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


Web Log - June, 2005


How generational changes affect Japan and China

A page one article in today's Wall Street Journal explains how Japan's attitudes towards China have changed as generations change.

The article explains that "Relations between Japan and China are at their tensest level in decades," and gives a generational reason for this:

"Ten years ago, when Chinese navy ships were spotted in waters between Japan and China, a newly elected lawmaker named Keizo Takemi warned that the Chinese were surveying energy resources also claimed by Japan. He was ignored by senior colleagues, who said they wanted to keep smooth ties with Beijing.

This year, as China prepares to drill for natural gas below that same part of the East China Sea, Japan is reacting very differently. Mr. Takemi, now a leader on foreign affairs in parliament, put together a response that was surprisingly robust by Japanese standards: In March, Tokyo announced it will launch a rival drilling effort, to be protected by Japan's high-tech military if necessary.

"Our nation's sovereign rights are at stake," says Mr. Takemi, 53 years old."

Related Articles

Japan and China in confrontation over comfort women: Meanwhile, countries throughout region are increasingly anxious as China makes major new military announcements.... (7-Mar-07)
China's Foreign Minister replies to "China threat" to US and Japan: And China changes the official transcript to hide what he really said.... (1-Mar-07)
Japan's real estate crash may finally end after 16 years: To see where America is going, look what happened in Japan.... (20-Feb-07)
Japan comes closer to renouncing its postwar pacifism: Japan stirs fears of increased militarism by upgrading its Defense Agency... (18-Dec-06)
New Japanese Prime Minister Shinzo Abe represents "hawkish" generational change: He's sure to infuriate the Chinese and Koreans.... (27-Sep-06)
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How generational changes affect Japan and China: A page one article in today's Wall Street Journal... (28-Jun-05)
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Japan: Is Japan's economy finally near collapse? (26-Mar-03)

The article describes "the emergence of a new generation of leaders with new notions about Japan's role in the world," and adds:

"These younger lawmakers, most in their 40s and 50s, want their nation to be more assertive. They are also willing to break old taboos about shows of military force, something Japan long avoided for fear of conjuring memories of World War II aggression. That's a big change from their predecessors, who avoided confrontation with China, instead showering it with billions of dollars in development aid out of guilt over Japan's brutal 1930s invasion. Memories are still raw in China of the Japanese attack, which historians say caused fighting and famine that killed millions of Chinese civilians."

Journalists have to rediscover this every time, but this article is describing one of the most important concepts underlying Generational Dynamics: That as long as a nation's leaders have personal memory of the last crisis war (World War II in this case), they're willing to compromise and contain problems, but they're willing to do anything to prevent another crisis war. That was true ten years ago, when the Chinese navy ships were first spotted.

But once the generational of leaders who grew up during the last crisis war all disappear (retire or die) all at once, the nation's attitudes change decisively and dramatically. The new leaders have no fear of a new crisis war and have a completely different world view than their departed elders. This is what began happening very rapidly in the late 1990s in countries around the world that fought in World War II.

Incidentally, we're not talking only about political leaders. We're talking about senior managers in government, labor unions, businesses, educational institutions, non-profit instituations, financial institutions, and so forth. That's why this generational change deeply affects every organization and institution throughout the nation.

I'm mentioning this article because it's so rare to see any mainstream publication discuss the effects of generational changes on society, finance and politics.

This is quite striking because the changes in the European Union are caused by exactly the same kinds of generational changes that the article describes in Japan.

As we pointed out in our analysis of the French rejection of the EU Constitution, the exit polls indicate that the people who were alive during World War II favor the Constitution because they believe that it's the best way to prevent a new European war, while those born after WW II are opposed to the Constitution because they believe it will cost them jobs. As time goes on, the generational balance will tilt further and further toward people who reject the European Union.

This analysis of exit polls isn't exactly rocket science, but to this day I haven't read a single article or heard a single analyst make this obvious point. Journalists, pundits and analysts are generally completely blind to even the simplest generational issues.

In all of these cases, the generational change continues, and the population of each country becomes more confrontational, and more willing to risk conflict.

Once this mood change takes place, it's very easy for a country to miscalculate. For example, referring to the WSJ story, there might be a small military confrontation between Japanese and Chinese ships trying to drill for natural gas. Each side may expect the other to back down, but as both sides become increasingly confrontational, neither side backs down, and a small battle spirals out of control into a major war.

Conflict risk level for next 6-12 months as of: 30-May-2005
W. Europe 1 Arab Israeli 2
Russia Caucasus 2 Kashmir 1
China 2 North Korea 3
Financial 3 Bird flu 3
Key: 1=green 1=Low risk 2=yellow 2=Med 3=red 3=High 4=black 4=Active

Generational Dynamics predicts that exactly that will happen with 100% certainty -- not just in China versus Japan, but around the world, leading to a new "clash of civilizations" World War. This might happen next week, next month, next year, or shortly thereafter, but it's going to happen with absolutely certainty.

The adjoining graphic, which also appears on the home page of this web site, gauges the risk level in several different regions around the world. Generational Dynamics predicts that once a war breaks out in any of these regions (or there's a major financial crisis or bird flu epidemic), then wars in all the remaining regions will follow within two years or so, leading to a world war. (28-Jun-05) Permanent Link
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Ultraconservative Mahmoud Ahmadinejad wins Iran Presidential election

I try to find humor wherever I can for this serious web site, and with this guy it's easy.

President-elect Mahmoud Ahmadinejad of Iran<font size=-2>(Source: )</font>
President-elect Mahmoud Ahmadinejad of Iran(Source: )

Start by checking out his personal web site,, where you'll find the adjoining picture.

Lovely, isn't he?

Next, click on the word 'Flash', and watch the flash presentation. Enjoy the music, and watch him:

So, this is the man who swept to a landslide victory in Friday's presidential elections.

Yes, he may be 49 years old, but he clearly fancies himself to be of movie star caliber.

As I discussed a couple of days ago, Iran is in the early stages of a "generational awakening" period, which means a "generation gap," enormous political conflict between older and younger generations. America's last awakening period was the 1960s, one generation past WW II, and last year I wrote an article comparing Iraq today to America in the 1960s.

So Iran's society is changing rapidly, and the ultraconservative Mahmoud Ahmadinejad doesn't have a clue what's going to happen.

Ahmadinejad wants to return to what he views as fundamental Islamic values. He wants to return to "pure" Iran culture, and not permit Western culture "pollute" Iran. He wants men to grow beards. He wants women to dress modestly. He doesn't want men and women to speak to one another in public.

Now, he got away with a lot of that stuff as Mayor of Tehran because the country was in a "generational austerity" era, just following the genocidal Iran/Iraq war. During the austerity era, the people who survived the war are traumatized by the war and glad just to be alive, and they adopt strict rules to normalize society and make sure no such war happens again. (To understand this, think of the "Leave it to Beaver" world of 1950s America.)

But 15-20 years after the war ends, the kids who were born after the end of the war begin to make themselves felt politically. They rebel against the austere rules adopted by their elders, leading to the "generational gap," and political turmoil. Ahmadinejad won't be expecting the ferociousness of the rebellions.

