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


Web Log - February, 2006


I just heard on CNN International: "The threat of civil war in Iraq is over."

Surprise! Surprise! The press corps was 100% wrong, and I was right.

I really have to chuckle at this. There was NEVER any chance of a civil war in Iraq, for reasons that I explained in detail last week.

All that existed were the fantasies and wet dreams of a press corps so incredibly anti-American that they've lost any shred of objectivity, and have little professional integrity remaining.

You don't have to be an expert in Generational Dynamics to see that Iraq is not heading for a civil war. The easiest way to see that is to compare the situation in Iraq with the situation in Palestine:

Arabs and Palestinians are in a "generational crisis" period, and are headed for a major regional war, as I've explained many times. That's why you're seeing the hatred between Palestinians and Jews continue to grow on almost a daily basis.

In order for a civil war to occur, you have to a palpable hatred between the warring groups. You need some emotion such as was carried by the phrase "Cut down the tall trees" in Rwanda in 1994 -- when this phrase was used as a signal by Hutu leaders to kill the Tutsi ethnic minority.

Or here's the description by Amy Chua, in her book, World on Fire, about the civil war in the Balkans in the early 1990s: "In the Serbian concentration camps of the early 1990s, the women prisoners were raped over and over, many times a day, often with broken bottles, often together with their daughters. The men, if they were lucky, were beaten to death as their Serbian guards sang national anthems; if they were not so fortunate, they were castrated or, at gunpoint, forced to castrate their fellow prisoners, sometimes with their own teeth. In all, thousands were tortured and executed."

That's the kind of emotion we'd have to see to conclude that a civil war is coming. That's what's building in Palestine, but there's nothing like that going on at all in Iraq. What violence there is remaining in Iraq is mostly directed against buildings (mosques). Where people are being killed, it's appears to be by the same insurgency that's been operating for months. That's how I could be sure that there would be no civil war in Iraq.

The press corps, the pundits, the analysts could all have seen the same thing. It's not rocket science. But they're all bound up in anti-Americanism, and lie awake at night having erotic dreams of the worst possible outcome for America.

The people in the Baby Boomer generation are extremely arrogant and narcissistic, as I've said many times before. But within the Baby Boomer generation, the group that's most arrogant and narcissistic of all is the journalists. We've seen this recently with their attitude about the Danish cartoon controversy.

This civil war hysteria was really the limit. These guys never once stopped to question their own assumptions and biases. They wanted to embarass America with an Iraqi civil war, and they overwhelmingly slanted the news in that direction. It's a truly shameful display, and it proves that journalists are also wrong when they say that they're professionally able to separate their political opinions from their reporting. There's no separation at all.

From the point of view of Generational Dynamics, what's going on today in Iraq is almost a textbook case of an Awakening era, like America in the 1960s, with the enfant terrible Shiite cleric Moqtada al-Sadr playing the role of the kids and America and the Iraqi government playing the role of the parents. Here's what I wrote two years ago:

What I wrote two years ago is just as true today. We're going to go through hell in Iraq, until the world war starts and we're forced to refocus our troops elsewhere. But there will be no Iraqi civil war, even though the press corps will keep hoping for one. (28-Feb-06) Permanent Link
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Sudden collapse of Iceland krona portends bursting of "carry trade" bubble

I don't normally write about international interest rates because there's a lot to explain, and frankly it's a lot easier to talk about the stock market bubble and the housing bubble, and a lot easier for readers to understand. Relatively speaking, it's easier to understand how the Fed's near-zero interest policy has created the housing bubble and has perpetuated to the stock market bubble, to the point where today it's overpriced by a factor of over 220%, making it highly vulnerable to a panic.

And besides, all these bubbles are heavily linked together, so that when one of them bursts and crashes, the other ones will too.

But the events of the past week in Iceland and Japan, and their domino effects on other nations, make it time to discuss the bubble in international interest rate trading, known as the "carry trade," and why the expected bursting of this bubble in the next few months is going to be particularly gruesome.

How the carry trade works

You're probably aware that the Federal Reserve Bank sets the "Fed funds rate" or the "overnight interest rate" for the dollar. This is the interest rate at which banks loan money to each other

Every country has its own central bank (with a single central bank for the European Union) that decides the bank lending rate for that nation's currency. Here's a list of the current interest rates for different countries:

    Country         Interest rate
    --------------  -------------
    Japan            0 %
    Switzerland      1 %
    Sweden           2 %
    Eurozone         2.25 %
    United States    4.5 %
    New Zealand      7.25 %
    Iceland         10.75 %

If you look at this table for a moment, you might get an idea of what a "carry trade" is. The interest rates are different. That means that you can do the following (if you're a bank or major investor):

So that's what a carry trade is -- it uses the differential between two different countries' interest rates to make money. All you have to do is borrow money at a low or zero interest, then lend it to someone at a high interest rate, and you make money. In the above example, you've made $45,000 without risking any of your own money. It's easy, right?

Big complication: Exchange rates

Well, there's a big complication, having to do with exchange rates. In the above example, you have to convert yen to dollars, and later convert dollars to yen. Those conversion rates can change, and that makes things even trickier.

In this case, the exchange rate has favored the speculator. A year or two ago, the exchange rate was 105 yen per dollar. Today, the exchange rate is 116 yen per dollar. This has been great for the speculator. He borrowed a ton of Japanese yen, converted them to dollars at 105 yen per dollar, and then lent the dollars to someone at 3.5-4.5% interest. During that period, the dollar became more valuable, and the yen became less valuable, so he needed about 10% fewer dollars to get the same amount of yen as he previously had. So he made money on interest, and also made money on currency exchange.

Iceland króna bloodbath

Take a look at the table above, and you'll see that Iceland has the highest interest rate shown -- 10.75%. This makes Iceland a very attractive place to lend money. A speculator can borrow money in euros from a European bank at 2.25%, convert it to Iceland krónas, and lend it at 10.75%, making 8.75% per year.

Many speculators have done exactly that, though here's an interesting side note: Nobody knows how much money is out there in carry trades, in Iceland banks or anywhere else.

Anyway, on Wednesday, the Fitch Ratings agency (along with S&P and Moody's, one of the three major international investment ratings agencies) issued a new rating on Iceland's banks, revising the country outlook for Iceland from "stable" to "negative," citing macroeconomic imbalances. (Paragraph corrected - 1-Feb-2009)

According the analysis released by Fitch:

"[The ratings] take into account Iceland's macro-prudential risks, including rising inflation, rapid credit growth, buoyant asset prices, a steep current account deficit and escalating external indebtedness. For [KB-bank, Landsbanki and Islandsbanki] these risks are offset to some extent by the banks' large capital bases, with Tier 1 ratios of 9.4%, 11.9% and 9.9% respectively at end-2005, and by the significant geographic diversification of their loan portfolios, with foreign lending representing between around 35% and 70% of the banks' loan books at end-2005."

(By the way, does the stuff about "rapid credit growth, buoyant asset prices, a steep current account deficit and escalating external indebtedness" remind you of some other country you may have heard of -- like the United States?)

The publication of Fitch's rating caused an immediate collapse in the value -- the exchange rate -- of the Iceland króna, which fell 9.3% against the dollar in just two days. This means that speculators making an 8.25% interest rate differential suddenly lost all their profit in a currency exchange rate revaluation.

A chain reaction

The Iceland collapse created a chain reaction that threatened numerous emerging markets from Brazil to Indonesia.

The reason is that many hedge funds and currency speculators suddenly lost a lot of money, forcing them to issue sell orders in other places in order to meet their payment commitments.

