Generational Dynamics: Forecasting America's Destiny Generational
Dynamics
 Forecasting America's Destiny ... and the World's

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Web Log - August, 2004

Summary French journalists kidnapped, don't count on Social Security and Welfare, the uprising in Najaf Iraq, Russian plane disaster, Georgian President Saakashvili close to war with Russia, oil prices falling, deflationary trend, Palestinian opinion, the Vatican and feminism

Two buses in Israel blown up today, apparently by suicide bombers

The thing to watch for - and it won't be widely reported - is changing attitudes of Israelis themselves.

The Israelis have undoubtedly been feeling very relieved in recent weeks, because there haven't been any suicide bombings in Israel for a relatively long time - since March.

The disappearance of suicide bombings has been attributed to Ariel Sharon's disengagement plans: Building the barrier separating Israel from the West Bank, and pulling out of the Gaza strip.


Israel
Israel

Both of these plans have been very controversial. A United Nations court has said, in essence, that Israel has no right to build such a barrier on Palestinian land, even if it prevents suicide bombings, although Israel could build a barrier on Israeli land if it wished.

And the plan to pull out of the Gaza strip in 2005 has roiled Palestinian politics, as different factions have competed with one another to fill the power vacuum that Israeli will be leaving.

This is all in the framework of a threat (or promise), by Palestinian militia group Hamas, of a major terrorist attack against Israel by the end of 2004, in retaliation for Israel's killings of major Hamas leaders.

So today we apparently have two new coordinated suicide bombings in Beersheba. How will this affect the attitudes of the Israeli people?

From the point of view of Generational Dynamics, the Palestine region appears to have entered a "generational crisis" period in 1999, starting with the new Intifada that resulted in a series of suicide bombings that forced the Israeli withdrawal from southern Lebanon, something that the Palestinian militia group Hizbollah considers to be a major victory over the Israelis.

However, the last generational crisis period ended in 1949, and so not enough time has passed for the region to be very deep into a crisis period. That's why both the Palestinians and the Israelis are still willing to look for ways to compromise and contain problems, rather than threaten all out war. (By contrast, the Caucasus region is deep into a crisis period and is far more dangerous.)

So, what we'll be watching for in the next few days is to see how Israeli public opinion changes, now that they face the realization that they're still exposed to suicide bombers.

Will they continue to seek ways to compromise and contain problems? Or will they start to become so infuriated that they'll seek revenge or a war to "fix the problem once and for all," as Americans did after 9/11 when we went to war in Afghanistan? (31-Aug-04) Permanent Link
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France stunned, Arabs embarassed by terrorist kidnapping of French journalists in Iraq

The "nice guys" aren't immune to terrorism either, as the French found out on Friday when two French journalists were kidnapped and held hostage. The kidnappers appear to be the same group, "the Islamic Army in Iraq," that murdered a kidnapped Italian journalist on Friday.

This is apparently the same terrorist group that scored an impressive victory in July by threatening to behead a Filipino hostage. The hostage was released after the Philippines capitulated to its demands and withdrew 50 troops from Iraq a few weeks earlier than had been scheduled.

The group had threatened to murder the Italian hostage unless Italy agreed to withdraw all troops from Iraq. Italy refused to comply, leading to journalist's gruesome murder on Friday.

The terrorists are now threatening to murder the French journalists unless France rescinds a new law that bans Muslim head scarves in schools. The law takes effect on Thursday, when school resumes following the summer vacation.

The controversial law is not directed only at Muslims. It forbids public school students from wearing "conspicuous" signs showing their religious affiliation, including Jewish skullcaps and large Christian crosses. However, the law appears to be mainly aimed at removing Muslim headscarves from schoolgirls.

The French, who have used every diplomatic means possible to oppose and embarass America over the war in Iraq, felt that they were more or less immune to the kinds of terrorist acts directed against America, Italy, and other countries.

Arab leaders, even those who have opposed the headscarf ban, are calling for the release of French journalists.

French diplomats have announced that the headscarf ban will not be rescinded, but have been working channels all weekend to get the hostages freed.

The terrorists have boxed themselves into a corner.

Which group do the terrorists care about more? We'll see.

The terrorists have set a deadline of later today. (30-Aug-04) Permanent Link
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Income growing more slowly than expected, but Americans keep on spending

Personal income rose 0.1% in July, but personal spending rose 0.8%, indicating that Americans are still buying more on credit, according to figures released this morning.

Personal income had been expected to rise 0.4%. (30-Aug-04) Permanent Link
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Alan Greenspan warns Baby Boomers not to count on Social Security and Medicare

Greenspan warned policy-makers to act soon to head off looming insolvencies in Medicare and Social Security that guarantee that Baby Boomers will not receive all the benefits that have been promised.

Medicare is in worse shape than Social Security because the cost of medical care has been increasing per patient, and there's no way to predict how much more expensive medical care for aging Boomers will be required.

In a speech Friday to the Federal Reserve Bank of Kansas City, Greenspan warned that the policy changes should be made quickly, in order to give Boomers a chance to change their habits and increase their savings rate.

In his words,

"As a nation, we owe it to our retirees to promise only the benefits that can be delivered. If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels. If we delay, the adjustments could be abrupt and painful."

The reason that "the adjustments could be abrupt and painful" is shown by the following graph.


Total number of person age 65 or older, and age 85 or older
Total number of person age 65 or older, and age 85 or older

The number of people age 65 or older is increasing rapidly. When the Baby Boomers reach age 65 in 2010, the rate of increase will become much more rapid.

This is a problem which has been building for decades but, as Greenspan points out, neither George Bush nor John Kerry has been talking about it. They're too busy worrying about stuff that happened in the 1960s.

The problem is complicated by the number of people living alone.


Percentage of population age 65 and older living along, male and female
Percentage of population age 65 and older living along, male and female

As the above graph shows, the number of older people living alone has been high, which complicates the problem of providing medical care.

This whole issue has an interesting relation to Generational Dynamics.

The Baby Boomers are the generation born after World War II. Generation X, the people born during the American "awakening" of the 1960s and 70s, followed.

Following the generational paradigm, the people in the Boomer generation (the one born right after a crisis war) tend to be narcissistic, moralistic and arrogant. This is the elder generation today.

The people in Generation X (born during an awakening) follow right behind them. They are the pragmatic middle managers doing most of the work today. As children, they were heavily criticized, and they grew up to be alienated. Following the generational pattern, the arrogant Boomers have always treated the GenXers with contempt, and the alienated GenXers have returned the favor by despising the Boomers.

These are all generalities of course, and not true of all people in each of those generations. But these are overall characteristics of the people in these two generational archetypes throughout history.

This is going to be part of the crunch that America is already facing. The aging Boomers are going to have very heavy voting power, and they're going to force politicians to impose more taxes to pay for income and medical services for themselves. The GenXers are going to be forced to pay those taxes for people in a generation that they don't particularly like, and they're going to be very unhappy about it.

Many people may find this kind of analysis surprising, but there's nothing remarkable about all this. These generational relationships repeat throughout history. The last time it happened was in the 1930s, with the generations that grew up following the Civil War. At that time the situation was resolved because the nation had to unite to fight the Great Depression and then World War II.

Journalists and pundits have remarked that the 2004 Presidential election campaign is the nastiest in a long time. It's these generational issues that are causing the increasing nastiness. Things are going to get a lot nastier in the next few years. (30-Aug-04) Permanent Link
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Polls show that Kerry has been hurt by "Swift Boat" controversy

John Kerry might have done better if he'd followed his own rule.

A year ago, when Howard Dean was the Democratic front-runner, I wrote that "the Democrats [are] making a potentially fatal error by being too stridently anti-Bush." I said the Democrat's hatred of George Bush could seriously backfire.

That's what's happened in the last few weeks. Instead of just letting the Swift Boat controversy die of its own accord, Kerry kept it alive for three weeks by personally making vitriolic attacks, accusing Bush of being involved in the Swift Boat campaign.

Kerry won the nomination in part by setting a rule for his campaign that it would not repeat Dean's mistake of appearing to hate Bush. The Swift Boat controversy has hurt Kerry because he violated his own rule.

By contrast, Bush did not make any such error when the far more damaging Fahrenheit 9/11 movie came out. He didn't make vitriolic accusations at Kerry over the movie, and let the storm pass.

Kerry should immediately drop the Swift Boat controversy and let it play itself out, while he concentrates on other issues, such as the economy, which are his strength.

It seems absurd that we're spending so much in this campaign on things that happened almost 40 years ago, but there is one remaining Vietnam War issue that's really concerning a lot of people (including me).