Bra-burning in 1960s
Bra-burning in 1960s

A particular feature of most awakening eras is the rise of gender issues. Remember how American college girls burned their bras in the 1960s? Well, maybe Iranian girls won't do the same (or maybe they will!), but they'll make their opinions felt in other ways. And since Ahmadinejad obviously considers himself a ladies man, they're going to target him specifically.

Don't get me wrong: Ahmadinejad is a very, very bad guy. He sponsors terrorism and he violently suppresses dissidents. He was one of the masterminds of the Iranian hostage crisis which took Americans hostage for many years in the 1980s. He was involved in a plan to assassinate the Indian-born British author Salman Rushdie. His most famous one-liner is, "We did not have a revolution in order to have democracy."

But at least we can take some pleasure in his discomfort, and he's about to suffer a lot of it. (25-Jun-05) Permanent Link
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Tony Blair: "We need jobs, not subsidies for cows"

Lots of vitriol led up to Blair's speech on Thursday

Responding to Blair's remark about cows, French President Jacques Chirac said, "France did everything, with its partners, to arrive at an agreement. Unfortunately, British intransigence did not allow one to be reached."

The outgoing EU President, Jean-Claude Juncker, got a standing ovation at the European Parliament by accusing Blair of having used false arguments and lying.

<i>Der Spiegel</i>'s photo of Tony Blair speaking to EU Parliament
Der Spiegel's photo of Tony Blair speaking to EU Parliament

British Prime Minister Tony Blair will be taking over the rotating EU presidency on July 1. His speech to the European Parliament on Thursday was the start of campaign to convince the Europeans to revise the entire EU budget, starting with the agricultural subsidies and the British rebate. Many people on the Continent didn't exactly sympathize, as can be seen by the adjoining picture in a critical article in the German magazine Der Speigel.

What Blair is pointing out is Europe is in a very great deal of trouble. Germany's economy, for example, is near desperation and getting worse. German exports keep falling, factory orders keep falling, and German unemployment rose to 12% in March, the highest since World War II.

America today is almost as bad off as Europe. America's public debt is astronomically high by historical standards, and one analysis shows that American consumers will have to cut spending by 1/3 for ten full years, just to cut the deficit in half.

But any attempt to do anything about the problem is only met with political vitriol in Washington.

For those of you who remember waaaaay, way back into the 1980s, you'll recall that Republicans and Democrats got together and agreed on difficult changes to Social Security, and then got together again and agreed on difficult budget rules to reduce the deficit. Today, a generation later, Republicans and Democrats can't agree on anything beyond blaming the other side for not being able to agree on anything. So the problems will only get worse until a meltdown imposes a solution.

The point is that the same things are happening in America and Europe. The politicians are frozen in place, and unable to solve the serious and growing problems.

From the point of Generational Dynamics, the world is entering a new 1930s style Great Depression. This will "solve" the problems for both Europe and America. (24-Jun-05) Permanent Link
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Iran holding chaotic runoff election on Friday

Iran and Iraq are generational twins, and their elections show it.

To understand Iran's elections, you have to realize that Iran is in a "generational awakening" era, since just one generation has passed since the genocidal Iran/Iraq war of the 1980s.

America's last awakening period was the 1960s, one generation past WW II, and last year I wrote an article comparing Iraq today to America in the 1960s. Generational awakening periods are characterized by political hostility between older and younger generations, but there is no civil war or violent revolutions, as there may be during generational crisis periods. America's last awakening period caused two Presidents, Lyndon Johnson and Richard Nixon, to leave office in disgrace.

Generational conflict

That kind of generational conflict is going on today.

Mahmoud Ahmadinejad
Mahmoud Ahmadinejad

The old hard-line geezer mullahs are supporting the ultra-conservative Mahmoud Ahmadinejad, the 49 year old appointed mayor of Tehran.

Most of Iran's population is under age 25, thanks to the number of deaths in the Iran/Iraq war. And the kids, also known as the "pro-reformist group," are trying to block "Iranian Taliban," often by using text messaging to spread cutting humor:

"Ahmadinejad announces his ministries: ministry of the evil, ministry of censorship, ministry of the Revolutionary Guard, ministry of religious paramilitaries."

The hard-line Iran leadership had shut down two pro-reformist newspapers just to prevent this kind of regressive, counter-revolutionary humor, but the kids are thwarting the hard-liners by using text messaging.

The text messaging revolution

Another text message refers to a Tehran traffic directive that allows cars with license plates ending in odd numbers into the city center on one day and those with even numbers the next day, and mocks a conservative preference for segregation of the sexes in public:

"The odd/even directive is being expanded to have one day when women can go out on the street, while men are allowed out the next day."

Text messaging is infuriating the mullahs, so much that Iran's ultra-conservative judiciary has now threatened to prosecute people who send text messages with the aim of "denigrating" candidates.

The country's supreme leader, Ayatollah Ali Khamenei, has been sharply critical of this kind of stuff. "Are you aware of what you are doing?," he said in a statement. "Are you aware that what you are doing is aimed at creating a crisis and pessimism among people, and is in line with what our enemies want to do to the revolution and the Islamic republic, and it will catch up with you, too? ... Others may have similar protests. Do you think they should have the right to question everything as well? I was not expecting this from you. And I will not allow anyone to create crisis in the country."

I can easily imagine similar words coming out of the mouths of Lyndon Johnson or Richard Nixon in the 1960s.

Khamenei's fellow hard-liners came to power in 1979, following a series of very violent student revolts that overthrew the existing government in a civil war. Khamenei is seeing students acting the same way, and is concerned that history is going to repeat itself, and his government will be violently overthrown in a similar civil war. What he doesn't understand is that such a civil war is impossible during a generational awakening period, just as a civil war has been impossible in Iraq (which I've pointed out on this web site dozens of times in the last two years).

Ayatollah Ali Akbar Hashemi Rafsanjani
Ayatollah Ali Akbar Hashemi Rafsanjani

The kids are supporting the 70-year-old ex-President Ayatollah Ali Akbar Hashemi Rafsanjani, since 1979 one of the two most powerful men within Iran’s ruling hierarchy.

Political turmoil

It is indeed an irony, isn't it, that the kids are supporting the "moderate" 70 year old, while the mullahs are supporting the 49 year old Mahmoud Ahmadinejad. However, that's a tribute to Rafsanjani as a very skillful politician, re-defining himself as just that -- a moderate and a pragmatist -- in contrast to his hard-line opponent.

Some commentators are claiming that a victory by either candidate is bad news for America because Iran's hard line policies will continue or worsen. Such commentators don't understand generational awakening eras. No matter who wins, the political conflict across the "generation gap" is going to grow, until some climax is reached.

There are two kinds of climaxes. One kind is an "internal revolution" within the government that gives the kids a political victory. The resignation of Richard Nixon is an example of this kind of internal revolution.

The other kind of climax is a hard government crackdown on the kids. The best recent example of this is the Tiananmen Square massacre in 1989 in China, when three million college students demonstrated in Beijing and thousands were killed by government forces. This massacre gave rise to the Falun Gong movement, which is the philosophical underpinning to a coming major civil war in China.

It's not possible to predict how or when Iran's awakening period will climax, but we can be certain that the level of political turmoil will be enormous.

Nuclear weapons development

This brings us to the final topic: What about Iran's nuclear weapon development program? Will the kids force the mullahs to give up nuclear weapons development?

