2008 futurecasts review

Volatility and dollar devaluation:

By "Near Futurecast VI," in February, 2004, the headline was "Revisiting the 1970s."

FUTURECASTS promised you greater volatility in its "Near Futurecast VII" for 2006, written after a quiet 2005 that was truly the calm before the storm. Indeed, the basic explanation for this phenomenon was provided to FUTURECASTS readers in the previous year, in "Near Futurecast VI" in February of 2004. This built on initial warnings that were provided as early as February, 2003, in "Near Futurecast V."
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Dollar devaluation and the growing risk of a return to the problems of the 1970s was a main theme of "Near Futurecast V" in February, 2003. By "Near Futurecast VI," in February, 2004, the headline was "Revisiting the 1970s." This has continued to be the main theme of FUTURECASTS near futurecasts ever since.
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FUTURECASTS has provided its readers with "today's news yesterday," in time for them to profit from it, as promised.

FUTURECASTS thus fulfills its primary promise. It has provided its readers with today's news yesterday. Indeed, a five year lead on today's financial news has been accurately provided for the benefit and profit of FUTURECASTS readers
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All the major phenomena of the 1970s are returning. Dollar devaluation, price surges in all the traditional inflation hedges, rising prices in oil, gold, and almost all other commodities, and rising real estate values, increasing instability and rates of volatility have again become prominent market features.
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Below are pertinent excerpts from the 2004 and 2005 Near Futurecasts. These calls were easy. The predictions were based on the most basic of economic phenomena, clearly explained in FUTURECASTS forecasts and other articles. They have been years in development and have been easily foreseeable for years.
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Any economist who failed to foresee them is revealed as incompetent. Any economist who fails to understand the nature and gravity of what is happening - who fails to understand what is happening as the inevitable result of Keynesian policies - is incompetent. Such failure reveals ignorance of the most basic aspects of economic systems.
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Vol. 6 No. 2, 2/1/04:

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The fall of the almighty dollar:

"The chronic weakness of the dollar is now the major operative fact in the economic world. The weakness in the dollar will be the primary cause or a major constraining factor in every major economic and financial problem that arises until the fundamental causes of the decline are addressed and dealt with.

The weakness in the dollar will be the primary cause or a major constraining factor in every major economic and financial problem that arises until the fundamental causes of the decline are addressed and dealt with.

"The importance and benefits of a strong dollar has been a constant theme for FUTURECASTS for more than six years now.

"A strong dollar lends strength to the Fderal Reserve Board.
"A strong dollar shields the domestic economy from foreign crises and provides the strength to play a positive role in their resolution.
"A strong dollar and expanding international trade are among the most important foundations of prosperity, and play major roles in keeping periodic recessions short and mild and relatively infrequent.

The U.S. economy is heading for a period of increased volatility.

"The strong dollar is what has been squandered by the Bush (II) administration and a sharply divided Congress. - - -
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"The U.S. economy is heading for a period of increased volatility. Some of those 'bubble' factors that FUTURECASTS has been keeping an eye on these last six years will undoubtedly not survive the stresses of these next couple of turns in the business cycle."

Vol. 7, No. 2, 2/1/05:

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Keynesian failure - again:

"There will be a second recession this decade - for the first time since the 1970s - and it will not be as short and shallow as the last two - in 1991 and 2000."

The Fed actually still has the ability to put off or greatly reduce this coming recession, but only if it is willing to tolerate a plunging dollar and price inflation rates that top 5%, with gold above $1,500 per ounce, oil above $150 per barrel and gasoline above $4 per gallon. Obviously, any such effort to put off the inevitable will make the inevitable much worse.

"It will be government policies and practices that will be the primary causes of the next recession. Government is always much slower and more reluctant to rationalize its mistaken policies and practices at such times than is the private sector. - - -

There will come a time this year when the Fed will stop permitting its interest rates to rise.