In 1971, Kerry said that American soldiers were committing war crimes "on a day-to-day basis with the full awareness of officers at all levels of command." These atrocities included rape, torture, and cutting off ears, heads and limbs.

Statements like these really infuriate many people who were alive at that time. The most visible person who made similar statements in the 70s was actress Jane Fonda, who visited the enemy capital (Hanoi) and made similar statements. Later, Fonda refused to condemn Vietnamese actions that led to the genocide of millions of Cambodians, leading many people to conclude that Fonda, Kerry, and others like them were motivated only by hatred of America, rather than by some abstract anti-war view.

(In fact, Jane Fonda was clearly motivated by hatred of her own father, Henry Fonda. Jane and Henry finally "made up" in 1982 when they co-starred in the movie, On Golden Pond.)

A lot of young people who don't understand what all the fuss is about should know that it's Kerry's statements about atrocities that are fueling the anger against him. The issue about what ribbons he won while serving is only a proxy for the real issue.

Even so, it might not even matter what Kerry said in the 1970s if he repudiated those statements. Jane Fonda has apologized for her actions, but Kerry has never done anything to repudiate his statements and actions from the 1970s.

Does Kerry still believe that American soldiers committed atrocities and war crimes on a day to day basis, with the full awareness of officers at all levels of command? As far as I can tell, he still does believe that. Does America want the War on Terror to be led by a man who believes that America itself committed regular atrocities in Vietnam? Probably not, and that's a big problem for Kerry.

From the point of view of Generational Dynamics, Kerry has made the same mistake that so many other journalists, pundits and high-priced analysts have been making since the war in Afghanistan began after 9/11. They've all said that when the body bags start coming back, Americans will turn against the War on Terror. They've said that because they don't understand that America today is in a "generational crisis" period, where such an attitude cannot prevail. In the 1970s, America was in a "generational awakening" period, which is completely different.

Kerry's problems with this issue are self-inflicted -- he has failed to understand the real intensity of feeling about this issue. Kerry should have apologized months ago for his 1970s actions. He could easily have done so, with no harm to himself, by saying that he made mistakes because he was young. (Remember that Bush has apologized for drinking and womanizing when he was young.)

At this late date, apologizing for his 1970s actions will not be as credible as it might have been months ago. Still, it's the best chance he has to defuse the Swift Boat campaign and get back to the real issues. (27-Aug-04) Permanent Link
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Grand Ayatollah Ali al-Sistani appears to be trumping Moqtada al-Sadr in Najaf

Things could still go wrong, but it appears that the adults are finally disciplining the kids. And the use of the words "adults" and "kids" is not just an attempt at humor. It's crucial to understanding what's going on.


Ayatollah Ali al-Sistani
Ayatollah Ali al-Sistani

As I've said many times, Iraq today is in a "generational awakening" period, one generation following the 1980s Iran/Iraq war. America's last awakening period was the 1960s, one generation following World War II.

Awakening periods occur in any nation at any time throughout history, one generation past the end of a genocidal crisis war. It's always a generational conflict -- between, on the one hand, the heroes who fought in the war and who have created new institutions and rules to prevent any such war from happening again, and, on the other hand, their children, who always rebel against those institutions and rules. The conflict is between the children and their parents, but it becomes a conflict between the children and any authority figure.

Thus, journalists and high-priced analysts who have been warning about a new Iraqi civil war between Sunnis and Shiites for the last year and a half have been completely wrong: No such civil war has ever occurred, throughout history, during an awakening period. It's literally impossible, as I've been saying on this web site for a long, long time. We can expect to see riots, demonstrations and low-level violence, but not the kind of uprising that journalists and high-priced analysts have been warning about.

In the Najaf conflict, the "kids" have been Moqtada al-Sadr and his followers, and the "adults" have been the provisional government and, of course, the Americans.

Grand Ayatollah al-Sistani holds special power in this situation, because he's a generation older than the leaders of the provisional government. It's his age that gives him the respect of both sides.

So what should we expect now (assuming that the current deal in Najaf continues to hold)?

One place to look is Iraq's previous awakening period -- in the mid-1940s. By 1948, the riots and demonstrations were so large and widespread that the British were forced to remove their troops from Iraq and had to give up sovereignty over their two air bases in Iraq.

Ayatollah al-Sistani certainly remembers that 1948 victory, and so do a lot of other older Iraqis. We can feel pretty certain that the unrest will continue as long as there are American troops and bases in Iraq. (27-Aug-04) Permanent Link
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Russian airplane catastrophe, 5 days before Chechen election, heightens Putin's woes in the Caucasus

Al-Qaeda has promised America a terrorist attack prior to our election, after their successful attack in Madrid on March 11 just prior to Spain's election. It looks like the terrorists were spectacularly successful in Russia on Tuesday, just a few days prior to Chechnya's presidential election, scheduled for Sunday.

Russia has not yet confirmed that yesterday's two simultaneous plane crashes were caused by terrorism, but it's hard to believe that it's anything else. Can anyone forget on 9/11, when a plane hit the first World Trade Center tower, most people thought it was an accident, but quickly changed their minds when another plane hit the second tower?


Troubled areas in Caucasus regions - including Chechnya
Troubled areas in Caucasus regions - including Chechnya

Russia has had dozens of Chechen terrorist attacks in the last couple of years, resulting in hundreds of casualties. Until this week, the most complex and spectacular occurred in October, 2002, when terrorists held hundreds of playgoers hostage in a Moscow theatre.

The most brazen was the assassination of Russian President Vladimir Putin's hand-picked Chechen President Akhmad Kadyrov on May 9 of this year. The attack was a major victory for the terrorists, since Kadyrov was killed by a bomb that tore through a heavily guarded section of stadium seats in Grozny, where Kadyrov and other officials were watching a "Victory Day" parade. The terrorists had cleverly planted the bomb, with a remote control device, underneath the stadium seats months earlier.

It's easy to see why Putin is loath to admit that his government is victim of yet one more spectacular Chechen terrorist attack. The pace of successful Chechen terrorist attacks is increasing. The troubles are piling up in the Caucasus region, where the Chechen war has been going on for ten years and is spreading into Ingushetia and Dagestan, and he's close to war with Georgia over the separatist province of South Ossetia.

From the point of view of Generational Dynamics, the Caucasus region is the most dangerous in the world right now, since it's farther into a generational crisis period than even Palestine. The Caucasus region is a major front line in the centuries old war between Orthodox Christians and Muslims. (26-Aug-04) Permanent Link
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New Islamic terrorist group claims credit for Bangladesh bombing leading to massive unrest and further violence

Like Pakistan, Bangladesh is overwhelmingly Muslim but still has excellent relations with the U.S.


India and surrounding countries, including Pakistan and Bangladesh <font size=-2>(Source: CNN)</font>
India and surrounding countries, including Pakistan and Bangladesh (Source: CNN)

One of the reasons for the excellent relations is that the country receives plenty of economic aid from America, totalling $100 million in 2001. Bangladesh is a low-lying country with plenty of rivers. jungles and rain, giving the country a fertile soil that provides bountious crops that feed the burgeoning population. However, almost every year the country is hit with natural calamities -- floods, cyclones, tornadoes, tidal floods -- and requires U.S. assistance to protect human health and encourage economic growth.

When the United Nations partitioned India following World War II in order to create a separate country for India's Muslims, apart from its Hindu population, Bangladesh was made part of Pakistan. However, East Pakistan's mostly Bengal population (language: Bengali) was in constant friction with West Pakistan's more multiethnic population (language: Urdu). As a result, East Pakistan broke off as the People's Republic of Bangladesh ("Bengal nation") in 1971.

Bangladesh has had a troubled political history since then, marred by several coups.

However, the level of violence took a sharp upwards turn last week when an assassination attempt on opposition political leader Sheikh Hasina of the Awami League party, involving grenades and gun fire, killed 19 persons and injured 200 others at a political rally in Dhaka.

This has sparked riots and demonstrations involving tens of thousands of people in cities throughout the nation. There's also been further violence, the worst of which was a mob attack on a passenger train, dousing it in gasoline and setting it on fire.

The country has been practically shut down by a two-day strike (also called a hartal), and a new hartal and more riots and demonstrations are expected this weekend.

On this web site, I try to focus only on things with worldwide strategic significance, and so ordinarily I might not have written about a local disturbance of this type. However, there are two aspects of this situation that are worthy of attention.