Quite the contrary. This is something that the kids and mullahs agree on. They both want Iran to have nuclear weapons for "defensive" purposes, and little can be done to prevent Iran from developing those weapons.

What about using Iranian nuclear weapons on Israel? Surely the kids won't approve of that.

That's true, but this is a political decision that Generational Dynamics can't predict. The behaviors and attitudes of large masses of people are quite predictable, and Generational Dynamics does that.

But a decision to use nuclear weapons on Israel will be made by a few mullahs, and no one can predict the actions of one person or a small group of politicians.

Iran's future is enormously complicated by the fact that Israel and the Palestinians are headed for war. At that time, Iran will be forced to support the Palestinians with troops and with weapons. Iranian moms will be very reluctant to send their young men into another war, after all the losses in the Iran/Iraq war; but there's little doubt that Iranian nuclear weapons will be used on Israel, once they're available. (23-Jun-05) Permanent Link
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Ariel Sharon and Mahmoud Abbas meet as Mideast cease-fire unravels

Like Britain vs France, Israel vs Palestinian Authority meetings are becoming increasingly confrontational.

Palestinian Authority president Mahmoud Abbas met with Israeli prime minister Ariel Sharon at Sharon's Jerusalem residence on Tuesday in a highly confrontational meeting that was intended to coordinate Israel's pullout from the Gaza strip, scheduled for July.

However, the long-scheduled meeting took place in an environment where the cease-fire and high expectations of January, when Abbas was elected, are almost completely destroyed.

On Monday night, just hours before the meeting, Israeli security forces arrested 50 Islamic Jihad militants. The Islamic Jihad militia group has never formally agreed to the cease-fire, but has been observing a voluntary ceasefire until recently.

Now the Israel Defense Forces (IDF) has decided to resume targeted killings of senior leaders of the group. "Islamic Jihad has taken itself absolutely out of the [cease-fire] agreement with its attacks, and so from our view, we are operating fully against them, as we did before," said Lt. Col. Erez Winner, a senior Israeli commander to Haaretz. "Anyone we know who is affiliated with this organization is a legitimate target."

And, the Hamas militia group is also threatening to end its ceasefire.

This brings us back to the meeting between Abbas and Sharon.

Abbas was looking for certain concessions from Israel: reopening Gaza's airport, further releases of Palestinian prisoners in Israeli jails and evacuation of some Jewish settlements in the West Bank.

Instead, Sharon said, "we're still taking casualties," in reference to Palestinian terrorist attacks. He offered some partial concessions, but only on the condition that Abbas use force to deprive Palestinian militias of weapons. That's obviously not going to happen.

Here's the crux of the matter: According to the BBC, Abbas wants to use persuasion and negotiation to get the Palestinian militia groups to disarm, because he believes that if he uses force the it will lead to civil war.

Now, I agree with Abbas that using force will cause a civil war, but persuasion won't work either. Look at other crisis wars: Would persuasion have stopped Hitler? Stopped the American Civil War or Revolutionary War? Would it have stopped the Hutus from slaughtering a million Tutsis in three months in the 1994 Rwanda war?

Crisis wars are like forces of nature; persuasion will no more stop a crisis war than it will stop a tsunami.

So the meeting was a failure. Sharon refused to back down until Abbas ends the violence, and Abbas refused to use force to try to end the violence, for fear it would start a civil war. Neither side was willing to compromise.

The same kind of thing happened last week at the European Union summit in Brussels, in the confrontation between Blair and Chirac.

The confrontation over the $5 billion rebate to England versus the $9 billion agricultural subsidies to France.

Ten years ago, this kind of issue would have been resolved in a compromise. That's because it was a "generational unraveling" period, and Europe was being led by people in the generation that grew up during WW II, and considered the European Union essential to prevent a new European war.

Today, Europe is in a "generational crisis" period, led by people in the generation born after WW II.

It's that simple, as we showed as we pointed out in our analysis of the French rejection of the EU Constitution. The exit polls indicated that the people who were alive during World War II favor the Constitution because they believe that it's the best way to prevent a new European war, while those born after WW II are opposed to the Constitution because they believe it will cost them jobs.

That's why there's little willingness to compromise today. The same is true in the Mideast, which is also entering a generational crisis period.

Recent news stories indicate that when British Prime Minister Tony Blair takes over as EU President on July 1, he and Chirac may reach a compromise. Some sort of temporary compromise is possible, just as it's possible to have a heat wave near the beginning of winter, but it doesn't stop the inevitable freeze. Imagine these two geezers, Blair and Chirac, going around Europe trying to convince kids that they want a European Union even if it means losing their jobs, and you can predict what's going to happen.

So we have Blair and Chirac in Europe, Abbas and Sharon in the Mideast. These are two pairs of people who distrust and dislike each other, unwilling to compromise very much, trying to convince their constituents that values that were important in the 1940s are still important today.

You know, Dear Reader, that I sometimes joke around in this web log, and I'm occasionally irreverent, but I have to tell you that I was genuinely upset by what happened last week in Brussels. Yes it's true that it's exactly the kind of thing that I've been predicting, but it's still very upsetting to see England and France go step by step toward a new war, with almost mathematical certainty. I've often said that Generational Dynamics is the saddest project that I've ever worked on in my life, and it seems that every day's news only seems to make it sadder. (22-Jun-05) Permanent Link
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Acrimonious European Union summit ends in crisis

Chirac and Blair exchanged bitter recriminations, with most of Europe blaming Blair for refusing to give up the $5 billion annual "rebate" that Margaret Thatcher negotiated in 1984.

At the end of a marathon session of the EU summit that lasted late into Friday evening, Blair refused to consider reducing the rebate unless France agreed to reduce the PAC (agricultural subsidies) that provides substantial subsidies to French farmers.

Defiant French President Jacques Chirac <font size=-2>(Source: LeMonde)</font>
Defiant French President Jacques Chirac (Source: LeMonde)

Chirac really poured on the heat. He refused to link the rebate reduction in any way with any other part of the budget, let alone reduce the PAC amount, which provides $9 billion in farm subsidies to France.

The current EU President, Luxembourg Prime Minister Jean-Claude Juncker, led the failing effort at reaching a compromise.

Furious EU President, Luxembourg Prime Minister Jean-Claude Juncker <font size=-2>(Source: BBC)</font>
Furious EU President, Luxembourg Prime Minister Jean-Claude Juncker (Source: BBC)

At a post-midnight press conference, a furious Jean-Claude Juncker clearly condemned Blair and the UK, saying he felt ashamed that "certain people did not have the will to reach agreement when some poorer other countries were willing to do so."

Grim-faced British Prime Minister Tony Blair <font size=-2>(Source: BBC)</font>
Grim-faced British Prime Minister Tony Blair (Source: BBC)

At a competing press conference, a grim-faced Blair accused Chirac of intentionally trying to isolate him, and pointed out that England was not isolated, since four other countries, Holland, Sweden, Finland and Spain, with Denmark and Italy abstaining, had joined the UK in rejecting the compromise budget.

From the point of view of Generational Dynamics, this is exactly the kind of political result that should be expected. Europe is headed for a major new war, as part of the "clash of civilizations" world war, and it's increasingly clear that France and Britain will be the two major belligerents. This prediction is based on generational changes that have already taken place and are continuing to take place.