"Economic expansion stimulated by Keynesian policies will ALWAYS be unbalanced. Keynesian policies of budgetary deficits and monetary expansion can only be continued as long as the currency remains strong - and Keynesian policies ALWAYS tend to weaken the currency. They ALWAYS put adverse pressure on international trade and payments balances.
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"Of course, John Maynard Keynes would undoubtedly not approve of today's applications of his theory. However, that is one of the inherent weaknesses of his approach. The notion that political leaders are capable of the measured and disciplined application of monetary expansion and deficit spending advocated by Keynes is ludicrous.
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"Moreover, even Keynes recognized that his recommendations must ultimately break down due to the inevitable weakening of the currency. However, 'ultimately' seemed a long way off during the depths of the Great Depression. 'In the long run, we are all dead,' he is famously reputed to have said. In fact, his 'General Theory' was not 'general' at all, but was applicable if at all only to the dysfunctional autarkic economic world of the Great Depression. - - -
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"This weakness applies not only to the 'naïve' Keynesian policies that failed so miserably in the 1970s, but also to the more modest policies of today that merely target price inflation.
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"To begin with, the definition of price inflation itself has changed. There have been major changes in the measurement of the rate of productivity gains that make it impossible to compare today's statistics with those of the 1970s. This is in addition to the other anomalous factors in the inflation statistics. Determining when basic interest rates have risen sufficiently to become 'positive,' and accurately evaluating how 'positive' they are at any point, is thus not possible with any degree of precision.
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"For what it is worth, the inflation rate for 2004 is currently calculated at 3.3%. Anyway you calculate it, as FUTURECASTS predicted, there was a significant percentage increase in inflation in 2004, and dollar devaluation continued.
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"There will come a time this year when the Fed will stop permitting its interest rates to rise. Chairman Greenspan will try to do this at an equilibrium point. He admits he has no way of determining in advance where that point might be. Of course, he will fail.

Interest rates that would be high enough to support the value of the dollar are now at a point too high to prevent economic decline.

"There are no equilibrium points in an inherently unbalanced economy. Interest rates that would be high enough to support the value of the dollar are now at a point too high to prevent economic decline.
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"The trick for investors - and for FUTURECASTS - will be to judge whether the interest rate increase has been stopped at a point that is too soon for dollar stability and/or too late for continued economic growth. Ultimately - if the situation is permitted to drag on long enough for stagflation to develop - there can be both currency weakness and sluggish economic conditions at the same time - both inflation and rising unemployment at the same time.

Market driven currency devaluation always runs behind the power curve.

"Currency devaluation has yet again failed to reduce chronic deficits in international trade and payments accounts. Many professional and academic economists continue to display their ignorance of how economic systems actually work. Many repeatedly provide erroneous evaluations of the benefits of currency devaluation.
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"The dollar had declined by about 16% in trade weighted terms by the end of 2004 - by more than 50% against the euro and 25% against the yen - yet U.S. trade and payments deficits had only worsened. (By the end of 2007, these figures looked even worse - much worse.) Only the persistent rise in Fed interest rates prevented acceleration of the dollar decline. Yet 'talking head' economists could still be seen on television estimating how far the dollar would have to fall to materially reduce the payments deficit and reach an equilibrium point.
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"Currency devaluation may be made unavoidable by payments deficits, but it can never by itself cure them. Market driven currency devaluation always runs behind the power curve. Only when accompanied by measures of budgetary and monetary austerity does currency devaluation assist in the reduction of international payments deficits - and then it is the austerity measures, not the devaluation, that does the heavy lifting.

The Fed can only be as strong as the dollar.

The Fed is powerless to do anything more than determine the sequence and mix of inflation and deflation that will be suffered.

It is these vast budget deficits, not Chinese mercantilist policies, that is to blame for the persistent trade and payments deficits that undermine the value of the dollar.

