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Generational Dynamics Web Log for 4-Nov-2011
4-Nov-11 World View -- Greece buckles to European demands and cancels referendum

Web Log - November, 2011

4-Nov-11 World View -- Greece buckles to European demands and cancels referendum

Fed Chairman Ben Bernanke's press conference

This morning's key headlines from

* Greece buckles to European demands and cancels referendum
* Referendum call forces historic changes
* Fed Chairman Ben Bernanke's press conference
* Following the script
* Elements of the script
* A little generational theory

Greece buckles to European demands and cancels referendum

 Papandreou exits a cabinet meeting at the Greek Parliament (FT)
Papandreou exits a cabinet meeting at the Greek Parliament (FT)

During a tense and tumultuous day in Athens, Greece's Prime Minister George Papandreou backtracked on a proposal to put Greece's latest debt deal with the European Union to a referendum. Furthermore, he suggested that he would be willing to step aside to form a unity government but said he still wanted his MPs to back him in a confidence vote on Friday night. "I am not clinging onto my seat," he said. The December 4 referendum has been cancelled, but if Papandreou loses the no-confidence vote on Friday, then there will be a December 4 election. Kathimerini

Referendum call forces historic changes

Whether or not the government of Greece's Prime Minister George Papandreou collapses, as may well happen on Friday, Papandreou's referendum call has caused dramatic changes. Within Greece, the main opposition candidate Antonis Samaras from the conservative New Democracy party was finally forced to acknowledge that he would support, however reluctantly, the austerity measures that the euro leaders were forcing on Greece. As for Greece itself, France's president Nicolas Sarkozy and Germany's Chancellor Angela Merkel made it clear that if you want to stay in the eurozone -- or even in the European Union -- then you have to do as your told. These are two major changes that have been brought about by Papandreou's call for a referendum. Some analysts are saying that these are exactly the results that Papandreou was hoping for, since he was almost completely isolated in supporting the austerity measures that would be required to continue getting bailout payments. CS Monitor

As an aside, Nicolas Sarkozy has been quoted as saying, "We can't stop the Greeks from committing suicide, but it's better to let them kill themselves, than to let Angela Merkel do it."

Fed Chairman Ben Bernanke's press conference

During Fed Chairman Ben Bernanke's press conference on Wednesday, he was asked the following question: "Given how hard it's been to bring down unemployment in the past, why are you confident you have the tools to bring it down in the future?"

Here's his response (my transcription):

"Well, we have the ability to provide more stimulus and accomodation. We believe that a good bit of the unemployment that we are seeing is what economists would call cyclical unemployment, that is unemployment rising because of inadequate demand in the economy. If that's the case, then monetary policy by lowering interest rates, making financial conditions more accomodative should stimulate demand, should stimulate spending, over a period of time, that will help bring down cyclical unemployment. That is something we know from a lot of experience, and although it's been a very slow process here, there's no reason to think that the same basic effect will not work in this case as well.

Now, it's also possible that part of the increase in unemployment reflects so-calld structural factors, mismatches between workers skills and job opportunities, loss of skills, geographical mistmach, etc. And to the extent that that's the case, then monetary policy is much less effective, because in that case only other kinds of labor market policies can make progress against that type of unemployment. Then again, I do think that a considerable part of the unemployment we're seeing is cyclical, and is thus amenable to monetary policy.

Final comment. Cyclical umplopyment left untreated, so to speak, for a long time can become structural unemployment as people lose skills, they lose attachment to the labor force, as their work networks dry up and so on. So in that respect, it's important for us to try to address the unemployment problem, in a sense, while it's still amenable to monetary policy."

With regard to the first paragraph above, I cannot for the life of me see how Bernanke can possibly believe what he's saying. He says we know certain things from "a lot of experience," when the whole point of the question he was asked were that those things have been abject failures in the last three years.

In a report last month, I quoted former Fed chairman Alan Greenspan as saying, "All the econometric models failed in 2008 - across the board." Surely Bernanke knows that as well, and yet he and other analysts and economists keep saying that what has failed before will work next time. The fact is that when Bernanke talks about "a lot of experience," he's talking about the period from 1945 to 1990. Nothing in that period is relevant today, and that's why all the econometric models fail, time after time. You have to go back to the 1930s to find data that's relevant today.

Following the script

I've been writing on Generational Dynamics for close to ten years now, and I've always tried to push the envelope to see what could be predicted, based on generational forecasting, and what could not. I've frequently pointed out that each individual has free will and can do anything he wants, but when you're talking about a generation that has millions of people, then certain kinds of aggregate actions and behaviors can be predicted with mathematical certainly. I've used the analogy that if you throw a rock into a lake, then you can't predict what any individual water molecule will do, but you can predict with certainty what kind of waves and ripples you'll get.