As we pointed out in our analysis of the French rejection of the EU Constitution, the exit polls indicate that the people who were alive during World War II favor the Constitution because they believe that it's the best way to prevent a new European war, while those born after WW II are opposed to the Constitution because they believe it will cost them jobs. As time goes on, the generational balance will tilt further and further toward people who reject the European Union.

The summit may have ended, but the acrimonious battle is far from over.

It is incredibly ironic that on July 1, Tony Blair will follow a pre-established rotating schedule and take over from Jean-Claude Juncker as the new EU President. Asked about this at the press conference, Juncker said, "I have no comment on that. And I won't give Mr. Blair any advice, since he doesn't seem to want my advice."

Thus, Blair will serve for six months as President of a European Union that will refuse to cooperate with him until he relents on the rebate issue. However, that would infuriate his own constituency back home, and so Blair is unlikely to back down.

As of today, the EU Constitution is dead, thanks to the French and Dutch referenda; the EU budget is dead after 2006, thanks to yesterday's fiasco; and the EU's euro currency is close to death, thanks to the differing needs of the 25 member countries.

Around 2015 or so, after the war is over, the survivors will try to form a new European Union, and they'll probably succeed at that time. (18-Jun-05) Permanent Link
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The worldwide household bubble is still expanding

Thanks to a worldwide collapse in mortgage interest rates, housing prices are booming around the world, growing 11% in the last year in the United States, and up to 20% or more in other countries.

The housing boom is related to the fact that 10-year Treasury bond interest rates have been falling, as have been similar bond rates around the world. Mortgage interest rates are set based on the 10-year Treasury bond rates, low interest rates allow home purchasers to buy more expensive houses for the same monthly payment, pushing housing prices up.

Cartoon from Monopoly board game
Cartoon from Monopoly board game

A humorous side note is that real estate prices have gone up so much in London that the Parker game company has issued a new 70th anniversary edition of the game with prices some 10,000 times as high as they were in the original game.

As we discussed a couple of weeks ago, Alan Greenspan and other analysts don't claim to have a clue that explains the conundrum of why long-term interest rates are falling. The only credible explanation is the Generational Dynamics explanation, related to the prediction that we're headed for a major stock market correction and a 1930s style Great Depression.

According to a front page article in yesterday's Wall Street Journal, home prices have been increasing in countries around the world, as shown in the following table:

2CHINA (Shanghai)*27%68%
13HONG KONG19%27%
16EURO AREA7%22%
17GREECE (Ex-Athens)4%22%
Source: WSJ

At some point the bubble is going to burst, and real estate prices are going to fall substantially.

So-called "analysts" like Suze Orman are going on television telling people not to worry about that. The reasoning is that you can still continue to live in a home even its value goes down substantially, although she does advise converting interest-only and adjustable rate mortgages to fixed rate mortgages.

But the problem is much more serious than these analysts are indicating. If property values go down in a community, then the money available to the local government will go down, causing the people living in overpriced homes to bear a much large real estate tax burden. Numerous other dislocations will occur as well.

Those having a choice should rent for now, and put off purchasing for a couple of years. Those considering selling should do so soon. (17-Jun-05) Permanent Link
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European "Union" descends further and further into chaos

At EU summit today, there may be blood on the floor, as Tony Blair and Jacques Chirac butt heads over the "UK rebate."

Former British Prime Minister Margaret Thatcher negotiated this in 1984 with regard to the budget of the European Economic Community (EEC).

All member states contributed to the budget, and the EEC then distributed the money back to the members, mostly in the form of agricultural subsidies, most of which went to France, which had designed the system. So Thatcher pointed out that Britain was paying a lot of the budget, and getting almost no subsidies, and said Britain wouldn't play under those terms, so Britain got a hefty budget "rebate."

Tony Blair scowls angrily at grinning Jacques Chirac at Élysée Palace in Paris on Tuesday. <font size=-2>(Source: AP)</font>
Tony Blair scowls angrily at grinning Jacques Chirac at Élysée Palace in Paris on Tuesday. (Source: AP)

Now the EEC has become the EU. The EU budget is being renegotiated at today's EU summit, and the UK has been under pressure for a while to give up the rebate. French President Jacques Chirac, who had expected France to be the leader of the EU, was enormously humiliated by the vote 2 1/2 weeks ago, where France rejected new EU Constitution.

Blair and Chirac have never liked each other very much anyway, so it was easy for Chirac to blame France's rejection on Blair's inflexibility on the rebate. (Actually, it was a generational thing, as I explained.)

So Blair said (paraphrasing), hey, we'll talk about cutting back the rebate, if you wanna talk about cutting back the agricultural subsidies. (The agricultural subsidies are called the "PAC," standing for "la politique agricole commune.")

So Chirac said (paraphrasing), Screw you.

What we're witnessing is the EU, crumbling before our very eyes.

The EU was already in a crisis, after France and then Holland refused to ratify the new EU Constitution.

And suddenly there's a lot of talk around Europe about abandoning the new euro currency, and going to back to individual country currencies.

Divergent economic growth in different EU countries. <font size=-2>(Source: WSJ)</font>
Divergent economic growth in different EU countries. (Source: WSJ)

Last year, the international investment firm Morgan Stanley warned that the euro could collapse entirely in 2005, because some EU countries have a "more virtuous budgetary policy" than others. The adjoining graphic shows how different countries' economies have been growing (or not growing) at different rates, causing difficulties of the type Morgan Stanley predicted.

And now, the budget crisis and the discord between Blair and Chirac are spiraling Europe further and further into chaos.

From the point of view of Generational Dynamics, Europe is heading for a new major war, just as it has time after time for centuries. What we're seeing in the step-by-step collapse of European Union is the step-by-step trip on the road to war. This European War will be part of the major "clash of civilizations" world war.

Generational Dynamics doesn't predict who the belligerents will be, but it's increasingly clear that Britain and France will be fighting a new crisis war.

A reader wrote to me after reading my coverage of the French vote, as follows:

"You mention the French and England war concept but give no details for what seems like such a radical statement. I would have never guessed a war between those two nations now. Could you please elaborate?"

It's really not so radical, considering the fact that England and France have had literally dozens of wars in the last millennium, as they've done over and over since 1066, when the Normans conquered Saxon England. In fact, the Hundred Years War (which lasted 117 years) was mainly between France and England. Why should this cycle be any different? Or at least, why should it be considered radical? It shouldn't, especially to anyone who's studied anything about Napoleon.

Generational Dynamics predicts that there'll be a new W. European war, but doesn't predict who'll be fighting whom. For that, we need to look at the current trend lines. In the leadup to the Iraq war, Germany and Russia opposed the war and didn't want to participate, but France actively tried to cause the English and Americans to be defeated. The leading architect of the French strategy was sleazebag Dominique de Villepin, whom Chirac recently elevated to the position of French Prime Minister. Incidentally, de Villepin is known to be an admirer of Napoleon.

What would be the scenario for such a war? In my opinion, one or the more likely scenarios is as follows: When there's a new Mideast war, it seems pretty clear that Britain will side with Israel, and France will side with the Arabs. With France supplying arms to Arabs, it won't be long before British and American bombers are bombing French factories and supply lines, and the French are making strategic strikes on England. NATO's weapons will then be in play, and anything can happen, including a nuclear strike on British or American soil.