The Brazilian real fell 3%, the South African rand more than 2%, the Indonesian rupiah and Polish zloty 1.5%, and the Mexican peso and Turkish lira 1%.

"These countries may be unrelated geographically but they are not unrelated in portfolios," said Tony Norfield, global head of Foreign Exchange (FX) strategy at ABN Amro. "What starts as a trimming back of a position can turn into an avalanche."

However, the panic was short-lived, and seems to have been resolved by the end of the week. Iceland, Brazil, Mexico and other countries immediately announced that they would defend their currencies either by raising interest rates further or by buying back their currency with dollars.

Yen revaluation

Like the stock market and housing, there's a "carry trade bubble," and it's going to have to unwind in the next few months.

The major source of the carry trade bubble has been Japan's 0% interest rate. This one interest rate has created huge positions in currencies around the world, possibly as much as billions of billions of dollars. All of these positions are based on the assumption of 0% interest rates to be paid back to the Bank of Japan.

What happens if the Bank of Japan suddenly decides to raise its interest rates -- just as the Fed has been doing? Well, that's exactly what the Bank of Japan has indicated that it plans to start doing.

This will have infinitely more impact than the little dust-up last week of the collapse of the króna. Few investors were deeply into the króna, but astronomically many more are depending on the yen interest rate.

"There are several hundred billion dollars of positions in the carry trade that will be unwound as soon as they become unprofitable," said Stephen Lewis, an economist at Monument Securities, quoted by The Telegraph. "When the Bank of Japan starts tightening we may see some spectacular effects. The world has never been through this before, so there is a high risk of mistakes."

Stephen Roach, chief economist at Morgan Stanley, warns that the carry trade is itself, in all its forms, a major cause of dangerous speculative excess. "The lure of the carry trade is so compelling, it creates artificial demand for 'carryable' assets that has the potential to turn normal asset price appreciation into bubble-like proportions," he said.

"History tells us that carry trades end when central bank tightening cycles begin," he said, quoted by The Telegraph.

Generational financial crisis cycles

From the point of view of Generational Dynamics, what we're headed for is a new 1930s style Great Depression, as we've said many times before.

But this "carry trade" issue adds a new dimension to it.

Generational financial crises affect the entire world economy. They occur roughly every 80 years, the length of maximum human lifespan, when the generation of people who remember the previous crisis all disappear (retire or die), all at once. The past few are Tulipomania bubble (1637), South Sea Bubble (1721), French Monarchy bankruptcy (1789), Hamburg Crisis of 1857, and 1929 Wall Street crash.

What all of these financial crises have in common is that they were based on an exponentially increasing credit bubble that eventually bursts. A person who survives the horror, homelessness and starvation of a major financial crisis invariably becomes a very risk-averse adult, and makes only the most cautious financial investments. As the generation of people who lived through the last financial crisis disappear, they leave behind younger generations of people with no personal memory of the previous financial crisis. They are much more risk-seeking, and they make more and more risky investments, creating a new credit bubble, leading to a new financial crisis.

For example, the Tulipomania bubble occurred in the early 1600s. Tulips were the "high tech" items of the day. By means of breeding experiments, Dutch botanists were able to produce tulips with spectacular colors. These tulips were sought by wealthy people, and by 1624, one particularly spectacular bulb sold for the cost of a small house. Prices kept going up until the market for tulip futures crashed in 1637.

International financial crises are often based on whatever "high tech" means for the day. The 1857 bubble was based on railroad expansion, the 1929 crash was based on the automobile, and the 1990s bubble was based on internet technology.

Each successive international financial crisis affected more and more of the world. The Tulipomania bubble affect mostly Western Europe. By 1857, all of Europe and North America were affected. The 1929 crash affected Japan and some other Asian countries.

Today, the carry trade bubble means that every country in the world is going to be affected. This will be the biggest and most far-reaching financial crash the world has ever seen. (27-Feb-06) Permanent Link
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Fear of Iraqi civil war nears hysteria

But there is NO CHANCE WHATSOEVER of a civil war.

Here are typical front page headlines on newspapers around the world:

The BBC World Service talked about civil war all day Thursday in the darkest tones. And I just heard someone on CNN International say, "In the next few days the gates of hell may open to a new civil war."

As I said yesterday (see previous item, below), a civil war in Iraq today is absolutely impossible. It will not happen, because Iraq is in a "generational awakening" era, just one generation past the end of the genocidal Iran/Iraq war of the 1980s.

The pictures coming out of Iraq on Thursday were not of Shiites yelling "Kill the Sunnis." They were not of Sunnis yelling, "Kill the Shiites."

What we've been seeing is huge masses of people -- tens of thousands of them -- demonstrating and demanding political changes. They're blaming the government and they're blaming the Americans. But they aren't looking for blood. There aren't even any signs of civil war.

These huge demonstrations are typical of awakening eras. Two years ago, I wrote a lengthy article comparing Iraq today to America in the 1960s, when America had its last awakening era, just one generation past the end of World War II.

Let me try to explain this a different way. Suppose Ahmed, an angry young Iraqi man, tells his mom, "Mom, I'm going to fight the bad guys (Sunnis or Shiites). Allah be blessed!" Now, Mom is in her 30s or 40s. She survived the bloody Iran/Iraq war, and she still has nightmares about it. She says, "Ahmed, you're not going anywhere. I lost my father and husband in war, and you lost your father and your uncle. Your friend Mahmoud? His mother was raped repeatedly. Most of the people in our neighborhood were beaten, poisoned, killed, raped or tortured, or all of those. I need you right here, and you're going to stay here." So Ahmed stays there and there's no civil war.

There's another thing that these moms know. It's terrible that the al-Askariya shrine was bombed, and that dozens of Sunni mosques were bombed, but these moms know that they're just buildings, and that they can be repaired or rebuilt. There have also been several dozen deaths, but those were at the hands of the insurgents, whom everyone increasingly dislikes. There isn't enough anger and hatred between Sunnis and Shiites because all of them are well aware that it's the insurgents -- led by Jordanian terrorist Abu Musab al-Zarqawi -- that's causing the deaths. A civil war doesn't even make sense.

There's a lot of wishful thinking going on in the press these days. The BBC World Service, which seethes with anti-Americanism, is only too happy to bias its reporting toward the outcome that's most unfavorable for Americans -- and for British too, by the way. And many other international news organizations are exactly the same. If they could get past their bias, even they could begin to understand why a civil war is impossible, and they wouldn't let their biases influence their reporting so much.

Incidentally, let me add (in case it isn't clear) that none of this is an endorsement of Bush or any political party. In fact, as I point out on my web site all the time, all politicians compete with each other to say the dumbest things, because they're all totally oblivious to even the most obvious generational considerations. In Iraq, Iran, Palestine, China, and Europe, even the simplest generational analysis provides enormous insights that no politician of any party appears capable of understanding, with the result that mistakes in judgment and tactics keep being made, and that includes the current administration.

Conflict risk level for next 6-12 months as of: 9-Feb-2006
W. Europe 1 Arab Israeli 3
Russia Caucasus 2 Kashmir 2
China 2 North Korea 2
Financial 3 Bird flu 3
Key: 1=green 1=Low risk 2=yellow 2=Med 3=red 3=High 4=black 4=Active

On this web site, the analyses are based on Generational Dynamics. And from the point of view of Generational Dynamics, the Mideast is headed for a major regional war between Arabs and Jews, and between Pakistanis and Indians over Kashmir. All of these people are in "generational crisis" eras and the young men don't have moms telling them to stay home, so these wars will occur with certainty. Iraq may be drawn into these wars, but in a "generational awakening" era, they'll fight with little enthusiasm. (24-Feb-06) Permanent Link
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Bombing of 1200 year old Shi'ite mosque inflames Iraq to the verge of massive civil war rhetoric

Shi'ites conducted over 90 revenge attacks on Sunni shrines on Wednesday, after insurgents detonated bombs inside the al-Askariya shrine in Samarra, near Baghdad.