THIS IS IMPORTANT - SO LISTEN UP, BOYS AND GIRLS!
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The problems to come will be blamed on the Fed and Bernanke. However, the Fed does not have the power to prevent them. The dollar is now too weak. The Fed can no longer avoid these troubles, it can only determine the sequence and mix of inflation and deflation that will be suffered.
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The problems with the nation's international trade and payments deficits will continue to be blamed on China's mercantilist policies, but the floating of the Chinese yuan would not materially reduce them. A world of freely floating currencies would not materially reduce them. These international deficits are homegrown problems. They are the inevitable result of the massive federal budget deficits and the Fed's monetization of enough of this debt to keep them from causing interest rates to spike unsustainably high.
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Certainly, monetary policy even at best will not be very precise. There is no way it can be. Precise administration of interest rates is as impossible as precise administration for any other price fixing schemes. However, it is the vast budget deficits incurred during the last six years that make the Feds task increasingly impossible. It is these vast budget deficits, not Chinese mercantilist policies, that are to blame for the persistent trade and payments deficits that undermine the value of the dollar.
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Who then is to blame? Congress is to blame!
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Always remember, when sanctimonious Congressmen point the finger of blame at China for our international deficits or eventually at Bernanke and the Fed as the domestic economy spins out of control, it is always Congress that is to blame. The Constitution of the United States leaves with Congress the power and responsibility to control its budget.
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This applies regardless of whether Congress is under the control of the Republicans or Democrats. Only Congress can materially reduce the economic problems of the next few years. It has the power to do this simply by a substantial decrease in the rate of spending increases. Don't hold your breath!

Currency volatility substantially increases risks and thus makes it more expensive to raise capital.

When political leaders succumb to temptation - when they irresponsibly expand monetary supplies and budgetary deficits pursuant to Keynesian policies - they are playing with fire.

"A declining dollar means an adverse shift in the terms of trade. The U.S. will have to work harder - will have to sell more of its produce abroad - to buy oil and other commodities for its home market." (The prices of oil and other natural resource imports have accordingly been skyrocketing at multiple double digit rates for several years now.)

"No nation has ever prospered with a weak currency. Chronic currency devaluation ALWAYS causes economic decline.

"Monetary volatility is costly in any event. Aside from the capital directly destroyed as comparative advantage moves significantly against many economic entities, substantial investments of new capital are needed to take advantage of favorable opportunities. However, currency volatility substantially increases risks and thus makes it more expensive to raise capital.
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"Monetary volatility could result in an increase in protectionism and competitive devaluations that could prove devastating for world commerce. A world that is heavily indebted can only service that indebtedness through world commerce. Expansion of international trade is thus of great importance, and a significant increase in protectionist policies is a major threat. When political leaders succumb to temptation - when they irresponsibly expand monetary supplies and budgetary deficits pursuant to Keynesian policies - they are playing with fire.
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"Economists who don't understand this, don't understand economics - no matter how many Ivy League degrees and Nobel Prizes and other honors they may have. See, 'Understanding Inflation," and "Capital as Purchasing Power.'"

Encouragingly, there have been many economists who have this time been warning of trouble to come for some time - unlike in the 1960s. Articles about bubble trouble have been appearing in the financial press for several years already. However, almost all of these economists have been attributing economic problems to some particular secondary factor - like inadequate savings or oil imports or imports in general. Most have avoided attributing these problems to the government policies that are the primary causes.
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The more the Federal Reserve Board employs Keynesian monetary policy to stabilize the economy and avoid the business cycle, the more unstable the economy MUST become and the more vicious the business cycle MUST become.

FUTURECASTS readers cannot complain that they were not adequately forewarned of the current difficulties, or that the warnings were not adequately explained. They cannot complain that the warnings were not sufficiently far in advance for them to protect vulnerable interests or profit from suitable investments.
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Volatility indeed did begin to increase in 2006, and by the end of 2007 had achieved proportions sufficient to "git the ahtenshun" even of the mules in the mainstream media. Triple digit daily moves in the DOW are now a common occurrence, with similar percentage moves in other stock, financial and commodity markets. This reflects the growing instability in the economy and must in turn cause even greater instability as it increases business and financial risks.
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The mainstream media report these events with mulish incomprehension - as if they were just an inexplicable curse of the gods. FUTURECASTS readers know the real reason.
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The more the Federal Reserve Board employs Keynesian monetary policy to stabilize the economy and avoid the business cycle, the more unstable the economy MUST become and the more vicious the business cycle MUST become. It was little more than a year after the Fed finished allowing its interest rates to rise before it hurriedly began to push its interest rates back down. FUTURECASTS will have more to say about this in next month's Near Futurecast X for 2008.
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The no longer so almighty dollar:

The importance of a strong dollar has been emphasized by FUTURECASTS since Near Futurecast I, in 1998. This was emphasized in no uncertain terms as early as Near Futurecast II in 1999. A serious recession was unlikely, it pointed out, until the dollar becomes weak.