What about the other European countries? When they are forced to choose between Britain and France, which side will they choose?

We can't be sure, of course, but a very intriguing analysis recently appeared in the Times of London. The analysis listed which countries are supporting France, and which are supporting the UK in the EU battles. Here's their list:

Supporting one side or the other in the current political battle doesn't guarantee what will happen in the case of war, but it provides some indication. (16-Jun-05) Permanent Link
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Worldwide shipping is slowing down, indicating a softening of world economic growth

Have you ever heard of the 'Baltic Dry Index'? It's been falling sharply.

The Baltic Dry Index (BDI) measures the shipments of "dry-bulk cargos," commodities like iron ore, grain, cement and coal, shipped in bulk on huge freighters traveling the seas around the world.

The BDI has a colorful history since it was established in 1744 by merchants and ships' captains chitchatting at the Virginia and Baltick Coffee House in Threadneedle Street in London.

The BDI is considered to be a reliable leading economic indicator for manufacturing, since it measures commodities that will eventually be used in the manufacture of finished goods.

Thus, the fact that it's down 50% since December, with the fall accelerating in recent weeks, signals a probable fall in manufacturing in the months to come and an economic downturn.

This is consistent with measures of worldwide manufacturing activity. As we reported two weeks ago, manufacturing activity was the slowest in two years worldwide, according to the JP Morgan global report on manufacturing. According to the report, "The latest fall in the PMI was the result of slower growth in output and new orders, which led to a decline in employment."

The worldwide slowdown in manufacturing and shipping almost gives one the visceral feeling that the earth's rotation is slowing down.

According to an article in the Wall Street Journal, worldwide shipping is decreasing because worldwide economic growth is slowing. In particular, China has cut back substantially in imports of iron ore used in steel production.

Baltic Dry Index, 1996-present <font size=-2>(Source: FinData)</font>
Baltic Dry Index, 1996-present (Source: FinData)

The Baltic Dry Index is not widely reported, but you can find current and historical BDI data on the FinData web site.

As the adjoining 10-year graph shows, the BDI is normally fairly steady, but skyrocketed in 2003-4 as Chinese commodity imports went up. After reaching a peak in December, the Chinese imports have been falling.

From the point of view of Generational Dynamics, China is transitioning from a "generational unraveling" period to a "generational crisis" period, and appears to be unraveling into a civil war. China is on a kind of "crack cocaine" addiction -- it's been growing at 9-10% for 20 years, and is addicted to continuing that rate of growth. A recession is inevitable, and when it occurs, it could destabilize the entire country. Whether the sharp fall in the BDI indicates that a Chinese recession is coming remains to be seen.

The worldwide fall in shipping and manufacturing growth is also consistent with the Generational Dynamics prediction that we're entering a 1930s style depression. America's hollowed out economy has closed factories and shipped jobs to China. China imports commodities and exports finished goods, especially textiles and electronics, to America, that we pay for on credit. China then repurchases our credit in the form of Treasury bonds. Other countries play a part to a lesser extent, and many of their economies are worse off than ours. Some unplanned event, like a recession, that interrupts this symbiotic relationship could be the trigger that causes the major economic readjustment that Generational Dynamics predicts. (14-Jun-05) Permanent Link
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"Wealthy nations" agree to cancel Africa's debts at G-8 meeting

Can Africa be saved? Will more money do it?

Some people think of Africa as the land of genocide, famine and AIDS, an unstable breeding ground for war and terrorism. Some believe that these are caused by racial or tribal issues, and some even blame it on slavery. These explanations are silly, of course. Africa is no different than any other continent. AIDS is spreading throughout Asia, and famine and hunger strike all heavily populated nations, and is currently occurring in North Korea. As for the two recent genocidal African wars (Darfur last year and Rwanda in 1994), genocide happens everywhere -- like the Balkans wars last decade, Cambodia in the 1970s, and Europe in the 1940s.

Nonetheless, the agreement on Saturday by the "rich nations" to forgive $40 billion of African debt is being called "historic." Actually, there was never a snowflake's chance in hell that those debts would ever be repaid anyway, so the agreement is really nothing more than accepting the inevitable.

Trying to save a country by pouring money into it is nothing new. We're doing it today with the West Bank, for example, where an all-out Arab-Jewish war is being postponed only with ever-increasing billions of dollars of aid. It's happening in Haiti today as well. And the leaders of China, a country with 150 million itinerant workers and frequent local riots, are known to believe that plenty of food will prevent civil war.

Africa is larger than Europe, America, Alaska, China, and New Zealand (not shown) combined. <font size=-2>(Source: Boston Univ)</font>
Africa is larger than Europe, America, Alaska, China, and New Zealand (not shown) combined. (Source: Boston Univ)

But Africa?? Pouring money into the West Bank is one thing, because it's tiny. In contrast, many people don't realize how big Africa is -- bigger than China, America, Alaska, Europe and New Zealand combined. If all the so-called "rich nations" of the world gave every penny they had to Africa, it still wouldn't be enough.

And what good does it do? Decades of providing aid to Africa through the World Bank and other organizations has evidently only made things worse -- if we're to believe all the people who are asking for more money now.

In fact, Ugandan investigative reporter and political commentator Andrew M. Mwenda explains how foreign aid has sabotaged reform in Uganda:

Mwenda's argument is that foreign aid makes governments unaccountable to the people, stifles government reform, subsidizes government corruption and incompetence, and saves the rich and well-connected from having to pay taxes.

This is what's happening in Africa, but it's also clear that the same things have been happening in Haiti and the West Bank. It's in the nature of this kind of aid.

But what's the choice? The alternative is to give that aid, but also impose controls, even place outside managers in the country to oversee how the money is spent.

That alternative has a name. It's call "colonialism."

The 1850s discovery of quinine as a treatment for malaria opened the floodgates to colonialism of Africa. In what was known as the "Scramble for Africa," England, Belgium, France, Portugal, Italy, Spain and Germany all competed to colonize parts of Africa in the late 1800s. By 1914, all of black Africa except Ethiopia and Liberia were European colonies. Since 1914, these former colonies have become independent nations.

Today, colonialism is not exactly a politically popular concept. For example, I have a friend named Mike who tends a little toward paranoia, and sees almost anything anyone does as driven by greed. Take any current news event anywhere in the world, no matter what it is, and he sees it as being motivated by one country trying to get another country's oil.

He sees colonialism as an unalloyed evil: a desire of one country to enslave the people of another in order to gain possession of their resources.

Does that apply to all of those countries -- England, Belgium, France, Portugal, Italy, Spain and Germany? To him, yes it does. What about the colonists bringing modern agriculture, modern medicine, modern communications, modern transportation, modern financial structures, factories, jobs, and so forth. To him, that doesn't matter. It's just greed and slavery.

A lot of people think that way, because colonialism never works out. At the beginning it's win-win, and great for everyone. As time goes on, the population increases, the food supply can't keep up with the population, poverty increases, and hunger increases. The colonists can no longer provide for the public welfare, and they develop a bunker mentality, and protect themselves to keep order. This leads to massive government corruption. In time a crisis war develops (like the Rwanda war), and enough people are killed so that the survivors have enough food.