First, a previously unknown Islamic group, Hikmatul Zihad, has claimed responsibility for the bombings. New Islamic terrorist groups have been springing up around the world, from Egypt, across the southern Asia sub-continent, and then down into the Pacific Islands (where tensions are also growing because of an increasing threat level between China and Taiwan).

These Islamic groups are becoming more and more violent, and are linking together in a loosely formed league related to al Qaeda.

Second, the level of public response to this act of violence has been much larger than anyone expected. This indicates a level of public fury that can have international effects.

Now put these two facts together. The objective of the international Islamic terrorist movement is to use terrorist attacks to spark a civil war that could spiral out of control and spark an Asian and Middle Eastern uprising against the Crusader and Zionist (Christian and Jewish) infidels.

They've tried that in Iraq, but it's failed there because Iraq is in a generational awakening period, since only one generation has passed since the last crisis war, the Iran/Iraq war of the 1980s. For that reason, a major civil war in Iraq is almost impossible.

But other regions are well into generational crisis periods, since three or more generations have passed since the last crisis war. These include Palestine, Kashmir, the Caucasus, and now Bangladesh.

In the long run, the odds are with the Islamic terrorists. If history is any guide, and it is, then sooner or later, one of these regions will provide the spark that they're looking for. (25-Aug-04) Permanent Link
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Georgia President says that war with Russia is 'very close'

When a head of state becomes as provocative as Saakashvili, it's not a good sign, since it's easy to make a miscalculation.

In an interview with a French newspaper, Georgian President Mikheil Saakashvili raised the level of confrontation with Russia even higher than in his op-ed piece (see item below.)

According to Saakashvili, Russia has distributed "vast quantities of weapons" to Ossetia, and that "the forces that attacked our positions last week were Russian forces, without any doubt." He added that the pro-Russian Chechen government is ready to send 5,000 Chechen soldiers of Ossetian ethnicity to South Ossetia to support the Russians.

He made an additional accusation: That Russia is hiding the number of people being killed in both Chechnya and Ossetia. "The tactics are the same as the Russians use in Chechnya: When there are battlefield deaths, they risk their lives to go and recover the bodies, and then they make the bodies disappear."

In response to a question on whether he was threatening war, he replied: "If a war is begun, it will be between Georgia and Russia, not between Georgians and Ossetians. It's absolutely necessary to avoid ethnic confrontations. We're very close to a war. The population must be prepared [for it]. But of course, that's the worst of the things that can happen; I have no intention of provoking a war - I'm not insane!"

He proposed an international conference on the issue, something that Russia currently opposes. (24-Aug-04) Permanent Link
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Georgian President lays out South Ossetia battle lines to American audience

Mikheil Saakashvili is asking the West to side with Georgia against Russia in an op-ed piece in Monday's Wall Street Journal.


Troubled areas in Caucasus regions
Troubled areas in Caucasus regions

Buried in 1000 words of politician-ese, Georgian President Mikheil Saakashvili laid down the battle lines. Here's what he said explicitly and what it really means for the future of the region:

He said: South Ossetia is "a small but integral area of our country."

He means: South Ossetia will not be allowed to secede from Georgia and join North Ossetia as part of Russia.

He said: Not long ago, the people of Georgia launched a bold and uncertain experiment. After years of decline and chronic lawlessness, they stood up last fall to defend their democracy in what has since been called the Rose Revolution.

He means: He's President now, after massive public demonstrations forced Eduard Shevardnadze out of office a year ago.

Shevardnadze, born in Georgia in 1928, lived through the massive Stalinist purges of the 1930s and the Nazi invasion of World War II. He later rose high in the Soviet KGB ranks, and became founding President of Georgia when the Soviet Union dissolved.

From the point of view of Generational Dynamics, the children in the generation raised during a crisis war grow up to become highly risk-averse, and try to avoid a new major war at any cost. Shevardnadze carefully led the country through a nascent civil war throughout the 1990s by careful compromise.

The younger generation officials that run the government now, including Mikheil Saakashvili, born 1968, are much more willing to take risks and risk confrontations.

So when Saakashvili talks about the Rose Revolution in which he replaced Shevardnadze last year, he's also saying that times have changed, that policies have changed, and that Georgia is no longer willing to go as far as before to compromise with Russia and avoid a serious confrontation.

He said: "The first step in Georgia's peaceful reunification came this May. Courageous activists in the Black Sea region of Ajara forced out a local dictator who for years outlawed political pluralism and free media, undermined efforts to hold democratic elections and threatened to secede from Georgia. Afraid to face the people he once terrorized, Ajara's former dictator fled to Moscow, where hardliners generously offered him safe haven."

As we described at length in in a piece I wrote several days ago, the situation in South Ossetia is very different from the situation in Ajara. The fact that Saakashvili is using Ajara as a model for South Ossetia is an ominous sign (caused by his relative youth) that he doesn't understand the situation.

He said: "For millennia, Georgia has prided itself on being a multi-ethnic, open-minded society. Ethnic and religious tolerance has always been a central component of our identity."

This is true and it would be interesting if Georgia had not also been, for millennia, a central battlefield for major genocidal Asian wars. For centuries, the Caucasus region has been the scene of major wars between the Orthodox Christian and Muslim civilizations.

He said: "Unfortunately, the attitude of South Ossetian authorities and certain elements within the Russian government have brought the situation to the brink of a major armed conflict. While Georgia has gone to great lengths not to respond to dangerous provocations, I have also made it clear that the security of our people is my highest priority and we will defend our citizens from aggression."

He means: It's Russia that's at fault for ongoing violence, not Georgia.

This is an interesting statement in view of the fact that a recent poll of Russian men and women indicates that most Russians blame Saakashvili for the current troubles. Russian public opinion of Saakashvili has been worsening dramatically, as only 11% still have confidence in him, down from 27% just two months ago.

He said: "Paramilitary groups and arms deliveries from Russia have played a major role in the escalation of tensions. ... That's where almost all of the arms, drugs and other contraband enters South Ossetia from Russia through the only road link into the region -- the Roki tunnel."

He means: Once again, the problem is that Russians are using the Roki tunnel, which penetrates the Caucasus mountains and connects North and South Ossetia, and so Russians are at fault.

He said: "I want to continue to have a productive working relationship with Moscow, but when it comes to defending our citizens, there is a distinct line representing protection of democratic values and territorial integrity that needs to be respected."

This is an explicit warning to Russia that he's willing to risk a larger confrontation.

He said: "A good start would be an active role for the international community -- specifically the United States, European Union and the Organization for Security and Cooperation in Europe (OSCE) -- in high-level negotiations among the parties directly involved. ... Therefore, an international peacekeeping operation that is balanced and takes into consideration Georgia's Euro-Atlantic partners should be mandated in South Ossetia to provide security for the population and ensure the conditions for political negotiations towards a lasting settlement. ... So, third, it is imperative to establish a joint Georgian-Russian customs and border checkpoint at the Roki tunnel. Russia has continued to balk at the establishment of such a checkpoint, even though it acknowledges that South Ossetia is indeed part of Georgia's territory."

This is a major policy disagreement between Georgia and Russia. If South Ossetia is part of Georgia, then why are Russian troops stationed there, and why can't Georgian troops move in to prevent smuggling through the Roki tunnel?

Saakashvili would like to replace Russian troops as peacekeepers with troops from America and Europe. Russia is firmly opposed to allowing Western troops into the Caucasus region at all.

The Caucasus region is one of the most dangerous regions of the world right now. From the point of view of Generational Dynamics, it's even more dangerous than the Palestine region, since it's farther into a crisis period. With low-level violence continuing in South Ossetia, and with a ten-year old war going on in the nearby Russian province of Chechnya, this is a major front line in the centuries old war between Orthodox Christians and Muslims. (24-Aug-04) Permanent Link
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Taiwan to launch advertising blitz in US and Europe for UN membership

The advertising campaign, beginning today, will target billboards, newspapers, radio and TV in New York, Washington, and some European cities, according to a news report.

China is opposed to UN membership for Taiwan since that would add to the perceived independence of Taiwan. China considers Taiwan to be part of China, and will go to war rather than permit Taiwanese independence.

The adjoining analysis on how Southeast Asian nations are being forced to pick sides between China and Taiwan describes how tensions are rising in the Pacific region. Singapore Prime Minister Lee Hsien Loong says that the Taiwanese are ignorant and na´ve with respect to Beijing's intentions, and that Taiwan will be destroyed no matter who wins a war.

This is also true of almost all Americans on the Taiwan issue except, of course, those who read this web site.