Golden dome of al-Askariya shrine in Samarra, near Baghdad
Golden dome of al-Askariya shrine in Samarra, near Baghdad

The shrine, built in the 800s AD, contains sacred tombs and is capped by Golden Dome 68 meters wide, containing more than 72,000 gold pieces.

The insurgent bombing left the golden dome destroyed, and the revenge attacks on Sunni mosques began almost immediately. By the end of the day more than 90 mosques lay damaged or wrecked, and at least eighteen Sunnis including three clerics, were reported murdered. There have been riots and demands for revenge.

There's been talk of civil war all day long, especially by journalists and pundits. The BBC World Service has been talking about a possible civil war all day, and CNN's Wolf Blitzer used his most anxious tone of voice to talk about Iraq "on the verge of civil war." On CNN International, they called the new violence a "tipping point."

As I've been saying on this web site repeatedly for three years now, there will be no civil war in Iraq because a crisis civil war is impossible. Only one generation has passed since the genocidal Iran/Iraq war of the 1980s, meaning that Iraq is in a "generational awakening" era, and any crisis war is impossible during an awakening era, similar to America's "generational awakening" period in the 1960s-70s.

A civil war could only come 25-30 years from now, when Iraq is approaching a new "generational crisis" period. Yes, there will be some riots and demonstrations. Yes, there may be additional revenge bombings and yes, there may be some low-level violence. But the rioting and bombings and the violence will fizzle out soon, and will not spiral up into a civil war.

I've made many predictions on this web site in the last three years, based on Generational Dynamics analysis, and I've bragged that I've never gotten any of these predictions wrong. I've also bragged that if you want to know what's going on in the world and what's going to happen, this is the only place in the world that actually tells you. But maybe this will be the one the proves my undoing -- maybe tomorrow we'll see that the Sunnis and Shi'ites are engaged in a new massive civil war. This would make the pundits and journalists right and me wrong, for the first time. Well, let's wait and see. Generational Dynamics predicts that there will be no Iraqi civil war, so you can be pretty certain that there won't be a civil war. (23-Feb-06) Permanent Link
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Former President Jimmy Carter says that Hamas will seek peace with Israel.

In an interview on Monday on CNN, Carter said that he's spoken to Palestinian Authority president Mahmoud Abbas, and he believes that Abbas wants peace and can bring peace.

Carter conceded that many Hamas leaders are committed to destroying Israel, but said he's certain that the Palestinian people want real peace with Israel.

Carter became nostalgiac about the peace agreement that he helped engineer between Egypt and Israel in 1978. He said that Egypt had wanted to destroy Israel, but once they saw that peace was the best solution, they signed a peace agreement that's been honored to this day. He said that the Palestinians will do the same thing.

The 1978 agreement is a fresh memory to Jimmy Carter, as it is to Wolf Blitzer, the interviewer, as it is to me, in fact. I remember it well.

But neither the interviewer nor interviewee thought to make the obvious point: that the 1978 peace agreement isas relevant to most Palestinians as the fall of Constantinople in 1453.

Do the math. The median age in the Gaza Strip is 15.6. The Palestinians are a society of children -- literally -- when you consider their ages. Do you think that they care what Jimmy Carter thinks, or what peace agreement was signed before they were born?

15.6 years ago was a couple of years into the Intifada that began in 1989. Palestinians and Israelis have been fighting ever since then, and that all that most of these kids have known for their whole lives. They just want to win.

What always puzzles me is how even the simplest generational concept is never even considered by these people.

For example, I discussed this with respect to the rejection of the European Constitution by French and Dutch voters, where it is clear that the population is split between the generation born before WW II and the generations born after.

Getting back to the Mideast, you can see what's happening and why Jimmy Carter is wrong just by looking at the numbers. The older generations, who grew up during the genocidal Arab-Jewish wars of the 1940s after the state of Israel was created, do not want to have another war. But those generations are disappearing fast. The younger generations have no such hesitation. To these kids, Jimmy Carter, senior Hamas leaders, and Mahmoud Abbas are just ancient babbling dinosaurs. That's what all these news interviews overlook.

Generational Dynamics predicts that the genocidal wars between the Arabs and Jews will be re-fought, and sooner rather than later. The war will engulf all the countries in the region, and will draw in the U.S. and Europe as well. (21-Feb-06) Permanent Link
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International "identity group" formation accelerates among Muslims worldwide since cartoon controversy

From Nigeria to Indonesia, regional conflicts are turning into anti-American riots, thanks to the Danish cartoon controversy that has inflamed the entire Muslim world.

From the point of view of Generational Dynamics, this is called "identity group" formation, meaning that disparate groups in places around the world are now identifying with one another for the purpose of conflict. A year ago, an ordinary person, a "man on the street" in each of these countries might have identified himself, if asked, as "a Nigerian" or "a Pakistani" or "an Indonesian." Today, such a "man on the street" may have become inflamed by the Danish cartoon controversy and, in that case, will identify himself first as "a Muslim," part of the worldwide struggle against Christians and Jews.

There's absolutely no rational reason why this kind of reaction should take place at exactly this time in history because of some cartoons published in a Danish newspaper last September. It's crazy. It's ridiculous. It makes no sense at all. But it happens. It's part of the human DNA. It's like sex. It's purely emotional. Tell my why people have sex with the wrong people, and I'll tell you why the Danish cartoons have created this controversy.

On Sunday evening, before writing this article, I watched the 2004 movie Hotel Rwanda on Showtime. This movie is about the 1994 genocidal crisis war in Rwanda, where the Hutus killed almost a million Tutsis. The movie was graphic, but left unexplained how it was possible for someone to pick up a machete, murder his neighbor, dismember his body, rape his wife, and murder and dismember her.

But that's what happens in "generational crisis" periods. It happened in Darfur last year and may still be happening; it happened in the Balkans in the 1990s, in Cambodia in the 1970s, and throughout Europe and Asia during World War II. And it's what we're headed for today, starting next month, next year, or shortly thereafter.

Conflict risk level for next 6-12 months as of: 9-Feb-2006
W. Europe 1 Arab Israeli 3
Russia Caucasus 2 Kashmir 2
China 2 North Korea 2
Financial 3 Bird flu 3
Key: 1=green 1=Low risk 2=yellow 2=Med 3=red 3=High 4=black 4=Active

The only thing that we don't year have a clear picture of is the scenario -- the sequence of events, shocks and surprises that will lead to the various declarations of war. The adjoining graphic shows the most dangerous regions of the world, in the sense that a regional crisis is almost certain to lead to a world war. The toppling of a country's leader or a small conflict spiraling out of control are examples of unexpected events that can lead, step by step, to a new world war.

Here's one particular thing to watch for: President Bush will be paying a state visit to President Pervez Musharraf of Pakistan, ten days from now. Radical Islamists, which have been stirring up pubic fury in Pakistan for months, are planning to use the visit to stir up massive street protests throughout the country, in the hope of unseating Musharraf. If successful, the détente that Pakistan's President Musharraf and India's Prime Minister Manmohan Singh have engineered over the disputed Kashmir region will probably become quickly undone.