A year ago, when I first wrote about the crisis war in Darfur, I predicted that the UN would be helpless to stop the crisis war until it had run its course. And I was absolutely right. Crisis wars are forces of nature, like typhoons, like tsunamis. They happen regularly, and they can't be stopped.

That's what happens in the case of colonialism, but that's also what happens in the case of direct aid (or loans), as we've been seeing.

And that's the point of this little essay. It doesn't matter whether you provide direct aid or you provide aid with controls, or you provide investments, or you provide full colonial control. It's always the same. World War II was a huge genocidal war involving many countries of the world, no different from Rwanda or Darfur. Each country, each region takes its turn.

The whole concept of "rich nations" giving aid is a joke. America is the "richest" country, but we're in hock up to our necks to China. Europe is supposed to be rich, but they're worse off than we are. China is currently a "rich" country, but they're a third world country so they don't count as rich.

However, that's not what's important today. What's important today is that the politicians have signed "an historic agreement on the way to eliminating poverty in the world." They did this by forgiving loans that never would have been paid, promising more aid that will make no difference, and patting themselves on the back for being so caring and clever.

But that's what politicians are for, isn't it. (12-Jun-05) Permanent Link
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North Korea is blocking all international communications

Continuing its war mobilization that began early last year, North Korea is moving aggressively to prevent its citizens from making international calls. It has cut 90% of its 970 international phone lines, and has confiscated 20,000 cell phones. The Internet has been all but shut down.

Ironically, the use of cell phones and the internet was considered by by many observers to be an important sign that personal and economic freedom was finally increasing in the Stalinist country. In particular, the cell phones permitted family members in the North and South to talk to one another for the first time in fifty years.

The Kim Jong-il government had been permitting a great deal of freedom in phone use since cell phones were introduced in 2002. But on April 24 of last year, there was a huge train explosion in Ryongchon province near the Chinese border, and Pyongyang was shocked by how quickly the details of the explosion became known around the world -- thanks to Korean citizens using their cell phones to call across the Chinese border!

Officials investigating the train explosion became convinced that the train explosion was an attempted plot to assassinate Kim, and that a cell phone was used to detonate the explosives.

The cell phone confiscation began at that time, but now Pyongyang has cut almost all international phone lines, with the result that North Koreans have almost no contact with the outside world.

Analysts believe that the phone cutoff is related to the Pyongyang claim that the U.S. will attack North Korea preemptively, and then North Korean citizens would be able to pass confidential information to the Americans. "Since a preemptive strike scenario surfaced in 2003, North Korea has been in a semi-state of war, and it is likely to continue until the six-party talks resume," said Jung Chang-hyun, a professor of North Korean studies at Kookmin University.

However, this all comes at a time when North Korea is facing the worst food shortages in years, and is facing a possible famine.

Conflict risk level for next 6-12 months as of: 30-May-2005
W. Europe 1 Arab Israeli 2
Russia Caucasus 2 Kashmir 1
China 2 North Korea 3
Financial 3 Bird flu 3
Key: 1=green 1=Low risk 2=yellow 2=Med 3=red 3=High 4=black 4=Active

From the point of view of Generational Dynamics, North Korea is in a "generational crisis" period, and a war to reunite Korea is a near 100% certainty.

A severe food shortage is exactly the kind of event that could trigger such a war during a generational crisis period. A famine would cause enormous unrest by citizens infuriated at the Kim government, and the government would redirect the citizens' passions against their hated enemies, America and Japan, who would be blamed for the fact that the North and South are still separated.

If Kim were going to invade South Korea soon, then cutting off international phone service would be the right thing to do in preparation. That doesn't mean that an early invasion is planned, but it's a possibility.

Generational Dynamics predicts that North Korea will preemptively launch a war to reunify South and North Korea under Kim's control. This war will engulf the region, including Japan, China and America. It could start next week, next month or next year, but it's certain. (10-Jun-05) Permanent Link
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Alan Greenspan predicts major losses by hedge funds

But still says he doesn't have a clue why 10-year Treasury bond interest rates are falling.

In a speech on Monday to an International Monetary Conference in Beijing, that hedge funds had picked "most of the low-hanging fruit of readily available profits," and that very soon, "many wealthy fund managers and investors could become less wealthy."

Hedge funds are based on small inefficiencies in the marketplace. If, for some reason, copper is selling for slightly more in Moscow than Chicago, then hedge fund managers use a technique called "arbitrage": they purchase Moscow copper and hedge (or collateralize) the purchase by selling Chicago copper, and make money when the prices converge again.

According to Greenspan,

Note that Greenspan likes hedge funds. He says above that they leave "as a byproduct much-more-efficient markets," and later he tells us not "to lose sight of the very important contributions hedge funds and new financial products have made to financial stability by increasing market liquidity and spreading financial risk, and thereby enhancing economic flexibility and resilience."

The question is whether a collapse in hedge funds will bring down the whole market. Greenspan says it won't, but other analysts fear a market meltdown, as I wrote last month.

Why is the yield curve flattening?

Early in 2004, Greenspan was bragging that he'd saved the economy from repeating the 1930s Great Depression. However, many things started going wrong during 2004, and Greenspan's language became increasingly uncertain, and by February, 2005, Greenspan completely repudiated his earlier reasoning about the 1990s stock market bubble and its aftereffects.

Greenspan pointed to a special "conundrum": The flattening of the yield curve in bonds, which I wrote about last year.

The issue is that interest rates for long-term investments keep falling, while the interest rates for short term investments have been rising. Here's an update of the chart that I posted last year, showing the interest rates for short and long-term bonds for some recent dates:

Treasury Bond Yields

Date 3-month

May 11 '040.94% 4.74%3.80%
June 11 '041.17% 4.79%3.62%
Aug 21 '041.38% 4.23%2.85%
Sept 21 '041.60% 4.03%2.43%
Feb 17 '052.44% 4.17%1.17%
Jun 7 '052.86% 3.90%1.04%

As you can see, the short-term rates continue to increase significantly, and the long-term rates have been decreasing or remaining steady.

Many analysts believe that the bond rates are trending towards an "inverted yield curve," where long term bonds have a lower interest rates than short-term bonds.

Whenever this has happened in the past, it was followed by a recession or a major stock market correction. (There's a great web page that discusses all this, and has a "living graphic" that shows how the yield curve has changed, month by month, since 1978, at The Living Yield Curve.)

Greenspan says that won't happen this time. OK.

In his speech, Greenspan says, "[By summer, 2004,] pressures emerged in the marketplace that drove long-term rates back down. In March of this year, market participants once again bid up long-term rates, but as occurred last year, forces came into play to make those increases short lived."

He added that this is happening around the world: "But what are those forces? Clearly, they are not operating solely in the United States. Long-term rates have moved lower virtually everywhere. Except in Japan, rates among the other foreign Group of Seven countries have declined notably more than have rates in the United States. Even in emerging economies, whose history has been too often marked by inflationary imbalances and unstable exchange rates, access to longer-term finance has improved."

Greenspan considers "a number of hypotheses" to explain "this remarkable worldwide environment of low long-term interest rates," but he rejects them, and finally concludes, "The economic and financial world is changing in ways that we still do not fully comprehend."