This na´vetÚ seems to be quite apparent with this proposed advertising blitz. I hope I get a chance to see one of these ads, because it sounds like waiving a red flag in front of a bull. (23-Aug-04) Permanent Link
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Bear Stearns predicts oil prices will fall by almost half

As oil reaches $49.06 per barrel this morning, Stearns predicts that prices will collapse to $25 per barrel next year. The prediction by Bear Stearns analyst Frederick Leuffer came in private note to clients earlier this week, according to a CNN news report.

The reasoning is as follows: During the last year, concerns about oil supplies have caused companies to increase their own private inventories of oil. Indeed, U.S. commercial inventories of crude oil are 5% above last year's level, according to the Wall Street Journal.

Therefore, the Stearns reasoning continues, this almost panic-like stocking up of oil inventories has created an "oil bubble." Once the inventory build-up ends, according to Stearns' research, the actual market fundamentals support only a $25 per barrel price. Prices close to $25 would be maintained even if a terrorist act caused a temporary supply shock, because of the large inventories of oil on hand.

This is definitely a minority position. Most analysts believe that there's an inventory build-up bubble that has added $10 to the price of oil, but has not doubled the price. This would indicate that oil prices will fall to the $30s.

However, other analysts believe that high oil prices are here to stay. The main reason is the ever-increasing demand from China and India. China's crude imports increased by 40% over last year, and India's are increasing at the rate of 11% over last year.

Just a few years ago, there was only one massive oil consumer - the U.S. Today, there are three, all competing for a limited oil supply. It's hard to see how oil prices are going to fall dramatically unless at least one of these three economies has a deep recession. (20-Aug-04) Permanent Link
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China's demand for oil up 40% over last year

Oil prices surged up again to $47.80 this morning, a new modern record, on news that Russian oil giant Yukos is continuing its descent into bankruptcy, and violence continues in Iraq. Prices are up more than $10 per barrel since the end of June, as a new record has been reached almost every day.

The Wednesday announcement by OPEC (Organization of the Petroleum Exporting Countries) that it would increase oil production next month does not appear to have stemmed the price rise.

For the last nine days, threats by terrorist insurgents in Iraq have forced export cutbacks in oil exports from that country by 50%. On top of that, there are also concerns that Saudi Arabia's old oil fields have reached their peak.

These concerns are magnified by a new report from China's State Statistical Bureau that China has imported 40% more crude so far this year than in 2003, and that China's refiners have processed 17.2 percent more crude. These two figures together indicate that China is increasingly dependent on foreign sources of oil. In fact, one of China's principal international suppliers is Yukos.

From the point of view of Generational Dynamics, China is in a generational "unraveling" period, similar to America in the 1990s or Japan in the 1980s, where societal and cultural norms of all kinds, including financial norms, appear to break down. Japan and America both experienced large stock market bubbles during these periods, with the bubbles ending in 1990 and 2000, respectively. China is now in a similar stock market bubble. When it bursts, it will reduce China's demand for imported oil, but it will also have significant negative effects on the global economy in other ways. (19-Aug-04) Permanent Link
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Putin calls Georgia's Ossetia policy a 'stupid decision'

Last week's cease-fire agreement between Tbilisi, Georgia's capital, and its secessionist South Ossetia province broke down within hours after the agreement was reached. Low-level violence between Ossetians and Georgian troops has continued unabated since then, resulting in about a dozen casualties in the last few days.


North and South Ossetia <font size=-2>(Source: BBC)</font>
North and South Ossetia (Source: BBC)

Russian President Vladimir Putin cancelled his scheduled trip to Tbilisi today, saying that it would be "inappropriate" amid the tension. "I want to remind people that this conflict [in South Ossetia] erupted after the collapse of the Soviet Union. After becoming independent Georgia announced that it is revoking autonomous status of South Ossetia. Ethnic conflict had erupted after this very stupid decision."

In ordinary times, a remark like this might simply be ignored. But the entire Caucasus region is in a "generational crisis period," and even little remarks can inflame passions.

Although Putin's language has been ambiguous as to which side he favors in the dispute between Georgia and South Ossetia, most South Ossetians have Russian passports, and the Georgians believe that Russia favors the separatist side. Georgian President Mikhail Saakashvili has stated that Georgia will not tolerate loss of its "territorial integrity."


Troubled areas in Caucasus regions
Troubled areas in Caucasus regions

Since the breakup of the Soviet Union, Georgia has been threatened by demands for greater autonomony from three of its provinces, Ajara, Abkhazia and South Ossetia.

While Georgia is mostly Orthodox Christian, Ajara has been historically Muslim; but thanks to many conversions to Christianity since the breakup of the Ottoman empire in the 1920s, Ajara's large cities are now mostly Christian. Although Islam still predominates in rural areas, Ajara is is ethnically similar to Georgia. As a result, after ten years of confrontation, Ajara agreed to submit to Tbilisi's control a couple of months ago.

The Ajara success story is not expected to be repeated in Abkhazia and South Ossetia, according to a report by the International Crisis Group.

While Ajara has never tried to secede from Georgia, the other two provinces have done so. And while Russia has no interest in Ajara, the Russians have offered the Ossetians and Abkhazians Russian citizenship.

Complicating the matter further is the fact that Russia has military bases in both Abkhazia and South Ossetia. Saakashvili has indicated his intention for Georgia to join Nato, which would bring Western troops into Georgia. Thus, Abkhazia and South Ossetia are not going to agree to Tbilisi control as easily as Ajara did. (19-Aug-04) Permanent Link
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Yukos still very close to bankruptcy as oil tops $47 per barrel

The U.S. State Department is expressing concern about the fate of Yukos. State Dept. deputy spokesman Adam Ereli says that the Yukos case should be resolved "in accordance with the rule of law and due process" and "without influence from political considerations."

That's going to be a good trick now, as the trial former Chief Executive Mikhail Khodorkovsky, whose trial on tax evasion and fraud, is just beginning. Khodorkovsky was jailed in October 2003 just after he announced plans to challenge Russian President Vladimir Putin politically.

I must have been dreaming when I wrote last Friday that the Kremlin had backed down on nationalizing Yukos without paying investors. Yukos' assets are still frozen, and the Kremlin is still making it clear that it will tear Yukos apart and sell the pieces to pay back taxes. It's pretty clear that the pieces will be sold to Kremlin-backed businesses at very low prices, effectively nationalizing Yukos at little cost to the Kremlin.

With its assets and bank accounts frozen, Yukos is now saying that the company is just a few days from bankruptcy. If that happens, then the first in line to get paid will be the major shareholder Group Menatep, which is controlled by Mikhail Khodorkovsky. This will be very displeasing to the Kremlin, which will, we can be sure, find a way to prevent Khodorkovsky from benefiting in any way from bankruptcy.

Analysts had been hoping that oil prices would come down, once the uncertainty surrounding last weekend's Presidential recall referendum in oil producer Argentina had been resolved. That uncertainty now seems to be removed, and prices did fall slightly for a few hours on Monday, but the concern over a Yukos bankruptcy pushed them back up again. Today they reached yet another modern record, at over $47 per barrel. At this writing (12:15 pm ET), the price is $47.16.

The State Department statement says, "The appearance of a lack of due process and a threat to private property rights have resulted in both the Russian and the international business communities being on their guard. The way the case has been handled also raises questions about respect for investment rights in Russia and has led to increased capital flight and a decline in new investment that is certainly having an impact on the Russian economy." (18-Aug-04) Permanent Link
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The al-Sadr standoff in Najaf is reaching a climax

Are you old enough to remember when Mark Rudd took over Columbia University in April, 1968?


Moqtada al-Sadr
Moqtada al-Sadr

Fighting is continuing in the southern Iraqi city of Janaf as Shiite rebels battle US-led Coalition troops. The rebels are mostly angry unemployed young men, led by the young Shiite cleric Moqtada al-Sadr, who is holed up in Imam Ali Mosque, the holiest Shiite Muslim site in Iraq. He's threatened to blow up the Mosque and everyone in it if America tries to forcibly remove him. A confrontation is near.

If you want to better understand the psychology of what's going on with al-Sadr takeover of Najaf today, there is no better way than by comparing it to the takeover of Columbia University by Mark Rudd in April, 1968.


Mark Rudd in 1968
Mark Rudd in 1968

I've written in the past about how Iraq today, one generation after the Iraq/Iraq war, is very much like America in the 1960s, one generation past World War II. Nowhere is the similarity more striking than in what's happening today.

Mark Rudd was part of the violent Students for a Democratic Society and Weather Underground. He led a large group of protesting students from New York's Columbia University to take over several administration buildings on the campus, and refuse to leave. As conditions for ending the "sit-in," he demanded that the University stop supporting the Vietnam War and end Columbia's "racist" attitudes.