Vol. II, No. 2, 9/1/99:

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Near Futurecast II

"As long as the dollar is strong, there should be no substantial recession in the United States. The next substantial recession should not occur until chronic weakness in the dollar forces the Fed to chose the austere policies needed to restore dollar strength. - - -

The Fed can only be as strong as the dollar.

"If you understand that the mighty dollar holds the key to our economic fortunes and the effectiveness of much of our international policies, then you begin to understand the financial realities of our world. If you understand that, absent fixed exchange rates, when the Fed pushes interest rates down, the result is higher market interest rates, and that the only way for the Fed to succeed in getting lower market interest rates is to push its interest rates up, then you begin to understand the reasons why 'monetary policy' nostrums pursued to Modern (Keynesian) Economic Theory cannot indefinitely render the business cycle obsolete."

After half a dozen years of strenuous Keynesian efforts to stabilize the economy by means of monetary expansion, the world is now awash in dollars and the dollar is now on its way to becoming a basket case.
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As FUTURECASTS has repeatedly explained, the Fed can only be as strong as the dollar. Now, the dollar collapses underfoot each time the Fed monetizes short term debt to force short term interest rates down. As FUTURECASTS has repeatedly pointed out, no nation has ever prospered with a weak currency. Those who tout the advantages of a weak dollar remain intentionally ignorant of the far greater disadvantages.
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Bubble trouble:

"Because Men Are Not Angels!"

Bubble trouble has been a constant theme of FUTURECASTS forecast issues. Long periods of prosperity permit weaknesses to accumulate. Houses of cards proliferate. These things happen because, as James Madison so wisely explained in a political context, "men are not angels."
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Recessions are essential to clear out these weaknesses and excesses. Getting rid of them is an important part of the vital creative destruction process of capitalist markets.
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FUTURECASTS was emphasizing the many bubbles observably growing in the economy by February 1, 2001, in "Near Futurecast III." Three of them - the debt leverage bubble, the bank lending bubble, and the Freddy Mac and Fannie Mae bubbles - have burst in 2007. The constraints of the energy market were also then emphasized. The housing bubble was first emphasized in "Heedless Government," October 1, 2002.
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These began to make their appearance five years ago. As then emphasized: "All that is needed now for the development of a substantial recession is the development of some chronic weakness in the dollar." Chronic weakness in the dollar has been duly provided by irresponsible Federal Reserve Board Keynesian monetary policy as it increasingly frantically strives to maintain economic stability in the face of huge budgetary deficits.
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Vol. 3, No. 2, 2/1/01:

The debt leverage bubbles:

The bank lending bubbles:

Bubbles:

"FUTURECASTS has been emphasizing the pernicious impacts of powerful tax incentives that favor debt capital and drive many economic entities to become heavily leveraged. - - -
"FUTURECASTS has been emphasizing the decline in bank lending standards. As the savings and loan crisis of the 1980s faded from memory, bank lending became increasingly aggressive. Not only were the banks lending more to more highly leveraged debtors, they themselves became increasingly leveraged. Their exposure to sinking equity prices has been increased by their increased holdings of private equity stakes. Some have substantial venture-capital operations that, by their very nature, pose substantial risks during any economic downturn. Many hold substantial positions in the junk bond market. Credit card and other consumer loans always soften during an economic slowdown. Second mortgage home equity loans have been expanding substantially and will suffer in any recession severe enough to affect real estate prices. Reserves are at their lowest since 1986, and the lowest in 50 years in risk-adjusted terms. A surge in defaults of various kinds has resulted in a hasty effort by banks to strengthen their lending practices. This has materially restricted credit availability and has played a major role in the current economic slowdown.

The energy market limits on economic growth:

"Now, the current tightness in the supply side of the energy market imposes a new limiting factor on the economic growth of the next few years. While energy prices have recently declined - and will probably remain weak during the current economic slowdown - already forcing OPEC to take some production off line - that excess capacity will be quickly drawn upon when economic growth again begins to surge. The first decade of the 21st century will be a prosperous one - but it will be no repeat of the last 'gay nineties' decade of the 20th century.