Another place to watch closely is the Palestinian region. With Hamas now in control, the Americans and the Europeans are refusing to provide aid, and Israel is refusing to pay the Palestinians the taxes it's collected on their behalf. Since the Palestinian Authority has little money to pay salaries, the region could become very unstable very quickly.

As usual, Generational Dynamics tells you what your destination is, but doesn't tell you how you'll get there. We know that we're headed for a "clash of civilizations" world war, but we have no way of knowing which regional conflict will explode first. We may know soon. (20-Feb-06) Permanent Link
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International political chaos grips Israel, Palestine, and everyone else, as Hamas takes over on Saturday

No one, not even Hamas itself, has any idea what to do next, except to let events play out as they will.

Hamas takes control of the Palestinian government today, after winning a parliamentary majority in the elections three weeks ago.

But just how much control should they take? Should they take as much power as possible from current Palestinian president Mahmous Abbas, or should they leave Abbas in charge, to keep the West happy?

It's a big deal, because it's all about money. America, which has given $1.5 billion in aid to Palestinians in the last decade, has announced that it will not give aid to a Hamas government, since Hamas is a terrorist group. In fact, $50 million in aid already given to the Palestinians will be returned to the US for this reason.

The European Union, which has given even more money than America, has a similar policy. And Israel, which collects customs duties and sales taxes as a service for the Palestinian Authority, and repays the Palestinians about $16 million per month, has said it will stop passing that money through. Indeed, Israel is threatening economic war against the Palestinians, by refusing to pay money and by closing borders.

In the past, Hamas has claimed credit for numerous suicide bombings directed against Israelis. “Is anyone prepared to give us a guarantee that such money won’t be used in suicide bombings?” says an Israeli spokesman.

With an election coming in a few weeks, Israeli polticians have no idea what to do. No Israeli politician can be seen to give into Hamas, so the three candidates are all taking a tough line. But they can't take too tough a line, because they have to leave room for compromise.

The Americans and Europeans have the same dilemma. There's no way that anyone can provide aid to a Hamas that might use the money for weapons to be used against Israel, but there has to be room for compromise.

In order to break this logjam, Hamas has to rescind its harsh positions. Hamas has never agreed to peace with Israel, and hasn't even agreed to recognize Israel as a nation. Yasser Arafat has recognized Israel in the past, but Hamas is threatening to reverse that recognition.

But if Hamas tries to change its positions, then it will piss off their base. Remember that the Palestinians are a society of children -- with a median age in the Gaza Strip is 15.6. These kids will not be happy if Hamas decides to sign a peace deal with Israel.

But the Palestinian Authority is broke. They have thousands of employees to pay, as well as numerous other projects, and no money to pay them with. If Israels fee repayment and America's aid and Europe's aid are all cut off, the Palestinians will completely destablize and fall into civil war.

When the "Mideast Peace Roadmap" was announced in May, 2003, the world thought that we were getting close. Do you remember what the "Roadmap" said? It said that there would be side-by-side Palestinian and Israeli states by 2005. That was last year, in case you've lost track.

It was on May 1, 2003, that I first wrote about the Mideast situation on this web site, and explained what was really going to happen.

I explained that Yasser Arafat and Ariel Sharon may hate each other, but they're both committed to avoiding a new crisis war in the Mideast. I explained that Generational Dynamics predicts that the region was headed for a new crisis war, with absolute certainty, like the massive bloodshed that occurred in 1948 and 1949 when the state of Israel was created out of a partitioned Palestine. I explained that when Arafat and Sharon were gone, then an important generational change will have occurred, and the Mideast will descend quickly info further chaos, with total war not far off.

Everybody I told those predicts to disagreed with me. Some called me an idiot, and others just wished me luck. But since that time, almost three years ago, things have gone exactly as I predicted. Every other pundit and analyst, as far as I know, has gotten everything wrong on the Mideast. This is the only web site that's gotten everything right, and that's because it's based on Generational Dynamics.

It's now 57 years since the end of the genocidal war between Arabs and Jews of the late 1940s. That war was so horrible that anyone who lived through it vowed that they would never let it happen again -- that's the basis for the Generational Dynamics prediction that it's only now that a new genocidal war will occur, since the people who lived through that war are now all disappearing (retiring or dying), all at once.

In the meantime, the Israelis, the Palestinians, the Americans and the Europeans are all frozen in place, with no idea what to do next. Hamas needs the money, but can't make the necessary concessions. Undoubtedly there'll be something worked out -- perhaps the money will go to non-government organizations according to some formula. But in the meantime the world has no idea what to do next, for fear that some path will lead to know. What Generational Dynamics tells us is that all paths lead to war. (18-Feb-06) Permanent Link
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New Fed Chairman Ben Bernanke gives predictable upbeat testimony to Congress

Pundits are smiling today, happy that they can understand "plain-speaking" Bernanke.

One pundit, a chief economist interviewed by the BBC on Wednesday, said that "Bernanke has exploded the 'Greenspan myth.'" According to the pundit, Greenspan defined the myth himself by saying, "If I speak plainly then I run the risk of inciting a financial panic. So it's in everyone's interest that no one understand a word that I say." The pundit added that Bernanke gave exactly the same message that Greenspan used to give, but in clear English, and the markets didn't panic.

The problem is that Bernanke gave quite a different message than Greenspan used to give. Bernanke gave his standard "What? Me worry?" speech, and Greenspan, in the last year or two, was giving speeches quite a bit of alarm, as I've described frequently on this web site, and summarized in my essay, "Ben S. Bernanke: The man without agony."

In his testimony to Congress on Wednesday, Bernanke said that the economy was performing "impressively," adding that the "economy achieved these gains despite some significant obstacles. Energy prices rose substantially yet again, in response to increasing global demand, hurricane-related disruptions to production, and concerns about the adequacy and reliability of supply."

Inflationary worries

Bernanke's major focus were his worries about inflation, and that's a generational issue. Bernanke was born in 1952 and hasn't seen any serious national economic problems except inflation in the 1970s. Since that's the only problem he's ever seen, that's all he thinks he has to worry about.

In his testimony, he expressed a fear of increased inflation, thanks to two problems. One problem is "higher energy prices." The other problem is that, "with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately ... to further upward pressure on inflation." I really have to laugh. This second reason is totally meaningless fluff, but he couldn't think of any other reasons besides high energy problems.

Consumer price index (CPI) from 1870 to present, with an exponential growth trend line.  The CPI is 185 in 2003, and 2010 has a trend value of 129.
Consumer price index (CPI) from 1870 to present, with an exponential growth trend line. The CPI is 185 in 2003, and 2010 has a trend value of 129.

From the point of view of Generational Dynamics, we've been saying for three years that we're in a long term deflationary period, and that prices will be falling by 30% in the next few years. This assessment is based on the adjoining graph of CPI from 1870 to the present, along with an exponential growth trend. What most people don't seem to understand is that almost all growth trend values must maintain the long term trend; this is the law of "Mean Reversion," that we've discussed before. Since the CPI is well above the trend line today, it has to start falling soon, and stay below the trend line long enough to balance things out.

So the kind of inflationary pressures that Bernanke is talking about simply don't exist. Remember that we've had near-zero interest rates for most of the last five years, and that oil prices have doubled. Those are huge stimuli, and they should have pushed inflation up above 10%, where it was in the 1970s with far less stimulus. Instead, inflation has remained very close to zero. In Wednesday's testimony, Bernanke himself predicted that inflation should be 2% for all of 2006, basing his prediction on the fact that he implies that the Fed is going to continue raising interest rates. Unfortunately Bernanke, who was an Economics Professor at Princeton, apparently can't grasp something as simple as the cyclical nature of inflation, based on generational changes, and that the Fed really has very little influence over the inflation rate, except temporarily.