The rhetoric of the time is very interesting to read today. Columbia president Grayson Kirk said,

As we've written, America in the 1960s was in a generational "awakening" period, and such periods are characterized by hostility between older and younger generations. The phrase "generation gap" was commonly used in the media throughout the 1960s to describe the vast difference in world view between the older generation of heroes who had fought in World War II and the younger generation of college kids with no personal memory of World War II. Grayson Kirk was wrong, incidentally: Similar generation gaps had also occurred during previous awakening periods in the 1820s and 1890s.

On April 22, Mark Rudd wrote an open letter to Grayson Kirk, responding to the above quote. Here is the letter in its entirety:

The 1968 media was extremely supportive of Mark Rudd and extremely hostile to President Johnson.

That led Mark Rudd to believe that he would receive enormous popular support for his actions. In fact, most Americans, even most college students who opposed the war, considered Mark Rudd to be a criminal.

The worldwide media have been extremely supportive of Moqtada al-Sadr and its constant talk of "Shiite uprisings" throughout the country. Such uprisings have, of course, never occurred, and in fact most Iraqis, even those who dislike American occupation, dislike al-Sadr even more.

There is one enormous difference between Mark Rudd in 1968 and Moqtada al-Sadr today: Mark Rudd did not have a large arsenal of guns, missiles and explosives, and al-Sadr does. That makes the al-Sadr situation much more explosive, both literally and figuratively.

Mark Rudd's sit-in ended a few days later on April 30, when 1,000 police raided the campus, evicting students from the occupied buildings.

The Iraqi provisional government is planning something similar. We can only wait and how it will unfold. (18-Aug-04) Permanent Link
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The Consumer Price Index falls in July

For the second month in a row, the CPI was lower than analysts expected, and indicates a deflationary trend.

The CPI fell by 0.1%, indicating that overall prices were slightly lower in July than they were in June.

The "Core index," which is like the CPI except that it doesn't include highly volatile food and energy prices, increased 0.1%.

Both of these figures were lower than expected, for the second month in a row.

The following table shows the values of these figures for each month so far in 2004:


                        Changes from preceding month    
                                    2004                
                     Jan. Feb. Mar. Apr.  May June July  
   ----------------- ---- ---- ---- ---- ---- ---- ---- 
   CPI                .5    .3   .5   .2   .6   .3  -.1 
   ----------------- ---- ---- ---- ---- ---- ---- ---- 
   "Core index"       .2    .2   .4   .3   .2   .1   .1 
   ----------------- ---- ---- ---- ---- ---- ---- ---- 

It was after seeing the May figures that the analysts were saying that inflation was beginning to rise out of control. That was because the CPI seemed to be spiking up rapidly, although the core index remained steady.

It was precisely the May figure that convinced the Fed to increase interest rates earlier this month. They were not dissuaded by the low June figures, perceiving them as a one-time aberration.

In fact, it's clear from the above table that the aberration goes in the other direction. The core index, which is the value that the Fed is most interested in, has been very low all year, with a one-time high-side aberration in March. Since then, it's been decreasing steadily.

As we've previously said, if you look at long-term trends instead of just a few months, we're actually in a long-term deflationary period. We actually expect prices to fall by 30% in the next few years.

The Fed made a mistake by increasing the funds rate earlier this month. We hope that the Fed will not compound the error by keeping its promise to raise interest rates further throughout the fall. (17-Aug-04) Permanent Link
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Will the Euro currency collapse?

International investment firm Morgan Stanley is warning that it's a real possibility, which shouldn't be surprising in view of the weakness of the European economy (see next item).


Euro currency
Euro currency

The Morgan Stanley report (PDF) originally came out in January, but the company publicized it this week in a highly visible full page ad in the Wall Street Journal. When a company is willing to pay tens of thousands of dollars to publicize such a controversial finding, it captures one's attention.

Here is a summary of the the report's reasoning:

Based on this analysis, the Morgan Stanley report forecasts that the euro will weaken considerably in the next 6-12 months, and long-term investors "should allow for the possibility of the euro falling apart" at some time in the future.

From the point of view of Generational Dynamics, a serious split in the European Union is very likely. There have been numerous wars between France, Germany and England for a millennium, and Generational Dynamics predicts that we have not seen the last of them. A splitup of the euro zone is something that we should be expecting. (15-Aug-04) Permanent Link
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More economists are raising concerns about job issue in Europe and America

Economists have been consistently dead wrong for two years on jobs, as they predicted that hiring was just about to surge. This has been going on at least since early 2003. Each month they would say, "Employment is a lagging indicator - now that the recession is over, we'll see lots of hiring soon." Early in 2004 they were saying, "We just don't understand it. Employment has to take off soon."

And yet it hasn't happened. But now we're seeing more economists express the view that "something is going on that we don't understand."

According to today's San Francisco Chronicle, the fact that California lost 17,300 jobs in July, when we're supposed to be in a recovery, has "left regional economists disappointed and puzzled."

And, "There is a growing camp of economists who believe today's brutally tough labor market is not a temporary American oddity," according to an article in the current international edition of Newsweek magazine..

There's no scarcity of possible villains. The price of oil, getting close to $50 per barrel, is receiving a great deal of the blame.

Alan Greenspan is receiving some criticism for increasing interest rates this week. I agree with this criticism, since we're in a long-term deflationary period.

The reason that we're in a deflationary period, as we've said, is that the country as a whole -- federal, state and local governments, businesses, labor unions, public schools, colleges, financial institutions, military, and so forth -- has become increasingly bureaucratic and resistant to change, and is producing products and services that are increasingly obsolete. We've been pointing out this obvious concept out for two years, but economists seem completely oblivious to it. They expect the economy to act the way it did in the 1991 or 1962 recessions, but they don't understand that the structure of today's economy is completely different from anything we've seen since 1945. You have to go back to the late 1920s to find an economy which is so bureaucratic and inflexible, and it was only cured by the mass bankruptcies of the 1930s depression.

From the point of view of Generational Dynamics, Europe is in roughly the same situation as America. Our major financial cycles are mostly synchronized, and it's to be expected that both would become increasingly bureaucratic at the same time.

In fact, it's a little noticed fact that America and Europe have gone through parallel generational financial cycles for centuries. The major historical financial credit bubbles have been as follows:

These are the major international bubbles of the last few centuries. The reason that they're approximately evenly spaced at roughly 70-80 years (the approximate maximum length of a human lifespan) is that a new major credit bubble only occurs when the people in the generation who remember the wild, undisciplined nature of the previous credit bubble all disappear (retire or die), all at the same time.

In each of the historical bubbles, the crash was a complete surprise to all the intelligent people of the day. There was no lack of experts in 1929, but if do as I did and you go back and look at what happened then, you discover that the experts of the the time (with the except of a few unpopular Cassandras) had no idea what was going on, even as late as a month or two after the crash had begun. (15-Aug-04) Permanent Link
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Kremlin backs down and hires Dresdner to evaluate Yukos subsidiary

Russia's ping-pong nationalization of Yukos appears to have ponged back in the direction of sanity, as the government hired a Western investment banking firm, Dresdner Kleinworth Wassertein to value Yukos' Yuganskneftegaz subsidiary.

To recap: The Kremlin has assessed Yukos with an enormously high back bill for past taxes, far exceeding the company's available cash.

That might be OK if it had been done the right way: Give the company a chance to sell off its own assets at market value, to pay the tax bill.

Instead, the Kremlin has been persuing one smelly maneuver after another, in what appears to be nothing more than a scheme to nationalize Yukos and gain all its assets for its own purposes. The planned mechanism was for the Kremlin to sell off Yukos' assets itself; in particular, the Yuganskneftegaz subsidiary would be sold to a Kremlin-controlled oil firm for a fraction of Yuganskneftegaz' true market value.

This appeared to be a reversion to the old Soviet ways, where the Kremlin could simply take any company's assets it wished, at any time, for any reason or for no reason.

But it's a new world for Russia. If it wants international investments, it has to convince the world that it plays by international rules, not its own Soviet rules. That's why the Kremlin has finally backed down on its plan. (13-Aug-04) Permanent Link
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US trade deficit surged dramatically in July, thanks to high oil prices and a global economic slowdown

Alan Greenspan's June 30 committee meeting expressed concern about a "wrenching" adjustment to rising deficits, but I think even he's surprised at how quickly it's risen since then.