Generational Dynamics view

Generational Dynamics, in its current stage of development, does not predict the yields on Treasury bonds. However, Generational Dynamics does make financial predictions that provide an indirect explanation for why long-term interest rates are falling worldwide.

First, you have to understand how long-term bonds are priced. Suppose you purchase a bond that will pay $1,000 in ten years. The more you pay for it, the less interest you'll be earning over ten years. So, as the price of bonds goes up, the interest rate (or yield) goes down.

That's what's been happening with 10-year Treasury Bonds: the prices have been going up, meaning that the yields have been coming down.

If the prices are going up, it means that there must be a greater demand for these bonds. So the real question is: Why are investors around the world purchasing more and more long-term bonds, pushing their prices up and their yields down?

We know that many Asian companies have been buying up US Treasury bonds, as have hedge fund managers in the Carribean.

But this is a worldwide phenomenon, as Greenspan pointed out. It's not just US Treasury bonds, but also long-term bonds in many other nations. What possible explanation is there for this worldwide demand for long-term bonds for countries around the world?

Alan Greenspan has no explanation, and neither does anyone else.

But Generational Dynamics does have an explanation: It predicts that the world is going through a generational financial crisis. These have occurred every 70-80 years since the 1600s: Tulipomania bubble (1637), South Sea Bubble (1721), French Monarchy bankruptcy (1789), Hamburg Crisis of 1857, and 1929 Wall Street crash. These bubbles and crashes always occur at exactly the time when the generation of people who grew up and lived through the previous bubble all disappear (retire or die), all at once.

The 1990s bubble occurred at exactly the time that senior financial managers who grew up during the 1930s Great Depression all disappeared (retired or died) all at once. The effects of the 1990s bubble have not fully unraveled, and we're still in a bubble. Price/earnings ratios have been at 20 or above for ten years now, as I've written about many times, meaning that stocks are overpriced.

So what's an investor to do? Stocks are risky because they're overpriced. Hedge funds are risky because even Greenspan says they're going to lose money. Investing directly in companies is risky because most companies have become heavy with bureaucracy and pension fund obligations.

Because of all those risks, investors around the world are investing in long-term bonds. They pay about 4% per year in interest, and they're much safer than any of these other investments.

This view, which Greenspan other high-priced analysts refuse to utter, is quite consistent with other data. An article in today's (June 8) Wall Street Journal says that manufacturing growth is slowing around the world. According to the article,

"Virtually across the world, the rate of growth is decelerating in manufacturing," says Daniel Meckstroth, chief economist with Manufacturers Alliance/MAPI, a public-policy group in Arlington, Va. ...

This year, U.S. industrial production is expected to rise 3.7%, slower than the 4.1% growth of last year. Germany is expected to slow to growth of 1.9% from 2.4%, while Italy is forecast to record a decline of 0.5%, compared with a fall of 0.7% in 2004. The drop-off is even more pronounced in parts of Asia, with industrial-production growth slipping to 1.4% in Japan from 5.2%, to 7.5% in Malaysia from 12.6%, and to 6.3% in Singapore from 13.9%. Export-oriented Asian economies such as Malaysia depend heavily on Japan to soak up their goods and are getting hammered by its slowdown. China is expected to decelerate modestly, to 14% from 16.7%, although past predictions about Chinese slowdowns haven't materialized."

So, the worldwide fall in long-term interest rates coincides quite naturally with the worldwide slowdown in manufacturing growth. Manufacturing isn't doing well, so investors put their money into long-term bonds rather than manufacturing plants, raising the price of bonds, and lowering yields (interest rates).

A recent article entitled, "Alan Greenspan warns that global economic dangers are without historical precedent," describes how Alan Greenspan reversed his long-held position on the health of the world economy. Generational Dynamics predicts that things are going to get much worse. (8-Jun-05) Permanent Link
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Abbas is increasingly losing control of Gaza and the West Bank

Palestinian militants are infuriated by Abbas' unilateral cancellation of parliamentary elections.

Palestinian Authority President Mahmoud Abbas on Saturday postponed the July 17 parliamentary elections indefinitely, in light of polls that have shown increasing popular support for the militant group Hamas.

Palestinians are showing increasing discontent with the corruption in Abbas' Fatah party. When Abbas took over Fatah following Yasser Arafat's death in November, Abbas promised to reduce corruption and disarm the militias.

Abbas repeated those promises in the euphoria following Abbas' election as Palestinian Authority president in January.

However, there's no sign of any decrease in corruption, the militias are not being disarmed, and the armed violence appears to be only increasing.

Armed gangs in the Al-Aqsa Martyrs Brigades and other militias have become increasingly powerful in the last few months. Yesterday, armed militias temporarily three government buildings to protest their opposition to Abbas' decision to cancel the elections.

Mideast, showing Israel/Palestine, Muslim countries, and Orthodox Christian countries
Mideast, showing Israel/Palestine, Muslim countries, and Orthodox Christian countries

The situation has become even more perilous as Lebanese Shi'ite Hezbollah militia group appears to have won south Lebanon's parliamentary elections on Sunday.

Like the Palestinian militia groups, Hezbollah has never agreed to the peace plan with Israel, but is allied with Syria and Iran, and claims to have 12,000 rockets and misslies capable of burying northern Israel. Sunday's election victory gives this group increased power.

Abbas' cancellation of the July 17 elections was a desperate move to try to buy time, but time is passing, and youthful generations of militants with no fear of war are growing in size.

From the point of view of Generational Dynamics, the Mideast is headed for a major new crisis war between Jews and Arabs that will engulf the entire region, refighting the war in the late 1940s that was triggered by the partitioning of Palestine and the creation of the state of Israel. There's no guarantee that Israel will survive this war. (6-Jun-05) Permanent Link
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Howard Dean says Republicans "never made honest living"

History tells us that both Republicans and Democrats will be using more and more of this bilious language.

On Thursday, Democratic National Committee Chairman Howard Dean said the following about why working parents find it difficult to make it to the polls on time to vote:

"Well, Republicans, I guess, can do that, because a lot of them have never made an honest living in their lives. But for ordinary working people, who have to work eight hours a day, they have kids, they got to get home to those kids, the idea of making them stand for eight hours to cast their ballot for democracy is wrong."

I hate this kind of putrid rhetoric from either Democrats or Republicans, but history tells us that now, in a "generational crisis" period, this is precisely the kind of rhetoric we're going to be hearing more and more, from both Democrats AND Republicans, between the "blue staters" and the "red staters."

The level of conflict will not reach the level of armed conflict, as it did during the Civil War, but the political conflict will be much worse than it is now, or than it even was during last year's election. (6-Jun-05) Permanent Link
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Rumsfeld expresses alarm over militarization of China and North Korea

Defense Secretary Donald Rumsfeld spoke in Singapore on Saturday to an international conference on Asian security issues, hosted by the International Institute of Strategic Studies.

In his speech to the conference, Rumsfeld described North Korea as follows:

"[C]onsider North Korea’s Stalinist regime, where: The children and grandchildren of dissidents are pressed into labor; Refugees who escape are kidnapped from foreign countries; and Where starving citizens search barren fields for individual grains.

A European doctor who spent many months treating children in North Korea said: “There are two worlds in North Korea: one for the senior military and the elite; and a living hell for the rest.”