Bernanke's testimony does give a hint of why inflation has stayed so low:

"The relatively benign performance of core inflation despite the steep increases in energy prices can be attributed to several factors. Over the past few decades, the U.S. economy has become significantly less energy intensive. Also, rapid advances in productivity as well as increases in nominal wages and salaries that, on balance, have been moderate have restrained unit labor costs in recent years."

Whether the U.S. is significantly less energy intensive is arguable, but his point about labor costs is an interesting one. Why have labor costs remained low?

Labor costs are influenced not by the Fed but by the law of supply and demand. Inflation was high in the 1970s because labor costs were high, because labor was in high demand. Labor was in high demand because the Great Depression of the 1930s had forced almost all businesses into bankruptcy, forcing the creation of news businesses that reached their peak growth in the 1960s and 1970s, causing a high rate of labor demand, causing a high rate of inflation. The Fed had nothing to do with it.

Today, those same businesses are encrusted with bureaucracy. This ties together with the the Katrina report that I discussed a couple of days ago. The sloth that the government showed during Katrina is the same sloth that businesses are exhibiting as well. Millions of jobs have been outsourced to China and India, leaving behind an American work force that places job security above everything else. So businesses "make do" with the people that they have. This increases productivity, as Bernanke mentions, but it also reduces the demand for labor, which keeps labor costs down, which keeps inflation low. Once again the Fed has absolutely nothing to do with all this, although this concept appears to be complete foreign to Professor Bernanke, as well as most analysts, journalists and pundits.

Other confusions

Professor Bernanke repeated some of the silly things in speeches that I've previously commented on on this web site.

He repeated "a hypothesis I offered last year":

"that, in recent years, an excess of desired global saving over the quantity of global investment opportunities that pay historically normal returns has forced down the real interest rate prevailing in global capital markets."

This refers to his claim that America's astronomically high public debt can be blamed on a "global savings glut" in other countries. This is so silly that he should be embarrassed to say it.

Household cash and liabilities, 1945 to present <font size=-2>(Source: Contrary Investor)</font>
Household cash and liabilities, 1945 to present (Source: Contrary Investor)

The adjoining graph shows how public debt has been increasing exponentially since 1945, and really took off in the 1990s, at exactly the same time that the stock market bubble occurred. They both happened at that time, and had the same cause: The risk=averse generation of senior managers that had grown up during the Great Depression all disappeared (retired or died) all at once in the 1990s, and were replaced by the risk-seeking Boomer generation, with no personal memory of the Depression. Once again, this has nothing to do with anything the Fed does, and blaming it on a "global savings glut" in other countries is just a silly conceit.

The man without agony

This brings us back to how plain-spoken he is. He's plain spoken because everything is simple for him. In Bernanke's "What? Me worry?" world, there are no bubbles, and panics are no problem at all, as I described in "Ben S. Bernanke: The man without agony." It's the same for everyone in the Boomer generation -- every problem is always someone else's fault and responsibility.

Alan Greenspan, born in 1926, lived through the Depression and knows how complicated the world really is. He knows that there are more dangers besides inflation, which is why Greenspan's "swan song" Fed speech warned about the stock market and housing bubbles, that "history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”

There's nothing like that kind of stern warning in any of Bernanke's speeches.

The reason that these expert economists, analysts and pundits that always get quoted on tv didn't understand what Greenspan was saying was because either they don't understand macroeconomics or didn't want to listen to what Greenspan was saying. "Plain-spoken" Bernanke will please these experts and pundits because it takes place in his academic world where the only danger is a little inflation. It's a shame the real world isn't like that.

As I've been saying since 2002, Generational Dynamics predicts that America is entering a new 1930s style Great Depression, with a stock market crash to the Dow 3000-4000 range by the 2007 time frame. I certainly have no reason to change this prediction now, especially with public debt and the trade deficit continuing to grow uncontrollably and exponentially, so it may happen a lot sooner than expected. (17-Feb-06) Permanent Link
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Katrina report finds massive incompetence at all levels

This report is really depressing because it shows how far and fast we're sinking.

"It was like the entire government was mired in mud and couldn't move," commented one television pundit today.

That's in reference to a leaked Congressional report on the government's response to Hurricane Katrina. The actual report will be released on Wednesday.

The reported criticized the Bush administration and the Dept. of Homeland Security, but also laid plenty of blame on Governor Kathleen Babineaux Blanco of Louisiana and Mayor C. Ray Nagin of New Orleans.

Since it's a Congressional report, you can bet it won't criticize any Congressmen, but in fact a Senator or Representative from Louisiana or Mississippi might also have taken a leadership position, but didn't.

Over 10,000 FEMA mobile homes sit unused in Hope, Arkansas <font size=-2>(Source: KTHV)</font>
Over 10,000 FEMA mobile homes sit unused in Hope, Arkansas (Source: KTHV)

One of most amazing sights today are the over 10,000 mobile homes, ordered by FEMA, sitting in a cow pasture at the airport near Hope, Arkansas. However, Federal regulations forbid the use of these mobile homes on a flood plain, which makes them useless in southern Louisiana. Why did FEMA order trailers it can't use?

What happened was this: All these government officials were standing around, waiting for someone else to do something. They took no initiative themselves, because they were waiting for someone else to take the initiative.

From the point of view of Generational Dynamics, here's what's happening: As a man gets older, he's supposed to acquire more and more wisdom, so that he can guide younger generations away from danger. But that means that the younger generations don't get the dangerous experiences that let them gather experience, so that they when they become older they remain stupid, not wise.

And that's what's happened. The generations of people that fought or grew up during World War II learned that things don't take care of themselves, that someone has to take the lead and do something, or else follow the lead of someone else who's doing something. Those generations guided the country away from danger all through the decades since WW II, until the late 1990s, when they all disappeared (retired or died), all at once.

Today, the country is led by the Baby Boomer generation, who have never accomplished anything but argue politics, and by Generation X, who have never accomplished anything except to hate the Boomers.

So, the bad news is that the country is increasingly incompetent, increasingly sliding into the mud of paralysis.

The good news is that our major enemies, like China, are going through exactly the same process, and are becoming as incompetent as we are.

This is what always happens when a nation enters a crisis war. Recall that when Japan bombed Pearl Harbor in 1941, they wiped out America's entire Pacific fleet. Our ENTIRE Pacific Fleet -- in a single day. How could that have happened? Because the same kinds of incompetent generations (they were known as the "Missionary Generation" and the "Lost Generation", instead of "Boomer" and "Generation X," respectively) were running things, and they were just too stupid to protect Pearl Harbor, even though many people in government were expecting an attack by Japan. But instead of protecting the harbor, they simply sat around arguing about politics and hating each other.

We won WW II against Japan because we were a much larger country. It took us a good six months to get off our asses and start fighting back, but because of our enormous size, we were able to use that time.

Things may not go so well with the coming war with China. China will have (or already has) nuclear missiles that can be launched from their submarines to strike almost any American city.

In fact, it was last year in July that General Zhu Chenghu, a top-level officer in China's People's Liberation Army (PLA) threatened America with nuclear war if America interfered with Taiwan. Speaking to a group of foreign journalists, General Zhu said,

"If the Americans are determined to interfere [then] we will be determined to respond. We . . . will prepare ourselves for the destruction of all of the cities east of Xian [a city in central China]. Of course the Americans will have to be prepared that hundreds . . . of cities will be destroyed by the Chinese."