Moral hazard at Fannie Mae and Freddy Mac:

"Now, Fannie Mae and Freddy Mac - the huge and rapidly expanding shareholder owned but government sponsored and favored mortgage companies - are pushing ever deeper into higher risk loans and lending practices. They are permitted substantially lower capital adequacy levels on the theory that their mortgage lending is on average substantially less risky than the broader spectrum of loans provided by banks. Here is a prime example of 'moral hazard' - the 'privatization of profits' accompanied by the continued 'socialization of losses.' Should some future recession ever get deep enough to cause a substantial decline in real estate values, these two mutant institutions (not government owned any more but not totally private yet either) could require a massive federal bailout - that nobody doubts would be forthcoming.

Vol. 4, No. 10, 10/1/02:

The housing bubble:

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Heedless Government

"With tax laws that now make housing the premier tax shelter, the inflation of a vast housing bubble should surprise nobody. People are building as much house as they can afford - some putting 3,500-to-5,500 square foot mansions ridiculously on lots of just about a half acre. Money is being poured into second and third homes. Low interest rates encourage the assumption of large mortgages."

Vol. 7, No. 7, 7/1/05:

There will be a period of substantial decline in our future.

"The Coming Generational Storm," by Kotlikoff & Burns

FUTURECASTS Comment:

"With mortgage rates below 6%, leveraging your money to buy as much house as possible is probably the best way to outrun inflation - just as long as you can maintain sufficient cash flow to maintain the house and service the mortgage.
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"Unfortunately, even this has become complicated. The much feared 'housing bubble' is quite real - and there will be a period of substantial decline in our future."

The employment of Keynesian methods to avoid recessions just permits excesses to increase and bubbles to grow, and ultimately adds currency weakness and inflation to the brew. When currency weakness and inflation get too bad to be ignored, the austerity policies required to deal with them replace recession with depression. Political and private business models and economic plans based on easy money conditions are threatened with collapse. These are the lessons of the 1970s - now so determinedly ignored by the Fed and numerous authoritative talking heads on television.
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Congress, of course, remains stupid beyond mere ignorance. Yet, some supposedly intelligent people want to turn over even more of our vital health care industry to these clowns.
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Welcome back to the 1970s:

The easy profits are behind us. Major profit opportunities still lie ahead, but caution, and an attention to detail, are again as in the middle 1970s prominent requirements.

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We are now again back in the 1970s, courtesy of the Fed's irresponsible Keynesian monetary policies and the major budget deficits incurred by Congress. Are you pleased with all the favors your government is anxious to bestow upon you?
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But don't forget that the middle 1970s also experienced periods of rapid decline in the prices that had rapidly increased. Financial turbulence with substantial increases in business and financial risks are also again prominent features of financial and economic markets, as demonstrated this year in the housing market. The easy profits are behind us. Major profit opportunities still lie ahead, but caution, and an attention to detail, are again as in the middle 1970s prominent requirements.
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Also as in the 1970s, the U.S. weakens as its adversaries strengthen, there is an unpopular conflict and a weak president, and the electorate has increasingly turned against incumbents. The increasing weakening of the Federal Reserve Board is already obvious - for those with eyes to see.
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1970s lite:

But the differences have also always been emphasized by FUTURECASTS and must be kept in mind.
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Increased economic flexibility makes the U.S. economy inherently stronger and more resilient than in the 1970s.