Trade deficit, 2001-Present. <font size=-2>(Source: WSJ)</font>
Trade deficit, 2001-Present. (Source: WSJ)

The dramatic increase in July was caused by a "perfect storm" of several factors: high oil prices are costing us more; a slowing European economy is reducing our ability to export goods; and we're importing goods from China.

Even before July's surge, the June 30 meeting of Alan Greenspan's Federal Open Market Committee, the meeting that sets short-term interest rates, expressed concern about the increases in deficit spending. According to the minutes of the meeting:

The minutes go on to indicate that the Fed can do little to affect external imbalances, but seemed surprisingly pessimistic that even fiscal policy could have an effect:

Meanwhile, this week's increase in short-term interest rates to 1.50% from 1.25%, set by Tuesday's Federal Open Market Committee meeting, appears to be having harsh effects, since stocks have fallen sharply in America, Asia and Europe since then.

This should not be surprising. An interest rate increase has immediate effects. Corporate borrowing immediately becomes more expensive, leaving less money for labor and other activities. Monthly job reports have been increasingly grim for three months, and the interest rate increase should negatively affect the next report, due on September 3, the morning after President Bush's acceptance speech at the Republican National Convention.

The FOMC minutes quoted above do not describe what a "wrenching" adjustment means, but one possibility is what Generational Dynamics has been predicting since 2002: A sharp fall in stock prices to less than one-half their current value. (13-Aug-04) Permanent Link
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Russia plans to increase its defense budget by 40% next year

The plan is announced as rising tensions indicate Georgia may be close to war in South Ossetia.

The substantial defense budget increase will be used to increase the number of full-time regiments, as opposed to conscript units. The money will also be used to improve pay and conditions of service for troops.

The funding announcement comes at a time of continuing problems in Russia's southern provinces, including the continuing ten-year-old Chechen war.

Meanwhile, envoys from Russia, Georgia and South Ossetia are now in Tbilisi, Georgia's capital, trying to work out a compromise to end violence in the region.

This is amid rising concerns that that Georgia's South Ossetia situation is worsening. "The concentration of arms and armed men in the conflict zone seems to have reached the dangerous level beyond which the process of beginning full-scale military action could unfortunately become unmanageable," says Izvestiya in an editorial.

South Ossetian leaders have declared their intention to unite with neighboring North Ossetia, which is in Russia. Tblisi has announced its intention to keep South Ossetia in Georgia, and Russia is thought to be encouraging the South Ossetians. A particular issue is that Tbilisi has demanded that its forces control the South Ossetian entrance to the tunnel beneath the Caucasus Mountains linking North Ossetia, in Russia, to South Ossetia in Georgia, supposedly to clamp down on the trade in contraband.

Both Turkey and America are encouraging Russia to allow Georgia to maintain territorial integrity. The American State Department is urging an emergency meeting of the so-called Joint Control Commission to resolve the situation. (13-Aug-04) Permanent Link
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Russia's southern Caucasus region becoming increasingly dangerous

It's more dangerous than Iraq, and possibly even more dangerous than Palestine, at least in the short term. Georgia's South Ossetia province began a war in 1992 to separate from Georgia, and join up with Russia's North Ossetia province. A peace agreement reached at that time was broken several months ago, and hostilities have been increasing since then.


The Caucasus Mountains run from the Black Sea to the Caspian Sea
The Caucasus Mountains run from the Black Sea to the Caspian Sea

The last two weeks have seen increases in the shooting, the violence, the retribution, and the rhetoric. A new war appears likely to break out soon.

This region has enormous strategic importance for many reasons, not the least of which is that oil pipelines run through it from Russia to the Black Sea.

Other trouble spots in this region include the following: Russia's ten year old war with Chechnya, which has spilled over into Ingushetia and Dagestan; Georgia's conflicts with two other separatist provinces, Abkhazia and Ajaria; and Armenia's claim to the Nagorno-Karabakh region of Azerbaijan.

The Caucasus region has been one of the three major historic sites for major "world wars" between Orthodox Christians and Muslims. (The other two are the Crimea and the Balkans.)

From the point of view of Generational Dynamics, the Caucasus region is deeper into a crisis period than even Palestine. The reason is that the last crisis war involving Palestine was in the aftermath of World War II, when the state of Israel was created, but the last crisis war of the Caucasus region was in the aftermath of World War I, some 20 years earlier. So a Caucasus war is more likely to "spiral out of control" than a Palestine war, although a war in either region would end up triggering a much larger "clash of civilizations." (12-Aug-04) Permanent Link
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Najaf mop-up operation is currently in progress

As we predicted, there's no widespread "uprising" in Baghdad or elsewhere, although there have been large anti-American demonstrations.

The battle going on right now in Najaf is very large and complex, but it's a typical kind of "mop-up" battle that often follows a war. It would be surprising if the main battle lasted more than a few days, though cleaning up may well take few more months.

The only thing that's atypical is the need to avoid damaging the Imam Ali Mosque, the holiest Shiite Muslim site in Iraq. The insurgents have holed up there, and loaded up with massive amounts of munitions, in the hope that an errant Coalition bomb will damage the Mosque and encourage other Shi'ites to join the battle.

This insurgent strategy has greatly increased the complexity of the battle. The Coalition soldiers have to put the relatively inexperienced Iraqi soldiers between themselves and the Mosque. Exactly how the Coalition plans to do this has not yet been revealed, but you can be sure that it's very well planned out.

As expected, there are large Shi'ite anti-American demonstrations in Baghdad and Basra, and lesser demonstrations elsewhere. However, such demonstrations are quite standard during a "generational awakening" period, and will not lead to an uncontrolled "uprising."

Meanwhile, it's fun to watch how the mindless Boston Globe reporters cover all this. Tuesday's lead multi-column page one headline was "Shi'ites' uprising grows." That was wishful thinking, and by Wednesday the page one Iraq headline was, "Qaeda arrests called 'lucky' break." Today's headline is "Young marines frustrated by lack of progress." Each day's headline seems so moronic that it could never be topped, but the next day's is even more moronic. I don't know how they manage to do it.

When I first came to Boston in the 1960s as an MIT student, I was told that the Boston newspapers were mostly garbage, and that the best Boston newspaper was an international newspaper headquartered in Boston, The Christian Science Monitor. I don't think that things have changed much in the last 40 years. (12-Aug-04) Permanent Link
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Are al-Sadr's militias in Iraq on their last legs?

Mindless journalists are proclaiming a massive Shi'ite revolt. Ummmm, I don't think so.

For example, today's Boston Globe lead page one headline is: Shi'ites' uprising grows, and quotes Moqtada al-Sadr as promising to fight to "the last drop of my blood." The story, which also appeared on page one of the Washington Post, gushed with what can only be called wishful thinking.

These stories have popping up regularly since the war began, and I've been saying for over a year and a half now that such an uprising is impossible. Only a single generation has passed since the Iran/Iraq war of the 1980s, and so Iraq is in a "generational awakening" period. Such massive civil wars and uprisings NEVER happen during generational awakenings.

What has finally happened is what I predicted last year: The incessant terrorism is backfiring. The Iraqi people, still war-weary from the 1980s, are sick and tired of the terrorism, and getting really pissed off at al-Sadr. That's why several Iraqi government officials, including Iraq's interim Prime Minister Ayad Allawi and Adnan al-Zarfi, the Governor of Najaf, have condemned al-Sadr's actions and have given the U.S. led American and Iraqi forces the go-ahead.

The fight is against a fairly small militia loyal to al-Sadr. It's not known how large the militia is, but it's thought to be a few hundred members. They are not receiving widespread support from Iraqi Shi'ites. The only way that could possibly happen is if the American forces did something so heinous that they completely offended believers to their core. That's why news reports indicate that it will be the Iraqi fighters, rather than American forces, who will actually enter the holy Shi'ite shrines.

From what I can tell, al-Sadr seems to be on his last legs. He's using bravado and braggadocio to compensate for the weakness and desperation of his position. And let's not forget that when he says he'll fight to "the last drop of my blood," he's staying safely out of sight and letting his followers fight to the last drop of their blood. The only time he comes out of hiding is to hold a press conference to give the eager, mindless reporters a few more quotes. (10-Aug-04) Permanent Link
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Yukos is now fit only for vultures, as rumors of insider trading fly

Concerns about Russian and Iraqi oil output are spiking international oil prices to new highs, with the price temporarily reaching $45.04 today.

In Iraq, threats from Shia militants led to the closure of a key production facility in the southern city of Basra, halting the country's oil output. Other factors concerning the markets include a volatile election in Venezuela and a recent OPEC disclosure that it has no remaining capacity.