This is the kind of war scenario that America is unprepared to handle, but the Katrina disaster is giving Americans a small taste of what to expect. And unfortunately, as more and more Boomers and Gen-Xers come to power, the country will be getting less and less prepared, less and less incompetent.

What all this means for you, dear Reader, is that you will be entirely on your own. It will be up to you to protect, feed and shelter yourself and your family. Do not expect any government aid, because you'll get none. Do not expect welfare checks, or Social Security checks, or pension checks, because you'll receive none. Do not expect neighbors or politicians to help you, because they won't. You'll only have what you've stashed away.

And be prepared for looters and maurading gangs, including gangs of former paramilitaries. If you're into guns, then be prepared to use one to defend yourself and your family.

That's where we're headed. But, as I said, there is good news. China is not only becoming as incompetent as we are, it's becoming increasingly unstable and is approaching a massive civil war as its bubble economy unravels. That won't stop them from getting off a few nuclear missiles to American cities, but at least they'll be preoccupied with their own troubles. That's the good news. (14-Feb-06) Permanent Link
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UN: Bird flu virus "only two mutations away" from global pandemic

"I wake up every morning thinking that today could be the day that I will see a report about a strange case of bird flu among humans," said Dr David Nabarro, who heads the UN drive to contain the virus, to a radio audience.

Dr. Nabarro said that everyone should prepare for a worldwide pandemic "as if this will happen tomorrow."

In a separate interview, Dr. Nabarro explained in detail how the recent spread of bird flu into Turkey, the Mideast, Europe and Africa greatly increases the chance of an immediate human pandemic.

"Unfortunately, we cannot tell when the mutation might happen, or where it might happen, or how unpleasant the mutant virus will turn out to be," he said in an interview. "Nevertheless, we must remain on high alert for the possibility of sustained human-to-human virus transmission and of a pandemic starting at any time." (14-Feb-06) Permanent Link
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US trade deficit continued exponential increase in 2005

The trade deficit reached the fourth record high in four consecutive years.

The article in the New York Times has a headline that reads, "U.S. Trade Deficit Sets Record, With China and Oil the Causes."

Well, those are interesting causes.

Oil can't really be the cause, because it doesn't explain why the trade deficit has been going up for years, including years when oil was much cheaper.

Blaming China is interesting, because that makes it China's fault that we're spending so much money on Chinese goods. I guess the Times has completely bought into Fed Chairman Ben Bernanke's claim that America's debt is caused by a "global savings glut." If only those darn other countries would stop their profligate habits of saving so much money, America wouldn't be so much in debt.

Imports and exports <font size=-2>(Source: Dept. of Commerce)</font>
Imports and exports (Source: Dept. of Commerce)

The adjoining diagram from the Bureau of Economic Research press release shows what's been going on. America's imports have been increasing at about 12% per year, while exports have been growing at a smaller 10% per year. So the trade deficit, which equals the exports minus the imports, continues to grow exponentially.

From the point of view of Generational Dynamics, it doesn't make sense to blame the trade deficit on "oil" or "China." Generational Dynamics is the study of changes in behaviors and attitudes of large masses of people as generations change. The trade deficit has been growing exponentially because it's been growing exponentially for decades.

Household cash and liabilities, 1945 to present <font size=-2>(Source: Contrary Investor)</font>
Household cash and liabilities, 1945 to present (Source: Contrary Investor)

The adjoining graph shows what's happening quite vividly.

People who lived through or grew up during the Great Depression of the 1930s spent their entire lives in fear of it happening again. They spent their lives as careful, risk-averse people who were determined never to risk bankruptcy, homelessness and starvation again, as happened so widely during the 1930s. For that reason, they carefully saved money, and they made sure that they were never seriously in debt. That's why "Household cash" (blue line in the above graph) was always greater than "Household liabilities" (red line).

By the 1990s, the people in the last generation that had grown up during the Great Depression all disappeared (retired or died) all at once. The Baby Boomer generation that took charge had no fear of bankruptcy, homelessness and starvation, because they'd never seen it with their own eyes, and so the large masses of people became, on the average, much more risk-seeking than risk-averse. Thus, household liabilities began to exceed household cash in the late 1990s.

That was exactly the time that the stock market bubble occurred, and for the same reason. The generational change that caused households to go into debt also caused investors to make much riskier investments. The stock market today is still overpriced by a factor of over 220%, making it highly vulnerable to a panic.

Today, household debt is increasing exponentially, just like the national trade deficit. These trends cannot now be stopped, until a major worldwide financial crisis forces them to stop.

As I've been saying since 2002, Generational Dynamics predicts that America is entering a new 1930s style Great Depression, with a stock market crash to the Dow 3000-4000 range by the 2007 time frame. I certainly have no reason to change this prediction now, especially with public debt and the trade deficit continuing to grow uncontrollably and exponentially, so it may happen a lot sooner than expected. (13-Feb-06) Permanent Link
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Hamas victory and cartoon controversy significantly affect chances of Mideast war

It's time to change to the world conflict risk graphic.

The world has been changing rapidly in the last few months -- much more quickly than before.

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

The graphic on the right, which I first posted in May, 2005, represents my view of where the greatest dangers are in the world. I once wrote an article on The Six Most Dangerous Regions of the World, so chosen because a regional war in any one of these regions will trigger a world war. The graphic lists those reasons, and I've added a financial crisis and a bird flu pandemic as two additional crises that could trigger a world war.

Generational Dynamics predicts that all of these crises (with the possible exception of a bird flu pandemic, about which Generational Dynamics has nothing to say) will occur in the context of a new world war with near mathematical certainty. However, Generational Dynamics only tells you for sure what your destination is - not how you'll get there. The conflict risk graphic is not a firm prediction; it highlights my opinion about which crises are more likely to occur first.

Here's the new modified graphic:

Conflict risk level for next 6-12 months as of: 9-Feb-2006
W. Europe 1 Arab Israeli 3
Russia Caucasus 2 Kashmir 2
China 2 North Korea 2
Financial 3 Bird flu 3
Key: 1=green 1=Low risk 2=yellow 2=Med 3=red 3=High 4=black 4=Active

We've made three changes:

Here's the long form graphic:

Conflict risk level by region/type for next six months
As of: 9-Feb-2006
W. Europe 1 Rising nationalism and ethnic tensions, but no overt national hostilities yet
Arab Israeli 3 Hamas election victory, loss of Ariel Sharon, rising influence of Iran, now fueled by Danish cartoon contoversy, could soon send this region spiraling out of control
Russia Caucasus 2 Simmering tensions remain, but Beslan massacre did not provoke retaliation, and Putin's hand is remaining steady.
Kashmir 2 Détente between Pakistan's Musharaff and India's Singh has significantly eased tensions, but Pakistan is becoming increasingly restive.
China 2 China is unraveling internally and is mobilizing for eventual war with US and Japan over Taiwan, as Taiwanese opinion shifts towards independence
North Korea 2 Kim Jong-il mobilizing for war at any time against South Korea and Japan, but will wait for China
Financial 3 Exponentially increasing public debt and the end of a corporate earnings streak make a financial crisis likely soon.
Bird flu 3 Mutations have allowed virus to spread more efficiently from Asia to Europe, the Mideast and Africa. A human pandemic is a possibility, though not a certainty.
Key: 1=green 1=Low risk 2=yellow 2=Med 3=red 3=High 4=black 4=Active

(10-Feb-06) Permanent Link
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Bird flu spreading through western Africa

This week's Nigeria announcement clears up a mystery.

