively less strong than they did a generation ago, while the US appears stronger. Within Europe, both the UK and Italy have improved their relative performance, as the graph on productivity changes since 1979 would seem to show. So it is at least possible that the changes in the dollar and sterling are long term rather short. Meanwhile, the difficulties of the yen may persist for some time, while the mark may even disappear if European Monetary Union (EMU) happens.
Two - a collapse of US share prices, dragging other equity markets down with it. Not much can be added to the wealth of literature on this subject, except perhaps to say (a) that not enough work is being done of a "what if?" variety to see the sensitivity of the US economy to, say, a 30 per cent fall in share prices; and (b) that the sort of arguments being used to justify present prices will be familiar to anyone who visited Japan in the late 1980s, when share prices there were shooting up.
Three - serious social tension in continental Europe. So far most of the Continent has managed to contain social pressures, but continued slow growth and rising unemployment would put very great strains on the consensus. A discontinuity could take several forms - worse riots in France, the return of a right-wing nationalistic government in Germany, maybe just more strikes across the Continent - but the end result would be pressure not just on things like the plan for EMU but on the whole concept of the European Union.
Four - might the EU itself either break up or be transformed into something more akin to a free-trade association? My own view is this sort of outcome, if it takes place, is 15 or 20 years away rather than onthe three-to- five year timescale. But even if one puts EU break-up as a low possibility, it ought to be on the map.
Five - the coming Russian boom. The idea here is that Russia and the whole of Eastern Europe will become the most vibrant part of the European economy even if the EU does not strike the problems catalogued in shocks three and four above. Already Poland, Hungary and the Czech Republic are growing rapidly by Western European standards and once take-off is established in Russia the economic balance of Europe will shift east in a dramatic way.
Six - a corresponding change in the balance of economic power in the third time zone. Power will shift from early leaders, in particular Japan but also South Korea, Hong Kong and Taiwan. It will move to mainland China, Indonesia and India. It has long been apparent that the big population countries will tend to gain power vis-a-vis the smaller ones. Maybe in the next five years the pace of change will suddenly accelerate.
Seven - leading on from that, really serious disruption in Japan. The most likely outcome for Japan may well be a long, slow pull out of recession, with stagnant living standards as the society ages, but it is very easy to outline a worse outcome, where economic depression was accompanied by political upheaval.
Eight - the next commodity price shock. Three years - no, three months - before the first oil shock in 1973 it would have been hardly conceivable that the oil price could quadruple in a few weeks. A sharp rise in commodity prices looks similarly unlikely at the moment, but it would not be difficult to sketch the main scenario which would push oil prices sharply up: conflict in the Middle East. And other scenarios could push up the price of other basic products including food.
Nine - a technical advance which will transform competitive advantage. The obvious candidate is the transformation of telecommunications: the sudden plunge in costs that is taking place right now, and the equally sudden surge in the capability of the networked computer. We still think in terms of country competitiveness, and all the notes above are framed in that language. But maybe the language is wrong, as individuals who earn their livings with a computer can base themselves anywhere in the world and sell their output instantly anywhere in the world too. Maybe this technical revolution will transform corporations in a way which we still cannot see, but which will become evident over the next five years.
And 10? That must surely be the "R" word, Recession. It is almost impossible for anyone to see recession coming. You could scan everything that has been written in the press, or spoken by business and political leaders, in the run-up to previous recessions and see no warnings at all that they were aware of what was about to hit them. At the moment there is widespread talk, at least in the US, that the business cycle no longer exists. But at some stage in the future there will be another global recession. It may be several years off; it may be a mild recession; it may not be synchronised, so some countries may be going down while other are still rising. But it is going to happen. Question: will it happen in our time- frame above, the next three-to-five years?
Well, there are 10 ideas of possible shocks. Most will not happen. But there is a powerful can for carrying out the "what if?" exercise, if only because a shock which has been at least partly foreseen is a less damaging shock when it strikes.