More Than a Four-Letter Word

A fascinating new report from the United Kingdom's Ministry of Defense, "Global Strategic Trends - Out to 2040" (which I've also made reference to at When Giants Fall), offers plenty of food for thought for those who, unlike today's equity investors, understand that risk is more than just a four-letter word.

In one section, the authors discuss the issue of "strategic shocks," a variation of which some might describe as "black swans":

The strategic context in 2040 is not shaped just by trends and drivers. On occasion, single events can provide discontinuities that cut across existing trends and re-shape the strategic environment. Such an event is a strategic shock. Historic examples of these high-impact low probability events include:

• The 2007-8 financial crisis.
• The 9/11 terrorist attacks.
• The collapse of the Berlin Wall.

Strategic shocks have a cascade effect, leading to multiple, apparently unconnected and unforeseen changes. They transform the strategic context, changing behaviour and activity across the board. For example, the 2007 financial crisis began with US sub-prime debt. Failures in this relatively obscure area were magnified by a number of factors including high-levels of interconnectedness, a lack of confidence, and the complexity of the global financial system. The cascade effect brought the entire global financial system close to collapse. This in turn led to a transformed strategic context that had economic, geopolitical and social effects as the shock waves travelled outwards. The medium to long term effects of this crisis are uncertain, however, the implications of this strategic shock may yet be significant, or even catastrophic.

Other complex, interconnected global systems may also be at risk of systemic failure. This includes globalisation itself, which can be thought of as an amalgam of multiple complex sub-systems spanning the social, economic, financial and geopolitical domains. These systems are typically difficult to understand, and are subject to no overall control and variable standards of regulation. Moreover, their resilience is difficult to assess and measure, and confidence in the integrity of the system is often fundamental to its effective functioning. Examples include: the global system for trade and the supply lines and infrastructure that underpin it; energy and food supplies; and the global communications system, with its dependence on space-based utilities. Out to 2040, global interdependence and reliance on complex systems is likely to continue to increase. This provides many benefits, but may make future strategic shocks and the systemic failures more frequent and pervasive than in the past.

This section considers what some of these high impact, low-probability events could be, while recognising that others may be beyond our experience to anticipate, conceive or understand. It is not a comprehensive list. Acknowledgement that shocks will happen is important. It is recognition that the future cannot be predicted in detail or with certainty. However, they will inevitably influence defence and security in some way, providing a strong argument for versatile and adaptable defence institutions, equipment and personnel to deal with the unexpected challenges they will present. The following is a selection of credible strategic shocks:

• Collapse of a Pivotal State. The sudden collapse of a pivotal state would threaten regional and global stability. For example, the descent into instability of a major hydrocarbon exporting state, such as Nigeria, Iran, Saudi Arabia or Russia, would have local and regional consequences, disrupting global energy supplies. This would affect global energy markets causing widespread economic, social and political dislocation. Similarly, if internal tensions caused instability within China the global economy could be disrupted by the simultaneous drop in demand for raw materials and reduced supply.
• Cure for Ageing. The development of a treatment that could prevent or cure the effects of ageing would have a significant impact on global society. Initial access to such an advance could be highly unequal and only be available to wealthier members of society, mostly in the developed world. The whole fabric of society would be challenged and new norms and expectations would rapidly develop in response to the change.
• New Energy Source. A novel, efficient form of energy generation could be developed that rapidly lowers demand for hydrocarbons. For example, the development of commercially available cold fusion reactors could result in the rapid economic marginalisation of oil-rich states. This loss of status and income in undiversified economies could lead to state-failure and provide opportunities for extremist groups to rise in influence.
• Collapse of Global Communications. A failure of the global communications system could occur for a variety of reasons; for example the destruction of satellites following an orbital electromagnetic pulse detonation or solar flare, or the complete overload of the global ICT infrastructure. Such an event is not without precedent. For example, in 1859, solar flare activity was linked to the collapse of the telegraph system when spark discharges shocked telegraph operators and set telegraph paper on fire. A similar collapse in the modern world would cause trade, commerce and the Internet to grind to a halt. Military operations dependent on the availability of communications networks would also be put at risk. Remaining bandwidth would see intense competition for access.
• External Influences. A number of strategic shocks could occur that are broadly outside the control of society, but would have considerable impact. These include a highly lethal pandemic, a geological or meteorological event of unprecedented scale, such as the eruption of a super-volcano, or the discovery of non-terrestrial intelligent life. In the military domain, the development of a new, as yet unforeseen capability that allows one state to exercise technological dominance over others would have a significant impact on the strategic context. Potential examples could include; quantum decryption, whole-scale application of nano-technology, biotechnology weapons or advanced robotics. This could ultimately result in the defeat of a Western military force on the battlefield in a ‘maxim gun’ moment, against an adversary who has the technological advantage over the West.

In fact, when you look at the following chart (click to enlarge), which is one of several that appear in the report, it's not hard to see how any number of things that might go wrong in one part of the world can quickly spread everywhere else:

(Hat tip to The Prudent Investor.)

Comments

[roger]

In my mind ,a strategic shock comes with an umbilical cord
no matter how incomprehensible it is to the human mind.
,

[Michael]

Oh boy. This and that latest post on Jesse's Cafe Americain nominally about Japan ... some things to look forward to in the immediate future and the long-term.

The article in The Guardian about this report was pretty grim reading.

Population growth is one issue with no palatable or even conceivable political solution and no possible scientific one; and ultimately the root or at least the severity of all of these issues.