In Russia, Yukos won what looked like a major court victory a couple of days ago, when a Moscow Arbitration Court ruled that the Kremlin's fire sale of Yukos' assets was illegal. The Arbitration Court reversed itself a few hours later, I assume because the judges on that court didn't want Putin reassigning them to the court in northern Siberia.

So now the Kremlin vultures are ripping pieces of Yukos off for resale to Kremlin-controlled oil firms at ten cents on the dollar, starting with its main oil-producing subsidiary, Yuganskneftegaz.

It's hard to imagine things getting worse for Yukos, but they have.

According to a report by Agence France Presse, rumors are flying in Moscow that Kremlin officials are using inside information for personal benefit in trading Yukos stock. In other words, someone knowing that the court's first ruling was coming could buy up Yukos stock, knowing that the price would go up as soon as the court ruling was announced. Then, someone knowing that the second ruling was coming could sell the stock, knowing that the price would fall again. This kind of insider trading is not illegal in Russia, and so there's no reason to believe that it isn't being practiced.

The Yukos situation has had a stench about it since the beginning. It'll be a relief when it's over. (10-Aug-04) Permanent Link
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The world awaits Fed's interest decision on Tuesday

The Fed should leave interest rates unchanged, since we're in a long term deflationary period.

If you forget the political passions of the moment, and look at the historic long-term trends, then the economy has plenty of built-in pressure to move in a deflationary direction. That means that the Fed has a lot less to worry about with respect to inflation than many analysts believe.

On the other hand, Friday's bad jobs report shows that the economy's labor market is in much worse shape than high-priced analysts have been saying for months. The fact is that analysts are stumped - they did not see this coming and they have no explanation for it except, "well, it's just a bump in the road." But it's now a three-month bump, and no one that I've heard is really certain that things will be better next month. In fact, let's face it: It's been years since the high-priced analysts have gotten their labor and output forecasts right.

What's going on in the economy has been fully explained on this web site.

And this brings us back to the question: What is the Fed's best policy now? Should the Fed increase the overnight funds rate to 1.50% from 1.25% tomorrow, as many people expect?

No matter what we think of the Fed's zero-interest rate policy since 2000, it's saved the country from an economic disaster, or at least postponed it. If the Fed had kept interest rates up, there's little doubt that we would have already had a cascading stock market crash like the early 1930s, with massive bankruptcies and homelessness.

If the Fed increases interest rates too much today, the effects will actually be much worse than they would have been in 2000. That's because many more people are in debt today than in 2000, so there would be many more bankruptcies and foreclosures.

The Fed should keep interest rates steady for now, and permit a little more inflation if necessary. An additional weakening of the dollar on international markets will not be that harmful either. The Fed can't continue this policy forever, of course, but there are so many uncertainties in the world today that it won't be long before something happens (a war, or collapse of the Chinese bubble, for example) to force a change of policy.

If a major economic upheaval has to occur, then let it happen because of some major international event, not because the Fed precipitated it. (9-Aug-04) Permanent Link
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The press is talking about another "uprising" in Iraq. Yawn.

Nothing shows more how clueless the press is about what's going on in Iraq than this constant talk about civil war and uprisings.

And nothing shows better why journalists, analysts and others should learn a little about how generations work than the situation in Iraq.

For a year and a half, the press, politicians, and analysts have been talking about things in Iraq "spiraling out of control" into a huge civil war between the Sunnis and Shi'as, or into a major uprising against the Americans. Let's face it, a lot of these concerns have been wishful thinking as much as anything else.

But here's "Generational Dynamics 1.01": That kind of civil war or uprising is impossible in Iraq at this time. Why? Because it's been only one generation since they've been in a major crisis war, the Iran/Iraq war of the 1980s. Iraq is in a generational "awakening" period, characterized by riots and demonstrations, but no major civil wars - just like America in the 1960s. If you'd like to understand what's really going on in Iraq, then read about America in the sixties.

What makes this talk about things "spiraling out of control" in Iraq so mindless is that that's exactly what might happen in a couple of other places -- in Palestine or in Russia's southern provinces (Chechnya) near the Caucasus. Either one of those regions really could break out into full scale war at any time, and either would would draw America into a major war. These possibilities are crucially important to America's future, but the press would rather talk about the impossible in Iraq.

There are things to worry about in Iraq. There are clearly insurgents in Fallujah and Najaf, well-funded by Abu Musab al-Zarqawi and Iranian mullahs, respectively, and there are terrorist bombings and kidnappings through the country. It's a dangerous place. But the perpetrators are small groups. Most important, they do not have the support of the mass of Iraqi people, most of whom are still war weary from the 1980s, and want no more of it. (7-Aug-04) Permanent Link
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Job growth figures worst in 8 months, far below analysts' estimates

The economy is not producing new jobs at anywhere near the rate that pundits, high-priced analysts and politicians have been promising.

I've been listening to analysts all week talk about an expected "job surge" to be reported today. Analysts were predicting 215,000 to 300,000 net new jobs to be created in July, and some said that anything as low as 100,000 would be a tremendous shock. The figure came in at only 32,000. Furthermore, the May and June figures were adjusted substantially downward as well.

Word of this morning's jobs report is causing bond prices to jump immediately, indicating that investors are likely to be moving money from stocks into bonds this morning.

The White House projected in February, just six months ago, that the economy would create 2.6 million jobs this year. They made this estimate by assuming that the recent recession is just like other recent recessions, such as the 1991 recession, or other recessions since 1945.

What Generational Dynamics says is that today's economy is like the 1930s-40s depression economy. The reason is that, within the last ten years, the generation of people who lived through the great depression have all disappeared (retired or died), all at the same time, and so our society has been making the same mistakes that gave rise to the 1930s depression.

The major "mistake" was the stock market bubble of the late 1990s which was, in essence, no different than the stock market bubble of the 1920s. The Federal Reserve has postponed, but not prevented, the aftereffects of the 1990s bubble by keeping interest rates at near zero. That's why we've been saying, since 2002, that we're entering a new 1930s style Great Depression.


Historical Price/earnings ratio for S&P 500
Historical Price/earnings ratio for S&P 500

The fact that stocks are due for a big fall has been evident for years to anyone looking at the extremely high price/earnings ratios, well into the 20s. If history is any guide, and it is, then the price/earnings ratios are going to fall below 10, which means that the Dow Jones average will fall to the 4000 range and the S&P 500 index will fall to the 400 range.

There is one thing about the current job report that's very intriguing: The number of people calling themselves "self-employed" grew by 641,000, causing the unemployment rate to tick down to 5.5% from 5.6%. Are these "self-employed" people just saying they're self-employed because they've given up seeking work? Or are these people actually creating new businesses that will eventually grow large enough to replace our aging business infrastructure? Only time will tell. (6-Aug-04) Permanent Link
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Incredible! The Kremlin has frozen Yukos' assets again, sending international oil prices to yet another record high

Putin's herky-jerky policy may signal a serious split in Kremlin leadership.

It was just a couple of days ago that the Kremlin appeared to be backing down on Yukos, after the previous harsh handling had shocked the international oil markets and also shocked investors in Russian businesses into rethinking any further investments. The obvious intent was to nationalize Yukos, and use its income and assets to enrich the Russian treasury.

On Tuesday, Russia's Justice Ministry reversed itself and gave Yukos access to its own bank accounts again, so that Yukos wouldn't go bankrupt. The international oil markets reacted positively, and oil prices fell slightly.

Today, the Justice Ministry reversed itself again, claiming that Tuesday's decision was a mistake because it "contradicts legal norms." Oil prices spiked to brand new highs, and Russian investors will certainly feel that their worst doubts about Russia are being confirmed.

One Yukos employee is quoted as saying, "It feels like we're being toyed with---like a baby seal being batted back and forth by killer whales."

These wildly mercurial policy changes raise serious questions about a possible split within the Kremlin itself. On the one hand, you see the official policy since 1992 of being an open free-market economy, willing to play by all the rules, encouraging and rewarding international investment.

But the Yukos incident reflects and older, darker policy of confiscating any assets the Kremlin pleases. The prototype of this policy was the seizure of the Russian Orthodox Church's assets, including gold treasuries accumulated over centuries, to finance the Bolshevik Revolution in 1917. Since then, until Communism ended in 1991, the Kremlin has felt free to take any assets it wanted, for any purposes it desires.