Floating exchange rates instead of fixed exchange rates permit adverse currency movements to occur smoothly rather than in periodic major crises. Marginal tax rates are lower, regulatory burdens are reduced, globalization is a major asset in holding down overall inflation rates and long term interest rates. With labor market flexibility, these factors hold down unemployment rates. They increase economic flexibility and resilience and make the U.S. economy inherently stronger than in the 1970s.
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But there are also now extraordinary weaknesses that were not present in the 1970s. The War on Terror is not nearly as financially burdensome as the Vietnam war and the Cold War, but entitlements are vastly more burdensome and due to increase massively in this next decade. The fiscal side of the problem is thus on balance considerably worse than in the 1970s - and Congress shows no signs of the spending restraint that alone can mitigate the nation's financial problems.
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No! Tax increases will not do the trick. If more revenues are provided, Congress will just spend them, and the economy will have to labor under the increased tax burdens
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Regulatory costs are again on the rise, especially with regard to efforts to deal with global warming. As each bubble bursts, Congress rushes in to apply regulatory fixes - some of which inevitably impose more costs than benefits. Here is one area where a Democratic administration would be clearly worse than a Republican administration.
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FUTURECASTS one major forecasting error for this period was caused by these differences. The surge in stock prices when the Fed stopped allowing its interest rates to rise was an obvious call for "Near Futurecast VIII" in February of 2006, but the extent of that surge was far greater than expected and out of line with 1970s experience. This was probably due to the many positive differences pointed out above.
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As long emphasized by FUTURECASTS, this is not - yet - a complete repeat of the 1970s. It is still 1970s lite.
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Military matters:

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FUTURECASTS provided a major review of its material pertinent to the War on Terror and the campaigns in Iraq and Afghanistan in last year's "Futurecasts Review," and need not repeat it here. Suffice it to point out that the recent encouraging - but still very unstable - progress in Iraq has validated FUTURECASTS material.
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The military success of the surge confirms the importance of "boots on the ground."
The progress in Sunni districts confirms the emphasis that alliances with the Iraqi peoples are the important alliances in this struggle.
That nation building is a dubious and difficult undertaking is confirmed by the continuing difficulties and instability faced by coalition forces.
That military occupation is a wasting asset for the U.S. that leaves it with no choice but to do what it can in the few years it has and then return the occupied country back to its people is confirmed by the current reduced ambitions for democratic reform.

The U.S. can powerfully support and encourage political and military success in Iraq and Afghanistan, but only the peoples of those nations can achieve it.
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The Bush (II) administration is the most Keynesian administration since Jimmy Carter, as FUTURECASTS has repeatedly pointed out. The Bush (II) administration is also the most incompetent wartime administration since Lyndon Johnson.
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Clearly, the Bush (II) administration is at fault for taking so long to realize the failure of its initial strategy in Iraq. The "small wars" strategy now being implemented brilliantly by Gen. David Petraeus has been around for decades. See, Boot, "The Savage Wars of Peace," at segment on "The 'Small Wars' Manual." Waiting until after the 2006 elections to admit initial failure and change course was unconscionable.
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In both Iraq and Afghanistan, the U.S. now has elegant strategic solutions in hand for a long term sustainable presence. More "boots on the ground" are nevertheless still needed in Afghanistan.
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Success both politically and militarily will at best be a generational matter.

Political "success" will mean the continuation of at least the appearance of democratic elections. As in South Korea and Taiwan, over time, people can come to expect more than just the appearance of democratic systems.
Military "success" will mean maintenance of military support equivalent to that in South Korea for a period of about 80 years, with the routine provision of domestic security increasingly provided by domestic forces. As proven in the Yugoslav states, not until everyone above 5 years of age during the conflict is dead or in his dotage - and peoples have engaged in peaceful commerce - and young people have found each other and intermarried - can it safely be said that a nation has put such a conflict behind it. However, since the killing continues, this clock has not even begun to run as yet in Iraq and Afghanistan.

Time is an important factor in these matters.

Only if the U.S. makes a credible stand somewhere on the field of battle will the growing mass of Middle Eastern people who resent the militants and insurgents and long for a better future have the heart to actively oppose them.

Success against insurgencies and against opponents using guerrilla tactics, however, requires more than just competent strategy, as vital as that is. It is simplistic to assume that a substantially larger force at the beginning, as useful as that would have been, could have avoided the subsequent insurgency. Time is an important factor in these matters.
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If Americans are tiring of the conflict, you can imagine how the Iraqi and Afghani peoples must feel with deadly conflict raging in their midst for year after long year. It also takes time for people to come to understand what submission to a Muslim militant theology would mean. Every time the insurgents or al qaeda militants succeed in setting off a bomb, they make more enemies
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The character of its enemies, as usual in the last century, is the greatest strategic weapon in the U.S. arsenal. However, if the U.S. stands aside, evil can win. There is a growing mass of Middle Eastern people who resent the militants and insurgents and long for a better future. However, only if the U.S. makes a credible stand somewhere on the field of battle will they have the heart to actively oppose the militants.
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War is inherently atrocious. As explained in Military Futurecast, in the segment on "Military Strategy - The Power of the Force," the ability and will to act atrociously is an inherent factor in military strategy. Middle Eastern combatants entertain no illusions about this matter,
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The major practical difference in this regard between Abraham Lincoln or Franklin D. Roosevelt on the one hand and Hitler and Stalin on the other, is that the American wartime presidents shifted immediately from ruthless attack to humanitarian assistance and rehabilitation as soon as opponents surrendered, while under Hitler and Stalin, atrocious actions never ceased.
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The Shia death squads have played a vital role in impressing upon the Sunni people that it will not be only Shia who suffer from the conflict.