Pyongyang’s nuclear ambitions threaten the security and stability of the region, and because of their record of proliferation, it threatens the world."

Here is what Rumsfeld said about China:

"[A DOD report] concludes that China’s defense expenditures are much higher than Chinese officials have published. It is estimated that China’s is the third largest military budget in the world, and clearly the largest in Asia.

China appears to be expanding its missile forces, allowing them to reach targets in many areas of the world, not just the Pacific region, while also expanding its missile capabilities within this region. China also is improving its ability to project power, and developing advanced systems of military technology.

Since no nation threatens China, one must wonder: Why this growing investment? Why these continuing large and expanding arms purchases? Why these continuing robust deployments?"

Rumsfeld is saying what has been getting increasingly obvious for a year: Both China and North Korea are mobilizing for war.

They both have large armies, and both are improving their missile technology and nuclear technology quickly.

China's anti-secession law has laid what Beijing considers the legal groundwork for a pre-emptive strike to reunite Taiwan with China, and N. Korea's desperately poor people are jealously eyeing the great wealth in S. Korea and Japan.

A more sanguine point of view was expressed by Lee Hsien Loong, Prime Minister of Singapore, in his keynote address to the conference:

This kind of statement exhibits the kind of generational naïveté in leaders that we saw this past week, as voters in France and Holland surprised the élite leaders of Europe by rejecting the EU Constitution in a major generational split.

Lee may be Asian, but he fits the same élite profile as the European leaders: Born in 1952, attended University of Cambridge, and got a Master's degree in public administration at the Kennedy School of Government in Harvard University.

As we noted last year, Singapore sides with China in the Taiwan dispute. Singapore is 80% Chinese and is very wealthy, the wealthiest country, per capita, in the region.

Taiwan poll results to question: "Do you feel Taiwanese, Chinese or both?" <font size=-2>(Source: WSJ)</font>
Taiwan poll results to question: "Do you feel Taiwanese, Chinese or both?" (Source: WSJ)

Lee's statement that "Taiwanese population and government now know that independence is now out of the question" is simply false, as is completely evident to anyone who looks at the generational issues.

The adjoining graph, which shows the number of Taiwanese who call themselves "Chinese" versus "Taiwanese" shows how the generational change is playing out. As the older generation dies out, the number of people calling them "Chinese" has been decreasing; as younger generations grow older, the number of people calling themselves "Taiwanese" is increasing.

Lee is generationally naïve, but the people of Taiwan are naïve as well. Lee is naïve because he thinks that the Taiwanese younger generations don't mean it when they say they want independence, and the Taiwanese younger generations are naïve because they don't believe that Beijing means it when they say they'll start a war over Taiwan. This is how these major crisis wars start, as they've started through millennia of history, as I've described in my books.

I always enjoy speaking to people from the "Silent Generation," as the generation that grew up during the Great Depression and World War II is called. Younger people who read this web site often think that the whole thing is crazy. But "Silents" who read this web site may disagree with some of the details, but they know that everything on this web site is perfectly possible. That's because Silents have seen it all before, and younger people haven't.

It's always a pleasant surprise to see any major leader speak frankly about the state of the world, but Donald Rumsfeld, a Silent born in 1932, grew up during World War II, and is very well aware that a war could be triggered at any time.

All that either China or N. Korea need is an actual trigger - a new pro-independence law in Taiwan, or an offensive anti-Kim remark by someone in Japan or U.S., for example, for either country to initiate a pre-emptive war. The war might begin next week, next month or next year, but it's coming with 100% certainty, and it will affect the entire world. (4-Jun-05) Permanent Link
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Fourth Turning forums web site will be up again soon

The Fourth Turning forums are often used to discuss generational issues, since the generational paradigm was developed by William Strauss and Neil Howe, and published in their 1995 book, The Fourth Turning: An American prophecy; What the cycles of history tell us about America's next rendezvous with destiny.

Strauss and Howe's historical analysis of contemporary diaries and histories for the last 600 years in England and America showed that six war cycles followed a common generational cycle. Generational Dynamics is built on their findings. (The differences can be found in my new book, Generational Dynamics for Historians.)

The Fourth Turning forums web site has been unavailable for the last ten days thanks to a hacker, and a number of people, including many who read this web site regularly, have been suffering severe withdrawal symptoms, including severe nervous reactions from being forced to spend more time with their families.

Craig, the Webmaster, is waiting to hear from the web host firm when the security hole has been fixed and the system is up and running again. Hopefully, this will happen soon. You may contact him directly at

When the Fourth Turning forum is running again, you'll be able to find it at .

I personally contribute to many of the dicussions, but the two that are most relevant to this web site are:

If you try these web pages today, you'll be redirected to an error page, since these system is still down. But they should be available soon. (3-Jun-05) Permanent Link
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Manufacturing index falls more than expected after falling for 24 months

In another sign that the economy is slowing down, the growth in manufacturing has been declining for two years.

Purchasing Managers Index, 2003-present <font size=-2>(Source: WSJ)</font>
Purchasing Managers Index, 2003-present (Source: WSJ)

The Purchasing Manager's Index is composed of several components, including New Orders, Employment, and Prices. Combined, the overal. index indicates whether the manufacturing sector is growing or declining.

The data "indicates that the sector is losing momentum, as this month's PMI is at the lowest level since June 2003 when it registered 50.4 percent," according to the report. "The rate of growth in New Orders continues to decline.... The Employment Index failed to grow, ending 18 months of employment growth. The manufacturing sector is definitely slowing, and the question is whether a somewhat stronger dollar and the burden of high energy costs are slowly bringing this manufacturing growth cycle to end."

Global Purchasing Managers Index, 1998-present
Global Purchasing Managers Index, 1998-present

The same thing is happening globally, and manufacturing activity was the slowest in two years worldwide, according to the JP Morgan global report on manufacturing. as shown by the adjoining graph. According to the report, "The latest fall in the PMI was the result of slower growth in output and new orders, which led to a decline in employment."

And probably nothing is more dramatic than the fall of ten-year treasury bond yields worldwide. The US bonds fell sharply to about 3.9%, when it was 4.5% just a few months ago. The same things are happening to government bonds in many other countries. This decline indicates that investors are becoming increasingly risk-averse, fleeing from risky investments in hedge funds and, for that matter, in new manufacturing plants, and investing in safe government bonds. That's one of the reasons why manufacturing activity is losing momentum.

These facts are all consistent with the predictions that I've been making since 2002, when I said that we're entering a new 1930s style Great Depression, and that the stock market would fall to the DJIA 3000-4000 range by the 2006-2007 time frame.

The reports also show that manufacturer's prices are showing little sign of inflation, and that they're cutting back on employment. This should be very surprising to conventional economists because short-term interest rates have been close to zero for three years, and are still historically low today. By conventional standards, these rates should be causing massive inflation. But as we've been saying since 2002, we're in a long-term deflationary trend, and I expect prices to actually fall by 30% or so by 2010.

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

Price/earnings ratios for stocks have been above 20 for ten years now, and as the adjacent graph shows, the P/E ratios fall below 10 within 5-15 years whenever that happens.

The fall could happen tomorrow, next week, or next year. There's no way to give an exact time prediction. But the worldwide economic situation continues to deteriorate, as yesterday's manufacturing data shows. (2-Jun-05) Permanent Link
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