Last week, in an article I wrote on bird flu in Northern Iraq, I quoted a a UN FAO press release that warned that bird flu "could be further spread by migratory birds particularly coming from Africa in the spring."

This was somewhat mysterious, since no one had announced a bird flu finding in Africa, and seemed to imply that FAO knew of bird flu but wasn't admitting it.

Well, now we know. This week's announcement that bird flu has been confirmed in Nigeria, based on samples taken on January 10, shows that FAO officials did, in fact, know that this announcement was coming.

Furthermore, since the confirmation is based on samples taken a month ago, there has already been several weeks -- plenty of time -- for the virus to spread much farther.

Indeed there are already unexplained deaths of large numbers of birds in northern Nigeria, and in other regions of western Africa.

As far as Europe is concerned, it's been found in Greece, Cyprus, Bulgaria, and Roumania, and it's endemic and firmly established in Turkey.

Long-time readers of this web site will recall a report from July of last year that bird flu had infected birds at Lake Qinghaihu, a huge lake in mid-China that served as an international meeting point and breeding ground for migratory birds, and that from there, bird flu was poised to spread around the world.

That appears to have happened for much of Asia, Europe, and now Africa. There has been no H5H1 in North America so far, but that may happen in the the spring as birds migrate from Asia, across the Bering Straits, into Alaska. American and Canandian officials are continually conducting tests.

An analysis on Henry Niman's Recombinomics web site shows that the H5N1 strain that's reached the Mideast and Africa originated in Lake Qinghaihu. Furthermore, while spreading around Turkey, the virus mutated slightly, picking up the "S227N polymorphism." This gives it the ability to infect humans a little more easily than before, through physical contact with an already infected bird or human.

So far as is known, no mutation has yet occurred anywhere that would permit easy human to human transmission, such as happens with the regular human flu. However, since it takes several weeks to find, test, and report results of new H5N1 infections, especially in remote areas of the world, we many not even know of such a mutation until it's already begun to spread rapidly around the world. (9-Feb-06) Permanent Link
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Cartoon controversy explodes into worldwide confrontations between Muslims and Westerners

Muslims around the world are electrified and outraged by the publication of 12 cartoons depicting the prophet Mohammed. In one of them, Mohammed is wearing a turban shaped like a bomb with its fuse lit. In another, Mohammed is telling suicide bombers to slow down, saying, "Stop, stop, we're running out of virgins."

The 12 cartoons first appeared in Denmark’s Morgenavisen Jyllands-Posten daily in September, but the outrage only began to take hold in the last couple of weeks.

Muslim anger especially increased last week when a number of European newspapers in France, Germany, Italy, and Spain reprinted the cartoons, to express solidarity with Jyllands-Posten. On Saturday, a New Zealand newspaper reprinted the cartoons.

Muslims around the world have retaliated, with demonstrations, with boycotts, and sometimes with violence. Uncontrolled mobs in Syria and Lebanon attacked the Danish and Norwegian embassies. Five people were killed in Afghanistan, as was a 14-year-old boy in Somalia. Rallies have also taken place in India, Thailand, Indonesia, Iran and Gaza and other countries. Even far-away Chechnya has banned Danish humanitarian groups.

There's now little doubt that the cartoon controversy is going to be a continuing source of Muslim anger for a long time to come.

It's hard to understand why this "trivial" incident seems to be getting blown out of proportion, and so to explain what's going on, I'll need to put the incident in the context of a more complete theoretical description from Generational Dynamics. The following paragraphs summarize the process that's occurring:

In order to understand the remarkable reaction to the Mohammed cartoons, note the sentence above, "There will be a series of shocks, surprises and confrontations."

That's what's going on now. The cartoon controversy might have come to nothing at another point in time, but it appears to have come at exactly the right time, a time when anxiety about poverty and powerlessness in the Muslim world is at just the right level, perhaps at a kind of "tipping point." The cartoon controversy is a kind of catalyst that was needed at this time in history, and if it hadn't happened then something else would have served as a catalyst.

Let's compare this to an event from another era, the Boston Tea Party, that preceded the American Revolutionary War.

A financial crisis in the English banking system in 1772 was disastrous to colonial businesses, especially in the Northeast, and many were forced into bankruptcy against their will. So when the English Parliament passed a new tea tax in May, 1773, the colonists were infuriated and radicalized, and in December 1773, a group of Boston activists dumped 342 casks of English tea into Boston Harbor.

At any other time in history, this might have been considered an expensive prank. The tea was ruined, but it could be easily replaced, and no one was hurt. But at that moment in history, it filled a need.

This trivial, childish prank, the Boston Tea Party, became world famous. It was so electrifying at the time that it surprised and shocked both the colonies and England. After that, one provocation after another on both sides finally led to war within two years.

There's no way to predict when such things will happen - when a trivial incident or a silly squabble will cause a major reaction way out of proportion to the original incident. But that's what happened with the Boston Tea Party, and that seems to be what's happening with the Mohammed cartoons. Even if the worldwide demonstrations calm down in the next few days, these cartoons will be used by radical Muslims to continue to inflame Muslims for months to come.

Of course, not all the shocks and surprises leading to war are trivial. We've already seen several -- the 9/11 attacks, the retaliatory wars in Afghanistan and Iraq, and the terrorist attacks in Bali, London and Madrid are shocks that have occurred before now, and were much more than trivial.

As I've been saying on this web site since 2002, the world is headed for a new "clash of civilizations" world war, with almost mathematical certainty. The chances are that 2 billion people or more will be killed in this war, based on my computations of population versus food supply. The world will approach this war through a series of shocks, surprises and confrontations that can't be predicted in advance. However, we can be fairly certain now that the Mohammed cartoon controvery will turn out to be an important milestone in the development of this world war, and will be considered an important historical event. (6-Feb-06) Permanent Link
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Worker productivity plummets as corporations do more hiring

After four years of boosting earnings by not hiring, companies did enough hiring in December to unexpectedly lower the unemployment rate to 4.7% from 4.9%, the lowest it's been since 2001.

This explains another surprise this week: Worker productivity plummeted and labor costs jumped in the last quarter of 2005. These results also exceeded analysts' expectations.

There's a great deal of irony in this situation for departing Fed Chairman Alan Greenspan based his entire strategy for handling the 1990s stock market bubble on worker productivity, according to a November, 2004, article in the Wall Street Journal.

Greenspan noticed in 1996 that a stock market bubble was beginning, but decided to ignore it, because he believed that it was occurring because of increased worker productivity stemming from information technology (IT - the use of computers). As I wrote, anyone familiar with the computer industry at that time would have known that Greenspan was simply wrong. Companies were spending astronomical sums of money on software development costs to bring up web sites, and any tiny amount of money saved would have been swamped by these huge development costs.

So Greenspan was wrong about worker productivity in 1996, and made a historic decision at the time not to try to stop the bubble, but instead to "deal with its aftereffects." What that meant was seen after the Nasdaq crash in 2000: The Fed lowered interest rates to near zero.

But something else happened at exactly the same time: During mid-2000, employment of IT professionals dropped to almost zero. Uniformly, businesses decided to do little or no more computer software development or web site development, and make do with what they already had. (As an IT consultant, I was personally affected by this, and was mostly unemployed for a couple of years. The "good" news is that this period of unemployment gave me plenty of time to develop Generational Dynamics and this web site.)

When businesses stopped hiring IT professionals, the thing that Greenspan thought was happening in 1996 actually started happening in 2002. Businesses did little software or web development, and the little that they did was performed by seasoned employees that had been hired years earlier. As a result, worker productivity really did increase, and has been very high since 2002.