Russia is in a very troubled period, close to war in the Caucasus, and dealing with a chaotic economic infrastructure. The daily Yukos flip-flop circus is a sign of increasing problems. (5-Aug-04) Permanent Link
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Sharp fall in consumer spending portends soft economy, as oil prices continue to spike up

If there's another recession, is it fair to blame it on oil prices?

Indeed, financial analysts are getting increasingly pessimistic about the possibility of another recession in the fall of 2004, after they were surprised by a Commerce Department report showing that consumer spending decreased 0.7%, after rising 1% in May. June's decrease was the first drop in a year, and the largest decline in three years.

Earlier this year, financial analysts were predicting very strong economic growth by this time. However, numerous economic figures have been disappointing, and indicated little if any growth. Most disappointing have been job reports, which have indicated that businesses are simply not hiring in anything like the magnitude that analysts have been predicting by now.

The highly anticipated July unemployment report will be available tomorrow (5-Aug).

Historically high oil prices have added to the pessimism.

In Germany, where the unemployment rate is 11%, the word from German Finance Minister Hans Eichel is that high oil prices are going to affect global economic growth.

But that argument carries very limited weight. It's true that high oil prices translate into high gasoline prices, and so consumers have to spend more on gas and have less money to spend on other things, and that depresses global economic growth.

But high oil prices also mean more money to oil producers -- Saudi Arabia, Russia, Venezuela, and so forth. That money is fed back into the global economy and should help global economic growth.

Of course it's true that any economic dislocation, including high oil prices, is going to affect global economic growth, if only because businesses take time to adjust to new conditions. Still, it's not clear that oil price changes should have a major change on the global economy.

Generational Dynamics predicts that the global economy is in a time of generational crisis, and that we're entering a new 1930s style Great Depression. (5-Aug-04) Permanent Link
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Why didn't Kerry get a post-convention poll "bounce"?

We know the answer. You guessed it - it's generational!

We thought Kerry did pretty well in his speech last week, and we thought Kerry would do better in the post-convention polling. As it turns out, the Gallup poll results show him actually losing ground, and other polls show him at best level.

There's a good reason for this, and it's not a reason that any of the pundits are mentioning. I know it the same way that I knew in 2002 that there wouldn't be any American anti-war movement in the War on Terror -- and there hasn't been, except for an occasional weekend blip here and there.

A major generational change has taken place in the last few years. During the 1990s, America's business and government leaders were all people generation that grew up during the Depression and World War II. Now, that's no longer true: Today's business and government leaders are from the Baby Boomer generation born after the war. That's exactly the kind of generational change that puts a nation into a "generational crisis period," where people become anxious and concerned about the future of their nation. The last time this kind of change happened was in the 1930s, when the generation of people who were born after the Civil War came to power.

In retrospect, the Democrats did make some mistakes at last week's convention.

John Kerry's own speech was not great but OK, indicating that he understood the seriousness of the situation that the nation is in.

But that was the only one. John Edwards' "two nations" speech was so cheerful and optimistic that it appeared na´ve. Teresa Heinz Kerry's speech made her appear more self-involved than involved in the nation's problems. The only other speech that's gotten any attention is Al Sharpton's, but the attention has been all negative.

So when you come right down to it, the only portion of the entire week's conference that addressed the subject most on Americans' minds was the first 20 minutes of Kerry's speech. And even then, he didn't say how he'd handle Iraq or prevent terrorism, but he did let us know, irrelevantly, that he's a Vietnam war hero.

There's been only one President in American history who served more than two terms: Franklin Delano Roosevelt, who served four (up to his death in 1945). That's because people don't want to change leaders during a crisis.

A recent poll of historians on the country's greatest Presidents listed FDR, Abraham Lincoln, and George Washington at the top. Those are the Presidents who lead the country through its three great generational wars, the Revolutionary War, the Civil War and World War II. It's great events that make great Presidents.

A lot of people are going to gag when I say this, but whoever wins the election this fall is probably going to be the next great President. There's still plenty of time for things to change, but right now it looks like that'll be George Bush. (3-Aug-04) Permanent Link
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Kremlin appears to be backing down on nationalizing Yukos

Russia's Justice Ministry gave Yukos more time to pay its back taxes, according to an announcement today.

This evidently puts on hold the Kremlin's plans to effectively nationalize Yukos by selling off its subsidiaries to Kremlin-controlled oil firms at extremely low prices.

It's most likely that Russian President Vladimir Putin backed down from the quick nationalization of Yukos because of the furious international reaction to his clumsy moves so far. Freezing Yukos' assets last week caused oil prices to spike to historic highs, and the threat to sell off its subsidiaries at fire sale prices has frightened investors. The Yukos story broke last year with the arrest of the company's CEO Mikhail Khodorkovsky, and Russian stocks have fallen some 30% so far this year.

In the old Soviet days, the Kremlin could take any company's assets it pleased, with little fear of retribution. Today, Putin is feeling more and more hemmed in by a world that Russia's history has not prepared it for. The Yukos case reminds him that Russia today depends on international investors, and he has to play by their rules or lose their money.

Even more serious is the ten-year-old war in Chechnya, a clash between Orthodox Christian and Muslim factions that has recently been spreading throughout the Caucasus region to Russia's other southern provinces, including Ingushetia, Dagestan, and North Ossetia, and to other countries to the south, including Georgia, Armenia, and Azerbaijan. History tells us that this region could ignite major civil war within Russia itself, as happened in the 1920s, and Putin is surely concerned about that. (2-Aug-04) Permanent Link
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A dramatic shift in Palestinian opinion, as Arafat retains control

Major violence has not yet spread from Gaza to West Bank, but the question of whether things will "spiral out of control" is still open. The level of violence hasn't gotten much worse in the last couple of weeks, but it hasn't gotten any better either.

In Jenin, the offices of the pro-Arafat district governor were torched, leading to a protest by thousands of Palestinians in support of the Al-Aqsa Martyrs Brigades. In Nablus, Arafat supporters used gunfire to break up a meeting of the anti-Arafat Al Awda Brigades. There were no injuries.

These two West Bank incidents are relatively minor violence by Mideast standards, but they show that the confrontation between the pro-Arafat "old guard" generation and the pro-reform "young guard" generation is far from resolution, and could get worse. Arafat is 74, and the "young guard" leaders are in their 20s, 30s and 40s.

The most dramatic change is a recent change in Palestinian attitudes towards Israel's planned pullout from Gaza in 2005. Palestinian support of the pullout was at 73% in March, but dropped to 34% by the end June, according to a new poll by the respected Palestinian Center for Policy and Survey Research.

This change occurs as anxious Palestinians have viewed the increasing levels of violence, by Israelis and from Palestinian infighting, that have occurred ever since Israel first announced the withdrawal plan. According to the new poll, 59% of the Palestinians believe that the Israeli withdrawal will not end Palestinian infighting, as different Palestinian militias compete to fill the power vacuum left by the Israeli withdrawal.

From the point of view of Generational Dynamics, the Palestinian region is in a very critical "generational crisis" period, and that the older generation led by Arafat, the "old guard," is the factor keeping the most extreme forms of violence under control. Generational Dynamics predicts that, with near 100% certainty, the region will spiral into a major war in the next few years, led by the self-appointed "prophets" or leaders of the young guard. The exact time cannot be forecast, but it's expected that it would begin in the months following the disappearance of Arafat through death or retirement. (1-Aug-04) Permanent Link
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Vatican criticizes the "lethal effects" of feminism

This is one more indication, following the backlash against Janet Jackson's bared breast at the Super Bowl, that the sexual revolution is over.

In a 37-page document "On the Collaboration of Men and Women in the Church and in the World", the Vatican attempts to address "distortions" generated by radical feminism. The document says that feminism has "inspired ideologies" which view men as "enemies to be overcome" and which question family and marriage as a commitment between a man and a woman.

From the point of view of Generational Dynamics, this is one more sign that the "sexual revolution" of the 1960s is being reversed.

Men and women assume their traditional gender-specific roles during generational "crisis periods," such as World War II (1940s) or the Civil War (1860s), and gender differences increase.

Gender differences are muted, and equality of the sexes becomes an important political principle during generational "awakening periods," such as the 1890s and 1960s.

The Vatican's criticism of the "lethal effects" of feminism would have been politically impossible just ten years ago, but it's acceptable today because we're once again entering a generational crisis period.

We should expect to see more signs of this cultural move toward traditional gender roles during the next few years. The pendulum is swinging back, and will continue to do so for a couple of decades.

This does not mean that women are not respected. Quite the contrary, women will be respected more and more for their unique values and contributions as women, rather than for their similarity to men. (1-Aug-04) Permanent Link
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