Sunni bombs have been met with Shia death squads.

The attempt to base governance on some level of consensus thus has dubious prospects.

It would be a strategic mistake of vast proportions for the U.S. to abandon its allies among the Middle Eastern peoples.

It must be understood and acknowledged - as politically incorrect as that may be - that the Shia death squads have played a vital role in impressing upon the Sunni people that it will not be only Shia who suffer from the conflict.
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For very good strategic reasons, the U.S. cannot act in the Middle East with the ruthlessness needed to "win" a conflict. However, the Shia death squads could.
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Sunni bombs have been met with Shia death squads. The death squads have finally impressed upon a growing number of Sunni groups that the Sunni's had better make their peace in the new Iraq while the U.S. still has a dominant military presence. This possibility has been a constant theme for FUTURECASTS since the 2004 FUTURECASTS Review. Although inherently unstable, there is now a real basis for resolution of the conflict.
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As many knowledgeable opponents of the war in Iraq have pointed out, Iraq is not a real nation. Like most nations in the Middle East, it is an artificial construct of colonial era map making. These religious sects and tribal groups have been fighting, dominating and slaughtering each other for millennia. Their hatreds rest on firm foundations of past atrocities and periods of harsh subjugation. Within their Western-imposed national boundaries, they are like tarantulas in a bottle. Terror, not consensus, is the basis of rule in the Middle East.
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The attempt to base governance on some level of consensus thus has dubious prospects. Any peace that is successfully arranged will remain inherently unstable for decades to come
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However, any level of success would constitute a HUGE victory. The U.S. has in fact gained many allies among the Afghani and Iraqi peoples. They are far from perfect allies, but many have demonstrated a willingness to take huge risks in the struggle against the militants. It would be a strategic mistake of vast proportions for the U.S. to abandon these allies.
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Governance:

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The inherent ineptness of government has been a central theme of FUTURECASTS since it summarized in its first issue the many things that the U.S. government does right and the many reasons why it does so much that is wrong. See, Government Futurecast.
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Apparently, the threats of global warming are not sufficient to trump farm state politics.

Today, global warming is viewed as a threat to the world, and the U.S. government has sprung into action. Gallant legislators have appropriated tens of billions of dollars to deal with the problem - with corn ethanol.
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Apparently, the global threat is not sufficient to trump farm state politics. In this context as in the economic policy context stated above, Congress remains stupid beyond mere ignorance. Yet, supposedly intelligent people want to turn over even more of our vital health care industry to these clowns.
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As Congress and the administration rush to do more favors and provide more benefits for the public, public esteem for both the administration and Congress plummet to record lows, precisely as FUTURECASTS expected.

Vol. 3, No. 1, 1/1/01.
(from Vol. 1, No. 1, 8/1/98)

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  "6) The more that government tries to do for the public, the more its esteem with the public will decline: The 21st Century futurecast for accelerating rates of change means that the shortcomings of government policymaking will be increasingly exposed. Evidence of government ineptness and sheer stupidity will become increasingly apparent in everyday life.
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  "As government continuously expands its activities, outside entities will increase their efforts to influence government. They will, of course, succeed - by means both legal and illegal. Government corruption must inevitably grow with the growth of government. Government itself will become the primary sociological problem of the 21st century.

  "The money flowing into campaign coffers provides irrefutable testimony of the correctness of this expectation. Efforts at campaign reform have - as FUTURECASTS predicted - failed to stem the tide."