The last few days have solidified for me a feeling that's been growing -- that the world has been following a preordained generational script, that cannot be prevented or avoided. And a Greek referendum was not in the script. The script that's being followed is very similar to the one the world was following in the 1930s.

When I wrote my article on the 1932 book, "The bubble that broke the world," I suggested that just as America tried to bail out Germany in 1931, China might try to bail out America in the current crisis. We can now understand why America tried to bail out Germany in 1931. America was forced by international pressure to do so, just as Europe is being forced by international pressure to bail out Greece, and Greece is forced to accept the terms.

When I was in school in the 1950s, there were two major mysteries about the 1930s that everyone referred to. First, why did all the economists keep saying that the worst was over, even though the Great Depression continued to worsen? And second, why did England believe in "peace in our time," when it was clear to Churchill and a few others that Germany was rapidly arming itself for war, while everyone else seemed oblivious to it.

Today I won't attempt to go into the question of why everyone seems oblivious to China's massive preparations for war with the U.S., except to point out that the situation with Germany is the obvious analogy.

But the first question, on why 1930s economists kept saying that the worst is over, is completely analogous to Bernanke's inane statement quoted above.

I've repeatedly pointed out on my web site that economists can't explain the tech bubble that began in 1995 -- why it occurred at all, and why it didn't occur instead in 1985 or 2005. Even if you don't accept all of generational theory, the answer to this question is unambiguously obvious -- the 1990s was the time when the survivors of the 1929 crash and the 1930s Great Depression all disappeared -- retired or died, all at once. As obvious as that is, I've never seen a single mainstream economist state it or even discuss it. This has always astounded me. Apparently, never admitting to a generational explanation for anything is part of the generational script, since admitting to a generational explanation implies that you can't do anything about it, and most people are emotionally unable to handle that.

One more point that I've emphasized before: The script cannot be controlled by politicians. In the United States, under President Barack Obama, I'm not aware of a single major policy that would be any different if President George Bush had had a third term. (See "22-Sep-11 World View -- Obama delivers 'warmest pro-Israel speech ever' to UN")

Elements of the script

So what are the elements of the script, and how can we define them so as to make it possible to make intelligent forecasts about the future? I've written about this subject in "Generational Dynamics forecasting methodology," and so this hypothesis of a "script" is new material that supplements the previous document.

The phrase that we hear constantly is "kick the can down the road," which means that no one in power can make a decision, except to make a decision to postpone making a decision. In the 1930s, America bailed out Germany to delay the worst of the Great Depression, and England believed in "peace in our time" in order to avoid preparing for war. Both of these actions were attempts to "kick the can down the road."

Thus, we hypothesize as follows: In this generational Crisis era, if you want to forecast what's going to happen in the future, then forecast the solution that kicks the can down the road.

Thus, the Greek referendum was not in the script because it risked too much. However, the referendum might have gone ahead, in which case there would have been a worldwide effort to convince the Greek people to accept the euro deal, and it would have passed. The generational script must be followed.

Once we've accepted this hypothesis, then we can predict many things. Greece will get its next bailout payment, and the one after that. China will try to bail out Europe at some point. America will remain oblivious to China's military buildup.

In each case, the problem being addressed has no solution. For example, Greece will eventually default, and bring down euroland. Most people emotionally simply can't face up to that, and so they argue with one another about solutions that can't work. The arguing only stops when a real crisis occurs.

A little generational theory

The 1990s was called a generational Unraveling era, because all the rules that the survivors of the previous crisis war (WW II) put in place, to prevent another war, unraveled. The 2000s have been a generational Crisis era, but it has two parts.

The early part of a Crisis era is what's still happening today -- endless political bickering over insoluble problems. One researcher (Matt Ignal) has referred to this as the "post-Unraveling" portion of the Crisis era.

The second part occurs when the real crisis begins. In our case, it will be a worldwide financial panic, a major terrorist attack on American soil, a Chinese attack on Taiwan, or some other terrifying event. Generational theory calls those "regeneracy events," because those are the events that end the political bickering once and for all, and regenerate civic unity for the first time since the end of WW II.

So the post-Unraveling is a period of enormous anxiety, when the world tries one desperate solution after another to postpone the inevitable disaster. The regeneracy is the disaster that finally occurs, and leads to the real crisis -- in our case a major global fiscal crisis and a new world war.

(Comments: For reader comments, questions and discussion, see the 4-Nov-11 News -- Greece buckles to European demands and cancels referendum thread of the Generational Dynamics forum. Comments may be posted anonymously.) (4-Nov-2011) Permanent Link
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