With worker productivity high, corporate earnings were also high. High earnings meant that price/earnings ratios would be lower for a given price.

So worker productivity combined with low interest rates to continue the stock market bubble that began in the late 1990s. The low interest rates made plenty of money available for purchases of stock on credit, and the extremely high earnings growth justified high prices, under the assumption that earnings would continue to grow at those historically high rates.

Note the last clause of the previous paragraph: Investors have been assuming that earnings would continue grow at the same historically high rate. As we explained in detail last month, this cannot happen. In fact, by the principle of "mean reversion," earnings are going to fall substantially, to historically low levels, for several years, in order to compensate for the years of historically high earnings. This will trigger a stock market crash similar to the one that began in 1929.

It's impossible to predict when a stock market panic will occur -- it might be next week, next month or next year -- but mathematically speaking it has to happen, and sooner rather than later. All we can do in these articles is point out that stocks are currently overpriced by a factor of some 220%, and that the time is increasingly right for a panic to occur.

Ironically, the increase in hiring and the lowering of the unemployment rate during a bubble is one of the signs. It means that corporations are risking earnings by betting that the bubble will continue indefinitely.

As I've been saying since 2002, Generational Dynamics predicts that America is entering a new 1930s style Great Depression, with a stock market crash to the Dow 3000-4000 range, probably by the 2007 time frame. I have no reason to change this prediction now, especially with public debt and the trade deficit continuing to grow uncontrollably and exponentially. (5-Feb-06) Permanent Link
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Bird flu spreads through Northern Iraq, with 162 suspected human cases

After first denying that bird flu was involved, WHO now says that a teen girl died of bird flu last month.

When 15 year old Shangen Abdul Qader of Northern Iraq died last month, the U.N. World Health Organization (WHO) performed the necessary steps and announced that the girl had not been suffering from bird flu.

Kurdish officials in Northern Iraq were still suspicious, since the region is near Turkey, where bird flu is becoming widespread and firmly established, and because the family kept chickens in the house, and some of them had died. Instead, WHO diagnosed the cause of death as cardiovascular disease.

However, WHO on Thursday finally confirmed that she did indeed die of the deadly H5N1 virus. And now, WHO officials are overseeing the slaughter of 500,000 birds, to prevent the spread of the disease.

Furthermore, the pan-Arab daily al-Hayat announced that 162 more people are under suspicion of having contracted the virus.

What this all shows is how confusing the situation is. It's been very strange, and entirely unrealistic, to believe that bird flu has affected Turkey from the the east to west, but somehow the infections have stopped at the Turkish border, with few or no reports of infections in neighboring countries. The explosion in Northern Iraq illustrates the problem - that many countries are simply not testing for H5N1, and so the world doesn't know what's happening until human beings start dying.

Bird flu may spread far into Africa and Europe by spring, according to a press release by the U.N. Food and Agriculture Organization (FAO).

I have to chuckle at what an FAO spokesman is quoted as saying:

"Fighting the avian influenza virus in animals is the most effective and cost-effective way to reduce the likelihood of H5N1 mutating or reassorting to cause a human flu pandemic. ... Governments will fail in combating avian influenza if they don’t give their veterinary services the political support as well as the technical and financial means to fight the virus. Early warning systems, swift interventions and preventive measures will remain weak and inadequate without strong, centrally organized veterinary services."

This probably makes sense, but I'm imagining President Bush addressing the nation and saying, "And tonight, my fellow Americans, I ask the Congress to provide $10 billion to veterinarians around the country to prepare to combat bird flu." Somehow, I don't think it's going to happen.

On a more serious note, the press release contains the following text:

The avian influenza virus could become entrenched in the Black Sea, Caucasus and Near East regions through trade and movement of people and animals and it could be further spread by migratory birds particularly coming from Africa in the spring. ... "FAO is concerned that with trade, the movement of people and animals and migratory birds, new countries could become infected," [said a spokesman.] “Countries in Africa deserve special attention. In Turkey, the virus has already reached the crossroads of Asia, Europe and Africa, and there is a real risk of further spread. If it were to become rooted in the African countryside, the consequences for a continent already devastated by hunger and poverty could be truly catastrophic."

The problem with this text is that it says that birds coming from Africa this spring could spread the disease through migration to Europe and Asia. Thus, in this text, the FAO appears to be admitting that it believes that H5N1 is already established in Africa, even though no such announcements have been made.

With the Chinese and Vietnamese Lunar New Year celebrations just finishing up, and with all the additional opportunities for gene recombination in the Mideast and Africa, it's possible that a dangerous human to human mutation could occur, or could even have already occurred, and we might not know until a pandemic starts spreading around the world uncontrollably. At that point, panic will set in worldwide.

For that reason, I once again strongly urge my readers to prepare for an H5N1 pandemic or for any kind of emergency (think of hurricane Katrina) by stocking up on food and water and currency and batteries for the entire household to live on for 2-3 months. This may cost a thousand dollars per person, but it's not wasted money since you can always eat the food later if no emergency occurs. Get canned or dried food that can last a long time in storage, and get a large container for storing water. Keep in mind that stored water becomes impure with time, so you'll also need some purifying tablets or bleach to kill bacteria in the water when the time comes. Finally, get whatever medicines you'll need to take care of yourself and your family for a long period of time. (3-Feb-06) Permanent Link
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State of the Union speech displays continuing misreading of Iran

It's wishful thinking to believe that an overthrow of the Mullahs is coming.

In Tuesday's State of the Union speech, President Bush said the following about Iran:

This is an echo of an argument that pundits and politicians, mostly on the Republican side, have been making for several years: We've been seeing Iranian college students protesting against the hardline Muslim clerics that run the country, and lately against the new President Mahmoud Ahmadinejad. Their complaints have largely to do with "women's issues," like the women's lib movement in 1960s America.

The reasoning goes that Iran is ripe for a revolutionarly overthrow of the hardline government. This is total nonsense, and even the most elementary generational analysis of the situation shows why.

Let's take this very slowly, step by step, so that it will be understandable to any politician, pundit or journalist who might happen to stumble across this web page:

I tried to make that so simple that even a politician or a journalist might be able to understand it, but I won't get my hopes up.

The point is that even if college students are demonstrating against Ahmadinejad and the hardline clerics, the adults in Iran have no interest or desire to go through another period of bloody war, as they just did not long ago. They fought for the clerics, and they'll keep the clerics.

What we're seeing is the increasing hardening of America's position against Iran, when President Bush said, "The Iranian government is defying the world with its nuclear ambitions, and the nations of the world must not permit the Iranian regime to gain nuclear weapons."

These words have a sense of a threat behind them, and that will create a reaction in Iraq.

America is not alone in this. The European Union has also been hardening its position against Iran. There's no way to tell where that will lead, but the sense of war against Iran's nuclear facilities is in the air.

There's something else in the air. When Hamas won a major election victory in Palestine last week, it was pretty clear that the major issue would be money -- continued aid from America and the EU, even though a terrorist group was now running the Palestinian government.

The Palestinians are now threatening to obtain aid from elsewhere, and Iran is a potential source of such aid. A close relationship between Hamas and Iran would throw the Mideast into further chaos.

From the point of view of Generational Dynamics, the Arabs and Jews are heading for a new genocidal crisis war, and it's appearing more and more that Iran will play a major part in that war. The last crisis war between Jews and Arabs was the extremely violent, genocidal war of the late 1940s, when the United Nations partitioned Palestine and created the state of Israel. Generational Dynamics predicts that we're heading for a major new Mideast war, replaying that war, and engulfing the entire region. (1-Feb-06) Permanent Link
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